nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒10‒22
eleven papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. News Shocks under Financial Frictions By Görtz, Christoph; Tsoukalas, John; Zanetti, Francesco
  2. IGEM-PA: a Variant of the Italian General Equilibrium Model for Policy Analysis By Barbara Annicchiarico; Claudio Battiati; Claudio Cesaroni; Fabio Di Dio; Francesco Felici
  3. Default Risk, Sectoral Reallocation, and Persistent Recessions By Amanda Michaud; David Wiczer
  4. Marriage and Employment Participation with Wage Bargaining in Search Equilibrium. By Roberto Bonilla; Alberto Trejos
  5. Global demographic change and climate policies By Gerlagh, Reyer; Jaimes Bonilla, Richard; Motavasseli, Ali
  6. Price rigidities and the granular origins of aggregate fluctuations By Pasten, Ernesto; Schoenle, Raphael; Weber, Michael
  7. Human Capital and Optimal Redistribution By Koeniger, Winfried; Prat, Julien
  8. The Sovereign-Bank Interaction in the Eurozone Crisis By Maximilian Goedl
  9. Optimal Incentive Contracts with Job Destruction Risk By Grochulski, Borys; Wong, Russell; Zhang, Yuzhe
  10. The Dynamics of Corruption and Unemployment in a Growth Model with Heterogeneous Labour By King Yoong Lim
  11. Should Unconventional Monetary Policies Become Conventional? By Quint, Dominic; Rabanal, Pau

  1. By: Görtz, Christoph; Tsoukalas, John; Zanetti, Francesco
    Abstract: We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods which provide robust evidence on the importance credit spreads for the propagation of news shocks. A DSGE model with financial frictions shows these are critical for the amplification of TFP news shocks. The very similar quantitative dynamics implied by VAR and DSGE methodologies provides support for the `news view' of business cycles.
    JEL: E2 E3
    Date: 2017
  2. By: Barbara Annicchiarico; Claudio Battiati; Claudio Cesaroni; Fabio Di Dio; Francesco Felici
    Abstract: This paper extends IGEM, the dynamic general equilibrium model for the Italian economy currently in use at the Italian Department of the Treasury for economic policy analysis. In this new variant of the model the public sector is explicitly modelled as suppliers of goods and services. With this tool in hand we are able to present an in-depth analysis of expenditure-based fiscal multipliers and ameliorate our understanding of the potential macroeconomic effects of several policy interventions,such as those aimed at the rationalization of public spending, at the improvement of the business environment and at fostering productivity of the public administration (PA).
    Keywords: Structural Reforms, Dynamic General Equilibrium Model, Italy, Public Administration Fiscal Multipliers, Simulation Analysis
    JEL: E27 E30 E60
    Date: 2017–05
  3. By: Amanda Michaud; David Wiczer
    Abstract: Using retrospective data, we introduce evidence that occupational exposure significantly affects disability risk. Incorporating this into a general equilibrium model, social disability insurance (SDI) affects welfare through (i) the classic, risk-sharing channel and (ii) a new channel of occupational reallocation. Both channels can increase welfare, but at the optimal SDI they are at odds. Welfare gains from additional risk-sharing are reduced by overly incentivizing workers to choose risky occupations. In a calibration, optimal SDI increases welfare by 2.3% relative to actuarially fair insurance, mostly due to risk sharing.
    Date: 2017
  4. By: Roberto Bonilla; Alberto Trejos
    Abstract: The empirical literature addressing links between the labor and the marriage markets is numerous and varied. Despite this, the theoretical (equilibrium) literature that explicitly links the two markets is less developed, particularly so with frictional markets. We build an equilibrium search model where married couples make joint decisions on home production and labor market participation. We then analyze the implications of our results for a frictional marriage market allowing us to consider the interaction between both markets. A worker´s bargaining position reflects their own productivity, and also the employment status and conditions of their spouse. We find that couples with very different productivities have different strategies regarding labor market participation. In symmetric couples, the partners behave symmetrically. Workers get better job offers when their spouses are employed, and in some equilibria a person may search for transitory jobs with the sole purpose of raising the long-term wages of their spouse. In some cases, firms unilaterally increase a worker’s wage in order to reduce turnover, by ensuring that the spouse stays at home. Whether firms follow that strategy or not may be a matter of multiple equilibria, depending on parameter values. All this provides an additional explanation for wage and search behavior heterogeneity of similar workers and/or couples.
    Keywords: labour market participation, wage formation, marriage market, linked frictional markets
    JEL: D13 J12 J22 J31
    Date: 2017
  5. By: Gerlagh, Reyer (Tilburg University, Center For Economic Research); Jaimes Bonilla, Richard (Tilburg University, Center For Economic Research); Motavasseli, Ali (Tilburg University, Center For Economic Research)
    Abstract: Between 1950 and 2017, world average life expectancy increased from below-50 to above-70, while the fertility rate dropped from 5 to about 2.5. We develop and calibrate an analytic climate-economy model with overlapping generations to study the effect of such demographic change on capital markets and optimal climate policies. Our model replicates findings from the OLG-demography literature, such as a rise in households’ savings, and a declining rate of return to capital. We also find that demographic change raises the social cost of carbon, at 2020, from 28 euro/tCO2 in a model that abstracts from demography, to 94 euro/tCO2 in our calibrated model.
    Keywords: climate change; social cost of carbon; environmental policy; demographic trends
    JEL: H23 J11 Q54 Q58
    Date: 2017
  6. By: Pasten, Ernesto; Schoenle, Raphael; Weber, Michael
    Abstract: We study the aggregate implications of sectoral shocks in a multi-sector New Keynesian model featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. We calibrate a 341 sector version of the model to the United States. Both theoretically and empirically, sectoral heterogeneity in price rigidity (i) generates sizable GDP volatility from sectoral shocks, (ii) amplifies both the “granular” and the “network” effects, (iii) alters the identity and relative contributions of the most important sectors for aggregate fluctuations, (iv) can change the sign of fluctuations, (v) invalidates the Hulten (1978) Theorem, and (vi) generates a “frictional” origin of aggregate fluctuations. JEL Classification: E31, E32, O40
    Keywords: idiosyncratic shocks, input-output linkages, sticky prices
    Date: 2017–10
  7. By: Koeniger, Winfried; Prat, Julien
    Abstract: We characterize optimal redistribution in a dynastic economy with observable human capital and hidden ability. We compute the optimal allocation and show how it can be implemented with student loans or means-tested grants. The numerical results reveal that human capital investment should decline in parental income because parents with high income bequeath more and this lowers the labor supply of their children through a wealth effect.
    JEL: E24 H21 I22 J24
    Date: 2017
  8. By: Maximilian Goedl (University of Graz, Austria)
    Abstract: This paper investigates the relationship between government debt default, the banking sector and the wider economy. It builds a model of the public bond market, the banking sector and the real economy to study the mechanism by which a government default affects the other sectors and shows that this model can explain some "stylized facts" of the Eurozone crisis. The key aspect of the model is a friction in the financial market which forces banks to hold part of their assets in the form of government bonds. In such a model, an exogenous increase in the probability of default can lead to the joint occurrence of a credit crunch (i.e. declining bank lending and rising spreads between loan interest rates and deposit rates) and a decline in output. The paper also shows that an adverse technology shock (an exogenous decline in total factor productivity) cannot fully explain these phenomena.
    Keywords: Government default; Financial frictions; Business cycle model
    JEL: E37 E44 H63
    Date: 2017–10
  9. By: Grochulski, Borys (Federal Reserve Bank of Richmond); Wong, Russell (Federal Reserve Bank of Richmond); Zhang, Yuzhe (Texas A&M University)
    Abstract: We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In modeling job destruction as an exogenous Poisson shock, we follow the Diamond-Mortensen-Pissarides search-and-matching literature. The optimal contract shows how job destruction risk is shared between the rm and the agent. Arrival of the job-destruction shock is always bad news for the rm but can be good news for the agent. In particular, under weak conditions, the optimal contract has exactly two regions. If the agent's continuation value is below a threshold, the agent's continuation value experiences a negative jump upon arrival of the job-destruction shock. If the agent's value is above this threshold, however, the jump in the agent's continuation value is positive, i.e., the agent gets rewarded when the match becomes unproductive. This pattern of adjustment of the agent's value at job destruction allows the firm to reduce the costs of effort incentives while the match is productive. In particular, it allows the firm to adjust the drift of the agent's continuation value process so as to decrease the risk of reaching either of the two inefficient agent retirement points. Further, we study the sensitivity of the optimal contract to the arrival rate of job destruction.
    Keywords: dynamic moral hazard; job destruction; jump risk
    JEL: D86
    Date: 2017–10–06
  10. By: King Yoong Lim
    Abstract: This paper presents an overlapping generations growth model with heterogeneous labour, endogenous unemployment, and public sector corruption. Unlike most previous studies, the model does not separate public officials and private individuals into two distinct groups. Instead, taking up bureaucratic appointment as a public servant is modelled as an occupational choice, which then allows for the endogenous determination of the proportion of public o¢fficials, the share of corrupt officials among them, and the public investment efficiency of the economy within the dynamic system. Parameterised for Nigeria, the dynamics of endogenous corruption and unemployment, as well as their policy tradeoff, are studied using numerical policy experiments based on relevant themes in the country, which include public sector downsizing and social intervention schemes.
    Keywords: Economic Growth, Corruption, Nigeria, Public Sector Efficiency, Unemployment
    JEL: H30 H54 O41
    Date: 2017
  11. By: Quint, Dominic; Rabanal, Pau
    Abstract: After the recent crisis, central banks deployed unconventional monetary policies (UMP) to affect credit conditions and to provide liquidity at a large scale. We study if UMP should still be used when economic conditions normalize. Using an estimated non-linear DSGE model with a banking sector and long-term debt for the US, we show that the benefits of using UMP in normal times are substantial. However, the benefits are shock-dependent and mostly arise when the economy is hit by financial shocks.
    JEL: C32 E32 E52
    Date: 2017

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