nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒01‒08
thirty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Parameter Bias in an Estimated DSGE Model By Yasuo Hirose; Takeki Sunakawa
  2. Capital controls, macroprudential measures and monetary policy interactions in an emerging economy By Valerio Nispi Landi
  3. Valuing Government Obligations When Markets are Incomplete By Jasmina Hasanhodzic; Laurence J. Kotlikoff
  4. Innovation and endogenous growth over business cycle with frictional labor markets By Marcin Bielecki
  5. Inequality in an OLG economy with heterogeneous cohorts and pension systems By Krzysztof Makarski; Joanna Tyrowicz; Marcin Bielecki
  6. US financial shocks and the distribution of income and consumption in the UK By Mumtaz, Haroon; Theodoridis, Konstantinos
  7. Long shadows of financial shocks: an endogenous growth perspective By Marcin Bielecki
  8. Real-time forecast evaluation of DSGE models with stochastic volatility By Diebold, Francis X.; Schorfheide, Frank; Shin, Minchul
  9. Rebalancing in China: a taxation approach By Damien Cubizol
  10. The Optimal Inflation Target and the Natural Rate of Interest By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  11. Unconventional Policies and Exchange Rate Dynamics By Gustavo Adler; Ruy Lama; Juan Pablo Medina
  12. Public investment and monetary policy stance in the euro area By Lorenzo Burlon; Alberto Locarno; Alessandro Notarpietro; Massimiliano Pisani
  13. Financial Frictions in Macroeconomic Models By Alfred Duncan; Charles Nolan
  14. Macroeconomic consequences of the demographic and educational transition in Poland By Aleksandra Kolasa
  15. Secular stagnation, R&D, public investment and monetary policy: a global-model perspective By Pietro Cova; Patrizio Pagano; Alessandro Notarpietro; Massimiliano Pisani
  16. Optimal monetary policy and fiscal interactions in a non-Ricardian economy By Massimiliano Rigon; Francesco Zanetti
  17. Credit Crunches from Occasionally Binding Bank Borrowing Constraints By Tom D. Holden; Paul Levine; Jonathan M. Swarbrick
  18. Real Rigidities and Optimal Stabilization at the Zero Lower Bound in New Keynesian Economies By Adiya Belgibayeva; Michal Horvath
  19. Technological progress, the supply of hours worked, and the consumption-leisure complementarity By Andreas Irmen
  20. Changes in education, wage inequality and working hours over time By Davoine, Thomas; Mankart, Jochen
  21. Price Dispersion, Private Uncertainty, and Endogenous Nominal Rigidities By G. Gaballo
  22. Labor Market Search, Informality and Schooling Investments By Bobba, Matteo; Flabbi, Luca; Levy Algazi, Santiago
  23. The diffusion of economic activity across space: a new approach By Carmen Camacho; Agustín Pérez-Barahona
  24. The Macroeconomic Effects of Longevity Risk under Private and Public Insurance and Asymmetric Information By Ben J. Heijdra; Yang Jiang; Jochen O. Mierau
  25. Monetary Policy Puzzle and wealth targeting consumers By Elliot Aurissergues
  26. Countercyclical Income Risk and Portfolio Choices over the Life-Cycle By Catherine, Sylvain
  27. Household Search or Individual Search: Does It Matter? By Luca Flabbi; James Mabli
  28. Liquidity provision as a monetary policy tool: The ECB's non-standard measures after the financial crisis By Quint, Dominic; Tristani, Oreste
  29. Repeated Implementation with Overlapping Generations of Agents By Azacis, Helmuts
  30. A Macroeconomic Model with Financial Panics By Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea
  31. Endogenous growth and the Taylor principle By Micheli, Martin

  1. By: Yasuo Hirose (Keio University); Takeki Sunakawa (The University of Tokyo, CEAFJP - Centre d’études avancées franco-japonais de Paris - FFJ - Fondation France-Japon de l'EHESS - EHESS - École des hautes études en sciences sociales)
    Abstract: How can parameter estimates be biased in a dynamic stochastic general equilibrium model that omits nonlinearity in the economy? To answer this question, we simulate data from a fully nonlinear New Keynesian model with the zero lower bound constraint and estimate a linearized version of the model. Monte Carlo experiments show that significant biases are detected in the estimates of monetary policy parameters and the steady-state inflation and real interest rates. These biases arise mainly from neglecting the zero lower bound constraint rather than linearizing equilibrium conditions. With fixed parameters, the variance-covariance matrix and impulse response functions of observed variables implied by the linearized model substantially differ from those implied by its nonlinear counterpart. However, we find that the biased estimates of parameters in the estimated linear model can make most of the differences small.
    Keywords: Nonlinearity,Zero lower bound,DSGE Model,Bayesian estimation
    Date: 2016–09
  2. By: Valerio Nispi Landi (Bank of Italy)
    Abstract: Are capital controls and macroprudential measures desirable in an emerging economy? How do these instruments interact with monetary policy? I address these questions in a DSGE model for an emerging economy whose banks are indebted in foreign currency. The model is augmented with financial frictions. The main results are as follows. First, capital controls and macroprudential policies are able to mitigate the adverse effects of an increase in the foreign interest rate. Second the desirability of these measures is shock dependent. Third, capital controls and monetary policy are complementary in addressing the trade-off between inflation and financial fluctuations.
    Keywords: financial markets, monetary policy, small open economy
    JEL: E44 E52 E58 F41
    Date: 2107–12
  3. By: Jasmina Hasanhodzic; Laurence J. Kotlikoff
    Abstract: Determining how to value net government obligations is a long-standing and fundamental question in public finance. Its answer is critical to cost-benefit analysis, the assessment of fiscal sustainability, generational accounting, and other economic issues. This paper posits and simulates a ten-period overlapping generations model with aggregate shocks to price safe and risky government net obligations, including options. Agents can't trade with future generations to hedge the model's productivity and depreciation shocks. Nor can they invest in anything other than one-period bonds and risky capital. Our results are surprising. We find that the pricing of short- as well as long-dated riskless obligations is anchored to the prevailing one-period risk-free return. More surprising, the prices of obligations whose values are proportional to the prevailing wage (e.g., Social Security benefits under a pay-go system with a fixed tax rate) are essentially identical to those of safe obligations, i.e., there is little risk adjustment. This is true notwithstanding our assumption of very large macro shocks. In contrast, government obligations provided in the form of options entail significant risk adjustment. We also show that the value of obligations to unborn generations depends on the nature of the compensating variation. Another finding is that the one-period bond market matters, but less than expected, to valuing obligations. Finally, our model lets us test the ability of arbitrage pricing to get prices right. Surprisingly, with the right specification, it comes close. Although highly stylized, our model suggests the potential of detailed, largescale CGE OLG models to price government obligations as well as non-marketed private securities in the presence of incomplete markets and macro shocks.
    JEL: E61 E62 E69 H00 H20 H43
    Date: 2017–12
  4. By: Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw; Narodowy Bank Polski)
    Abstract: This paper proposes a microfounded model featuring frictional labor markets that generates procyclical R&D expenditures as a result of optimizing behavior by heterogeneous monopolistically competitive firms. This allows to show that business cycle fluctuations affect the aggregate endogenous growth rate of the economy. Consequently, transitory shocks leave lasting level effects. This mechanism is responsible for economically significant hysteresis effects that increase the welfare cost of business cycles by two orders of magnitude relative to the exogenous growth model. I show that this has serious policy implications and creates ample space for policy intervention. I find that several static and countercyclical subsidy schemes are welfare improving.
    Keywords: business cycles, firm dynamics, search and matching, innovation, endogenous growth
    JEL: E32 J63 J64 O3 O40
    Date: 2017
  5. By: Krzysztof Makarski (Narodowy Bank Polski; Warsaw School Economics; Group for Research in Applied Economics (GRAPE)); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw; Institut für Arbeitsrecht und Arbeitsbeziehungen in der Europäischen Union (IAAEU); Institute of Labor Economics (IZA)); Marcin Bielecki (University of Warsaw; Narodowy Bank Polski)
    Abstract: We analyze the consumption and wealth inequality in an OLG model with obligatory pension systems. Our framework features within cohort heterogeneity of endowments (individual productivities) and heterogeneity of preferences (preference for leisure and time preference). We allow for population aging and gradual productivity slowdown. We show four main results. First, longevity increases substantially aggregate consumption inequality and wealth inequality, regardless of the pension system features. Second, the effect of a pension system reform from a defined benefit to a defined contribution works to reinforce the consumption inequality and reduce the wealth inequality. Third, minimum pension benefits are able to counteract a part of that increase in inequality, at a fiscal cost. Fourth the minimum pension benefit guarantee addresses mostly the inequality which stems from differentiated endowments and not that which stems from heterogeneous preferences.
    Keywords: majority voting, pension system reform, welfare
    JEL: E32 E44 E58
    Date: 2017
  6. By: Mumtaz, Haroon (Queen Mary University); Theodoridis, Konstantinos (Cardiff Business School)
    Abstract: We show that US financial shocks have an impact on the distribution of UK income and consumption. Households with higher income and higher levels of consumption are affected more by this shock than households located towards the lower end of these distributions. An estimated multiple agent DSGE model suggests that the heterogeneity in the household responses can be explained by the different levels of access to financial markets. We find that this heterogeneity magnifies the effect of this shock on aggregate output.
    Keywords: FAVAR, DSGE model, Financial Shock
    JEL: D31 E32 E44
    Date: 2017–12
  7. By: Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw; Narodowy Bank Polski)
    Abstract: The Great Recession has resulted in a seemingly permanent level shift in many macroeconomic variables. This paper presents a microfounded general equilibrium model featuring frictional labor markets and financial frictions that generates procyclical R&D expenditures and replicates business cycle features of establishment dynamics. This allows demonstrating the channels through which productivity and financial shocks influence the aggregate endogenous growth rate of the economy, creating level shifts in its balanced growth path. I find that financial shocks are an important driver of the aggregate fluctuations and their influence is especially pronounced for establishment entry. Since the growth rate of the economy can in principle be affected by policy measures, I examine the macroeconomic and welfare effects of applying several subsidy schemes.
    Keywords: business cycles, establishment dynamics, endogenous growth, working capital, financial shocks
    JEL: E32 G01 J63 J64 O3 O40
    Date: 2017
  8. By: Diebold, Francis X.; Schorfheide, Frank; Shin, Minchul
    Abstract: Recent work has analyzed the forecasting performance of standard dynamic stochastic general equilibrium (DSGE) models, but little attention has been given to DSGE models that incorporate nonlinearities in exogenous driving processes. Against that background, we explore whether incorporating stochastic volatility improves DSGE forecasts (point, interval, and density). We examine real-time forecast accuracy for key macroeconomic variables including output growth, inflation, and the policy rate. We find that incorporating stochastic volatility in DSGE models of macroeconomic fundamentals markedly improves their density forecasts, just as incorporating stochastic volatility in models of financial asset returns improves their density forecasts.
    Keywords: Dynamic Stochastic General Equilibrium Model,Prediction,Stochastic Volatility
    JEL: E17 E27 E37 E47
    Date: 2017
  9. By: Damien Cubizol (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce some firms' overinvestment and maintain a high level of welfare. To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to firms that are not overinvesting. Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for State-Owned Enterprises (SOEs) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (public and private). In this model, firms' credit cost is a key channel because it impacts both firms' investment and household consumption (through returns on savings). These consumption and investment reforms bring welfare benefits to households, and the results are close to direct welfare maximization. In this framework, the rebalancing of the domestic demand does not require the readjustment of the external financial position because the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, another theoretical framework proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption. Abstract The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various
    Keywords: The Chinese economy,tax reforms,financial intermediation,consumption,investment,welfare,foreign assets
    Date: 2017–11–10
  10. 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: macroeconomia, economia internacional
    JEL: E31 E52 E58
    Date: 2017–12
  11. By: Gustavo Adler; Ruy Lama; Juan Pablo Medina
    Abstract: We study exchange rate dynamics under cooperative and self-oriented policies in a two-country DSGE model with unconventional monetary and exchange rate policies. The cooperative solution features a large exchange rate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policy instruments. Self-oriented policies (Nash equilibrium), however, entail limited exchange rate movements and an aggressive use of unconventional policies in both countries. Our results highlight the role of international policy cooperation in allowing the exchange rate to play the traditional role of shock absorber.
    Keywords: Foreign exchange intervention;Quantitative Easing, International Policy Coordination, International Policy, Monetary Policy (Targets, Instruments, and Effects), Open Economy Macroeconomics, International Policy Coordination and Transmission, International Business Cycles
    Date: 2017–11–13
  12. By: Lorenzo Burlon; Alberto Locarno (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic impact of a programme for public infrastructure spending in the euro area (EA) under alternative assumptions about funding sources and the monetary policy stance. The quantitative assessment is made by simulating a dynamic general equilibrium model of a monetary union with region-specific fiscal policy. The main results are the following. First, EA-wide stimuli are more effective than unilateral (region-specific) stimuli. Second, under EA-wide stimulus, the fiscal multiplier is close to 2 if the forward guidance (FG) on the short-term policy rate holds. Third, if the monetary authority keeps down both the policy rates (with FG) and the long-term interest rates (with quantitative easing), the fiscal multiplier exceeds 3 at peak and investment spending is self-financing. Fourth, the financing method is relevant: debt financing, particularly under an accommodative monetary policy stance and if the sovereign spreads do not increase, is more growth-friendly than tax financing in the short-term (but not in the long-term). Fifth, the effectiveness of the fiscal stimulus is larger if government spending is directed towards productive goods and its implementation occurs efficiently and without delays.
    Keywords: public investment, fiscal policy, monetary policy, euro area
    JEL: E52 E62 F41 F42
    Date: 2017–12
  13. By: Alfred Duncan; Charles Nolan
    Abstract: In this chapter we: (i) Review the core DSGE workhorse models of financial frictions that existed ahead of the recent financial crisis. (ii) Summarize the recent empirical literature on the history of financial crises. (iii) Summarize the key modelling developments around credit intermediation in DSGE models since the crisis. (iv) Identify gaps in the literature that are especially important for policymakers and modelers.
    Keywords: Financial Frictions; Credit Intermediation; Macroeconomics
    JEL: E32 E44
    Date: 2017–12
  14. By: Aleksandra Kolasa (Faculty of Economic Sciences, University of Warsaw)
    Abstract: Soon after the start of the transition to market economy in the early 1990s, Poland has experi- enced both a dramatic decline in the fertility rate and an increase in the share of students among young high-school graduates. These two processes significantly changed the age structure of the population and average income characteristics of households. Using a general equilibrium model with heterogeneous households and uninsured income shocks I try to assess the impact of these demographic and educational changes on the Polish economic performance and inequalities. I find that in the long term the positive effects of educational transition on output per capita more than offset the negative impact of lower fertility, but the outcome strongly depends on the adjustments in the structure of labor demand. I also show that the educational transition increases income and consumption inequalities, while the demographic transition decreases inequality in assets.
    Keywords: population aging, educational transition, inequalities, models with heterogeneous agents
    JEL: J11 D31 I24 D58 J26
    Date: 2017
  15. By: Pietro Cova (Bank of Italy); Patrizio Pagano (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the global macroeconomic effects of fiscal and monetary policy measures to counterbalance secular stagnation by simulating a five-region New Keynesian model of the world economy, calibrated to the United States (US), the euro area (EA), Japan (JP), China (CH), and the rest of the world (RW). The model includes investment in research and development (R&D) as a factor that affects global growth. Our main findings are as follows. First, a negative efficiency shock to R&D in the main advanced economies partially replicates the observed slowdown in long-term global growth and the decrease in interest rates. Second, in the medium- and long-term, the increase in US public investment favours global growth; in the short-term, it stimulates US economic activity but reduces foreign activity. Third, in the US an accommodative monetary stance, which provokes the crowding-in effect, amplifies the short-term macroeconomic effectiveness of public investment, without inducing additional negative spillovers. Fourth, EA, JP, and CH, by simultaneously increasing public investment and adopting an accommodative monetary policy, counterbalance US short-run negative spillovers and further enhance long-term world growth.
    Keywords: DSGE models, secular stagnation, open-economy macroeconomics, public investment, monetary policy
    JEL: E43 E44 E52 E58
    Date: 2017–12
  16. 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 finitely-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 households 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 inflation targeting rule that fully stabilizes the output gap and the inflation rate while leaving debt to freely fluctuate in response to demand shocks.
    Keywords: optimal monetary policy, fiscal and monetary policy interaction
    JEL: E53 E63
    Date: 2017–12
  17. By: Tom D. Holden; Paul Levine; Jonathan M. Swarbrick
    Abstract: We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data.
    Keywords: Business fluctuations and cycles, Credit and credit aggregates, Economic models, Financial markets
    JEL: E22 E32 E51 G2
    Date: 2017
  18. By: Adiya Belgibayeva (Birkbeck, University of London); Michal Horvath (University of York)
    Abstract: The paper re-visits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labour market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.
    Keywords: zero lower bound, strategic complementarity, labour market, inflation, income tax, government spending.
    JEL: E31 E32 E52 E61 E62
    Date: 2017–02
  19. By: Andreas Irmen ( - Université du Luxembourg, PSE - Paris School of Economics, CESifo - CESifo - Munich, 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)
    Abstract: At least since 1870 hours worked per worker declined and real wages increased in many of today’s industrialized countries. The dual nature of technological progress in conjunction with a consumption-leisure complementarity explains these stylized facts. Technological progress drives real wages up and expands the amount of available consumption goods. Enjoying consumption goods increases the value of leisure. Therefore, individuals demand more leisure and supply less labor. This mechanism appears in an OLG-model with two-period lived individuals equipped with per-period utility functions of the generalized log-log type proposed by Boppart-Krusell (2016). The optimal plan is piecewise defined and hinges on the wage level. Technological progress moves a poor economy out of a regime with low wages and an inelastic supply of hours worked into a regime where wages increase further and hours worked continuously decline.
    Keywords: Technological Change,Capital Accumulation,Endogenous Labor Supply,OLG-model
    Date: 2017–12
  20. By: Davoine, Thomas; Mankart, Jochen
    Abstract: The US skill premium and college enrollment have increased substantially over the past few decades. In addition, while low-wage earners worked more than highwage earners in 1970, the opposite was true in 2000. We show that a parsimonious neoclassical model featuring skill-biased technical change, endogenous education and labor supply decisions can explain the change in the college education rate between 1967 and 2000 as well as the trend in the wage-hours correlation. Moreover, we show analytically and quantitatively that endogenous labor supply is important. Assuming constant hours significantly biases the estimates of the effects of skillbiased technological progress on college enrollment and the skill premium. Further, we find that limiting the maximum number of hours someone can work lowers welfare for almost all generations. Since it increases the skill premium, the welfare loss is most severe for the low-skilled, reaching almost one percent of life-time consumption.
    Keywords: higher education,wage inequality,skill-biased technical change,labor supply,working time regulation
    JEL: I24 J2 J31
    Date: 2017
  21. By: G. Gaballo
    Abstract: This paper shows that when agents learn from prices, large private uncertainty may result from a small amount of heterogeneity. As in a Phelps-Lucas island model, final producers look at the prices of their local inputs to infer aggregate conditions. However, market linkages between islands make the informativeness of local prices endogenous to general equilibrium relations. In this context, I show that a vanishingly small heterogeneity in local conditions is enough to generate an equilibrium in which prices are rigid to aggregate shocks and transmit only partial information. I use this insight as a microfoundation for price rigidity in an otherwise frictionless monetary model and show that even a tiny amount of dispersion in fundamentals can lead to large non-neutrality of money.
    Keywords: learning from prices, expectational coordination, dispersed information.
    JEL: D82 D83 E3
    Date: 2017
  22. By: Bobba, Matteo (Toulouse School of Economics); Flabbi, Luca (University of North Carolina, Chapel Hill); Levy Algazi, Santiago (Inter-American Development Bank)
    Abstract: We develop a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering the labor market and whether searching for a job as unemployed or as self-employed. Firms optimally decide the formality status of the job and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market parameters and institutions. We focus on an increasingly important institution: a "dual" social protection system whereby contributory benefits in the formal sector coexist with non-contributory benefits in the informal sector. We estimate preferences for the system – together with all the other structural parameters of the labor market – using labor force survey data from Mexico and the time-staggered entry across municipalities of a non-contributory social program. Policy experiments show that informality may be reduced by either increasing or decreasing the payroll tax rate in the formal sector. They also show that a universal social security benefit system would decrease informality, incentivize schooling, and increase productivity at a relative fiscal cost that is similar to the one generated by the current system.
    Keywords: labor market frictions, search and matching, Nash bargaining, informality, returns to schooling
    JEL: J24 J3 J64 O17
    Date: 2017–11
  23. By: Carmen Camacho (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, PSE - Paris School of Economics); Agustín Pérez-Barahona (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Dynamic spatial theory has been a fruitful approach to understand economic phenomena involving time and space. However, this new field has opened a set of questions still unresolved in the literature. For instance, the identification of the social optimal allocation of economic activity across time and space has not been ensured yet in economic growth. By means of a monotone method, we study in this paper the optimal solution of spatial Ramsey-type models. We analytically prove, under fairly general assumptions, the existence of a unique social optimum. The iterative nature of this approach also allows us to present a new algorithm to simulate the optimal trajectories of the economy. We provide two economic illustrations of our method. Firstly, we apply our existence result to the spatial growth model and to a framework for optimal land-use planning, concluding that these problems are well-posed. We then consider the spatial growth model in order to investigate the importance of capital mobility in economic growth. We particularly underline the spatial dynamic implications of this feature on social welfare and income inequality.
    Keywords: Control,Spatial dynamics,Ramsey model,Partial differential equations
    Date: 2017–12
  24. By: Ben J. Heijdra; Yang Jiang; Jochen O. Mierau
    Abstract: We study the impact of a fully-funded social security system in an economy with heterogeneous consumers. The unobservability of individual health conditions leads to adverse selection in the private annuity market. Introducing social security—which is immune to adverse selection—affects capital accumulation and individual welfare depending on its size and on the pension benefit rule that is adopted. If this rule incorporates some implicit or explicit redistribution from healthy to unhealthy individuals then the latter types are better off as a result of the pension system. In the absence of redistribution the public pension system makes everybody worse off in the long run. Though attractive to distant generations, privatization of social security is not generally Pareto improving to all generations.
    Keywords: social security, annuity market, adverse selection, overlapping generations, redistribution
    JEL: D91 E10 H55 J10
    Date: 2017
  25. By: Elliot Aurissergues (PSE - Paris School of Economics)
    Abstract: In this paper, I document that the three equation new keynesian model predicts a strong overreaction of real wages to monetary policy shocks, whereas the response is close to zero in datas. This puzzle may be solved by sticky wages but I show that this overreaction is created by the intertemporal choice of households, on which the recent forward guidance literature have cast doubts. Then, I build a simple new keynesian model with bounded rationality. At each period, households do not form a consistent plan for their lifetime but choose between leisure, consumption and future wealth. It transposes joy of giving model to the business cycles analysis. I show that this simple model generates more realistic response to monetary policy shocks than the three equation new keynesian model. The model also highlights the importance of perceived future wealth and asset supply. Their response to changes in real inetrest rates deeply affects consumption and leisure decision. This point could be useful for more complicated model like Heterogenous agents or Behavioral new keynesian model. JEL Classification: D83,D84
    Keywords: Forward guidance,nonseparable preferences,bounded ratio- nality,euler equation,monetary policy shocks
    Date: 2017–10–27
  26. By: Catherine, Sylvain
    Abstract: This paper presents a life-cycle model that incorporates the cyclical skewness of labor income shocks. Cyclical skewness can explain the limited stock market participation of households with modest financial wealth and the positive age trend in conditional equity shares. Structural estimation reveals that a relative risk aversion of 5 and a yearly participation cost of $290 fits the US data. Omitting cyclical skewness leads to a three-fold overestimation of participation costs and generates a counterfactual decline of conditional equity shares. As its portfolio implications are smaller for wealthy households, cyclical skewness reduces aggregate demand for equity by only 15%.
    Keywords: Household finance; Labor income risk; Portfolio choices; Human capital; Life-cycle model; Simulated method of moments
    JEL: D14 D91 G11 G12 H60 J24
    Date: 2017–05–01
  27. By: Luca Flabbi; James Mabli
    Abstract: Most labor market search models ignore the fact that decisions are often made at the household level. We fill this gap by developing and estimating a household search model with on-the-job search and labor supply.
    Keywords: labor market, household search, individual search
    JEL: J
  28. By: Quint, Dominic; Tristani, Oreste
    Abstract: We study the macroeconomic consequences of the money market tensions associated with the financial crisis in the euro area. In a structural VAR, we identify a liquidity shock rooted in the interbank market and use its impulse response functions to calibrate key parameters of a Smets and Wouters (2003) closed-economy model augmented with a banking sector à la Gertler and Kiyotaki (2010). We highlight two main results. First, an identified liquidity shock causes a sizable and persistent fall in investment. The shock can account for one third of the observed, large fall in euro area aggregate investment in 2008-09. Second, the liquidity injected in the market by the ECB played an important role in attenuating the macroeconomic impact of the shock. According to our counterfactual simulations based on the structural model, in the absence of ECB liquidity injections interbank spreads would have been at least 200 basis points higher and their adverse impact on investment would have been more than twice as severe.
    Keywords: ECB,euro area,financial crisis,financial frictions,interbank market,non-standard monetary policy
    JEL: E44 E58
    Date: 2017
  29. By: Azacis, Helmuts (Cardiff Business School)
    Abstract: We study repeated implementation in a model with overlapping ge- nerations of agents. It is assumed that the preferences of agents do not change during their lifetime. A social choice function selects an alternative in each period as a function of the preferences of agents who are alive in that period. We show that any social choice function satisfying mild necessary conditions is repeatedly implementable in subgame perfect equilibrium if there are at least three agents and they live sufficiently long.
    Keywords: Repeated Implementation, Subgame Perfect Implementa- tion, Overlapping Generations, Necessary and Sufficient Conditions
    JEL: C72 C73 D71 D82
    Date: 2017–12
  30. 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
  31. By: Micheli, Martin
    Abstract: This paper analyzes conditions for determinacy in a new Keynesian model with endogenous growth. Endogenous growth shrinks the determinacy region considerably. Complying with the Taylor principle is not sufficient for determinacy, which decreases in the spillovers from actual on potential output. Monetary policy therefore has to be more aggressive than in an exogenous growth setup to ensure determinacy.
    Keywords: Endogenous growth,business cycle,monetary policy,Taylor principle
    JEL: E32 E52 O42
    Date: 2017

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