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on Dynamic General Equilibrium |
| By: | Ma, Zhixia |
| Abstract: | This dissertation addresses two distinct issues. The first paper studies business cycles with asset fire sales under limited commitment in financial markets. Paper 2 and 3 study firm entry and exit dynamics in a global game with incomplete information. The second paper derives analytical solutions when firms’ productivity is uniformly distributed. The third paper extends the analysis to span more general distributions and solves the problem numerically.The first paper develops a stochastic over-lapping generations’ model to study the intertemporal and intergenerational transmission of productivity shocks. Productivity shocks cause fire sales of capital, which in turn affects the income of future generations. From a constrained-efficiency perspective, competitive equilibria can be inefficient as agents' choices in equilibrium exhibit ex-ante over-borrowing. The inefficiency arises because entrepreneurs cannot get fully financed from outside funds due to limited commitment in financial markets. The fact that the capital prices are determined in competitive markets also contributes to the above inefficiency because agents fail to internalize potential ex-post fire sales. A capital requirement policy can reduce fire sales when adverse productivity shocks occur, and can thus increase the income for all future generations. On the other hand, a lower capital stock even when good productivity shocks occur decreases income for all future generations. Overall, this paper shows that in the long run, a capital requirement policy can (strictly) increase welfare of agents.The second paper develops a static general equilibrium model to study firms' entry and exit decision in a global game with incomplete information. Firms' choices are strategic substitutes. This paper analytically proves the existence and uniqueness of a monotonic pure strategy equilibrium when the mean productivity and the productivity conditional on the mean are both drawn from uniform distributions. Using numerical examples, it is shown that when the precision of public information increases, the equilibrium switching productivity level increases and, as a result, the aggregate industry productivity increases. By reallocating resources to more productive firms, an increase in the precision of public information leads to a higher welfare.The third paper extends the problem studied in the second paper to examine whether and how the shapes of productivity distributions affect the existence of the monotonic pure strategy equilibria. The mean productivity is now drawn from a truncated normal distribution and individual firm's productivity conditional on the mean is drawn from more general (truncated) distributions, such as truncated normal, truncated gamma, and truncated exponential distributions. With numerical examples, it is shown that a unique monotonic pure strategy equilibrium continues to exist when firms’ productivity is drawn from non-uniform distributions. As in paper 2, both the aggregate productivity and the welfare per worker increase with the increase in the precision of public information. However, unlike in paper 2, the impact of an increase in the precision of private information on aggregate productivity and the welfare depends on the shape of the distribution. In particular, this impact is uncertain when the productivity conditional on the mean is drawn from truncated gamma distribution, which is skewed. |
| Date: | 2016–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:201601010800006049&r=dge |
| By: | Jan Eeckhout (University College London and Barcelona); Korie Amberger (UPF and Barcelona GSE) |
| Abstract: | Labor market liquidity (flows to and from employment) have decreased sharply in the US in the last decades while the unemployment rate has remained constant; and across developed economies, there are also huge differences in flows. This poses very different risk profiles for workers: low labor market liquidity makes employment more attractive (higher job security) and unemployment less so (lower reemployment security). In this paper we ask which regime offers better insurance and higher welfare: job security or reemployment security? Except for very high levels of labor market liquidity, we find that welfare for a given asset level is increasing in liquidity for both the unemployed and employed. To avoid being borrowing constrained in an illiquid labor market, unemployed workers dissave more slowly, and the employed increase their savings, whose value is affected by equilibrium prices (wages and the interest rate). However, allowing capital markets to readjust generates higher aggregate welfare as flows decrease, completely through improved job security and asset accumulation for the low-skilled employed. The aggregate welfare gains from lower liquidity are sizable, 1.4% of consumption when comparing across countries. Optimal Unemployment Insurance (UI) is around 40% in the benchmark US economy and is increasing with lower labor market liquidity. A skill-specific optimal policy heavily favors the less wealthy low skilled but less so in a more illiquid labor market. Finally, we find lower flows decrease wealth inequality. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:839&r=dge |
| By: | Michal Szkup (The University of British Columbia); Fernando Leibovici (Federal Reserve Bank of St. Louis); David Kohn (Universidad Catolica de Chile) |
| Abstract: | We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. We investigate a small open economy with heterogeneous firms and idiosyncratic productivity shocks, where firms face financing constraints and debt can be denominated in domestic or foreign units. In our model, a real depreciation affects firms through two channels. On the one hand, it increases the returns to selling internationally, making exporting more profitable. On the other hand, it tightens the borrowing constraint by increasing the value of foreign-denominated debt relative to firms’ net worth. We calibrate the model to match key features from plant-level data and use it to quantify the importance of these channels. We find that financial frictions slow down the response of aggregate exports, and foreign-denominated debt amplifies this effect by decreasing firms’ net worth on impact. However, we find that these channels can only explain a small fraction of the dynamics of exports observed in the data. While financial frictions and balance-sheet effects distort production and investment decisions, exports are significantly less affected as firms reallocate sales across markets in response to the change in the real exchange rate. We document the importance of cross-market reallocation for export dynamics using firm-level data from Mexico’s devaluation in 1994. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:859&r=dge |
| By: | Bachmann, Rüdiger; Bai, Jinhui; Lee, Minjoon; Zhang, Fudong |
| Abstract: | This study explores the welfare and distributional effects of fiscal volatility using a neoclassical stochastic growth model with incomplete markets. In our model, households face uninsurable idiosyncratic risks in their labor income and discount factor processes, and we allow aggregate uncertainty to arise from both productivity and government purchases shocks. We calibrate our model to key features of the U.S. economy, before eliminating government purchases shocks. We then evaluate the distributional consequences of the elimination of fiscal volatility and find that, in our baseline case, welfare gains increase with private wealth holdings. |
| Keywords: | Distributional Effects; fiscal volatility; labor income risk; transition path; Wealth Inequality; Welfare costs |
| JEL: | E30 E32 E60 E62 H30 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12384&r=dge |
| By: | Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos |
| Abstract: | This paper analyses the macroeconomic effects of the ECB’s quantitative easing using an open-economy DSGE model estimated with Bayesian techniques. Shock decompositions for real GDP growth and CPI inflation suggest positive contributions of up to 0.4 and 0.5 pp in the standard linearized version of model. Using piecewise linear solution techniques to allow for an occasionally binding zero-bound constraint raises the positive impact on growth and inflation to 0.8 and 0.7 pp. |
| JEL: | E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168060&r=dge |
| By: | SeHyoun Ahn; Greg Kaplan; Benjamin Moll; Thomas Winberry; Christian Wolf |
| Abstract: | We develop an efficient and easy-to-use computational method for solving a wide class of general equilibrium heterogeneous agent models with aggregate shocks, together with an open source suite of codes that implement our algorithms in an easy-to-use toolbox. Our method extends standard linearization techniques and is designed to work in cases when inequality matters for the dynamics of macroeconomic aggregates. We present two applications that analyze a two-asset incomplete markets model parameterized to match the distribution of income, wealth, and marginal propensities to consume. First, we show that our model is consistent with two key features of aggregate consumption dynamics that are difficult to match with representative agent models: (i) the sensitivity of aggregate consumption to predictable changes in aggregate income and (ii) the relative smoothness of aggregate consumption. Second, we extend the model to feature capital-skill complementarity and show how factor-specific productivity shocks shape dynamics of income and consumption inequality. |
| JEL: | A00 C00 E00 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6581&r=dge |
| By: | Tatsuro Senga (Queen Mary University of London); Julia Thomas (Ohio State University); Aubhik Khan (Ohio State University) |
| Abstract: | We study aggregate fluctuations in an economy where firms have persistent differences in total factor productivity, capital and debt or financial assets. Investment is funded by retained earnings and non-contingent debt. Firms may default upon loans, and this risk leads to a unit cost of borrowing that rises with the level of debt and falls with the value of collateral. On average, larger firms, those with more collateral, have higher levels of investment than smaller firms with less collateral. Since large and small firms draw from the same productivity distribution, this implies an insufficient allocation of capital in small firms and thus reduces aggregate total factor productivity, capital and GDP. We consider business cycles driven by shocks to aggregate total factor productivity and by credit shocks. The latter are financial shocks that worsen firms’ cash on hand. In equilibrium, our nonlinear loan rate schedules drive countercyclical default risk and exit. Because a negative productivity shock raises default probabilities, it leads to a modest reduction in the number of firms and a deterioration in the allocation of capital that amplifies the effect of the shock. The recession following a negative credit shock is qualitatively different from that following a productivity shock and more closely resembles the 2007 U.S. recession in several respects. A rise in default and a substantial fall in entry yield a large decline in the number of firms. Measured TFP falls for several periods, as do employment, investment and GDP, and the ultimate declines in investment and employment are large relative to that in TFP. Moreover, the recovery following a credit shock is gradual given slow recoveries in TFP, aggregate capital, and the measure of firms. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:889&r=dge |
| By: | CAMILLI, Andrea; LAGERBORG, Andresa |
| Abstract: | Using annual data for 20 OECD countries over the period 1961-2014, we study whether labor market institutions (LMIs) not targeted to maternity impact the total fertility rate (TFR). We distinguish between employment rigidities (ER) and real wage rigidities (RWR), since the former reduces and the latter amplifies the response of the business cycle to shocks. Panel regressions and principal component analysis reveal that ER, such as employment protection and union strength, increase TFR. On the other hand, RWR, proxied by the centralization of wage bargaining and unemployment benefits, reduce TFR. We also find evidence that unemployment volatility reduces fertility whereas wage volatility raises fertility. Thus, to the extent that labor market institutions affect unemployment and wage volatility, they may also affect fertility. We complement our analysis with a DSGE model that incorporates households' fertility decision as well as unemployment and wage rigidities. We find that downward wage rigidities amplify real contractions in response to negative demand shocks and lead to large drops in employment and fertility. |
| Keywords: | fertility, labor market institutions, female labor force participation, income volatility, DSGE |
| JEL: | J01 J08 J13 J41 J51 D1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2017/07&r=dge |
| By: | Santanu Chatterjee; Olaf Posch; Dennis Wesselbaum |
| Abstract: | In this paper, we analyze the consequences of delays and cost overruns typically associated with the provision of public infrastructure in the context of a growing economy. Our results indicate that uncertainty about the arrival of public capital can more than offset its positive spillovers for private-sector productivity. In a decentralized economy, unanticipated delays in the provision of public capital generate too much consumption and too little private investment relative to the first-best optimum. The characterization of the first-best optimum is also affected: facing delays in the arrival of public goods, a social planner allocates more resources to private investment and less to consumption relative to the first-best outcome in the canonical model (without delays). The presence of delays also lowers equilibrium growth, and leads to a diverging growth path relative to that implied by the canonical model. This suggests that delays in public capital provision may be a potential determinant of cross-country differences in income and economic growth. |
| Keywords: | public goods, delays, time overrun, cost overrun, implementation lags, fiscal policy, economic growth |
| JEL: | C61 E62 H41 O41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6341&r=dge |
| By: | Benjamin Schwanebeck (University of Kassel) |
| Abstract: | The cross-country interbank market in the euro area was a crucial transmission channel of financial stress. By using a two-country DSGE model of a financially heterogeneous monetary union where banks in one country lend funds to their foreign counterparts, I examine its role as shock amplifier and the implications for unconventional policy interventions Using the international interbank market to pool and insure against shocks is not neutral, the resulting spillovers rather act as shock multipliers on union output. Country-specific unconventional policies of direct lending to firms seem to be the most effective interventions in terms of union and relative output stabilization. The higher the size of the interbank market, the more effective are these policies in terms of union stabilization. The effectiveness of interventions in the interbank market seems to be very sensitive to the type of shock and the interbank market size. Hence, the central bank should rather shy away from this policy as it is only useful under specific circumstances. |
| Keywords: | financial intermediation; financial frictions; interbank market; monetary union; unconventional policy; |
| JEL: | E32 E44 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201741&r=dge |
| By: | Konstantinos Angelopoulos; Andrea Benecchi; Jim Malley |
| Abstract: | A well-established stylised fact is that employer provided job-related training raises productivity and wages. Using UK data, we further find that job-related training is positively related to subsidies aimed at reducing training costs for employers. We also find that there is a positive, albeit quantitatively small, relationship between wage inequality and training inequality in the UK. Motivated by the above, we explore whether policies to subsidise firms’ monetary cost of training can improve earnings for the lower skilled and reduce inequality. We achieve this by developing a dynamic general equilibrium model, featuring skilled and unskilled labour, capital-skill complementarity in production and an endogenous training allocation. Our results suggest that training subsidies for the unskilled have a significant impact on the labour income of unskilled workers. These subsides also increase earnings for skilled workers and raise aggregate income with implied lifetime multipliers exceeding unity. Finally, the positive spill over effects to skilled workers imply that training subsidies are not very effective in reducing inequality, measured as the distance between skilled and unskilled wages and incomes. |
| Keywords: | job-related training, wage and earning inequality, training subsidies |
| JEL: | E24 J24 J31 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6605&r=dge |
| By: | Ryan Michaels (Federal Reserve Bank of Philadelphia); David Ratner (Federal Reserve Board); Michael Elsby (University of Edinburgh) |
| Abstract: | Replacement hiring—recruitment that seeks to replace positions vacated by workers who quit—is a prominent feature of empirical firm dynamics. We document this phenomenon by establishing a set of novel facts: 1) many establishments exhibit no net change in employment over time, despite nontrivial quit rates; 2) higher quit rates are associated with lower degrees of net inaction; 3) rates of inaction over net changes decay slowly by frequency (quarterly, yearly, bi-yearly etc.) suggesting that high-frequency net changes are exactly reversed at lower frequencies; 4) even among establishments that remain inactive, there is a substantial accumulation of gross turnover over time; and 5) direct measures of replacement hires account for a large fraction of total hires. A model of replacement hiring that is calibrated to match these empirical facts reveals a novel positive feedback channel through which an initial rise in vacancy posting in an expansion induces still more vacancy posting to replace employees who are poached. This vacancy chain in turn induces volatile responses of vacancies, and thereby unemployment, to cyclical shocks. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:888&r=dge |
| By: | Borella, Margherita; De Nardi, Mariacristina; Yang, Fang |
| Abstract: | In the U.S., both taxes and old age Social Security benefits explicitly depend on one's marital status. We study the effects of eliminating these marriage-related provisions on the labor supply and savings of two different cohorts. To do so, we estimate a rich life-cycle model of couples and singles using the Method of Simulated Moments (MSM) on the 1945 and 1955 birth-year cohorts. Our model matches well the life cycle profiles of labor market participation, hours, and savings for married and single people and generates plausible elasticities of labor supply. We find that these marriage-related provisions reduce the participation of married women over their life cycle, the participation of married men after age 55, and the savings of couples. These effects are large for both the 1945 and 1955 cohorts, even though the latter had much higher labor market participation of married women to start with. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12390&r=dge |
| By: | De Nardi, Mariacristina; Pashchenko, Svetlana; Porapapakkarm, Ponpoje |
| Abstract: | Health shocks are an important source of risk. People in bad health work less, earn less, face higher medical expenses, die earlier, and accumulate much less wealth compared to those in good health. Importantly, the dynamics of health are much richer than those implied by a low-order Markov process. We first show that these dynamics can be parsimoniously captured by a combination of some lag-dependence and ex-ante heterogeneity, or health types. We then study the effects of health shocks in a structural life-cycle model with incomplete markets. Our estimated model reproduces the observed inequality in economic outcomes by health status, including the income-health and wealth-health gradients. Our model has several implications concerning the pecuniary and non-pecuniary effects of health shocks over the life-cycle. The (monetary) lifetime costs of bad health are very concentrated and highly unequally distributed across health types, with the largest component of these costs being the loss in labor earnings. The non-pecuniary effects of health are very important along two dimensions. First, individuals value good health mostly because it extends life expectancy. Second, health uncertainty substantially increases lifetime inequality by affecting the variation in lifespans. |
| Keywords: | health; Health Insurance; life-cycle models; medical spending; wealth-health gradient |
| JEL: | D52 D91 E21 H53 I13 I18 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12386&r=dge |
| By: | Howard Kung (London Business School); Gonzalo Morales (University of Alberta); Alexandre Corhay (University of Toronto) |
| Abstract: | This paper explores the interactions between yield curve dynamics and nominal government debt maturity operations under fiscal stress in a New Keynesian model with endogenous bond risk premia. Violations of debt maturity neutrality occur when the yield curve slope is nonzero in a fiscally-led policy regime. When the risk profiles of government liabilities differ, rebalancing the maturity structure changes the government cost of capital. In the fiscal theory, changes in discount rates affect inflation through the intertemporal government budget equation. When the yield curve is upward-sloping (downward-sloping), the fiscal discount rate channel implies that shortening the maturity structure dampens (amplifies) the stimulative effects of quantitative easing policies. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:840&r=dge |
| By: | Cakir Melek, Nida (Federal Reserve Bank of Dallas); Plante, Michael D. (Federal Reserve Bank of Dallas); Yucel, Mine K. (Federal Reserve Bank of Dallas) |
| 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. |
| Keywords: | DSGE; oil; trade; fuel prices; export ban |
| JEL: | F41 Q38 Q43 |
| Date: | 2016–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1708&r=dge |
| By: | Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Faculty of Economics, Seikei University) |
| Abstract: | This study considers the politics of public education policy in an overlapping- generations model with physical and human capital accumulation. In particular, this study examines how debt and tax financing differ in terms of growth and welfare across generations, as well as which fiscal stance voters support. The analysis shows that the growth rate in debt financing is lower than that in tax financing, and that debt financing creates a tradeoff between the present and future generations. The analysis also shows that debt financing attains slower economic growth than that realized by the choice of a social planner who cares about the welfare of all generations. |
| Keywords: | Economic growth, Human capital, Public debt, Political equilib- rium |
| JEL: | D70 E24 H63 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1601r3&r=dge |
| By: | Dlugoszek, Grzegorz |
| Abstract: | This paper combines the bifurcation theory and the nonlinear moving average approximation to solve asymmetric DSGE models with portfolio choice. Contrary to existing local solution techniques, the proposed method captures the direct effect of risk on agents’ portfolios. The risk-adjusted net and gross asset positions are shown to lie close to the ergodic mean of the global solution. Hence, the method is able to account for asymmetries in the model, which improves accuracy of the approximation. |
| JEL: | E44 F41 G11 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168182&r=dge |
| By: | Minchung Hsu (National Graduate Institute for Policy Studies); Gary Hansen (UCLA); Elena Capatina (UNSW Business School) |
| Abstract: | We build a life-cycle model of household consumption and saving decisions, where long term care (LTC) expenditures are endogenous. We use an LTC-state dependent utility function where regular consumption and LTC are valued differently. The model includes both married and single households, thus capturing important family dynamics that are important for precautionary savings and LTC decisions. Married individuals face the risk of a spouse needing LTC and quickly depleting joint assets. However, those needing LTC can benefit from the presence of a healthy spouse who provides informal care, lowering the costs of LTC given a fixed quality of care. We use the calibrated model to estimate the importance of family dynamics for savings and consumption decisions, and also to quantify the impacts of LTC policy reforms such as the provision of a universal public system that pays for a minimum level of LTC costs. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:854&r=dge |
| By: | Almut Balleer; Nikolay Hristov; Dominik Menno |
| Abstract: | This paper investigates how financial market imperfections and the frequency of price adjustment interact. Based on new firm-level evidence for Germany, we document that financially constrained firms adjust prices more often than their unconstrained counterparts, both upwards and downwards. We show that these empirical patterns are consistent with a partial equilibrium menu-cost model with a working capital constraint. We then use the model to show how the presence of financial frictions changes profits and the price distribution of firms compared to a model without financial frictions. Our results suggest that tighter financial constraints are associated with lower nominal rigidities, higher prices and lower output. Moreover, in response to aggregate shocks, aggregate price rigidity moves substantially, the response of inflation is dampened, while output reacts more in the presence of financial frictions. This means that financial frictions make the aggregate supply curve flatter for all calibrations considered in our model. We show that this differs fundamentally from models in which the extensive margin of price adjustment is absent (Rotemberg, 1982) or constant (Calvo, 1983). Hence, the interaction of financial frictions and the frequency of price adjustment potentially induces important consequences for the effectiveness of monetary policy. |
| Keywords: | frequency of price adjustment, financial frictions, menu cost model |
| JEL: | E31 E44 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6309&r=dge |
| By: | Bernardino Adao; Borghan Narajabad; Ted Loch-Temzelides |
| Abstract: | We study the effect of technological progress on the optimal transition to a renewable energy-fueled world economy. We develop a dynamic general equilibrium model where energy is used as an input in production and can come from fossil or renewable sources. Both require the use of capital, which is also needed in the production of final goods. Renewable energy firms can invest in improving the productivity of their capital stock. The actual improvement is subject to spillovers and involves an opportunity cost. This results in underinvestment in the productivity of renewable energy capital. In the presence of environmental externalities, the optimal allocation can be implemented through a Pigouvian tax on fossil fuel, together with policy that promotes new renewable technologies. We calibrate our model using world-economy data and characterize the transition toward a low carbon economy. We find that it is optimal for renewables to “start small†and pick up their market penetration only later. In the short run, investment is needed mainly to improve productivity in the renewable energy sector. Later, renewable energy contributes by becoming a “modest†engine of economic growth. It takes approximately 150 years before fossil fuel is phased out entirely, resulting in a 2.8 degree Celsius temperature increase. |
| JEL: | D81 H21 Q54 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6372&r=dge |
| By: | Aaron Cooke (University of Connecticut); Hyun Lee (University of Connecticut); Kai Zhao (University of Connecticut) |
| Abstract: | Rising income and wealth inequality across the developed world has prompted a renewed focus on the mechanisms driving inequality. This paper contributes to the existing literature by studying the impact from life-cycle savings, intergenerational transfers, and fertility differences between the rich and the poor on wealth distribution. We find that bequests increase the level of wealth inequality and that fertility differences between the rich and the poor amplify this relationship. In addition, we find expected bequests crowd out life-cycle savings and this interaction is quantitatively important for understanding wealth inequality in the United States. |
| Keywords: | Intergenerational transfers, differential fertility, wealth inequality, life-cycle savings. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2017-22&r=dge |
| By: | Schulhofer-Wohl, Sam (Federal Reserve Bank of Chicago) |
| Abstract: | A standard approach to estimating structural parameters in life-cycle models imposes sufficient assumptions on the data to identify the “age profile" of outcomes, then chooses model parameters so that the model's age profile matches this empirical age profile. I show that this approach is both incorrect and unnecessary: incorrect, because it generally produces inconsistent estimators of the structural parameters, and unnecessary, because consistent estimators can be obtained under weaker assumptions. I derive an estimation method that avoids the problems of the standard approach. I illustrate the method’s benefits analytically in a simple model of consumption inequality and numerically by reestimating the classic life-cycle consumption model of Gourinchas and Parker (2002). |
| Keywords: | Age-time-cohort identification problem; Life-cycle models |
| JEL: | C23 D91 J1 |
| Date: | 2017–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2017-18&r=dge |
| By: | Chris Garbers (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch) |
| Abstract: | This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks. Easier capital control regimes enhance the attenuation and amplification properties associated with each capital control, whilst strict regimes do the opposite. Lastly, the analysis shows that the welfare effects of capital controls are agent dependent, and that society prefers the outflow capital control to the inflow capital control. Taken together, these results are indicative of the comparative desirability of capital controls imposed on the financial sector (outflows) as compared to the real sector (inflows). |
| Keywords: | Capital controls, Welfare, Wealth, Real business cycle, Financial intermediation, DSGE |
| JEL: | E21 E32 E43 E44 E51 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers288&r=dge |
| By: | Böhm, Sebastian; Grossmann, Volker; Strulik, Holger |
| Abstract: | We investigate the future of human longevity, morbidity and health costs in a novel, multi-period OLG model with endogenous medical R&D and endogenous survival. Our calibrated model implies substantial future increases in longevity that are associated with both reductions in morbidity and a rising health expenditure share in GDP. Extending health care rationing has potentially sizable effects on morbidity and longevity, with dramatic welfare losses particularly for future generations. |
| JEL: | H50 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168288&r=dge |
| By: | Xiaoji Lin (Ohio State University); Ding Luo (University of Minnesota, Twin Cities); Andres Donangelo (University of Texas); Frederico Belo (University of Minnesota and NBER) |
| Abstract: | Using a standard production model, we demonstrate theoretically that (a) aggregate hiring rates negatively predict aggregate discount rates and dividends (b) large firms explain most of return predictability while small firms explain most of the dividend predictability and (c) the explanatory power of hiring rates is not explained by traditional cash-flow based measures of performance. We present evidence for the three predictions of our model, and demonstrate the significance of labor hiring to understand the dynamic nature of discount rates and cash flows. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:885&r=dge |
| By: | Andreas Schrimpf (Bank for International Settlements); Semyon Malamud (Ecole Polytechnique Federale de Lausanne) |
| Abstract: | We introduce intermediation frictions into the classical monetary model with fully flexible prices. Trade in financial assets happens through intermediaries who bargain over a full set of state-contingent claims with their customers. Monetary policy is redistributive and affects intermediaries' ability to extract rents; this opens up a new channel for transmission of monetary shocks into rates in the wider economy, which may be labelled the markup channel of monetary policy. Passthrough efficiency depends crucially on the anticipated sensitivity of future monetary policy to future stock market returns (the ``Central Bank Put"). The strength of this put determines the room for maneuver of monetary policy: when it is strong, monetary policy is destabilizing and may lead to market tantrums where deteriorating risk premia, illiquidity and markups mutually reinforce each other; when the put is too strong, passthrough becomes fully inefficient and a surprise easing even begets a rise in real rates. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:812&r=dge |
| By: | Fusshoeller, Chantal; Balleer, Almut |
| Abstract: | This paper addresses the dynamic effects of a migration inflow on the host country. In particular, we focus on the role of skill composition and investment behaviour of migrants and show how these affect labour supply and investment behaviour of natives and, hence, the adjustment path of the economy to various shocks in a real business cycle model. We quantify these effects for the recent refugee inflow into the German economy in 2014 and 2015. |
| JEL: | E13 E32 F22 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168125&r=dge |
| By: | Athanasios Geromichalos (University of California – Davis); Lucas Herrenbrueck (Simon Fraser University) |
| Abstract: | We propose a new model of liquidity in the macroeconomy. It is simple and tractable, yet takes the foundations of liquidity seriously, and can thus be precise about the implementation, effects, and optimality of monetary policy. The model shines light on some open issues in macroeconomics: the effect of asset purchases, the tension between two channels through which the price of liquidity affects the economy (Friedman’s real balance effect vs Mundell’s and Tobin’s asset substitution effect), the liquidity trap, and the importance of using the right interest rate for empirical analysis. |
| Keywords: | monetary theory, monetary policy, financial frictions, liquidity trap |
| JEL: | E31 E43 E44 E52 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp17-16&r=dge |
| 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 post-war 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 US labor share. |
| Keywords: | neoclassical growth, balanced growth, technological progress, capital-skill complementarity, labor share, capital share |
| JEL: | O40 E25 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1504&r=dge |
| By: | Philip Jung; Moritz Kuhn |
| Abstract: | Large and persistent earnings losses following displacement have adverse consequences for the individual worker and the macroeconomy. Leading models cannot explain their size and disagree on their sources. Two mean-reverting forces make earnings losses transitory in these models: search as an upward force allows workers to climb back up the job ladder, and separations as a downward force make nondisplaced workers fall down the job ladder. We show that job stability at the top rather than search frictions at the bottom is the main driver of persistent earnings losses. We provide new empirical evidence on heterogeneity in job stability and develop a life-cycle search model to explain the facts. Our model offers a quantitative reconciliation of key stylized facts about the U.S. labor market: large worker flows, a large share of stable jobs, and persistent earnings shocks. We explain the size of earnings losses by dampening the downward force. Our new explanation highlights the tight link between labor market mobility and earnings dynamics. Regarding the sources, we find that over 85% stem from the loss of a particularly good job at the top of the job ladder. We apply the model to study the effectiveness of two labor market policies, retraining and placement support, from the Dislocated Worker Program. We find that both are ineffective in reducing earnings losses in line with the program evaluation literature. |
| Keywords: | life-cycle labor market mobility, job tenure, earnings losses, worker- and match-specific skills |
| JEL: | E24 J63 J64 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6552&r=dge |
| By: | Xiaoji Lin (Ohio State University); Nicholas Bloom (Stanford); Ivan Alfaro (The Ohio State University) |
| Abstract: | We show theoretically and empirically how real and financial frictions amplify the impact of uncertainty shocks on firms' investment, employment, debt (term structure of debt growth), and cash holding. We start by building a model with real and financial frictions, alongside uncertainty shocks, and show how adding financial frictions to the model roughly doubles the negative impact of uncertainty shocks on investment and hiring. The reason is higher uncertainty induces the standard negative real-options effects on the demand for capital and labor, but also leads firms to hoard cash and cut debt to hedge against future shocks, further reducing investment and hiring. We then test the model using a panel of US firms and a novel instrumentation strategy for uncertainty exploiting differential firm exposure to exchange rate and factor price volatility. We find that higher uncertainty reduces real investment and hiring, while also leading firms to increase cash holdings by cutting debt, dividends and stock-buy backs, and these effects are strongest in periods of higher financial frictions and for the most financially constrained firms. This highlights why in periods with greater financial frictions -- like during the global-financial-crisis -- uncertainty can be particularly damaging. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:887&r=dge |
| By: | Marianna Kudlyak (Federal Reserve Bank of San Francisco); Andreas Hornstein (Federal Reserve Bank of Richmond) |
| Abstract: | We introduce a simple representation of endogenous search effort into the standard matching function with job-seeker heterogeneity. Using the estimated augmented matching function, we study the sources of changes in the average employment transition rate. In the standard matching function, the contribution of matching efficiency is decreasing in the matching function elasticity. In contrast, for our matching function with variable search effort and small matching elasticity, search effort is procyclical, accounting for most of the transition rate volatility; and the decline of the aggregate matching efficiency accounts for a small part of the decline in the transition rate after 2007. For a large matching elasticity, search effort is countercyclical, and large movements in matching efficiency compensate for that; and the decline in the matching efficiency accounts for a large part of the decline in the transition rate after 2007. The data on employment transition rates provide evidence for endogenous search effort but do not separately identify cyclicality of search effort and matching elasticity. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:881&r=dge |
| By: | Mine Senses (Johns Hopkins University); Andrei Zlate (Federal Reserve Bank of Boston); Christopher Kurz (Board of Governors) |
| Abstract: | Despite the large theoretical literature on the macroeconomic dynamics arising from international trade, there is little theoretical research that rationalizes the relationship between a firm's trading patterns and its volatility. Our paper attempts to fill this gap by exploring the relationship between firms' exporting and importing status and firm-level volatility in a dynamic, stochastic, general equilibrium model. We augment the framework with heterogeneous firms and endogenous exporting from Ghironi and Melitz (2005) to allow for international input sourcing. In this framework, we examine the firm-level volatility generated by the model for a cross-section of firm types, which are defined to reflect the rich heterogeneity in firms' international activities. In line with recent empirical evidence on the link between a firm's trade status and its volatility, the model predictions are: (1) Exporters display lower volatility than non-exporters, whereas importers display higher volatility that non-importers. (2) Firms that trade for longer durations display lower volatility than firms switching in and out of international trade. (3) Firms that export to uncorrelated foreign markets are less volatile, whereas firms importing from uncorrelated foreign suppliers are more volatile. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:851&r=dge |
| By: | Nir Jaimovich (Duke University); Henry Siu (University of British Columbia); Guido Matias Cortes (University of Manchester) |
| Abstract: | We document a new finding regarding the deterioration of labor market outcomes for men in the US: Since 1980, the probability that a college-educated man was employed in a cognitive/high-wage occupation fell. This contrasts starkly with the experience of college-educated women: their probability of working in these occupations rose, despite a much larger increase in the supply of educated women relative to men during this period. We study a general neoclassical model of the labor market that allows us to shed light on the forces capable of rationalizing these observations. The model indicates that one key channel is a greater increase in the demand for female-oriented skills in cognitive/high-wage occupations relative to other occupations. Using occupational-level data from the Dictionary of Occupational Titles, we find evidence that this relative increase in the demand for female skills is due to an increasing importance of social skills within such occupations. We find a strong and robust relationship between the change in the female share of employment and the importance of social skills in an occupation over time. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:809&r=dge |