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on Dynamic General Equilibrium |
| By: | Hakon Tretvoll (BI Norwegian Business School); Fernando Leibovici (Federal Reserve Bank of St. Louis); David Kohn (Universidad Catolica de Chile) |
| Abstract: | This paper studies the role of the sectoral composition of production and trade in accounting for emerging market business cycles. We document that in emerging economies the production of commodities is a larger share of total production than in developed ones, and that they run larger sectoral and aggregate trade imbalances. We set up a small open economy model that produces commodities and manufactures and trades them with the rest of the world. We contrast the implied business cycle dynamics of two economies that are respectively calibrated to match the observed differences between developed and emerging countries. In the model, shocks to the relative price of commodities lead to much larger fluctuations in output, net exports and TFP in the emerging economy, accounting for the higher volatility that we observe in the data. A key driver of these effects is that emerging economies consume relatively more manufactures than they produce. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:743&r=dge |
| By: | Matthias Schön (Deutsche Bundesbank); Dirk Krueger (University of Pennsylvania); Alexander Ludwig (Research Center SAFE, Goethe University); Jesus Fernandez-Villaverde (University of Pennsylvania) |
| Abstract: | We develop an overlapping generations model with endogenous growth and a health sector, in order to explain three secular facts characteriz- ing the U.S. economy: a substantial increase in life expectancy, a rise in the share of GDP devoted to health-related expenditures as well as an increase in the relative price of medical goods. We show how to inter- pret these observations as the equilibrium outcome of a model in which technological progress through quality improvements is endogenously directed to the sector producing medical goods. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:767&r=dge |
| By: | Diego Daruich (New York University) |
| Abstract: | Standard macroeconomic analysis of inequality focuses on the optimal choice of progressive taxation. However, early childhood environment has been shown to significantly impact adult outcomes. Using children's time diaries, we show that parental quality time with children is strongly associated with children's skills—which is later associated with their education. To compare the quantitative role of standard policies to ones that target early childhood, we extend the standard general-equilibrium heterogeneous-agent life-cycle model with earnings risk and credit constraints to allow for endogenous education, parental time and money investments towards children's skill development, and family transfers. The model includes two types of college majors: STEM and non-STEM. We evaluate three policies: progressive taxation, college tuition subsidies, and parenting education. Progressive taxation is the most effective at reducing disposable income inequality, but it does not promote the development of skills necessary to increase college graduation or social mobility. College subsidies promote only non-STEM graduation, since STEM is a better alternative only for high-skilled individuals. Parenting education is the most effective at increasing intergenerational mobility and the only one able to promote STEM graduation. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:770&r=dge |
| By: | Föll, Tobias |
| Abstract: | This paper studies the effects of combining financial frictions with wage rigidity in a search and matching framework. The model is able to match three empirical observations that existing search and matching models struggle to explain jointly: the cyclical component of the unemployment rate is positively skewed, the number of hires tends to increase in recessions, and the correlation between vacancies and unemployment is highly negative. |
| JEL: | E24 E27 E32 E44 J63 J64 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168080&r=dge |
| By: | Joseph E. Stiglitz |
| Abstract: | This paper shows that there is a presumption that Pareto efficient taxation entails a positive tax on capital. When tax and expenditure policies can affect the market distribution of income, those effects need to be taken into account, reducing the burden imposed on distortionary redistribution. The paper extends the 1976 Atkinson-Stiglitz results to a dynamic, overlapping generations model, correcting a misreading of the result on the desirability of a zero capital tax. That result required separability of consumption from labor and that the only unobservable differences among individuals was in (fixed) labor productivities. In a general equilibrium model, one needs to take into account the effects of policy changes on binding self-selection constraints; and with non-separability, capital taxation depends on the complementarity/substitutability of leisure during work with retirement consumption. The final section considers taxation when there are constraints on the imposition of intergenerational transfers (either political constraints or those derived from unobservability.) It constructs a simple two class model, capitalists who maximize dynastic welfare and workers who save for retirement, whose productivity can be enhanced by (publicly provided) education. It derives a simple expression for the optimal capital tax, which is positive, so long as the social welfare function is sufficiently equalitarian and the productivity of educational expenditures are sufficiently high. |
| JEL: | E2 H2 H41 H52 I24 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23892&r=dge |
| By: | Sergio de Ferra (Stockholm University) |
| Abstract: | The experience of the European monetary union has been characterized by three distinctive facts. First, core and periphery countries ran widening current account surplus and deficit positions, after the inception of the union. Second, core countries intermediated gross capital flows from the rest of the world, which in turn financed deficits in the periphery. Finally, a sovereign debt crisis took place, affecting multiple countries and causing severe recessions. I argue that institutional features of the European Economic and Monetary Union are responsible for the observation of imbalances, intermediation and pervasive crises. First, I show in a theoretical model that subsidies on holdings of euro-denominated assets contribute to all three phenomena. Second, I build a dynamic model of an economic union with trade in goods and financial assets. In the model, the introduction of a subsidy on cross-border asset holdings generates predictions for net and gross asset flows that quantitatively replicate the euro area experience. The model features a novel theoretical mechanism magnifying the severity of a debt crisis in an economic union, due to the joint presence of financial and trade linkages among union members. This mechanism is likely to have exacerbated the recent recession in the euro area periphery. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:726&r=dge |
| By: | Christine Ma (Deloitte Access Economics); Chung Tran (The Australian National University (E-mail: chung.tran@anu.edu.au)) |
| Abstract: | To what extent does population ageing limit fiscal capacity and affect fiscal sustainability? We answer this question through the lens of a fiscal space defined by the budgetary room between the current tax revenue and the peak of a Laffer curve. We use a dynamic general equilibrium, overlapping generations model calibrated to data from Japan and the US. Our findings show that the evolution of underlying demographic structures plays an important role in shaping a country fs fiscal capacity. There will be significant contractions in the fiscal space of Japan and the US when the two countries enter the late stage of demographic transition in 2040. In particular, the results from the model calibrated to Japan indicate that an increase in the old-age dependency ratio to over 70 percent can reduce Japan fs fiscal space by 36 percent. The existing design of Japan fs tax-transfer system is not fiscally sustainable by 2040 when factoring in the growing fiscal cost of the social security program. |
| Keywords: | Population Ageing, Laffer Curve, Fiscal Limit, Sustainability, Heterogeneity, Dynamic General Equilibrium |
| JEL: | E62 H20 H60 J11 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:17-e-07&r=dge |
| By: | Meier, Matthias |
| Abstract: | Investment is central for business cycles and a key characteristic of investment is time to build (TTB). I document that TTB is volatile and largest during recessions. To study these fluctuations, I develop a model. In the model, the longer TTB, the less frequently firms invest, and the less investment reflects productivity, which worsens the allocation of capital. In the calibrated model, one month longer TTB lowers GDP by 0.5%. Empirical evidence corroborates the quantitative results. |
| JEL: | C32 C68 D92 E01 E22 E32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168059&r=dge |
| By: | Randall Wright; Philipp Kircher; Benoit Julîen; Veronica Guerrieri |
| 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. |
| JEL: | D40 E40 J30 J64 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23884&r=dge |
| By: | Yu Zhu (Bank of Canada); Randall Wright (University of Wisconsin); Damien Gaumont (CRED) |
| Abstract: | This paper develops some novel models of housing markets based on price posting, using both noisy search and directed search. The models generate price dispersion and price stickiness -- i.e., they are consistent with the observation that some sellers do not adjust listed prices when market conditions change, something commentators say is puzzling and challenging for standard economic theory. We also contribute to the literature on price dispersion, in general, by considering big-ticket durable goods and agents that trade infrequently. The framework is tractable: comparative statics are characterized and parametric examples are solved explicitly. Using English housing data, we show the empirical relevance of the directed search model. This contributes to the literature of directed-search by showing how to identify and estimate a directed-search model. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:744&r=dge |
| By: | Lehmus, Markku |
| Abstract: | This paper presents a review of a quarterly macroeconomic model built for forecasting and policy simulation purposes at the Research Institute of the Finnish Economy (ETLA). The ETLA model can be labelled as a structural econometric macro model (also known as “SEM” or “policy model” in the recent literature). The ETLA model constitutes of 81 endogenous and 70 exogenous variables and hence at this stage, it is relatively small in size. The model encompasses Keynesian features in the short run, albeit particular attention is paid to its long-term equilibrium properties which are defined from supply side. Owing to these characteristics, its adjustment to external/policy shocks resembles the behavior of New Keynesian DSGE models with sticky prices and wages. The agents of the model are partly forward-looking. |
| Date: | 2017–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:rif:wpaper:54&r=dge |
| By: | Ricardo M. Reyes-Heroles; Gabriel Tenorio |
| Abstract: | We introduce external risks, in the form of shocks to the level and volatility of world interest rates, into a small open economy model subject to the risk of sudden stops—large recessions together with abrupt reversals in capital inflows| and characterize optimal macroprudential policy in response to these shocks. In the model, collateral constraints create a pecuniary externality that leads to "overborrowing" and sudden stops that arise when the constraints bind. The typical sudden stop generated by the model replicates existing empirical evidence for emerging market economies: Low and stable external interest rates reinforce "overborrowing" and lead to greater exposure to crises typically accompanied by abrupt increases in interest rates and a persistent rise in their volatility. We solve for the optimal policy and argue that the size of a tax on international borrowing that implements the policy depends on two factors, the incidence and the severity of potential future crises. We show quantitatively that these taxes respond to both the level and volatility of interest rates even though optimal decisions in the competitive equilibrium do not respond substantially to changes in volatility, and that the size of the optimal tax is non-monotonic with respect to external shocks. |
| Keywords: | Macroprudential policy ; time-varying volatility ; sudden stops ; financial crises ; external interest rates |
| JEL: | E3 E6 F3 F4 G1 G2 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1213&r=dge |
| By: | Alessandro Spiganti (University of Edinburgh); David Comerford (University of Strathclyde) |
| Abstract: | Committed and credible implementation of climate change policy, consistent with the usual 2C limit, is thought to require large fossil fuel asset write-offs. This issue, termed the Carbon Bubble, is usually presented as having implications for investors but, for the first time, this paper discusses its implications for macroeconomic policy and for climate policy itself. We embed the Carbon Bubble in a macroeconomic model exhibiting a financial accelerator: if investors are leveraged, the Carbon Bubble may precipitate a fire-sale as investors rush for the exits, and generate a large and persistent fall in output and investment. We investigate policy responses which can accompany the writing-off of fossil fuel assets, like debt transfers, investment subsidies, government guarantees, or even deception about the true scale of the required write-off of fossil fuel assets. We find a role for policy in mitigating the Carbon Bubble. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:734&r=dge |
| By: | Christopher Sleet (Carnegie Mellon University) |
| Abstract: | Economic opportunities and wages are unevenly dispersed across locations. The risk of being born in and having personal attachment to a low wage location creates a motive for social insurance. Policymakers must trade this motive off against its adverse impact on location choice and migration. Our paper develops the theory of optimal geographic social insurance. We provide new formulas that characterize optimal location-conditioned transfers and a quantitative analysis of such transfers for the US. We model workers as solving dynamic discrete choice location problems and embed these problems into an optimal policy framework. The policy maker is assumed to observe and condition transfers on the locational choices of workers, but not their private locational preferences. In the simplest environment, optimal policy is characterized by a generalized multidimensional version of formulas originally derived by Bailey (1978), Saez (2002) and Chetty (2006) in the context of unemployment insurance. This formula equates the marginal benefit of a transfer to the recipient with the marginal resource cost where the latter incorporates behavioral sufficient statistics describing the elasticities of migration with respect to transfers. The discrete choice framework allows us to connect these sufficient statistics to structural primitives and quantitatively evaluate optimal policy. We extend the model to a rich dynamic setting with endogenous wage determination. This complicates optimal policy formulas through the introduction of terms capturing the option value of future relocations and the impact of relocations on the wage distribution. We use the approach of Hotz and Miller (1993) to estimate the migration costs and other structural parameters. We then quantitatively evaluate optimal geographic policy at steady state and under various adjustment scenarios. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:799&r=dge |
| By: | Pierre Yared (Columbia University); Marina Azzimonti (Stony Brook University) |
| Abstract: | We develop a theory of optimal government debt in which publicly-issued and privately-issued safe assets are substitutes. While government bonds are backed by future tax revenues, privately-issued safe assets are backed by the future repayment of pools of defaultable private loans. We find that a higher supply of public debt crowds out privately-issued safe assets less than one for one and reduces the interest spread between borrowing and deposit rates. Our main result is that the optimal level of public debt does not fully crowd out private lending and maintains a positive interest spread. Moreover, the optimal level of public debt responds positively to an increase in the volatility of idiosyncratic shocks, to a decrease in the cost of default, and to an increase in financial repression. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:755&r=dge |
| By: | Lansing, Kevin J. (Federal Reserve Bank of San Francisco) |
| Abstract: | This paper develops a New Keynesian model with a time-varying natural rate of inter-est (r-star) and a zero lower bound (ZLB) on the nominal interest rate. The representative agent contemplates the possibility of an occasionally binding ZLB that is driven by switching between two local rational expectations equilibria, labeled the "targeted" and "deflation" solutions, respectively. Sustained periods when the real interest rate remains below the central bank's estimate of r-star can induce the agent to place a substantially higher weight on the deflation equilibrium, causing it to occasionally become self-fulling. I solve for the time series of stochastic shocks and endogenous forecast rule weights that allow the model to exactly replicate the observed time paths of the U.S. output gap and quarterly inflation since 1988. In model simulations, raising the central bank's inflation target to 4% from 2% can reduce, but not eliminate, the endogenous switches to the deflation equilibrium. |
| JEL: | E31 E43 E52 |
| Date: | 2017–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2017-24&r=dge |
| By: | Nezih Guner (CEMFI); Christopher Rauh (University of Montreal); Elizabeth Caucutt (University of Western Ontario) |
| Abstract: | The differences between black and white households and family structure have been a concern for policy makers for a long time. The last few decades, however, have witnessed an unprecedented retreat from marriage among black individuals. In 1970, about 89% of black women between ages 25 and 54 were ever married, in contrast to only 51% today. Wilson (1987) suggests that the lack of marriageable black men due to incarceration and unemployment is behind this decline. In this paper, we take a fresh look at the Wilson Hypothesis. We argue that the current incarceration policies and labor market prospects make black men much riskier spouses than white men. They are not only more likely to be, but also to become, unemployed or incarcerated than their white counterparts. We develop an equilibrium search model of marriage, divorce and labor supply that takes into account the transitions between employment, unemployment and prison for individuals by race, education, and gender. We calibrate this model to be consistent with key statistics for the US economy. We then investigate how much of the racial divide in marriage is due to differences in the riskiness of potential spouses, heterogeneity in the education distribution, and heterogeneity in wages. We find that differences in incarceration and employment dynamics between black and white men can account for about 76% of the existing black-white marriage gap in the data. We also study how "The War on Drugs" in the US might have affected the structure of black families, and find that it can account for between 13% to 41% of the racial marriage gap. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:779&r=dge |
| By: | Paul, Pascal (Federal Reserve Bank of San Francisco) |
| Abstract: | Financial crises are born out of prolonged credit booms and depressed productivity. At times, they are initiated by relatively small shocks. Consistent with these empirical observations, this paper extends a standard macroeconomic model to include financial intermediation, long-term defaultable loans, and occasional financial crises. Within this framework, crises are typically preceded by prolonged boom periods. During such episodes, intermediaries expand their lending and leverage, thereby building up financial fragility. Crises are generally initiated by a moderate adverse shock that puts pressure on intermediaries’ balance sheets, triggering a creditor run, a contraction in new lending, and ultimately a deep and persistent recession. |
| JEL: | E32 E44 E52 G01 G21 |
| Date: | 2017–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2017-22&r=dge |
| By: | Philipp Kircher (European University Institute and University of Edinburgh); Paul Muller (Gothenburg University); Michele Belot (University of Edinburgh) |
| Abstract: | In this study we introduce a small number of artificial vacancies with randomised characteristics in an otherwise standard job search platform. This allows us to study how job seekers react to job characteristics - in analogy of usual randomised audit studies of employers' reactions to applicant characteristics. We focus on the reaction to wage announcements, and test the main implications of directed search: high wages should attract more and better applicants, but some applicants apply only to low wages even if higher wage offers are present. Both parts of the theory and support among the randomised job offers, suggesting an allocative role for wage competition in search markets. We calibrate a directed search model with multiple applications and on-the-job search and and that it can reproduce our findings quantitatively. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:722&r=dge |
| By: | Jüßen, Falko; Bredemeier, Christian; Winkler, Roland |
| Abstract: | We document heterogeneity in occupational employment dynamics in response to government spending shocks. Employment rises most strongly in pink-collar occupations, while employment in blue-collar occupations is hardly affected. We develop a business-cycle model that explains the heterogeneous occupational employment dynamics as a consequence of differences in the short-run substitutability between labor and capital services across occupations. |
| JEL: | E62 E24 J21 J23 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168193&r=dge |
| By: | Ryan Chahrour (Boston College; Boston College) |
| Abstract: | The United States enjoys an “exorbitant privilege” that allows it to borrow at especially low interest rates. Meanwhile, the dollarization of world trade appears to shield the U.S. from international disturbances. We provide a new theory that links dollarization and exorbitant privilege through the need for an international medium of exchange. We consider a two-country world where international trade happens in decentralized matching markets, and must be collateralized by assets — a.k.a. currencies — issued by one of the two countries. Traders have an incentive to coordinate their currency choices and a single dominant currency arises in equilibrium. With small heterogeneity in traders’ information, the model delivers a unique mapping from economic conditions to the dominant currency. Nevertheless, the model delivers a dynamic multiplicity: in steady-state either currency can serve as the international medium of exchange. The economy with the dominant currency enjoys lower interest rates and the ability to run current account deficits indefinitely. Currency regimes are stable, but sufficiently large shocks or policy changes can lead to transitions, with large welfare implications. |
| Keywords: | Home Bias, Information Choice, Portfolio Choice, Dynamics |
| JEL: | F3 G11 G15 D8 D83 |
| Date: | 2017–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:934&r=dge |
| By: | Marianna Kudlyak (Federal Reserve Bank of San Francisco); M. Saif Mehkari (University of Richmond); Bill Dupor (Federal Reserve Bank of St. Louis); Marios Karabarbounis (Federal Reserve Bank of Richmond) |
| Abstract: | We analyze the effect of the spending component of the Recovery Act (2009-2012) on consumer spending, namely retail and auto purchases. We find a that a $1 increase in county-level government spending, increased county-level retail spending by $0.20, and auto spending by $0.05. We translate these regional estimates into aggregate effects using a novel quantitative model. We explicitly model several spillover channels through which government spending may spread across regions, such as trade in intermediate goods, a federal tax union, and a currency union. However, we also allow for heterogeneity and incomplete markets within each region. We simulate regional government spending shocks and analyze their effect on local consumer spending. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:707&r=dge |
| By: | Yin-Chi Wang (Chinese University of Hong Kong); Ping Wang (Washington University in St. Louis); Chong Yip (Chinese University of Hong Kong); Pei-Ju Liao (Institute of Economics, Academia Sinica) |
| Abstract: | Observing China's rapid skill-enhanced development and urbanization process accompanied by continual reforms of the household registration system, we explore the underlying drivers, highlighting the channel of rural to urban migration. In addition to conventional work-based migration, we incorporate education-based migration by constructing a dynamic spatial equilibrium model of migration decisions with educational choice. We then calibrate our model to fit the data from China over the 1980--2007 period. We find that the effects of education-based migration on total per capita output cannot be ignored. There also exist rich interactions between the two migration channels. Furthermore, our results suggest that the increase in the college admission selectivity for rural students seriously depresses China's development. Policy experiments on migration and labour-market regulations are also conducted to assess their quantitative significance. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:738&r=dge |
| By: | Edle von Gaessler, Anne; Ziesemer, Thomas (UNU-MERIT, and SBE Maastricht University) |
| Abstract: | We modify a Lucas-type endogenous growth model to contain endogenous labour supply, imperfect international capital movements, and estimated interest and education time functions. Solutions based on realistic calibrations show that (i) the rate of human capital depreciation through ageing has a much stronger negative impact on growth than further changes in the population growth rate or the Frisch elasticity of labour supply; (ii) a higher rate of human capital depreciation, a higher growth rate of the dependency ratio, and lower past cumulated savings all go together with a higher second-best education time and higher growth; (iii) demographic dividends are positive in the short run but negative in the long run. |
| Keywords: | Ageing, human capital, endogenous growth, open economy, serendipity theorem |
| JEL: | F43 J11 O11 O33 O41 |
| Date: | 2017–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2017043&r=dge |
| By: | Iachan, Felipe Saraiva |
| Abstract: | Credit constraints generate a hedging motive that extends beyond purely financial decisions by also distorting the selection and operation of real investment projects. We study these distortions through a dynamic model in which collateral constraints emerge endogenously. The hedging motive can be broken down into three components: expected future productivity, leverage capacity, and current net worth. While constrained firms behave as if averse to transitory fluctuations in net worth, additional exposure to factors related to persistent productivity innovations or credit capacity fluctuations increases their value. The most constrained firms abstain from financial hedging while still distorting real decisions to reflect the hedging motive. Firm-level volatility is influenced by capital budgeting distortions, which contribute as a potential explanation for the higher volatility of lower net-worth firms. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:786&r=dge |
| By: | Oscar Avila (University of Rochester); George Alessandria (University of Rochester) |
| Abstract: | We study trade integration in Colombia over a long period through the lens of GE model with new exporter dynamics in which exporters invest in accumulating a better shipping technology. We emphasize the relationship between the firm-level export intensity and aggregate export intensity disciplines the changes in technology and policy accounting for this integration. We find that a common decline in tariffs can account for about 75 percent of the growth in exports as a share of manufacturing sales. We attribute the remaining 25 percent to an increase in the success of investments in export market access. We show that about 10 percent of the increase is accounted for through the endogenous accumulation of an improved exporting technology by existing exporters. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:719&r=dge |
| By: | Fabio C. Bagliano (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Carolina Fugazza (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Giovanna Nicodano (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy) |
| Abstract: | The Great Recession has highlighted that long-term unemployment may become a trap with loss of human capital. This paper extends the life-cycle model allowing for a small risk of long-term unemployment with permanent effects on labour income. Such nonlinear income risk dampens both early consumption and early investment in risky assets, resulting in an optimal equity portfolio share relatively flat in age. The driver of such flattening in the life-cycle profile is the resolution of uncertainty, as the worker ages, concerning this personal disaster. Shifting to such flatter investment profile away from a simple “age rule†delivers mean welfare gains that are three times larger than in models with linear labour income shocks. |
| Keywords: | Disaster risk, Life-cycle portfolio choice, Unemployment risk, Human capital depreciation, Age rule. |
| JEL: | E21 G11 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpapnw:041&r=dge |
| By: | Russell Wong (Federal Reserve Bank of Richmond); Guillaume Rocheteau (University of California, Irvine); Zachary Bethune (University of Virginia) |
| Abstract: | We develop a New-Monetarist model of unemployment in which distributional considerations matter. Households who lack commitment are subject to both employment and expenditure risk. They self-insure by accumulating real balances and, possibly, claims on firms profits. The distribution of liquidity is endogenous and responds to idiosyncratic risks and monetary policy. Despite the ex-post heterogeneity our model can be solved in closed form in a variety of cases. We show the existence of an aggregate demand channel according to which the distribution of workers across employment states, and their incomes in those states, affects the distribution of liquid wealth and firms' profits. An increase in unemployment benefits or wages has a positive effect on aggregate demand and can lead to higher employment. Moreover, an increase in productivity has a multiplier effect on firms' revenue. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:760&r=dge |
| By: | Ippei Fujiwara (Keio University / ANU); Scott Davis (Federal Reserve Bank of Dallas) |
| Abstract: | Abandoning an objective function with multiple targets and adopting a single mandate is an effective way for a central bank to overcome the classic time-inconsistency problem. We show that the choice of a particular single mandate depends on a country's level of trade openness. Both inflation targeting and nominal exchange rate targeting come with their own costs. We show that the costs of inflation targeting are increasing in a country's level of trade openness while the costs of exchange rate targeting are decreasing in trade openness. Thus a relatively closed economy will prefer an inflation targeting mandate and a very open economy will prefer an exchange rate target. Empirical results show that as central banks become less credible they are more likely to adopt a pegged exchange rate, and crucially the empirical link between central bank credibility and the tendency to peg depends on trade openness. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:795&r=dge |
| By: | Andrea Waddle (University of Richmond); Ellen McGrattan (University of Minnesota) |
| Abstract: | In this paper, we estimate the impact of increasing costs on foreign producers following a withdrawal of the United Kingdom from the European Union (popularly known as Brexit). Our predictions are based on simulations of a multicountry neoclassical growth model that includes multinational firms investing in research and development (R&D), brands, and other intangible capital that is used nonrivalrously by their subsidiaries at home and abroad. We analyze several post-Brexit scenarios. First, we assume that the United Kingdom unilaterally imposes tighter restrictions on foreign direct investment (FDI) from other E.U. nations. With less E.U. technology deployed in the United Kingdom, U.K. firms increase investment in their own R&D and other intangibles, which is costly, and welfare for U.K. citizens is lower. If the European Union remains open, its citizens enjoy a modest gain from the increased U.K. investment since it can be costlessly deployed in subsidiaries throughout Europe. If instead we assume that the European Union imposes the same restrictions on U.K. FDI, then E.U. firms invest more in their own R&D, benefiting the United Kingdom. With costs higher on both U.K. and E.U. FDI, we predict a significant fall in foreign investment and production by U.K. firms. The United Kingdom increases international lending, which finances the production of others both domestically and abroad, and inward FDI rises. U.K. consumption falls and leisure rises, implying a negligible impact on welfare. In the European Union, declines in investment and production are modest, but the welfare of E.U. citizens is significantly lower. Finally, if, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, U.K. inward FDI and welfare both rise significantly. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:710&r=dge |