nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒01‒01
twelve papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Fiscal Consolidation Programs and Income Inequality By Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry
  2. Capturing macroprudential regulation effectiveness: A DSGE approach with shadow intermediaries By Federico Lubello; Abdelaziz Rouabah
  3. Inferring Inequality with Home Production By Boerma, Job; Karabarbounis, Loukas
  4. No Business Taxation Without Model Representation; Adding Corporate Income and Cash Flow Taxes to GIMF By Benjamin Carton; Emilio Fernández Corugedo; Benjamin L Hunt
  5. Tax Reform, Unhealthy Commodities and Endogenous Health By Jiunn Wang; Laura Marsiliani; Thomas Renstrom
  6. Household Labour Supply and the Marriage Market in the UK, 1991-2008 By Marion Goussé; Nicolas Jacquemet; Jean-Marc Robin
  7. International Transmission of Financial Shocks without Financial Integration By Ohdoi, Ryoji
  8. Optimal Monetary Policy and Fiscal Policy Interaction in a non-Ricardian Economy By Massimiliano Rigon; Francesco Zanetti
  9. A New Keynesian model with unemployment: The effect of on-the-job search By Kantur, Zeynep; Keskin, Kerim
  10. Longevity-induced vertical innovation and the tradeoff between life and growth By Baldanzi, Annarita; Prettner, Klaus; Tscheuschner, Paul
  11. Teaching Modern Macroeconomics in the Mundell-Fleming Language: The IS-MR-UIP-AD-AS Mode By Waldo Mendoza
  12. A Macroeconomic Model with Financial Panics By Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea

  1. By: Pedro Brinca (Nova School of Business and Economics, Universidade Nova de Lisboa; Center for Economics and Finance, Universidade do Porto); Miguel H. Ferreira (Nova School of Business and Economics, Universidade Nova de Lisboa); Francesco Franco (Nova School of Business and Economics, Universidade Nova de Lisboa); Hans A. Holter (Department of Economics, University of Oslo); Laurence Malafry (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: 2017–12
  2. By: Federico Lubello; Abdelaziz Rouabah
    Abstract: Shadow intermediaries activities have registered a spectacular increase during the last decades. Recently, their market shares have rapidly been gaining momentum partially due to “regulatory arbitrage". Although their centrality to the credit boom in the early 2000s and to the collapse during the financial crisis of 2007-2009 is widely documented, the number of contributions studying the implications on the real economy and the underlying transmission mechanisms is surprisingly limited. We contribute to filling this gap and devise a new DSGE model whose productive sector captures key characteristics of the European economy by accounting for small and large firms vertically linked in a production chain. The adopted framework includes commercial banks and shadow financial intermediaries directly interconnected in the interbank market with specific and differentiated channels of financing to the real economy. The framework also incorporates moral hazard for commercial banks which, together with regulatory arbitrage, might bring further incentives for banks to securitize part of their assets. An attempt to incorporate macroprudential policy is considered through the implementation of capital requirements and caps to securitization in the traditional banking sector. The results show that the complementarity of such tools devised by a macroprudential authority can be effective in dampening aggregate volatility and safeguarding financial stability.
    Keywords: DSGE models, Macroprudential Policy, Shadow Banking, SMEs
    JEL: C32 E32 E44 E5 G21 G23
    Date: 2017–10
  3. By: Boerma, Job (Federal Reserve Bank of Minneapolis); Karabarbounis, Loukas (Federal Reserve Bank of Minneapolis)
    Abstract: We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and a home production technology. Accounting for home production amplifies welfare-based differences across households meaning that inequality is larger than we thought. Using the optimality condition that households allocate more consumption to their more productive sector, we infer that the dispersion in home productivity across households is roughly three times as large as the dispersion in their wages. There is little scope for home production to offset differences that originate in the market sector because productivity differences in the home sector are large and the time input in home production does not covary with consumption expenditures and wages in the cross section of households. We conclude that the optimal tax system should feature more progressivity taking into account home production.
    Keywords: Home production; Labor supply; Consumption; Inequality
    JEL: D10 D60 E21 J22
    Date: 2017–12–22
  4. By: Benjamin Carton; Emilio Fernández Corugedo; Benjamin L Hunt
    Abstract: The Global Integrated Monetary and Fiscal model (GIMF) is a multi-region, forward-looking, DSGE model developed at the International Monetary Fund for policy analysis and international economic research. This paper documents the incorporation of corporate income, cash-flow and destination based cash-flow taxes into the model. The analysis presented considers the transmission mechanism of these taxes and details how financial frictions interact with each of the taxes.
    Date: 2017–11–17
  5. By: Jiunn Wang (Durham Business School); Laura Marsiliani (Durham Business School); Thomas Renstrom (Durham Business School)
    Abstract: This paper explores how tax reforms with taxes on unhealthy commodities impact consumer behaviours and welfare when individual health is endogenised. We employ a dynamic general equilibrium model which includes both goods and health sectors. Although unhealthy commodities provide utility, they pose a detrimental effect on health. The analytical results show that the introduction of taxes on unhealthy commodities does not have direct effects on health in the steady state. However, based on our simulation results, with a revenue-neutral tax reform where labour income taxes are adjusted, the introduction of taxes on unhealthy commodities improves both health and welfare, but reduces leisure in the long run. On the other hand, a tax reform where capital income taxes are adjusted contributes to even higher welfare as both health and leisure improve. Our analysis may inform policy making decisions on taxation of unhealthy commodities when government can adjust pre-existing taxes
    Keywords: Unhealthy commodities taxation, endogenous health, tax reform
    JEL: D91 E20 H20 I18
    Date: 2017–12
  6. By: Marion Goussé (Département d'Economique, Université Laval - Université Laval); Nicolas Jacquemet (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Jean-Marc Robin (ECON - Département d'économie - Sciences Po, Department of Economics, University College London - UCL - University College of London [London])
    Abstract: We document changes in labour supply, wage and education by gender and marital status using the British Household Panel Survey, 1991-2008, and seek to disentangle the main channels behind these changes. To this end, we use a version of Goussé, Jacquemet, and Robin (2016)'s search-matching model of the marriage market with labour supply, which does not use information on home production time inputs. We derive conditions under which the model is identified. We estimate different parameters for each year. This allows us to quantify how much of the changes in labour supply, wage and education by gender and marital status depends on changes in the preferences for leisure of men and women and how much depends on changes in homophily.
    Keywords: Search-matching, sorting, assortative matching, structural estimation, collective labour supply
    Date: 2017–06–01
  7. By: Ohdoi, Ryoji
    Abstract: This study analyzes how financial shocks in one country transmit to another country through international trade. To this end, it develops a dynamic general equilibrium model of two-country Ricardian trade with a continuum of goods. Financial frictions exist in each country and the two countries can be asymmetric in terms of the degree of frictions, which can be a novel source of comparative advantage. In the case of a permanent credit crunch, we can analytically show that such a shock reduces the long-run investment, GDP, wage income, and aggregate income of heterogeneous entrepreneurs in both countries. We also numerically investigate the transitory responses to a temporal credit shock and show that such an internationally synchronized economic downturn is also observed during transition periods.
    Keywords: Financial Frictions, Dynamic Ricardian Trade with a Continuum of Goods, Heterogeneous Agents, Asymmetric Countries, Credit Crunch
    JEL: E22 E32 E44 F11 F44
    Date: 2017–12
  8. By: Massimiliano Rigon (Bank of Italy); Francesco Zanetti (University of Oxford)
    Abstract: This paper studies optimal discretionary monetary policy and its interaction with fiscal policy in a New Keynesian model with fi?nitely-lived consumers and government debt. Optimal discretionary monetary policy involves debt stabilization to reduce consumption dispersion across cohorts of consumers. The welfare relevance of debt stabilization is proportional to the debt-to-output ratio and inversely related to the household?s probability of survival that affects the household?s propensity to consume out ?financial wealth. Debt stabilization bias implies that discretionary optimal policy is suboptimal compared with the infl?ation targeting rule that fully stabilizes the output gap and the in?flation rate while leaving debt to freely fl?uctuate in response to demand shocks.
    Keywords: Optimal monetary policy, ?fiscal and monetary policy interaction.
    JEL: E52 E63
    Date: 2017–12
  9. By: Kantur, Zeynep; Keskin, Kerim
    Abstract: Although New Keynesian models with labor market frictions found an increase in unemployment and a decrease in labor market tightness in response to a positive technology shock (which appears to be in line with recent empirical findings), the volatilities of unemployment and labor market tightness are not as high as their empirical counterparts. This calls for the introduction of new tools that will amplify the volatilities of these variables. This paper contributes to the theoretical literature by studying the effect of employment-to-employment flows in a New Keynesian model with labor market frictions. In that regard, the authors assume two types of firms which offer different wage levels, thereby incentivizing low-paid agents to search on-the-job. Differently from the literature, the main source of wage dispersion is the assumption of different bargaining powers of firms motivated by the strength of labor unions. The authors show that the proposed model generates a higher volatility of unemployment and labor market tightness in response to a positive technology shock compared to the model without on-the-job search without causing a change in the responses of the other variables.
    Keywords: New Keynesian model,employment-to-employment flow,unemployment fluctuations,the Shimer puzzle,search and matching
    JEL: E12 E24 E32 J63 J65
    Date: 2017
  10. By: Baldanzi, Annarita; Prettner, Klaus; Tscheuschner, Paul
    Abstract: We analyze the economic growth effects of rising longevity in a framework of endogenous growth driven by quality-improving innovations. We show that a rise in longevity raises savings and thereby reduces the market interest rate. Since the monopoly profits generated by a successful innovation are discounted by the endogenous market interest rate, this raises the net present value of innovations, which, in turn, fosters R&D. The associated increase in the employment of scientists leads to faster technological progress and a higher long-run economic growth rate. From a welfare perspective, we show that the direct effect of an increase in life expectancy on lifetime utility is much larger than the indirect effect of the induced higher consumption due to faster economic growth. Consequently, the debate on rising health care expenditures should not predominantly be based on the growth effects of health care.
    Keywords: long-run growth,vertical innovation,increasing life expectancy,welfare effects of changing longevity,size of health-care sectors
    JEL: J11 J17 O31 O41
    Date: 2017
  11. By: Waldo Mendoza (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: The traditional open aggregate demand and aggregate supply model backed by the Mundell-Fleming model, together with the supply curve that relates the price level to the output gap, should be abandoned in undergraduate Macroeconomics teaching. First, because economies do not return automatically to equilibrium; second, modern central banks set the interest rate, not the amount of money; and third, the main variable of interest is inflation, not price level. The New Keynesian models taught in intermediate macroeconomics have raised these questions, and had been expected to replace the traditional model. However, they lack its appeal and simplicity. At present, the Mundell-Fleming model, on the verge of turning 60, remains a fundamental part of undergraduate-level macroeconomics textbooks. In this article we present an alternative, the IS-MR-UIP-AD-AS, a simple New Keynesian model and a form of the Mundell-Fleming with inflation targeting that determines the equilibrium values ​​of production, inflation, the real interest rate, and the real exchange rate. The model is as simple as the traditional one in that it replicates the general equilibrium scheme, it contains a reasonable measure of mathematics and graphical treatment, and it has a simple connection between predictions and facts; but it is also useful in analyzing the main questions of interest. In addition, and more importantly, the device is as flexible as the traditional one, so it can be extended to deal with more complex matters.The main objective is that this model replace the traditional Mundell-Fleming in the teaching of macroeconomics at the undergraduate level. JEL Classification-JEL: E32 , E52 , E58
    Keywords: Teaching macroeconomics, Inflation Targeting Scheme, Mundell-Fleming Model, Open-Economy New Keynesian Model, monetary policy rule
    Date: 2017
  12. By: Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea
    Abstract: This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
    Keywords: Bank Runs; Financial Crisis; New Keynesian DSGE
    JEL: E23 E32 E44 G01 G21 G33
    Date: 2017–12–15

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