nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒10‒01
eighteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Default Risk, Sectoral Reallocation, and Persistent Recessions By Cristina Arellano; Yan Bai; Gabriel Mihalache
  2. Recall and Unemployment By Fujita, Shigeru; Moscarini, Giuseppe
  3. Rural-Urban Migration, Structural Transformation, and Housing Markets in China By Carlos Garriga; Aaron Hedlund; Yang Tang; Ping Wang
  4. Competitive Supply of Money in a New Monetarist Model By Waknis, Parag
  5. Sovereign Default Resolution Through Maturity Extension By Gabriel Mihalache
  6. The U.S. Shale Oil Boom, the Oil Export Ban, and the Economy: A General Equilibrium Analysis By Nida Çakir Melek; Michael Plante; Mine K. Yücel
  7. Imperfect mobility of labor across sectors and fiscal transmission By Olivier CARDI; Peter CLAEYS; Romain RESTOUT
  8. Receptivity and Innovation By Furukawa, Yuichi; Lai, Tat-kei; Sato, Kenji
  9. Informality, Public Employment and Employment Protection in Developing Countries By Yassin, Shaimaa; Langot, François
  10. Systemic Risk: A New Trade-Off for Monetary Policy? By Laséen, Stefan; Pescatori, Andrea; Turunen, Jarkko
  11. Wage posting, nominal rigidity, and cyclical inefficiencies By Gottfries, Axel; Teulings, Coen N
  12. On Targeting Frameworks and Optimal Monetary Policy By Martin Bodenstein; Junzhu Zhao
  13. Un modelo de equilibrio general dinámico para la evaluación de la política económica en Colombia By Rodrigo Suescún; Roberto Steiner
  14. Optimal population growth as an endogenous discounting problem: The Ramsey case By Raouf BOUCEKKINE; Blanca MARTINEZ; J.R. RUIZ-TAMARIT
  15. Interest on reserves and monetary policy of targeting both interest rate and money supply By Ngotran, Duong
  16. The Productivity Slowdown and the Declining Labor Share: A Neoclassical Exploration By Gene M. Grossman; Elhanan Helpman; Ezra Oberfield; Thomas Sampson
  17. Macro Needs Micro By Fabio Ghironi
  18. Capital Control, Exchange Rate Regime, and Monetary Policy: Indeterminacy and Bifurcation By William Barnett; Jingxian Hu

  1. By: Cristina Arellano; Yan Bai; Gabriel Mihalache
    Abstract: Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for nontradable sectors. This paper documents this pattern using Spanish data and builds a two-sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock increases the likelihood of default, limits capital inflows, and thus restricts the ability of the economy to exploit investment opportunities. The economy responds by reducing investment and reallocating capital toward the traded sector to support debt service payments. The real exchange rate depreciates, a reflection of the scarcity of traded goods. We find that these mechanisms are quantitatively important for rationalizing the experience of Spain during the recent debt crisis.
    Date: 2017
  2. By: Fujita, Shigeru (Federal Reserve Bank of Philadelphia); Moscarini, Giuseppe (Yale University)
    Abstract: We document in the Survey of Income and Program Participation covering 1990- 2013 that a surprisingly large share of workers return to their previous employer after a jobless spell and experience very different unemployment and employment outcomes than job switchers. The probability of recall is much less procyclical and volatile than the probability of finding a new employer. We add to a quantitative, and otherwise canonical, search-and-matching model of the labor market a recall option, which can be activated freely following aggregate and job-specific productivity shocks. Recall and search effort significantly amplify the cyclical volatility of new job-finding and separation probabilities.
    Keywords: Recall; unemployment; duration; matching function; business cycles
    JEL: E24 E32 J64
    Date: 2017–06–29
  3. By: Carlos Garriga; Aaron Hedlund; Yang Tang; Ping Wang
    Abstract: This paper explores the contribution of the structural transformation and urbanization process to China's housing-market boom. Rural to urban migration together with regulated land supplies and developer entry restrictions can raise housing prices. This issue is examined using a multi-sector dynamic general-equilibrium model with migration and housing. Our quantitative findings suggest that this process accounts for about 80 percent of urban housing price changes. This mechanism remains valid in extensions calibrated to the two largest cities with most noticeable housing booms and to several alternative setups. Overall, supply factors and productivity account for most of the housing price growth.
    JEL: E20 O41 R21 R31
    Date: 2017–09
  4. By: Waknis, Parag
    Abstract: Whether currency can be efficiently provided by private competitive money suppliers is arguably one of the fundamental questions in monetary theory. It is also one with practical relevance because of the emergence of multiple competing financial assets as well as competing cryptocurrencies as means of payments in certain class of transactions. In this paper, a dual currency version of Lagos and Wright (2005) money search model is used to explore the answer to this question. The centralized market sub-period is modeled as infinitely repeated game between two long lived players (money suppliers) and a short lived player (a continuum of agents), where longetivity of the players refers to the ability to influence aggregate outcomes. There are multiple equilibria, however we show that equilibrium featuring lowest inflation tax is weakly renegotiation proof, suggesting that better inflation outcome is possible in an environment with currency competition.
    Keywords: currency competition, repeated games, long lived- short lived players, inflation tax, money search, weakly renegotiation proof.
    JEL: E52 E61
    Date: 2017–09–11
  5. By: Gabriel Mihalache
    Abstract: Sovereigns resolve their default status by offering bond swaps to their lenders, usually following negotiations. We model this interaction in a quantitative model of borrowing and default, and focus on its consequences for debt levels, default risk, and haircuts. The empirical literature finds that the bulk of debt relief is implemented by lengthening the maturity of debt, rather than changing face value. Countries exit renegotiations with less debt but with a greater share of long-term debt in total, compared to the maturity structure at the time of default. A standard maturity choice model, augmented with a renegotiation phase, is unable to replicate this critical feature of the data. We explain this negative result by showing an equivalence between the choice of maturity during the swap and and at issuance, in key states of the world. Introducing a demand shock solves the puzzle. We interpret this reduced-form shock in the context of the literature on political turnover risk. It captures in a parsimonious way the notion that emerging markets may elect policy-makers more prone to short-termism.
    Date: 2017
  6. By: Nida Çakir Melek; Michael Plante; Mine K. Yücel
    Abstract: This paper examines the effects of the U.S. shale oil boom in a two-country DSGE model where countries produce crude oil, refined oil products, and a non-oil good. The model incorporates different types of crude oil that are imperfect substitutes for each other as inputs into the refining sector. The model is calibrated to match oil market and macroeconomic data for the U.S. and the rest of the world (ROW). We investigate the implications of a significant increase in U.S. light crude oil production similar to the shale oil boom. Consistent with the data, our model predicts that light oil prices decline, U.S. imports of light oil fall dramatically, and light oil crowds out the use of medium crude by U.S. refiners. In addition, fuel prices fall and U.S. GDP rises. We then use our model to examine the potential implications of the former U.S. crude oil export ban. The model predicts that the ban was a binding constraint in 2013 through 2015. We find that the distortions introduced by the policy are greatest in the refining sector. Light oil prices become artificially low in the U.S., and U.S. refineries produce inefficiently high amount of refined products, but the impact on refined product prices and GDP are negligible.
    JEL: F41 Q38 Q43
    Date: 2017–09
  7. By: Olivier CARDI (Université de Tours, LEO (CNRS UMR 7322) and Université de Paris 2 CRED); Peter CLAEYS (Vrije Universiteit Brussel, Faculteit Economische en Sociale Wetenschappen); Romain RESTOUT (Université de Lorraine, BETA and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Our paper investigates the impact of government spending shocks on relative sector size and contrasts the effects across countries. Using a panel of sixteen OECD countries over the period 1970-2007, our VAR evidence shows that a rise in government consumption i) increases the share of non tradables in labor and real GDP and lowers the share of tradables, and ii) causes a significant increase in non traded wages relative to traded wages. While the first finding reveals that the non traded sector is more intensive in the government spending shock and experiences a labor inflow that increases its relative size, the second finding suggests the presence of labor mobility costs preventing wage equalization across sectors. Turning to cross-country differences, empirically we detect a positive relationship between the magnitude of the impact responses of sectoral output shares and the degree of labor mobility across sectors. To account for our evidence, we develop an open economy version of the neoclassical model with tradables and non tradables. Our quantitative analysis shows that the model is successful in replicating the responses of sectoral output shares to a fiscal shock, as long as we allow for a difficulty in reallocating labor across sectors along with adjustment costs to capital accumulation. Finally, calibrating the model to country-specific data, we are able to generate a cross-country relationship between the degree of labor mobility and the responses of sectoral output shares which is similar to that in the data.
    Keywords: Fiscal policy; Labor mobility; Investment; Non tradables; Sectoral wages
    JEL: E22 E62 F11 F41 J31
    Date: 2017–08–18
  8. By: Furukawa, Yuichi; Lai, Tat-kei; Sato, Kenji
    Abstract: In this study, we investigate the relationship between receptivity to novelty and innovation. Consumers’ receptivity to novelty, as an individual propensity toward new goods, might be perceived to encourage innovation at the aggregate level unambiguously. On analyzing data from the World Values Survey and the World Intellectual Property Organization, however, we find that there is an inverted U-shaped relationship between average receptivity and innovation at country level; receptivity may not always be conducive to innovation. To capture a mechanism behind this counterintuitive fact, we develop a new dynamic general equilibrium model with the understanding that innovation consists of two separate activities of inventing new goods and introducing them to the society. In our model, consumer receptivity encourages firms to invent but discourages them from introducing. Interacted with population size and the elasticity of substitution, these opposing forces generate a non-monotonic relationship. While economies with moderate receptivity can achieve sustained innovation and thereby long-run growth, those with too much or too little receptivity are likely to be caught in an underdevelopment trap, in which innovations eventually fail. These results suggest a theory that explains the inverted-U.
    Keywords: Openness to novelty; aversion to novelty; underdevelopment traps; endogenous growth; innovation cycles
    JEL: E32 O40 Z10
    Date: 2017–09
  9. By: Yassin, Shaimaa (University of Lausanne); Langot, François (University of Le Mans)
    Abstract: This paper proposes an equilibrium matching model for developing countries' labor markets where the interaction between public, formal private and informal private sectors are taken into account. Theoretical analysis shows that gains from reforms aiming at liberalizing formal labor markets can be annulled by shifts in the public sector employment and wage policies. Since the public sector accounts for a substantial share of employment in developing countries, this approach is crucial to understand the main labor market outcomes of such economies. Wages offered by the public sector increase the outside option value of the workers during the bargaining processes in the formal and informal sectors. It becomes more profitable for workers to search on-the-job, in order to move to these more attractive and more stable types of jobs. The public sector therefore acts as an additional tax for the formal private firms. Using data on workers' flows from Egypt, we show empirically and theoretically that the liberalization of labor markets plays against informal employment by increasing the profitability, and hence job creations, of formal jobs. The latter effect is however dampened or even sometimes nullified by the increase of the offered wages in the public sector observed at the same time.
    Keywords: job search, informality, public sector, Egypt, unemployment, wages, policy interventions
    JEL: E24 E26 J60 J64 O17
    Date: 2017–09
  10. By: Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Pescatori, Andrea (International Monetary Fund); Turunen, Jarkko (International Monetary Fund)
    Abstract: We introduce time-varying systemic risk (à la He and Krishnamurthy, 2014) in an otherwise standard New-Keynesian model to study whether simple leaning-against-the-wind interest rate rules can reduce systemic risk and improve welfare. We find that while financial sector leverage contains additional information about the state of the economy that is not captured in inflation and output leaning against financial variables can only marginally improve welfare because rules are detrimental in the presence of falling asset prices. An optimal macroprudential policy, similar to a countercyclical capital requirement, can eliminate systemic risk raising welfare by about 1.5%. Also, a surprise monetary policy tightening does not necessarily reduce systemic risk, especially during bad times. Finally, a volatility paradox a la Brunnermeier and Sannikov (2014) arises when monetary policy tries to excessively stabilize output.
    Keywords: Monetary Policy; Endogenous Financial Risk; DSGE models; Non-Linear Dynamics; Policy Evaluation
    JEL: E30 E44 E52 E58 E61 G12 G20
    Date: 2017–08–01
  11. By: Gottfries, Axel; Teulings, Coen N
    Abstract: We consider a Burdett/Mortensen style wage posting model with aggregate shocks. We analyze the equilibrium under two alternative assumptions on wage setting in ongoing jobs: either fully flexible or downwardly rigid. In the model firms optimally pay only retention premiums. The equilibrium is characterized by a Taylor expansion. The model yields two simultaneous relations for wages and quits, of which the parameters are simple functions of three empirically observable arrival rates of: (i) jobs, (ii) lay offs, and (iii) aggregate shocks. Hence, there are overidentifying restrictions, which are supported remarkably well by the data. We find strong evidence for wage downward rigidity and inefficiently low job-to-job transitions during the downturn. Furthermore, we find evidence that firms pay only retention premiums, not hiring premiums. A model with wage rigidity in ongoing jobs and OJS is therefore a useful benchmark for a wage equation in macro models. Under rigidity, job-to-job transitions are in efficiently low during the downturn.
    Keywords: job-to-job transitions; Nominal wage rigidity; on-the-job search
    JEL: J31 J63 J64
    Date: 2017–09
  12. By: Martin Bodenstein; Junzhu Zhao
    Abstract: Speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently delivers better welfare outcomes than flexible inflation targeting or flexible price level targeting in empirical New Keynesian models when policymakers lack the ability to commit to future policies. Even if the policymaker can commit under an inflation targeting strategy, the discretionary speed limit policy performs better for most empirically plausible model parameterizations from a normative perspective.
    Keywords: Delegation ; Inflation targeting ; Optimal monetary policy ; Price level targeting ; Speed limit policy
    JEL: E52 E58
    Date: 2017–09–22
  13. By: Rodrigo Suescún; Roberto Steiner
    Abstract: Este documento presenta un modelo de equilibrio general dinámico para el análisis de la economía colombiana. A diferencia de la mayoría de modelos de equilibrio general aplicado, este integra simultáneamente (i) el modelamiento dinámico de la toma de decisiones; (ii) la posibilidad de simular política económica discrecional; y (iii) un tratamiento explícito de los encadenamientos intersectoriales en la economía. Gracias a esto, resulta idóneo para responder preguntas que no se prestan para ser estudiadas con otros modelos económicos, como los modelos de equilibrio general dinámico estocástico (DSGE) o los modelos de equilibrio general computable (CGE). El trabajo consta de cuatro capítulos. En el primero se hace una detallada revisión de la literatura, tanto teórica como de modelos aplicados al caso de Colombia. Queremos con ello hacer plena claridad respecto del vacío que pretendemos llenar con nuestro trabajo. El segundo capítulo desarrolla el modelo mientras que en el tercero se presenta la calibración de los parámetros. El cuarto capítulo se presenta un par de simulaciones para ilustrar el uso del modelo.
    Keywords: Modelos de Equilibrio General Computable, Política EconómicaEconomía Colombiana, Evaluación Económica, Colombia
    JEL: C68 D58 E60 C52 D04
    Date: 2017–07–31
  14. By: Raouf BOUCEKKINE (Aix-Marseille University, CNRS, EHESS, Centrale Marseille, AMSE and IMRA); Blanca MARTINEZ (Department of Economics, Universidad Complutense de Madrid, Spain and Instituto Complutense de Analisis Economico (ICAE)); J.R. RUIZ-TAMARIT (Department of Economic Analysis, Universitat de Valencia, Spain, and IRES Department of Economics, Universite 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
    JEL: C61 C62 J1 O41
    Date: 2017–08–29
  15. By: Ngotran, Duong
    Abstract: We build a dynamic model with currency, demand deposits and bank reserves. The monetary base is controlled by the central bank, while the money supply is determined by the interactions between the central bank, banks and public. In banking crises when banks cut loans, a Taylor rule is not efficient. Negative interest on reserves or forward guidance is effective, but deflation is still likely to be persistent. If the central bank simultaneously targets both the interest rate and the money supply by a Taylor rule and a Friedman's k-percent rule, inflation and output are stabilized.
    Keywords: interest on reserves; negative interest on reserves; forward guidance; monetary base; endogenous money supply
    JEL: E4 E42 E5 E51
    Date: 2017–08–30
  16. By: Gene M. Grossman; Elhanan Helpman; Ezra Oberfield; Thomas Sampson
    Abstract: We explore the possibility that a global productivity slowdown is responsible for the widespread decline in the labor share of national income. In a neoclassical growth model with endogenous human capital accumulation a la Ben Porath (1967) and capital-skill complementarity a la Grossman et al. (2017), the steady-state labor share is positively correlated with the rates of capital-augmenting and labor-augmenting technological progress. We calibrate the key parameters describing the balanced growth path to U.S. data for the early postwar period and find that a one percentage point slowdown in the growth rate of per capita income can account for between one half and all of the observed decline in the U.S. labor share.
    JEL: E13 E25 J24 O41
    Date: 2017–09
  17. By: Fabio Ghironi
    Abstract: An emerging consensus on the future of macroeconomics views the incorporation of a role for financial intermediation, labor market frictions, and household heterogeneity in the presence of uninsurable unemployment risk as key needed extensions to the benchmark macro framework. I argue that this is welcome, but not sufficient for macro—and international macro—to tackle the menu of issues that have been facing policymakers since the recent global crisis. For this purpose, macro needs more micro than the benchmark setup has been incorporating so far. Specifically, artificial separations between business cycle analysis, the study of stabilization policies, and growth macro, as well as between international macroeconomics and international trade, must be overcome. I review selected literature contributions that took steps in this direction; outline a number of important, promising directions for future research; and discuss methodological issues in the development of this agenda.
    JEL: E10 E32 E52 F12 F23 F40
    Date: 2017–09
  18. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Jingxian Hu (Department of Economics, The University of Kansas;)
    Abstract: Will capital controls enhance macro economy stability? How will the results be influenced by the exchange rate regime and monetary policy reaction? Are the consequences of policy decisions involving capital controls easily predictable, or more complicated than may have been anticipated? We will answer the above questions by investigating the macroeconomic dynamics of a small open economy. In recent years, these matters have become particularly important to emerging market economies, which have often adopted capital controls. We especially investigate two dynamical characteristics: indeterminacy and bifurcation. Four cases are explored, based on different exchange rate regimes and monetary policy rules. With capital controls in place, we find that indeterminacy depends upon how inflation and output gap coordinate with each other in their feedback to interest rate setting in the Taylor rule. When forward-looking, both passive and positive monetary policy feedback can lead to indeterminacy. Compared with flexible exchange rates, fixed exchange rate regimes produce more complex indeterminacy conditions, depending upon the stickiness of prices and the elasticity of substitution between labor and consumption. We find Hopf bifurcation under capital control with fixed exchange rates and current-looking monetary policy. To determine empirical relevance, we test indeterminacy empirically using Bayesian estimation. Fixed exchange rate regimes with capital controls produce larger posterior probability of the indeterminate region than a flexible exchange rate regime. Fixed exchange rate regimes with current-looking monetary policy lead to several kinds of bifurcation under capital controls. We provide monetary policy suggestions on achieving macroeconomic stability through financial regulation.
    Keywords: Capital controls, open economy monetary policy, exchange rate regimes, Bayesian methods, bifurcation, indeterminacy.
    JEL: F41 F31 E52 C11 C62
    Date: 2017–09

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