|
on Dynamic General Equilibrium |
|
Issue of 2017‒12‒18
thirty-two papers chosen by |
| By: | Paulina Restrepo-Echavarria (Federal Reserve Bank of St Louis); Mark Wright (Federal Reserve Bank of Chicago); Lee Ohanian (University of California Los Angeles) |
| Abstract: | Since 1950, the economies of East Asia grew rapidly but received little international capital, while Latin America received considerable international capital even as their economies stagnated. The literature typically explains the failure of capital to flow to high growth regions as resulting from international capital market imperfections. This paper proposes a broader thesis that country-specific distortions, such as domestic labor and capital market distortions, also impact capital flows. We develop a DSGE model of Asia, Latin America, and the Rest of the World that features an open-economy business cycle accounting framework to measure these domestic and international distortions, and to quantify their contributions to international capital flows. We find that domestic distortions have been the predominant drivers of international capital flows, and that the general equilibrium effects of these distortions are very large. International capital market distortions also matter, but less so. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1109&r=dge |
| By: | Chris Garbers (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch) |
| Abstract: | This paper presents a generic small open economy real business cycle model with banking and foreign borrowing. We incorporate capital requirements, reserve requirements, and loan-to-value (LTV) regulation into this framework, and subject the model to a positive foreign interest rate shock that raises the country risk premium and reduces the supply of foreign funds. The results show that these macroprudential instruments can attenuate the impact of such a shock, and that this attenuation property increases with the strictness of the regulatory regime. Capital requirements and LTV regulation deliver the largest attenuation benefits and are shown to be close substitutes. That being said, capital requirements are shown to be more effective at leaning against the financial cycle whereas LTV regulation is more effective at stimulating the financial cycle. The analysis indicates that capital and reserve requirements can interact such that reserve requirements are most effective when used to supplement existing capital requirement or LTV measures. We find that financial and macroeconomic stability objectives are aligned following a positive foreign interest rate shock such that a macroprudential response to such shocks can be to the benefit of both objectives. Lastly, our results show that capital requirements and LTV regulation exhibit decreasing returns to scale. |
| Keywords: | Macroprudential policy, Open economy macroeconomics, Financial stability, Business cycle, Welfare, DSGE |
| JEL: | E32 E44 E58 F41 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers291&r=dge |
| By: | Holter, Hans A. (Dept. of Economics, University of Oslo); Brinca, Pedro (Nova School of Business and Economics, Universidade Nova de Lisboa); Ferreira, Miguel H (Nova School of Business and Economics, Universidade Nova de Lisboa); Franco, Francesco (Nova School of Business and Economics, Universidade Nova de Lisboa); Malafry, Laurence (Department of Economics, Stockholm University) |
| Abstract: | Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data. |
| Keywords: | Fiscal Consolidation; Income Inequality; Fiscal Multipliers; Public Debt; Income Risk |
| JEL: | E21 E62 H31 H50 |
| Date: | 2017–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2017_011&r=dge |
| By: | Claudio Battiati (LUISS University, School of European Political Economy) |
| Abstract: | Recent evidence suggests that credit booms and asset price bubbles may undermine economic growth even as they occur, regardless of whether a crisis follows, by crowding out investment in more productive, R&D-intensive industries. This paper incorporates Schumpeterian endogenous growth into a DSGE model with credit-constrained entrepreneurs to show how shocks affecting firms' access to credit can generate boom-bust cycles featuring large fluctuations in land prices, consumption, and investment. During the expansion, rising land prices tend to crowd out capital and (especially) R&D investment: in the long run, this results in lower productivity levels, which in turn implies lower levels of aggregate output and consumption. Moreover, higher initial loan-to-value ratios tend to be associated with larger macroeconomic fluctuations. A counter-cyclical LTV ratio targeting credit growth has relevant stabilization effects but brings about small gains in terms of long-run consumption levels, and thus of welfare. |
| Keywords: | Schumpeterian Growth, Financial frictions, Land prices, Macroprudential policy |
| JEL: | E22 E32 E44 O30 O40 |
| Date: | 2017–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:48&r=dge |
| By: | Jeffrey Campbell (Federal Reserve Bank of Chicago) |
| Abstract: | This paper considers monetary and fiscal policy when tangible assets can be created and stored after shocks that increase desired savings, like Joseph's biblical prophecy of seven fat years followed by seven lean years. The model's flexible-price allocation mimics Joseph's saving to smooth consumption. With nominal rigidities, monetary policy that eliminates liquidity traps leaves the economy vulnerable to confidence recessions with low consumption and investment. Josephean Quantitative Easing, a fiscal policy that purchases either obligations collateralized by reproducible tangible assets or the assets themselves, eliminates both liquidity traps and confidence recessions by putting a floor under future consumption. This requires no commitment to a time-inconsistent plan. In a small open economy, the monetary authority can implement Josephean Quantitative Easing with a sterilized currency-market intervention that accumulates foreign reserves. This can improve outcomes even if it leaves nominal exchange rates unchanged. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1165&r=dge |
| By: | Bruno Sultanum (Federal Reserve Bank of Richmond) |
| Abstract: | This paper studies the interaction between financial fragility and over-the-counter markets. In the model, the financial sector is composed of a large number of investors divided into different groups, which are interpreted as financial institutions, and a large number of dealers. Financial institutions and dealers trade assets in an over-the-counter market à la Duffie et al. (2005) and Lagos and Rocheteau (2009). Investors are subject to privately observed preference shocks, and financial institutions use the balanced team mechanism, proposed by Athey and Segal (2013), to implement an efficient risk-sharing arrangement among its investors. I show that when the market is more liquid, in the sense that the search friction is mild, the economy is more likely to have a unique equilibrium and, therefore, is not fragile. However, when the search friction is severe, I provide examples with run equilibria—where investors announce low valuation of assets because they believe everyone else in their financial institution is doing the same. In terms of welfare, I find that, conditional on bank runs existing, the welfare impact of the search friction is ambiguous. The reason is that, during runs, trade is inefficient and, as a result, a friction that reduces trade during runs has the potential to improve welfare. This result is in sharp contrast with the existing literature which suggests that search friction has a negative impact on welfare. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1122&r=dge |
| By: | Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron |
| Abstract: | We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty. |
| Keywords: | inflation target, effective lower bound. |
| JEL: | E31 E52 E58 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1591&r=dge |
| By: | Schumacher, Malte D.; Żochowski, Dawid |
| Abstract: | We study a quantitative DSGE model linking a state of the art asset pricing framework a la Kung and Schmid (2015) with a constraint on leverage as in Gertler and Kiyotaki a (2010). We show that a mere increase in the probability of firms being financially constrained leads to an increase in risk premia. Even for a small adverse shock to productivity a drop in asset valuation restrains firms from outside financing and by that induces a persistent low growth environment. In our framework a constraint on leverage induces countercyclical risk premia in equity markets even when it does not bind. JEL Classification: D53, G01, G12 |
| Keywords: | asset pricing, endogenous growth, financial accelerator, risk premia |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172114&r=dge |
| By: | Virgiliu Midrigan (New York University); Fernando Leibovici (Federal Reserve Bank of St. Louis); Julio Blanco (University of Michigan) |
| Abstract: | We study an economy with capital-skill complementarities, an endogenous human capital and occupational choice decision and firm-level financing constraints. We ask: to what extent do financial frictions reduce output per worker across countries? In our economy, firm-level frictions depress physical capital accumulation and, in equilibrium, also reduce the acquisition of human capital, thus amplifying the decline in output per worker. We estimate the model using repeated cross-sections of individual workers' educational attainment, labor earnings and occupational choice, both for U.S. time-series, as well as for a cross-section of countries. We find that financial frictions have much larger effects on output per worker in our economy than they do in economies with a fixed supply of human capital. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1187&r=dge |
| By: | Kristoffer Nimark (Cornell University) |
| Abstract: | In models where privately informed agents interact, they may need to form higher-order expectations, i.e. expectations about other agents' expectations. In this paper we prove that there exists a unique equilibrium in a class of linear dynamic rational expectations models in which privately informed agents form higher order expectations. We propose an iterative procedure that recursively computes increasing orders of expectations. The algorithm is a contraction mapping, and the implied dynamics of the endogenous variables converge to the unique equilibrium of the model. The contractive property of the algorithm implies that, in spite of the fact that the model features an infinite regress of expectations, the equilibrium dynamics of the model can be approximated to an arbitrary accuracy with a finite-dimensional state. We provide explicit bounds on the approximation errors. These results hold under quite general conditions: It is sufficient that agents discount the future and that the exogenous processes follow stationary (but otherwise unrestricted) VARMA processes. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1132&r=dge |
| By: | Pessoa de Araujo, Ana Luisa (Federal Reserve Bank of Minneapolis) |
| Abstract: | How much wage inequality in Brazil is caused by firing costs? To answer this question, I develop and estimate a general equilibrium search and matching model with heterogeneous layoff rates among firms. Using matched employer-employee data from Brazil, I estimate the model, and I find that it replicates the observed residual wage inequality in the data. I simulate a counterfactual removal of existing firing costs, and I find that residual wage inequality drops by 26% as measured by wage variance and by 4.4% as measured by the p95-p5 ratio among 25- to 55-year-old males working in the private sector with at most a high school degree. Worker welfare among this subgroup of households increases by almost 1% in response to the abolishment of firing costs. |
| Keywords: | Layoff rates; Earnings inequality; Firm heterogeneity; Matched employer-employee data; Wage differentials; Equilibrium search model |
| JEL: | E61 J31 J63 |
| Date: | 2017–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:0005&r=dge |
| By: | Alexey Vasilenko (National Research University Higher School of Economics) |
| Abstract: | We develop the approach based on the synthesis of New Keynesian macroeconomics and agent-based models, and build a model, allowing for the incorporation of behavioral and speculative factors in ?nancial markets in a New Keynesian model with a ?nancial accelerator, `a la Bernanke et al. (1999). Using our model, we study the optimal strategy of central banks in pricking asset price bubbles for the maximization of social welfare and preserving ?nancial stability. Our results show that pricking asset price bubbles can be a policy that enhances social welfare, and reduces the volatility of output and in?ation; especially, in the cases when asset price bubbles are caused by credit expansion, or when the central bank conducts effective information policy, for example, effective verbal interventions. We also argue that pricking asset price bubbles with the lack of the effectiveness of information policy, only by raising the interest rate, leads to negative consequences to social welfare and ?nancial stability |
| Keywords: | optimal monetary policy; asset price bubble; New Keynesian macroeconomics; agent-based ?nancial market |
| JEL: | E44 E52 E58 G01 G02 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:182/ec/2017&r=dge |
| By: | Erzo Luttmer (University of Minnesota) |
| Abstract: | Most firms begin very small and large firms are the result of typically decades of persistent growth. This can be understood as the result of some form of capital accumulation---organization capital. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This means that most capital accumulation must be accounted for by incumbent firms. This paper describes a range of circumstances in which this implies very slow aggregate convergence rates, in contrast to the rapid convergence of the Cass-Koopmans economy, given standard calibrations of the aggregate labor share. Through the lens of the models described in this paper, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1117&r=dge |
| By: | Claudio Cesaroni (Economic Analysis and Research, Sace S.p.A.) |
| Abstract: | This paper studies the optimal long-run rate of inflation in a two-sector model of the Lithuanian economy with informal production and price rigidity in the regular sector. The government issues no debt and is committed to follow a balanced budget rule. The informal sector is unregulated and untaxed and its existence limits the government’s ability to collect revenues through fiscal policy. Such environment provides therefore the basis for quantifying the possible existence of a public finance motive for inflation. The main results can be summarized as follows: First, there is a strong heterogeneity in the optimal inflation rate which depends on the tax rate that is endogenously adjusted to keep the budget balanced. Inflation can be as high as 6.77% when the capital tax rate is endogenous, but when labor income taxes are adjusted optimal policy calls for a rate of deflation such that the nominal interest rate hits the zero lower bound. Second, the optimal inflation rate is a non-decreasing function of the size of the informal economy and, in most cases, there is a positive relationship between the two. Finally, substantial deviations from zero inflation are observed even in presence of a plausible degree of price rigidity. |
| Keywords: | Optimal Inflation, Informal Economy, Endogenous Tax Changes |
| JEL: | E26 E52 H26 |
| Date: | 2017–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:46&r=dge |
| By: | Ryoji Hiraguchi; Keiichiro Kobayashi |
| Abstract: | We investigate a monetary model with two kinds of decentralized markets and where each agent stochastically chooses the market in which to participate. In one market, the pricing mechanism is competitive, whereas in the other, the terms of trade are determined by Nash bargaining. We show the sub-optimality of the Friedman rule, which is already demonstrated by existing models, where the setting of search externality in the competitive market is not completely satisfactory. We show this result in the more plausible setting when the competitive market does not have a search externality. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:17-013e&r=dge |
| By: | Grodecka, Anna (Financial Stability Department, Central Bank of Sweden) |
| Abstract: | Models in the infinite horizon macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish micro-data, I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt-to-GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time. In a model with occasionally binding constraints, I show that also for the analysis of the short-run effects of different policies, the consideration of multiple constraints, possibly binding at the same time, is important. The effectiveness of LTV as a measure to tackle the rise in indebtedness has to be reassessed and is likely lower than previously shown. |
| Keywords: | borrowing constraints; household indebtedness; macroprudential policy; housing prices; loan-to-value ratio; debt-service-to-income ratio |
| JEL: | E32 E44 E58 R21 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0347&r=dge |
| By: | Edward Herbst (Federal Reserve Board); David Lopez-Salido (Federal Reserve Board); Christopher Gust (Federal Reserve Board) |
| Abstract: | We estimate a New Keynesian model in which the private sector has incomplete information about a central bank’s reaction function and must infer it based on economic outcomes. A central bank’s reaction function can change across regimes and we document a systematic change in U.S. policymakers’ reaction function during the 2009-2016 period in which the federal funds rate was at the effective lower bound. This regime is characterized by being more responsive to economic slack and implies that policymakers sought to keep the policy rate at the ZLB longer than would the case by the pre-existing reaction function; hence, we call this the forward guidance regime. We use the model to assess the impact of forward guidance on the macroeconomy and to evaluate the role of imperfect information and learning in limiting its effectiveness. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1189&r=dge |
| By: | Cubas, German; Silos, Pedro |
| Abstract: | This paper studies how insurance from progressive taxation improves the matching of workers to occupations. We propose an equilibrium dynamic assignment model to illustrate how social insurance encourages mobility. Workers experiment to find their best occupational fit in a process filled with uncertainty. Risk aversion and limited earnings insurance induce workers to remain in unfitting occupations. We estimate the model using microdata from the United States and Germany. Higher earnings uncertainty explains the U.S. higher mobility rate. When workers in the United States enjoy Germany’s higher progressivity, mobility rises. Output and welfare gains are large. |
| Keywords: | Progressive Taxation, Social Insurance, Occupational Choice |
| JEL: | E21 H24 J31 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83020&r=dge |
| By: | Chari, V. V. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal) |
| Abstract: | We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations. |
| Keywords: | Capital income tax; Free trade; Value-added taxes; Border adjustment; Origin- and destination-based taxation; Production efficiency |
| JEL: | E60 E61 E62 |
| Date: | 2017–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:745&r=dge |
| By: | George Economides (Athens University of Economics and Business); Dimitris Papageorgiou (Bank of Greece); Apostolis Philippopoulos (Athens University of Economics and Business) |
| Abstract: | This paper provides a quantitative study of the main determinants of the Greek great depression since 2010. We use a medium-scale DSGE model calibrated to the Greek economy between 2000 and 2009 (the euphoria years that followed the adoption of the euro). Then, departing from 2010, our simulations show that the fiscal policy mix adopted, jointly with the deterioration in institutional quality and, specifically, in the degree of protection of property rights, can explain essentially all the total loss in GDP between 2010 and 2015 (around 26%). In particular, the fiscal policy mix accounts for 14% of the total output loss, while the deterioration in property rights accounts for another 8%. It thus naturally follows that a less distorting fiscal policy mix and a stronger protection of property rights are necessary conditions for economic recovery in this country. |
| Keywords: | Growth; public debt; institutions |
| JEL: | O4 H6 E02 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:234&r=dge |
| By: | Philippe Bacchetta (University of Lausanne) |
| Abstract: | In this paper, we explore the implications of infrequent portfolio adjustment for international portfolios and asset prices in a two-country model. We focus on equity portfolios and estimate the model based on available data. For portfolio positions, we consider the U.S. versus the rest of the world and we use the estimates for U.S. assets and liabilities computed by Bertaut and Tryon (2007) and Bertaut and Judson (2014). We assume that infrequent portfolio investors face each period a constant probability p of adjusting their portfolio position. We then determine the endogenous response of asset prices and portfolios to three types of shocks. The estimated version of the model is able to match the dynamic behavior of portfolio position and excess returns when p is low. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1166&r=dge |
| By: | Harris Dellas (University of Bern); Dimitris Malliaropulos (Bank of Greece); Dimitris Papageorgiou (Bank of Greece); Evangelia Vourvachaki (Bank of Greece) |
| Abstract: | Macroeconomic models that omit the shadow economy systematically mis-forecast and mis-measure the effect of fiscal –in particular tax– policy on economic activity and tax revenue. We add an informal sector to the Bank of Greece DSGE model and use the actual package of fiscal consolidation implemented in Greece over the period 2010–2015 to evaluate the role of the black economy. In the data, official Greek GDP declined by about 26%, budget deficits proved larger and more persistent and tax rates increased by much more and tax revenue by much less than predicted. The model replicates the official output decline but implies a true output decline that is less than two thirds of that in recorded output. The discrepancy is even more pronounced for employment. The model also implies that the size of fiscal adjustment and the drop in economic activity could have been considerably milder had the informal sector been curtailed (it instead increased by about 50%). The underground economy seems to have been a key factor in Greece’s failure to achieve orderly debt consolidation while avoiding economic depression. |
| Keywords: | Shadow economy; fiscal consolidation, multipliers, tax revenue, true output |
| JEL: | E26 E32 E62 E65 H26 H68 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:235&r=dge |
| By: | Rebien, Martina (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Stops, Michael (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Zaharieva, Anna |
| Abstract: | "This study explores the relationship between firms' characteristics and their recruitment strategies. We propose a model based on a search and matching framework with two search channels: a formal channel which is costly for firms and a costless informal channel, i.e. referrals. There is a continuum of heterogeneous vacancies in our model where every firm with an open vacancy chooses an optimal search effort in order to attract job candidates. This search effort depends on the productivity of the firm and, contrary to the previous literature, workers send simultaneous applications to open vacancies. We assess the model predictions by using the IAB Job Vacancy Survey, a representative survey among human resource managers in Germany reporting information about their most recent recruitment case. Based on the finding that firm size and productivity are positively correlated we show that: (1) Larger firms invest more effort into formal search activities; (2) Firms invest more formal search effort in labour markets for more educated workers; (3) The positive relationship between firm's size and formal search intensity can also be observed for firms that don't use referrals; (4) Firms that use referrals as a search channel invest less effort into formal search compared to firms that don't use referrals; (5) Larger firms are less likely to hire an applicant by referral than smaller firms, and (6) More intensive search effort leads to a larger number of applications." (Author's abstract, IAB-Doku) ((en)) |
| Keywords: | Personalbeschaffung, Personalauswahl, offene Stellen, Stellenbesetzung, Mitarbeiter, informelle Kommunikation, Unternehmensgröße, Suchverfahren, Qualifikationsanforderungen, qualifikationsspezifische Faktoren, IAB-Stellenerhebung |
| JEL: | J21 J23 J63 J64 |
| Date: | 2017–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:iab:iabdpa:201733&r=dge |
| By: | Marc Fleurbaey (Princeton University); Marie-Louise Leroux (UQAM - Université du Québec à Montréal - UQAM - Université du Québec à Montréal); Pierre Pestieau (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain, PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Grégory Ponthière (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - UPEM - Université Paris-Est Marne-la-Vallée); Stephane Zuberk (PSE - Paris School of Economics) |
| Abstract: | While little agreement exists regarding the taxation of bequests in general, there is a widely held view that accidental bequests should be subject to a confi…scatory tax. We propose to reexamine the optimal taxation of accidental bequests in an economy where individuals care about what they leave to their offspring in case of premature death. We show that, whereas the conventional 100 % tax view holds under the standard utilitarian social welfare criterion, it does not hold under the ex post egalitarian criterion, which assigns a strong weight to the welfare of unlucky short-lived individuals. From an egalitarian perspective, it is optimal not to tax, but to subsidize accidental bequests. We examine the robustness of those results in a dynamic OLG model of wealth accumulation, and show that, whereas the sign of the optimal tax on accidental bequests depends on the form of the joy of giving motive, it remains true that the 100 % tax view does not hold under the ex post egalitarian criterion. |
| Keywords: | mortality,accidental bequests,optimal taxation,egalitarianism,OLG models |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01649527&r=dge |
| By: | Yosuke Jin |
| Abstract: | This paper analyses how technological progress embodied in capital goods raises productivity and income, while at the same time it can modify the allocation of consumption, investment and the capital stock. With capital-embodied technological progress, new capital goods become more productive, thus more valuable, but the production capacity of the existing capital goods declines comparatively and they become less valuable. In a dynamic and stochastic general equilibrium framework, a shock to the process of capital-embodied technological progress is shown not to raise investment as much as could be expected, allowing the owners of capital goods mainly to raise consumption instead. As a result, overall capacity taking account of the improvement in the quality of capital goods rises only modestly. The muted investment response might seem very conservative, because the owners of capital could take greater advantage of the sudden acceleration in the improvement of the quality of capital goods which allows them to raise their production capacity more than usually. However, this conservative behaviour is consistent with an anticipated faster decline in the value of capital goods which become quickly obsolete, raising the cost of capital for the owners. Finally, this paper analyses the implications of the shock to capital-embodied technological progress coinciding with other shocks, namely, a positive one to the investment accelerator mechanism and a negative one to the risk premium. With deceleration in the quality improvement of capital goods, investors would require higher rates of return while affecting negatively the valuation of the capital stock. |
| Keywords: | asset valuation, capital goods, Capital stock, investment, obsolescence, technological progress |
| JEL: | D92 E22 O31 O47 |
| Date: | 2017–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1445-en&r=dge |
| By: | Selahattin Imrohoroglu (University of Southern California); Gary Hansen (UCLA) |
| Abstract: | Over the past two decades, Japan has suffered from low economic growth and a large and growing debt to output ratio. Furthermore, this ratio is expected to continue to rise as Japan anticipates significant increases in future government expenditures due to an aging population. As a consequence of these problems, Japan has proposed and implemented decreases in the corporate income tax rate as well as increases in the consumption tax rate. In this paper we focus on the output and welfare effects of a reduction in income taxation in Japan along with increases in consumption taxation to stabilize the debt to output ratio. We consider various tax reforms using the model described in Hansen and Imrohoroglu (2016). Reducing or eliminating labor or capital income taxation, and replacing the lost revenues with higher consumption taxation, produces sizable increases in labor supply, investment and output. For example, while output is projected to be roughly constant between 2015 and 2020 in the benchmark equilibrium representing the status quo, under alternative policies considered it would be 7% to 14% higher by 2020. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1114&r=dge |
| By: | Huw Dixon (Cardiff University); ANTHONY SAVAGAR (University of Kent) |
| Abstract: | This paper argues that firm entry causes endogenous fluctuations in macroeconomic productivity through its effect on incumbent firms’ capacity utilization. The analysis shows that imperfect competition causes long-run excess entry leading to many small firms each with excess capacity. Since entry occurs slowly, macroeconomic shocks are initially borne by these incumbents who respond by altering their capacity utilization. As they vary utilization efficiency changes because of non-constant returns to scale and this aggregates to affect the economy’s productivity. In the long run, entry occurs and new firms dissipate the shock, which alleviates incumbents’ alteration in capacity. Therefore the endogenous productivity effect is temporary. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1130&r=dge |
| By: | Andrew Foerster (Federal Reserve Bank of Kansas City); Troy Davig (Federal Reserve Bank of Kansas City) |
| Abstract: | Sixty-two countries around the world use some form of inflation targeting as their monetary policy framework, though none of these countries express explicit policy rules. In contrast, models of monetary policy typically assume policy is set through a rule such as a Taylor rule or optimal monetary policy formulation. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, tolerance bands, and economic projections. When inflation moves outside the band, the central bank must also specify a time frame over which inflation will return to within the band. We show how communication about time horizons and tolerance bands can uniquely pin down a policy rule, and highlight how different types of communication can be used to convey different policy rules. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1133&r=dge |
| By: | Alberto F. Boix; Adri\'an Segura Moreiras |
| Abstract: | The goal of this paper is to shed light on the determinacy question that arises in New Keynesian models as result of a combination of several monetary policy rules; in these models, we provide conditions to guarantee existence and uniqueness of equilibrium by means of results that are obtained from theoretical analysis. In particular, we show that Taylor--like rules in interest rate setting are not the only way to reach determinacy of the rational expectations equilibrium in the New Keynesian setting. The key technical tool that we use for that purposes is the so--called Budan--Fourier Theorem, that we review along the paper. |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1712.03681&r=dge |
| By: | Rodolfo Manuelli (Washington University and Federal Reserve Bank of St. Louis) |
| Abstract: | In this paper we develop a continuous time stochastic growth model that is suitable for studying the impact of natural disasters on the short run and long run growth rate of an economy. We find that the growth effects of a natural disaster depend in complicated ways on the details of expected foreign disaster aid and the existence of catastrophe insurance markets. We show that disaster aid can delay recovery. We also show that access to catastrophe insurance can reduce investment in prevention and mitigation activities. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1118&r=dge |
| By: | Christopher Phelan (University of Minnesota); Manuel Amador (University of Minnesota and Federal Reserve Bank of Minneapolis) |
| Abstract: | This paper presents a continuous time model of sovereign debt. In it, a relatively impatient sovereign government's hidden type switches back and forth between a behavioral type which cannot default and follows a set rule governing its borrowing as a function of its current debt and the price at which it can issue additional bonds, and an optimizing type which can default on the country’s debt at any time. We show that in the unique Markov perfect equilibrium, the optimizing type mimics the behavioral type when borrowing, revealing its type only by defaulting on its debt at random times. The Markov perfect equilibrium (the solution to a simple pair of ordinary differential equations) displays positive gross issuances at all dates, constant net imports as long as there is a positive equilibrium probability the government is the optimizing type, and net debt repayment only by the behavioral type. For countries which have recently defaulted, the interest rate the country pays on its debt is a decreasing function of the amount of time since its last default, its total debt is an increasing function of the amount of time since its last default, and the yield curve on its debt is downward sloping. For countries which have not recently defaulted, interest rates are constant and yield curves are flat. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1167&r=dge |
| By: | Andrea Waddle (University of Richmond) |
| Abstract: | In the decade following the Mexico-U.S. trade integration, the manufacturing skill premium rose by almost 60 percent in Mexico and by only 12 percent in the U.S. Standard trade theory predicts that when countries with different levels of skilled labor integrate, the skill premium should fall - not rise - in the skill-scarce country. In this paper, I reconcile theory and data by building a model in which intermediate goods are produced using rented technology. After integration, producers in Mexico begin to rent technologies from the United States, which are more advanced and, hence, more skill-intensive. This has two effects: The skill premium in Mexico rises due to adoption of the more advanced technology and the skill premium in the U.S. rises due to increased investment in this technology, which is driven by the increased marginal return on technology arising from its adoption in Mexico. The mechanism is supported by industry-level evidence: Mexican industries which are integrated into the U.S. supply chain have higher skill premia than their non-integrated counterparts. The calibrated model can account for about two-thirds of the increase in the skill premium in each country. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1185&r=dge |