|
on Dynamic General Equilibrium |
|
Issue of 2017‒11‒26
29 papers chosen by |
| By: | Saloua Chaouche (High scholl of applied statistic and economic); Rachid Toumache (High scholl of applied statistic and economic) |
| Abstract: | The aim of the paper is to describe the theoretical structure of a New Keynesian DSGE model with sticky prices and wages , as well as a Taylor rule as monetary policy for the Algerian economy.Moreover, the clear specification of the stochastic shocks allows one to identify the source of economic fluctuations, the model incorporates various other features such as habit formation.We used the calibration/estimated strategy on key macro-economic variables: GDP, consumption, prices, real wages, employment and the nominal interest rate.The introduction of two orthogonal structural shocks including productivity, policy shocks allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the Algerian economy. Having as benchmark the model of Smets and Wouters (2003, 2007,2011), and Gali (1999). The thesis describes how the model works, how it is estimated, and how it is used for monetary policy analysis. The parameters of the New Keynesian DSGE model are calibrated in such a way that selected theoretical moments given by the model match as closely as possible those observed in the data. One way of achieving this, is by minimizing some distance function between the theoretical and empirical moments of interest. The output of the simulator is posterior estimates of The New Keynesian DSGE models, are summarized and compared to results in the existing literature. |
| Keywords: | New Keynesian DSGE model, Monetary policy, Calibration/estimation strategy, Taylor rule, Sticky prices, Sticky wages. |
| JEL: | C51 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:5808143&r=dge |
| By: | Vincent Sterk (University College London); Morten Ravn (University College London) |
| Abstract: | New Keynesian models with unemployment and incomplete markets are rapidly becoming a new workhorse model in macroeconomics. Such models typically require heavy computational methods which may obscure intuition and overlook equilibria. We present a tractable version which can be characterized analytically. Our results highlight that - due the interaction between incomplete markets, sticky prices and endogenous unemployment risk - productivity shocks may have radically different effects than in traditional NK models, that the Taylor principle may fail, and that pessimistic beliefs may be self-fulfilling and move the economy into temporary episodes of low demand and high unemployment, as well as into a long-lasting "unemployment trap". At the Zero Lower Bound, the presence of endogenous unemployment risk can create inflation and overturn paradoxical properties of the model. We further study financial asset prices and show that non-negligible risk premia emerge. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1067&r=dge |
| By: | Sergio Ocampo (University of Minnesota); Gueorgui Kambourov (University of Toronto); Daphne Chen (Florida State University); Burhanettin Kuruscu (University of Toronto); Fatih Guvenen (University of Minnesota) |
| Abstract: | This paper studies the quantitative implications of wealth taxation (as opposed to capital income taxation) in an incomplete markets model with return rate heterogeneity across individuals. The rate of return heterogeneity arises from the fact that some individuals have better entrepreneurial skills than others, allowing them to obtain a higher return on their wealth. With such heterogeneity, capital income and wealth taxes have different efficiency and distributional implications. Under capital income taxation, entrepreneurs who are more productive and, as a result, generate more income pay higher taxes. Under wealth taxation, on the other hand, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity. Thus, in this environment, the tax burden shifts from productive entrepreneurs to unproductive ones if the capital income tax were replaced with a wealth tax. This reallocation increases aggregate productivity. Second, and at the same time, it increases wealth inequality in the population. To provide a quantitative assessment of these different effects, we build and simulate an overlapping generations model with individual-specific returns on capital income and with idiosyncratic shocks to labor income. Our results indicate that switching from a capital income tax to a wealth tax increases welfare by almost 8% through better allocation of capital. We also study optimal taxation in this environment and find that, relative to the benchmark, the optimal wealth tax increases welfare by 9.6% while the optimal capital income tax increases it by 6.3%. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:913&r=dge |
| By: | Christian Bayer (Universitaet Bonn); Ralph Luetticke (University College London) |
| Abstract: | This paper develops a general equilibrium model of incomplete markets, liquid paper assets and illiquid housing. Housing liquidity fluctuates significantly over time and systematically so over the business cycle. A decrease in the liquidity of housing leads to an increased demand for liquid paper assets and a decrease in demand for houses (as assets). We show that the model generates substantial business cycle effects of fluctuations in housing liquidity on house prices, employment and output, while being in line with relatively small fluctuations in rental rates of housing. We find that low housing liquidity during the Great Recession offers a novel explanation for the sharp decline in interest rates on government bonds. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1069&r=dge |
| By: | Marcin Waniek (University of Warsaw); Krzysztof Makarski (Warsaw School of Economics and Narodowy Bank Polski); Joanna Tyrowicz (National Bank of Poland); Marcin Bielecki (University of Warsaw and Narodowy Bank Polski) |
| Abstract: | In this paper, we analyze the consumption and wealth inequality in an OLG model with obligatory pension systems. We model both policy relevant pension systems (a defined benefit system -- DB -- and a transition from a DB to a defined contribution system, DC). Our framework features within cohort heterogeneity of endowments (individual productivities) and heterogeneity of preferences (preference for leisure and time preference). We introduce two widely used policy instruments: a contribution cap and a minimum pension. We show four main results. First, longevity increases substantially aggregate consumption inequality and wealth inequality alike in both pension systems. Second, the effect of a pension system reform works to reinforce the consumption inequality and reduce the wealth inequality. Third, the contribution cap has negligible effect on inequality, but the role for minimum pension benefit guarantee is more pronounced. In fact, the reduction in inequality due to minimum pension benefit guarantee cuts by half the increase of inequality due to the pension system reform and this reduction is achieved with virtually no effect on capital accumulation. Fourth the minimum pension benefit guarantee addresses mostly the inequality which stem from differentiated endowments and not those that stem from differentiated preferences. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:958&r=dge |
| By: | Pau S. Pujolas; Zachary L. Mahone |
| Abstract: | We study a labor market where firms have private information about their ex-ante heterogeneous productivities and search is random. In this environment, a binding minimum wage can be efficiency-enhancing - we show that setting it using a version of the Vickery-Clarke-Groves mechanism delivers full efficiency. In a dynamic, stochas-tic version of the model calibrated to the Routine Manual labor market in the U.S., our proposed mechanism generates sizeable welfare gains. The resulting minimum wage is procyclical, dampening the response of unemployment to aggregate shocks. |
| Keywords: | Minimum Wage Determination, Business-cycle, Vickrey-Clarke-Groves Auction |
| JEL: | J2 J3 J5 |
| Date: | 2017–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2017-15&r=dge |
| By: | Gaston Navarro (Federal Reserve Board); Axelle Ferriere (European University Institute); Daniel Feenberg (NBER) |
| Abstract: | We provide a statistical description of the evolution of tax progressivity and income inequality in the U.S. for the period 1960-2008, using tax revenue data. We document a large and steady increase of tax progressivity over our sample, with brief exceptions during the early 1980’s and early 2000’s. We provide flexible – parametric and non-parametric – yearly estimates of the tax distribution. We then use a canonical heterogeneous households model (Aiyagari, 1994) to compare the optimal tax progressivity to the current U.S. tax system. Our findings are threefold. First, under the joint assumptions of a linear capital capital tax and an intensive labor supply choice, the optimal progressivity is very close to the one measured in the data. However, if the labor supply choice is on the extensive margin only, optimal tax progressivity is much larger than in the data. Third, preliminary results suggest that the optimal tax system should allow for a non-zero cross-term between capital and labor income taxes: there are welfare gains in allowing the marginal capital tax rate to be increasing in labor income. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:989&r=dge |
| By: | Xavier Ragot (Sciencespo); Francois Le Grand (EMLyon Business School) |
| Abstract: | We show that allocations in incomplete insurance-market economies can be represented as the solution of the program of a constrained planner. This representation allows for solving Ramsey programs in incomplete-market economies with aggregate shocks. We apply this framework to derive optimal fiscal policy and public debt dynamics in an economy with capital after persistent technology shocks, when the planner can use distorting taxes on capital and labor and positive lump-sum transfers. Average capital taxation is a simple function of the tightness of credit constraints. In a quantitative exercise, it is shown that private savings increase too much after a technology shock, and are absorbed by an increase in public debt and a decrease in capital taxes. Simulations of these optimal solutions can be obtained by simple perturbation methods. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:969&r=dge |
| By: | Michael Sposi (Federal Reserve Bank of Dallas); Ana Maria Santacreu (St. Louis Fed); B Ravikumar (Federal Reserve Bank of St Louis) |
| Abstract: | We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation. We examine transition paths for 93 countries following a permanent, uniform, unanticipated trade liberalization. Both the relative price of investment and the investment rate respond to changes in trade frictions. Relative to a static model, the dynamic welfare gains in a model with balanced trade are three times as large. The gains including transition are 60 percent of those computed by comparing only steady states. Trade imbalances have negligible effects on the cross-country distribution of dynamic gains. However, relative to the balanced-trade model, small, less-developed countries accrue the gains faster in a model with trade imbalances by running trade deficits in the short run but have lower consumption in the long-run. In both models most of the dynamic gains are driven by capital accumulation. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:915&r=dge |
| By: | Christopher Waller (Federal Reserve Bank of St. Lousi); Paola Boel (Sveriges Riksbank) |
| Abstract: | We construct a monetary economy in which agents face aggregate demand shocks and heterogeneous idiosyncratic preference shocks. We show that, in this environment, not all agents are satiated at the zero lower bound even when the Friedman rule is the best interest rate policy the central bank can implement. Therefore, there is scope for central bank policies of liquidity provision even at the zero lower bound. This is because such policies temporarily relax the liquidity constraint of impatient agents without harming the patient ones, thus improving welfare. Due to a pricing externality, this may also have beneficial general equilibrium effects for the patient agents even if they are unconstrained in their holdings of real balances. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1030&r=dge |
| By: | Franck Malherbet (CREST and Ecole Polytechnique); Helene Benghalem (CREST) |
| Abstract: | This paper analyzes the consequences of the taxation of temporary jobs recently introduced in several European countries to induce fi rms to create more open-ended contracts and to increase the duration of jobs. The estimation of a job search and matching model on French data shows that the taxation of temporary jobs does not reach its objectives: it reduces the mean duration of jobs and decreases job creation, employment and welfare of unemployed workers. We find that a reform introducing an open-ended contract without layoff costs for separations occurring at short tenure would have opposite effects. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:974&r=dge |
| By: | Andrew Binning (Norges Bank (Central Bank of Norway)); Junior Maih (Norges Bank (Central Bank of Norway) and BI Norwegian Business School) |
| Abstract: | Occasionally binding constraints are part of the economic landscape: for instance recent experience with the global financial crisis has highlighted the gravity of the lower bound constraint on interest rates; mortgagors are subject to more stringent borrowing conditions when credit growth has been excessive or there is a downturn in the economy. In this paper we take four common examples of occasionally binding constraints in economics and demonstrate how to use regime-switching to incorporate them into DSGE models. In particular we investigate the zero lower bound constraint on interest rates, occasionally binding collateral constraints, downward nominal wage rigidities and irreversible investment. We compare our approach against some well-known methods for solving occasionally-binding constraints. We demonstrate the versatility of our regime-switching approach by combining multiple occasionally binding constraints to a model solved using higher-order perturbation methods, a feat that is difficult to achieve using alternative methodologies. |
| Keywords: | Occasionally Binding Constraints, DSGE models, ZLB, Collateral Constraints |
| Date: | 2017–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2017_23&r=dge |
| By: | Eric French (University College London) |
| Abstract: | This paper assesses the effect of the Affordable Care Act (ACA) on the labor supply of Americans ages 50 and older. Using data from the Health and Retirement Study and the Medical Expenditure Panel Survey, we estimate a dynamic programming model of retirement that accounts for both saving and uncertain medical expenses. Importantly, we model the two key channels by which health insurance rates are predicted to change: the Medicaid expansion and the subsidized private exchanges. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1025&r=dge |
| By: | Ramon Marimon (European University Institute and UPF - Barcelona GSE) |
| Abstract: | European labour markets are subject to idiosyncratic shocks (and idiosyncratic responses to common shocks), resulting in countercyclical unemployment expenses difficult to accommodate under existing, fiscal compact, budget rules. These and other factors (solidarity, labour market integration) provide a rationale for European unemployment risk sharing. We study the potential benefits, and problems, of creating a European Unemployment Insurance Mechanism (EUIM). Following Krusell et al. (2011 and 2015), we use a dynamic general equilibrium model with search frictions to analyze workers' flows (employment, unemployment and inactivity) and their cyclical properties, to assess the potential benefits of a EUIM under alternative common (and jointly financed) unemployment insurance policies. Our analysis shows that country-specific structural differences play a determinant role in explaining labour market differences, leaving limited space for welfare improvements with an EUIM. The framework would also allow to study the optimal design of an EUIM, subject to redistributional and incentive (moral hazard and free riding) constraints. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1042&r=dge |
| By: | Richard Blundell; Luigi Pistaferri; Itay Saporta-Eksten |
| Abstract: | We consider the life cycle choices of a household that in each period decides how much to consume and how to allocate spouses' time to work, leisure, and childcare. In an environment with uncertainty, the allocation of goods and time over the life cycle also serves the purpose of smoothing marginal utility in response to shocks. We combine data on consumption, spouses' wages, hours of work, and time spent with children to estimate the sensitivity of consumption and time allocation to transitory and permanent wage shocks. These structural parameters describe the ability of household to self-insure in response to shocks. We find that behavioral responses to wage shocks depend on the presence of young children. We also find that labor supply cross-responses depend on three counteracting forces: complementarity of leisure time, substitutability of time in the production of child services, and added worker effects. |
| JEL: | J13 J22 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24006&r=dge |
| By: | Brennan Platt (Brigham Young University); Nuray Akin (Ozyegin University, School of Business) |
| Abstract: | This paper presents a novel approach to the theory of fire sales, where an asset is sold for a price below its fundamental value. Specifically, we model the “urgency to sell” motivation that pushes some unlucky sellers in the market to become anxious (desperate) about liquidating their asset because failing to do so would cause them to incur a cost. Homogenous buyers strategically choose when to enter the market and what price to offer, knowing that some sellers are more motivated, but do not know the type of the seller they meet. We characterize equilibrium prices in this economy both in the steady state and on the transition path as the economy converges to a new steady state after a permanent demand shock. We find that prices oscillate, rather than monotonically converging to the steady state. Moreover, the dynamic behavior of prices indicate overshooting, where sometimes prices fall below their long run equilibrium value and rise above it, depending on the proportion of desperate to relaxed sellers as well as the number of buyers that would clear the market. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:949&r=dge |
| By: | Marie Hoerova (European Central Bank); Harald Uhlig (University of Chicago); Fiorella De Fiore (European Central Bank) |
| Abstract: | We build a general equilibrium model featuring unsecured and secured interbank markets, and collateralized central bank funding. The model accounts for some key facts about the European money markets since 2008: i) the decline in the ratio of interbank liabilities in total bank assets since the onset of the global financial crisis; ii) the reduced ability of banks to access the unsecured market during the sovereign crisis, and their shift to secured market funding; iii) the increased reliance on central bank funding, particularly for banks in countries with a vulnerable sovereign. Using the calibrated model, we find that a decline in the share of unsecured to secured interbank market transactions, as observed during the crisis, generates a sizeable macroeconomic impact. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1092&r=dge |
| By: | Virginia Sanchez Marcos (Universidad de Cantabria); Ezgi Kaya (Cardiff Business School); Nezih Guner (CEMFI) |
| Abstract: | How does the dual labor market structure, i.e. the presence of jobs with temporary and permanent contracts, affect the fertility behavior of women in Spain? Using data from the Spanish Social Security Records, we first show that having a temporary contract has a significant and negative effect on the probability that a woman has her first birth. A highly-educated women with permanent contract is twice more likely to have a birth compared to a similar woman with a temporary contract. Second., we show that having a child lowers the probability of being promoted from a temporary to permanent contract and the effect is strongest for highly-educated women. We next build a life-cycle model in which married women decide whether to work or not as well as how many children to have and when to have them. In the model economy, all agents start their labor careers with temporary jobs and children affect the probability of being promoted to a permanent jobs negatively. Given the cost of having children, both in terms of time and money as well as in terms of labor market implications, women make their fertility choices. We use this model to quantify how the dual labor market structure affects fertility decisions as well as potential effects of labor market reforms on fertility. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1015&r=dge |
| By: | Daniele Coen-Pirani (University of Pittsburgh) |
| Abstract: | I study the effect of progressive income redistribution on human capital investment and welfare in a new dynamic model of migration. The model features an arbitrary number of labor markets and finitely-lived agents, yet it is analytically tractable. The model's key parameters are estimated using panel data on migration and wage growth from the PSID. The quantitative model is used to perform counterfactual analysis. A more progressive tax-transfer scheme is shown to reduce migration rates. This distortion to human capital investment induces the welfare-maximizing social planner to select a less progressive tax system than under exogenous geographic mobility. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1079&r=dge |
| By: | Giovanni Gallipoli (UBC); Brant Abbott (Queen's University) |
| Abstract: | We estimate the degree of inequality of ``permanent income'', as well as trends over time. Our notion of permanent income is related to Friedman's (1957) original idea, but does not assume linear-quadratic utility. We account for financial and real wealth, as well as the certainty equivalent value of a household's potential future earnings, thus providing a monetary statistic directly related to economic welfare, which is not true of income or wealth alone. We combine publicly available consumption and income data from the PSID with net worth data from the SCF to produce our estimates. Our method imposes no restrictions on the dynamics of observed income processes and features state-dependent stochastic discount factors, as opposed to the risk-free discount factors commonly used to estimate the present value of lifetime earnings. We show that stochastic discount factors depend on many sources of risk beyond income risk, e.g. marital uncertainty. We use our estimates of permanent income to study how inequality in the U.S. evolved between 1989 and 2013, and how the human component of wealth varies over the life cycle of different households. Our findings suggest that accounting for human wealth significantly changes the assessment of aggregate inequality and of its evolution. Specifically, we find that: (i) top $10\%$ and top $1\% $ shares of permanent income are substantially smaller (roughly 1/2) than the corresponding shares of net worth typically reported in the literature; (ii) however, top shares of permanent income have grown much faster over the 1989-2013 period than top shares of net worth, suggesting that actual inequality has increased more than previously thought. For instance, the share of financial wealth owned by the top $10\%$ of the wealth distribution grew over that period by 8 percentage points while the share of permanent income attributable to that same group grew by 14 percentage points. Finally, we find that the share of households who sit at the top of both the net worth and human wealth distributions has actually decreased between 1989 and 2013, indicating that increased concentration of permanent income is not due to a small set of households holding increasing shares of all types of wealth. Instead, increasing concentration of permanent income is mostly due to the growing importance of real/financial wealth as a share of total wealth. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1033&r=dge |
| By: | Bjoern Bruegemann (VU University Amsterdam) |
| Abstract: | Matching frictions have been shown to reconcile wage rigidity and private efficiency in settings with constant marginal returns to labor. A recent line of research has studied the implications of wage rigidity in models with matching frictions and diminishing returns. I show that the allocation of labor is privately inefficient off the equilibrium path in the models used in this line of research, and thus inconsistent with any theory of wage determination that yields private efficiency. The culprit is rigidity of the wage with respect to firm-level employment. I examine how wage rigidity can be reconciled with private efficiency, focusing on two polar specifications. In the first, wages are rigid with respect to aggregate shocks and flexible with respect to firm-level employment. The labor market responds strongly to aggregate shocks. Yet novel policy implications obtained by this line of research are lost, and thereby shown to be driven by rigidity with respect to firm-level employment. In the second, the wage only adjust when called for by private efficiency, and workers fully appropriate rents in the event of adjustment. Novel policy implications obtained in this line of research are restored, including the existence of unemployment in the limit as matching frictions vanish. But fighting this type of rationing unemployment is much easier than in existing models. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:978&r=dge |
| By: | Agnieszka Markiewicz (Erasmus University Rotterdam) |
| Abstract: | We study the relationship between income inequality and stock market returns. We develop a quantitative general equilibrium model that includes two groups of agents: top 10% income group (capital owners) and workers who consume their after-tax labor income. Inequality in the model arises from two sources: capital and labor, and its increase is modeled as growth in the capital owners' capital and labor shares of income. The model and the data predict positive relationship between capital income inequality and real equity returns and negative relationship between labor income inequality and real equity returns. We find that real cumulative return on ex-dividend S&P 500 index would have been lower by 40% if there was no rise in capital income inequality. If the labor share of top decile would not grow, the same S&P 500 index would have experienced cumulative growth higher by 32%. The effects of capital and labor incomes' changes partially offset each other, and S&P 500 index displays a cumulative increase of 290% between 1970 and 2014 and 275% if there was no increase in income inequality. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1016&r=dge |
| By: | Boris Chafwehé (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | I provide a theoretical framework of optimal purchases of new and used consumer durables in an economy with heterogenous agents, idiosyncratic income risk and incomplete financial markets. Agents choose optimally between consuming nondurable and durable goods and accumulating a risk-free asset. The price of durable goods in the secondary market is determined endogenously, through market clearing. The model is used to study the impact of idiosyncratic unemployment risk and incomplete financial markets on market outcomes, and especially on the resale price of durables. I find that an unexpected shock to unemployment probabilities has the effect of lowering this price on impact. The mechanism behind this result is that following the increase in risk, the non-ownership option becomes more attractive to households, which rebalance their portfolio from durables towards liquid asset holdings. This decreases the demand for durable goods and exerts a downward pressure on their price. |
| Date: | 2017–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2017021&r=dge |
| By: | William Fuchs (University of California, Berkeley); Brett Green (UC Berkeley--Haas School of Business); Vladimir Asriyan (CREi, UPF, and Barcelona GSE) |
| Abstract: | We study a dynamic asset market, in which asset owners (i) are privately informed about the quality of their assets and (ii) experience occasional liquidity needs that give rise to gains from asset trade. The important feature of our setting is that although asset prices are always equal to fundamentals, the fundamentals themselves depend on asset prices through their effect on how efficiently assets are allocated. When the perceived quality of assets in the market is sufficiently low, the equilibrium features a ``market freeze'': only low quality assets trade at the lowest possible price. On the other hand, when the perceived quality of assets is sufficiently high, the equilibrium features ``efficient trade'': high and low quality assets trade at the highest possible price. Finally, for intermediate asset quality, there is equilibrium multiplicity and asset prices are driven by ``market sentiment.'' There is a rich set of equilibria, in which asset prices fluctuate due to sunspots, resembling what one may refer to as ``bubbles.'' |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:986&r=dge |
| By: | Lukas Mayr (European University Institute); Dominik Sachs (European University Institute); Fabian Kindermann (University of Bonn) |
| Abstract: | Taxing bequests not only generates direct tax revenue, but can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future labor income tax revenue. How large is this effect? We use a state of the art life-cycle model that we calibrate to the German economy to answer this question. Our model successfully matches quasi-experimental evidence regarding the size of wealth effects on labor supply. Using this evidence directly for a back of the envelope calculation fails because (i) heirs anticipate the reduction in bequests through taxation and adjust their labor supply already prior to the actual act of bequeathing, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to a change in the expected size of bequests. We find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 9 Cents of labor income tax revenue (in net present value) through a higher labor supply of (non-)heirs. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1046&r=dge |
| By: | Anne Villamil (University of Iowa); Zhigang Feng (University of Nebraska) |
| Abstract: | Abstract Americans who obtain health insurance coverage through employment do not currently pay income or payroll taxes on this benefit. Tax-deductible employer-based health insurance (EHI) is regressive, and we show that this tax policy can help correct misallocation between self-employment and firm employment. Agents face idiosyncratic health risk and have heterogeneous ability as workers or entrepreneurs, and choose their occupation. Linking employment and health insurance creates a wedge between the marginal cost and benefit of EHI and employment at a firm. In equilibrium, some highly skilled individuals with adverse health shocks leave entrepreneurship while individuals with intermediate skills but favorable health shocks opt to manage firms. In the presence of imperfect information on private agent's health risk and managerial ability, and in the absence of perfectly discriminating taxes, a regressive tax subsidy for entrepreneurs to purchase health insurance helps correct distortions associated with non-contractible heterogeneity in managerial talent and health shocks. The subsidy makes entrepreneurship a more (less) attractive option for the highly (medium) skilled unhealthy (healthy) agents as such a policy increases (reduces) net-tax entrepreneurial income. Consequently, this tax policy provides an additional incentive (disincentive) for the first (second) type to be an entrepreneur, hence improving talent allocation. For a dynamic equilibrium model calibrated to the US economy, we find that the welfare gain from improved talent allocation outweighs the loss due to reduced risk sharing associated with the regressive subsidy. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1059&r=dge |
| By: | Liutang Gong (Guanghua School of Management and LMEQF, Peking University); Chan Wang (Guanghua School of Management and LMEQF, Peking University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University) |
| Abstract: | This paper examines optimal monetary policy in a two-country New Keynesian model with international trade in intermediate inputs. We derive the loss function of a cooperative monetary policymaker and ï¬ nd that the optimal monetary policy must target intermediategoods price inflation rates, ï¬ nal-goods price inflation rates, ï¬ nalgoods output gaps, and relative-price gaps. We use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three Taylor-type monetary policy rules. A main ï¬ nding is that the degree of price stickiness at the stage of intermediate-goods production is a key factor to determine which policy rule should be followed. Speciï¬ cally, when the degree of price stickiness at the stage of intermediate-goods production is high, the policymaker should follow intermediate-goods PPI-based Taylor rule, whereas CPI-based Taylor rule should be followed when the degree of price stickiness at the stage of intermediate-goods production is intermediate or low. |
| Keywords: | Vertical production and trade, Optimal monetary policy, Inflation targeting, Welfare |
| JEL: | E5 F3 F4 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:604&r=dge |
| By: | Carter Mix (University of Rochester); George Alessandria (University of Rochester) |
| Abstract: | Since 2012, global trade growth has slowed significantly relative to both its historical trend and output growth. There is some debate around whether this slowdown is due to cyclical or structural factors. The answer to this question has important implications for future trade growth. We develop a dynamic quantitative two-country model in which trade responds gradually to changes in trade costs. We capture cyclical and structural factors with movements in productivity and trade costs. We use Bayesian estimation to match the model with time series from the data. We then compute the contributions of cyclical and structural factors on the slowdown. Our model also offers insights on how changes in productivity and trade costs affect trade and output in different ways. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:907&r=dge |
| By: | Vladimir Asriyan (CREi, UPF, and Barcelona GSE) |
| Abstract: | How effectively does a decentralized marketplace aggregate information that is dis-persed throughout the economy? We study this question in a dynamic setting, in which sellers have private information that is correlated with an unobservable aggregate state. We first characterize equilibria with an arbitrary (but finite) number of informed sellers. A common feature is that each seller’s trading behavior provides an informative and con-ditionally independent signal about the aggregate state. We then ask whether the state is revealed as the number of informed sellers goes to infinity. Perhaps surprisingly, the answer is no. We provide conditions under which the amount of information revealed is necessarily bounded and does not reveal the aggregate state. When these conditions are violated, there may be coexistence of equilibria that lead to full revelation with those that do not. We discuss the implications for policies meant to enhance information dissemination in markets. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:988&r=dge |