nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒10‒08
28 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Countercyclical prudential tools in an estimated DSGE model By Serafín Frache; Jorge Ponce; Javier Garcia Cicco
  2. Estimating Dynamic Stochastic General Equilibrium models in Stata By David Schenck
  3. Leverage and deepening business cycle skewness By Henrik Jensen; Ivan Petrella; Søren Hove Ravn; Emiliano Santoro
  4. Market Reforms at the Zero Lower Bound By Cacciatore, Matteo; Duval, Romain; Fiori, Giuseppe; Ghironi, Fabio
  5. Redistributive effects of the US pension system among individuals with different life expectancy By Fürnkranz-Prskawetz, Alexia; Sanchez Romero, Miguel
  6. Yes we can! Teaching DSGE models to undergraduate students By Solis-Garcia, Mario
  7. Directed Search: A Guided Tour By Guerrieri, Veronica; Julien, Benoit; Kircher, Philipp; Wright, Randall
  8. Monetary policy, asset prices, and liquidity under adverse selection By Florian Madison
  9. Measuring the size of the shadow economy using a dynamic general equilibrium model with trends By Solis-Garcia, Mario; Xie, Yingtong
  10. Natural rates across the Atlantic By Stefano Neri; Andrea Gerali
  11. Formal search and referrals from a firm's perspective By Rebien, Martina; Stops, Michael; Zaharieva, Anna
  12. Structural Reforms and Monetary Policies in a Behavioural Macroeconomic Model By De Grauwe, Paul; Ji, Yuemei
  13. Banking Panics and Liquidity in a Monetary Economy By Tarishi Matsuoka; Makoto Watanabe
  14. Rising inequality and trends in leisure By Boppart, Timo; Ngai, Liwa Rachel
  15. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
  16. Monetary Policy Shifts and Central Bank Independence By Qureshi, Irfan
  17. Why Are Exchange Rates So Smooth? A Household Finance Explanation By YiLi Chien; Hanno Lustig; Kanda Naknoi
  18. The Productivity Slowdown and the Declining Labor Share: A Neoclassical Exploration By Grossman, Gene; Helpman, Elhanan; Oberfield, Ezra; Sampson, Thomas
  19. Wage Posting, Nominal Rigidity, and Cyclical Inefficiencies By Gottfries, A.; Teulings, T.
  20. Teaching Modern Macroeconomics in the Traditional Language: The IS-MR-AD-AS Model By Waldo Mendoza Bellido
  21. Macroeconomic effects of non-standard monetary policy measures in the euro area: the role of corporate bond purchases By Anna Bartocci; Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  22. Estimación de los efectos de la Ley de Inclusión Financiera en un marco Dinámico Estocástico de Equilibrio General By Serafín Frache; Juan Odriozola
  23. Should unconventional monetary policies become conventional? By Quint, Dominic; Rabanal, Pau
  24. Medical Progress, Demand for Health Care, and Economic Performance By Kuhn, Michael; Frankovic, Ivan; Wrzaczek, Stefan
  25. A Note on the Multi-Agent Contracts in Continuous Time By Qi Luo; Romesh Saigal
  26. Optimal quantitative easing By Harrison, Richard
  27. Entrepreneurship, College and Credit: The Golden Triangle By M Samaniego, Roberto; Yu Sun, Juliana
  28. US monetary regimes and optimal monetary policy in the Euro Area By Kostas Mavromatis

  1. By: Serafín Frache (Banco Central del Uruguay); Jorge Ponce; Javier Garcia Cicco
    Abstract: We develop a DSGE model for a small, open economy with a banking sector and endogenous default in order to perform a realistic assessment of macroprudential tools: countercyclical capital buffer (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning is in place since early 2000s. We find that (i) the source of the shock affecting the financial system matters, to select the appropriate indicator variable under the CCB rule, and to calibrate the size of the DP. Given a positive external shock, CCB (ii) generates buffers without major real effects; (iii) GDP as an indicator variable has quicker and stronger effects over bank capital; and (iv) the ratio of credit to GDP decreases, which discourages its use as an indicator variable. DP (v) generates buffers with real effects, and (vi) seems to outperform the CCB in terms of smoothing the cycle.
    Keywords: Banking regulation, minimum capital requirement, countercyclical capital buffer, reserve requirement, dynamic loan loss provision, endogenous default, Basel III, DSGE, Uruguay
    JEL: G21 G28
    Date: 2017
  2. By: David Schenck (StataCorp)
    Abstract: Dynamic stochastic general equilibrium (DSGE) models are used in macroeconomics for policy analysis and forecasting. A DSGE model consists of a system of equations derived from economic theory. Some of these equations may be forward looking, in that expectations of future values of variables matter for the values of variables today. Expectations are handled in an internally consistent way, known as rational expectation. I describe the new dsge command, which estimates the parameters of linear DSGE models. I outline a typical DSGE model, estimate its parameters, discuss how to interpret dsge output, and describe the command's postestimation features.
    Date: 2017–09–20
  3. By: Henrik Jensen (University Of Copenhagen and CEPR); Ivan Petrella (University of Warwick and CEPR); Søren Hove Ravn (University of Copenhagen); Emiliano Santoro (University of Copenhagen)
    Abstract: We document that the U.S. economy has been characterized by an increasingly negative business cycle asymmetry over the last three decades. This fi nding can be explained by the concurrent increase in the fi nancial leverage of households and fi rms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplifi ed due to binding constraints. As a result, booms become progressively smoother and more prolonged than busts. We are therefore able to reconcile a more negatively skewed business cycle with the Great Moderation in cyclical volatility. Finally, in line with recent empirical evidence, fi nancially-driven expansions lead to deeper contractions, as compared with equally-sized non-fi nancial expansions.
    Keywords: credit constraints, business cycles, skewness, deleveraging
    JEL: E32 E44
    Date: 2017–09
  4. By: Cacciatore, Matteo; Duval, Romain; Fiori, Giuseppe; Ghironi, Fabio
    Abstract: This paper studies the impact of product and labor market reforms when the economy faces major slack and a binding constraint on monetary policy easing---such as the zero lower bound. To this end, we build a two-country model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that while the effect of market reforms depends on the cyclical conditions under which they are implemented, the zero lower bound itself does not appear to matter. In fact, when carried out in a recession, the impact of reforms is typically stronger when the zero lower bound is binding. The reason is that reforms are inflationary in our structural model (or they have no noticeable deflationary effects). Thus, contrary to the implications of reduced-form modeling of product and labor market reforms as exogenous reductions in price and wage markups, our analysis shows that there is no simple across-the-board relationship between market reforms and the behavior of real marginal costs. This significantly alters the consequences of the zero (or any effective) lower bound on policy rates.
    Keywords: Employment protection; Monetary policy; Producer entry; Product market regulation; Structural reforms; Unemployment benefits; Zero lower bound
    JEL: E24 E32 E52 F41 J64
    Date: 2017–09
  5. By: Fürnkranz-Prskawetz, Alexia; Sanchez Romero, Miguel
    Abstract: We investigate the differential impact that pension systems have on the labor supply and the accumulation of physical and human capital for individuals that differ by their learning ability and levels of life expectancy. Our analysis is calibrated to the US economy using a general equilibrium model populated by overlapping generations. Within our framework we analyze the redistributive and macroeconomic effects of a progressive versus a flat replacement rate of the pension system.
    JEL: H55 D58 D91 J11 J24 J26
    Date: 2017
  6. By: Solis-Garcia, Mario
    Abstract: Dynamic stochastic general equilibrium (DSGE) models have become the workhorse of modern macroeconomics and the standard way to communicate ideas among applied macroeconomists. Undergraduate students, however, often remain unaware of their existence. The lack of specialized knowledge can hurt them if they decide to attend graduate school. Indeed, many first-year PhD students discover that the material they are currently learning differs significantly from what they mastered in college. But this can change. In this essay, I describe how to teach a full-fledged macroeconomics course where DSGE models take center stage. I discuss how to arrange such a course within a one-semester time frame, detail the main components of instruction, and finish with some thoughts based on my teaching experience at Macalester College.
    Keywords: DSGE models, Bayesian estimation, undergraduate education, advanced macroe- conomics
    JEL: A22 B41 E30 E60
    Date: 2017–09–21
  7. By: Guerrieri, Veronica; Julien, Benoit; Kircher, Philipp; Wright, Randall
    Abstract: This essay surveys the literature on directed/competitive search, covering theory and applications in, e.g., labor, housing and monetary economics. These models share features with traditional search theory, yet differ in important ways. They share features with general equilibrium theory, but with explicit frictions. Equilibria are typically efficient, in part because markets price goods plus the time required to get them. The approach is tractable and arguably realistic. Results are presented for finite and large economies. Private information and sorting with heterogeneity are analyzed. Some evidence is discussed. While emphasizing issues and applications, we also provide several hard-to-find technical results.
    Keywords: competitive search; directed search; job search; survey; Wage setting
    JEL: J3 J64
    Date: 2017–09
  8. By: Florian Madison
    Abstract: The aim of this paper is to analyze the relationship between primary market investment, decentralized secondary market asset trades, and final goods consumption under asymmetric information regarding the quality of the traded assets. Using a search-theoretic dynamic general equilibrium model where money and real assets coexist, but only fiat money is accepted as a direct medium of exchange, I study bilateral bargaining on over-the-counter asset markets under private information and analyze impact of monetary policy on equilibrium allocations. The main results show that asymmetric information impairs the liquidity of the real asset on the over-the-counter market and reduces both trading volume and consumption. As a consequence, a positive liquidity differential between money and assets emerges, resulting in an increased demand for fiat money, as observed since the eruption of the global financial crisis. A policy intervention replacing information sensitive assets with government bonds or fiat money, as done in the asset-purchase program implemented by the Federal Reserve Bank, improves equilibrium consumption and overall welfare.
    Keywords: Money, assets, over-the-counter, asymmetric information, signaling, undefeated equilibrium, search and matching
    JEL: D82 D83 E44 E52 G11 G12
    Date: 2017–09
  9. By: Solis-Garcia, Mario; Xie, Yingtong
    Abstract: We propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic general equilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output.
    Keywords: Shadow economy, business cycles, DSGE models
    JEL: E26 E32 O17
    Date: 2017–01–03
  10. By: Stefano Neri (Bank of Italy); Andrea Gerali (Bank of Italy)
    Abstract: The paper estimates a closed-economy medium-scale model for the United States and the euro area to assess the current level of the natural rate of interest and shed light on its drivers. The dynamics of the model are driven by permanent and transitory shocks that bear some connection to the explanations put forward in the literature to explain the secular downward trend in interest rates. The analysis shows that the natural rate has declined, contributing to a lowering of nominal and real rates. Risk premium shocks, a short-cut for changes in agents’ preference for safe assets, have been an important driver in the euro area; in the United States, shocks to the risk premium and to the efficiency of investment, which proxy the functioning of the financial sector, have played a major role. These differences in the importance of the shocks underscore the need to adopt a structural model with a rich stochastic structure, featuring permanent and transitory shocks.
    Keywords: natural rate of interest, monetary policy, DSGE model, Bayesian methods
    JEL: C51 E32 E43 E52
    Date: 2017–09
  11. By: Rebien, Martina (Center for Mathematical Economics, Bielefeld University); Stops, Michael (Center for Mathematical Economics, Bielefeld University); Zaharieva, Anna (Center for Mathematical Economics, Bielefeld University)
    Abstract: This study explores the relationship between firms’ characteristics and their recruitment strategies. We propose a model based on a search and matching framework with two search channels: a formal channel which is costly for firms and a costless informal channel, i.e. referrals. There is a continuum of heterogeneous vacancies in our model where every firm with an open vacancy chooses an optimal search effort in order to attract job candidates. This search effort depends on the productivity of the firm and, contrary to the previous literature, workers send simultaneous applications to open vacancies. We assess the model predictions by using the IAB Job Vacancy Survey, a representative survey among human resource managers in Germany reporting information about their most recent recruitment case. Based on the finding that firm size and productivity are positively correlated we show that: (1) Larger firms invest more effort into formal search activities; (2) Firms invest more formal search effort in labour markets for more educated workers; (3) The positive relationship between firm’s size and formal search intensity can also be observed for firms that don’t use referrals; (4) Firms that use referrals as a search channel invest less effort into formal search compared to firms that don’t use referrals; (5) Larger firms are less likely to hire an applicant by referral than smaller firms, and (6) More intensive search effort leads to a larger number of applications.
    Keywords: firm size, productivity heterogeneity, search effort, referrals, recruitment strategies
    Date: 2017–10–02
  12. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We use a New Keynesian behavioral macroeconomic model to analyze how structural reforms affect the nature of the business cycle and the capacity of the central bank to stabilize output and inflation. We find that structural reforms that increase the flexibility of wages and prices can have profound effects on the dynamics of the business cycle. Our main finding here is that there is an optimal level of flexibility (produced by structural reforms). We also find that in a rigid economy the central bank in general faces a tradeoff between output and inflation volatility. This tradeoff disappears when the economy becomes sufficiently flexible. In that case the central bank's efforts at stabilizing inflation and output are always welfare improving.
    Keywords: behavioural macroeconomics; Structural reforms
    Date: 2017–09
  13. By: Tarishi Matsuoka (Tokyo Metropolitan University); Makoto Watanabe (VU Amsterdam; Tinbergen Institute, The Netherlands)
    Abstract: This paper studies banks' liquidity provision in the Lagos and Wright model of monetary exchanges. With aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors' need of consumption smoothing. The banking panics can be eliminated by the zero-interest policy for the perfect risk sharing, but the first best can be achieved only at the Friedman rule. In our monetary equilibrium, the probability of banking panics is endogenous and increases with inflation, as is consistent with empirical evidence. The model derives a rich array of non-trivial effects of inflation on the equilibrium deposit and the bank's portfolio.
    Keywords: Money Search; Monetary Equilibrium; Banking panics; Liquidity
    JEL: E40
    Date: 2017–09–22
  14. By: Boppart, Timo; Ngai, Liwa Rachel
    Abstract: This paper develops a model that generates rising average leisure time and increasing leisure inequality along a path of balanced growth. Households derive utility from three sources: market goods, home goods and leisure. Home production and leisure are both activities that require time and capital. Households allocate time and capital to these non-market activities, work and rent capital out to the market place. The dynamics are driven by activity-specific TFP growth and a spread in the distribution of household-specific labor market efficiencies. When the spread is set to match the increase in wage inequality across education groups, the model can account for the observed average time series and cross-sectional dynamics of leisure time in the U.S. over the last five decades.
    Keywords: balanced growth path; Home Production; inequality; Labor Supply; leisure
    JEL: E24 J22 O41
    Date: 2017–09
  15. By: Luca Gambetti (Universitat Autonomade Barcelona); Dimitris Korobilis (University of Essex); John D. Tsoukalas (University of Glasgow); Francesco Zanetti (Centre for Macroeconomics (CFM); University of Oxford)
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises signi cantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over in ation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models, DSGE models
    JEL: E20 E32 E43 E52
    Date: 2017–09
  16. By: Qureshi, Irfan (The University of Warwick)
    Abstract: Why does low central bank independence generate high macroeconomic instability? A government may periodically appoint a subservient central bank chairman to exploit the inflation-output trade-off, which may generate instability. In a New Keynesian framework, time-varying monetary policy is connected with a “chairman effect.” To identify departures from full independence, I classify chairmen based on tenure (premature exits), and the type of successor (whether the replacement is a government ally). Bayesian estimation using cross-country data confirms the relationship between policy shifts and central bank independence, explaining approximately 25 (15) percent of inflation volatility in developing (advanced) economies. Theoretical analyses reveal a novel propagation mechanism of the policy shock.
    Keywords: Time-varying policy parameters ; macroeconomic volatility ; central bank independence ; type of chairman changes
    JEL: E30 E42 E43 E52 E58 E61 O11 O23 O57
    Date: 2017
  17. By: YiLi Chien (Federal Reserve Bank of St. Louis); Hanno Lustig (Stanford Graduate School of Business); Kanda Naknoi (University of Connecticut)
    Abstract: Empirical moments of asset prices and exchange rates imply that pricing kernels have to be almost perfectly correlated across countries. If they are not, observed real exchange rates are too smooth to be consistent with high Sharpe ratios in asset markets. However, the cross-country correlation of macro fundamentals is far from perfect. We reconcile these empirical facts in a two-country stochastic growth model with heterogeneous trading technologies for households and a home bias in consumption. In our model, only a small fraction of households actively participate in international risk sharing by frequently trading domestic and foreign equities. These active traders, who induce high cross-country correlation to the pricing kernels, are the marginal investors in foreign exchange markets. In a calibrated version of our model, we show that this mechanism can quantitatively account for the excess smoothness of exchange rates in the presence of highly volatile pricing kernels and weakly correlated macro fundamentals.
    Keywords: asset pricing, market segmentation, exchange rate, international risk sharing
    JEL: G15 G12 F31 F10
    Date: 2017–09
  18. By: Grossman, Gene; Helpman, Elhanan; Oberfield, Ezra; Sampson, Thomas
    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.
    Keywords: balanced growth; capital share; capital-skill complementarity; Labor Share; neoclassical growth; technological progress
    Date: 2017–09
  19. By: Gottfries, A.; Teulings, T.
    Abstract: We consider a Burdett and 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.
    Keywords: Nominal wage rigidity, on-the-job search, job-to-job transitions
    JEL: J31 J63 J64
    Date: 2017–09–27
  20. By: Waldo Mendoza Bellido (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: During the last two decades we have witnessed the emergence in the field of intermediate macroeconomics of an extensive literature that seeks to dismiss the traditional IS-LM-AD-AS model and replace it with the New Keynesian option. However, the efforts have not been successful, and currently most macroeconomics textbooks still rely on the traditional model, which is more than 80 years old. In order to help break this inertia, this paper proposes the IS-MR-AD-AS model, a New Keynesian model that allows determining the equilibrium values of production, inflation and the real interest rate. The model differs from the existing ones in two respects. Firstly, in the description of the model, in the graphic and mathematical treatment, and in the use of comparative static as a method to simulate the effects of the exogenous variables on the endogenous ones, the simplicity and elegance of the traditional IS-LM-AD-AS is replicated. Second, in spite of its simplicity, more complex issues can be dealt with, since the general model gives rise to four subsystems with which short-term equilibrium, steady-state equilibrium, transit toward steady-state equilibrium and rational expectations are addressed one at a time. JEL Classification-JEL: E32, E52
    Keywords: Inflation Targeting Scheme, New Keynesian model, Monetary policy
    Date: 2017
  21. By: Anna Bartocci (Bank of Italy); Lorenzo Burlon (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of the corporate sector purchase programme (CSPP) implemented in the euro area by the Eurosystem. For this purpose we calibrate and simulate a monetary-union dynamic general equilibrium model. We assume that entrepreneurs can finance their spending by issuing bonds in the domestic corporate bond market and by borrowing from domestic banks. We found that the March 2016 CSPP boosts euro-area GDP by around 0.3% in the second year (peak level). Inflation rises too but by a smaller amount. Second, taking into account the programme’s extension in December 2016, its overall impact on GDP amounts to 0.6%. Third, the CSPP also stimulates banking activity, because the improvement in macroeconomic conditions leads to higher demand for loans from households and entrepreneurs. Fourth, an early exit from the CSPP negatively impacts its macroeconomic effectiveness, while forward guidance on monetary policy rate enhances it.
    Keywords: DSGE models, financial frictions, open-economy macroeconomics, non-standard monetary policy, corporate bonds, forward guidance, euro area
    JEL: E43 E44 E52 E58
    Date: 2017–09
  22. By: Serafín Frache (Banco Central del Uruguay); Juan Odriozola
    Abstract: El objetivo de este trabajo es estimar los efectos de la obligatoriedad de cobro de sueldos, honorarios, pasividades y beneficios sociales en cuentas bancarias, analizándolo desde un marco dinámico estocástico de equilibrio general. La promoción de medios de pago electrónicos y la obligatoriedad del cobro en cuenta afecta la preferencia de los agentes entre dinero en efectivo y depósitos vista. A partir de un modelo DSGE se estiman los cambios en el equilibrio general de la economía, derivados del cambio en las preferencias y de un crecimiento del sistema financiero. Los resultados muestran que en el nuevo equilibrio determinado luego de la aplicación de la Ley de Inclusión Financiera, se observa un crecimiento en el sector financiero, una caída en el diferencial de tasas activas y pasivas y un aumento en el producto y la inversión, aunque también se observa una caída en los salarios que deriva en una caída en el consumo. Sin embargo estas variaciones son de una pequeña magnitud, especialmente las relativas al sector real. Finalmente se observa que la respuesta de la economía frente a distintos shocks, no se altera significativamente una vez implementada totalmente la Ley.
    Date: 2016
  23. By: Quint, Dominic; Rabanal, Pau
    Abstract: The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity on a large scale after short-term policy rates had reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should continue to be used once economic conditions and interest rates have normalized. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits of using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. By contrast, when more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.
    Keywords: Unconventional Monetary Policy,Banking,Optimal Rules
    JEL: C32 E32 E52
    Date: 2017
  24. By: Kuhn, Michael; Frankovic, Ivan; Wrzaczek, Stefan
    Abstract: We study medical progress within an economy of overlapping generations subject to endogenous mortality. We characterize the individual optimum and the general equilibrium of the economy and study the impact of improvements in the effectiveness of health care. We find that general equilibrium effects dampen strongly the increase in health care usage following medical innovation and that an increase in savings offsets the negative impact on GDP per capita of a decline in the support ratio..
    JEL: D91 I11 I12 I18 J11 J17 O31 O41
    Date: 2017
  25. By: Qi Luo; Romesh Saigal
    Abstract: Dynamic contracts with multiple agents is a classical decentralized decision-making problem with asymmetric information. In this paper, we extend the single-agent dynamic incentive contract model in continuous-time to a multi-agent scheme in finite horizon and allow the terminal reward to be dependent on the history of actions and incentives. We first derive a set of sufficient conditions for the existence of optimal contracts in the most general setting and conditions under which they form a Nash equilibrium. Then we show that the principal's problem can be converted to solving Hamilton-Jacobi-Bellman (HJB) equation requiring a static Nash equilibrium. Finally, we provide a framework to solve this problem by solving partial differential equations (PDE) derived from backward stochastic differential equations (BSDE).
    Date: 2017–10
  26. By: Harrison, Richard (Bank of England)
    Abstract: I study optimal monetary policy in a simple New Keynesian model with portfolio adjustment costs. Purchases of long-term debt by the central bank (quantitative easing; ‘QE’) alter the average portfolio return and hence influence aggregate demand and inflation. The central bank chooses the short-term policy rate and QE to minimise a welfare-based loss function under discretion. Adoption of QE is rapid, with large-scale asset purchases triggered when the policy rate hits the zero bound, consistent with observed policy responses to the Global Financial Crisis. Optimal exit is gradual. Despite the presence of portfolio adjustment costs, a policy of ‘permanent QE’ in which the central bank holds a constant stock of long-term bonds does not improve welfare.
    Keywords: Quantitative easing; optimal monetary policy; zero lower bound
    JEL: E52 E58
    Date: 2017–09–25
  27. By: M Samaniego, Roberto (The George Washington University); Yu Sun, Juliana (School of Economics, Singapore Management University)
    Abstract: We develop a model to evaluate the impact of college education finance on welfare, inequality and aggregate outcomes. Our model captures the stylized fact that entrepreneurs with college are more common and more profitable. Our calibration to US data suggests this is mainly because higher labor earnings allow college educated agents to ameliorate credit constraints when they become entrepreneurs. The welfare benefits of subsidizing education are greater than those of eliminating financing constraints on education because subsidies ameliorate the impact of financing constraints on would-be entrepreneurs.
    Date: 2016–04–28
  28. By: Kostas Mavromatis
    Abstract: Monetary policy in the US has been documented to have switched from reacting weakly to inflation fluctuations during the '70s, to fighting inflation aggressively from the early '80s onwards. In this paper, I analyze the impact of the US monetary policy regime switches on the Eurozone. I construct a New Keynesian two-country model where foreign (US) monetary policy switches regimes over time. I estimate the model for the US and the Euro Area using quarterly data and find that the US has switched between those two regimes, in line with existing evidence. I show that foreign regime switches affect home (Eurozone) inflation and output volatility and their responses to shocks, substantially, as long as the home central bank commits to a time invariant interest rate rule reacting to domestic conditions only. Optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer price inflation and to international variables, like imported goods relative prices. In fact, I show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally. Interestingly, I show that only marginal gains arise for the Euro Area when the ECB adjusts its policy according to the monetary regime in the US. Thus, a simple time-invariant monetary policy rule with a strong reaction to PPI inflation and relative prices is enough to counteract the effects of monetary policy switches in the US.
    Keywords: Monetary Policy; Markov-switching DSGE and Bayesian estimation; optimal monetary policy; international spillovers
    JEL: C3 E52 F3 F41 F42
    Date: 2017–09

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