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on Dynamic General Equilibrium |
| By: | Pablo Guerron-Quintana (Boston College); Jesus Fernandez-Villaverde (University of Pennsylvania); Thorsten Drautzburg (Federal Reserve Bank of Philadelphia) |
| Abstract: | We argue that one important determinant of the variation in income shares is political risk. To that end, we document significant changes in the capital share after political events such as the introduction of right-to-work legislation in U.S. states and international events such as the Carnation Revolution in Portugal. These policy changes are often associated with significant fluctuations in output and asset prices. To quantify the importance of these political shocks for the U.S., we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search unemployment. We calibrate the model to the U.S. corporate non-financial business sector with a standard process for productivity. A one standard deviation redistribution shock reduces the capital share up 0.2 percentage point on impact and leads to a drop in output of 0.6 percent. Our calibration also implies that political distribution risk can explain 15 to 25% of the observed volatility of U.S. gross capital shares -- and 35 to 45 percent of output volatility, depending on the elasticity of substitution between capital and labor. Eliminating political redistribution risk in the U.S. would raise the welfare of the representative household by 1.6 percent of steady state consumption. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1201&r=dge |
| By: | BEKIROS, Stelios D.; NILAVONGSE, Rachatar; UDDIN, Gazi S. |
| Abstract: | We contribute to the literature on dynamic stochastic general equilibrium models with housing collaterals by including shocks to house price expectations. We incorporate endogenous mortgage defaults which are rarely included in DSGE models with housing collaterals. We show that our theoretical model of mortgage default is consistent with empirical evidence. We use this particular DSGE setup to study the effects of variations in house price expectations on macroeconomic dynamics and their implications for monetary policy. Extensive model simulations show that an increase in expected future house prices leads to a decline in mortgage default rates as well as in interest rates on loans, whereas it leads to an increase in house prices, household debt, bank leverage ratios and economic activity. As opposed to previous studies we find that inflation is low during a house price boom. Finally, we demonstrate that although monetary policy that reacts to household credit growth improves the stability of the real economy and enhances financial stability, yet it jeopardizes price stability. |
| Keywords: | House price expectations, Inflation dynamics, Monetary policy, Mortgage defaults |
| JEL: | E32 E44 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2017/09&r=dge |
| By: | Samuel Huber; Jaehong Kim |
| Abstract: | We integrate an overlapping generations model into a new monetarist framework and show that the Friedman rule is not optimal. This is because inflation makes saving for retirement less attractive, such that young agents optimally choose to increase their consumption at the expense of lower savings. On the other hand, old agents consume less due to the inflation tax. We show that for low inflation rates, the former effect dominates the latter, such that the Friedman rule is not optimal. However, this effect disappears for higher inflation rates such that the optimal rate is at an intermediate level. |
| Keywords: | Overlapping generations, monetary theory, Friedman rule |
| JEL: | D90 E31 E41 E50 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:272&r=dge |
| By: | Xavier Raurich (Departament de Teoria Econòmica, CREB and BEAT, Universitat de Barcelona.); Thomas Seegmuller (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille) |
| Abstract: | The aim of this paper is to study the role of the distribution of income by age group on the existence of speculative bubbles. A crucial question is whether this distribution may promote a bubble associated to a larger level of capital, i.e. a productive bubble. We address these issues in a three period overlapping generations (OC) model, where productive investment done in the first period of life is a long term investment whose return occurs in the following two periods. A bubble is a short term speculative investment that facilitates intertemporal consumption smoothing. We show that the distribution of income by age group determines both the existence and the effect of bubbles on aggregate production. We also show that fiscal policy, by changing the distribution of income, may facilitate or prevent the existence of bubbles and may also modify the effect that bubbles have on aggregate production. |
| Keywords: | bubble,efficiency,income distribution,overlapping generations |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01629219&r=dge |
| By: | Lin Liu (University of Liverpool); Aditya Goenka (University of Birmingham) |
| Abstract: | This paper investigates the joint determination of the transmission of infectious diseases, human capital accumulation and economic growth. We develop an economic epidemiological model by incorporating SIS epidemiological model into an endogenous growth model with human capital accumulation. Households choose how much to invest in human and physical capital, as well as in controlling the risk of infection. If an individual is infected, he is incapacitated and can neither work nor accumulate human capital. There are multiple balanced growth paths where the endogenous prevalence of the disease determines whether human capital is accumulated or not, i.e. whether there is sustained economic growth or a poverty trap. In the decentralized economy households fail to internalize the externality associated with controlling diseases. We further characterize the optimal solution and the subsidy that will decentralize it. With the optimal public health policy, economies are more likely to take off or grow at a higher rate. We show that there can be underinvestment in preventive health expenditures, and perversely for countries that are most afflicted with diseases and in a poverty trap, the optimal subsidy is lower than for growing economies. The poor health conditions are not only the result of tighter budget constraints, but more importantly the lack of incentives for investing in health capital. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1218&r=dge |
| By: | Job Boerma; Loukas Karabarbounis |
| 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. |
| JEL: | D10 D60 E21 J22 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24166&r=dge |
| By: | Andrew Binning; Junior Maih |
| Abstract: | Occasionally binding constraints are part of the economic landscape: for instance recent experience with the global financial crisis has highlighted the gravity of the lower bound constraint on interest rates; mortgagors are subject to more stringent borrowing conditions when credit growth has been excessive or there is a downturn in the economy. In this paper we take four common examples of occasionally binding constraints in economics and demonstrate how to use regime-switching to incorporate them into DSGE models. In particular we investigate the zero lower bound constraint on interest rates, occasionally binding collateral constraints, downward nominal wage rigidities and irreversible investment. We compare our approach against some well-known methods for solving occasionally-binding constraints. We demonstrate the versatility of our regime-switching approach by combining multiple occasionally binding constraints to a model solved using higher-order perturbation methods, a feat that is difficult to achieve using alternative methodologies. |
| Keywords: | Occasionally Binding Constraints, DSGE models, ZLB, Collateral Constraints |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0058&r=dge |
| By: | Bobba, Matteo; Flabbi, Luca; Levy, Santiago |
| 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 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32223&r=dge |
| By: | Jonathan Willis (Federal Reserve Bank of Kansas City); John Haltiwanger (University of Maryland); Russell Cooper (Penn State University) |
| Abstract: | Recent papers have documented a decline in indicators of business dynamism (e.g., job reallocation) over time in the U.S. along with declining entrepreneurship. This decline in both dynamism and entrepreneurship has accelerated in the post 2000 period. In addition to the decline in the startup rate for new firms, there has been a substantial decline in the dispersion of firm and establishment growth rates over time for existing firms/establishments. Decker et. al (2016) undertake an empirical decomposition that concludes that the decline is dynamism is not due to a reduction in the dispersion of idiosyncratic productivity shocks. They find empirically that the decline is not a result of businesses facing a reduced dispersion of idiosyncratic shocks, but rather the businesses are not responding to those shocks as much as before. This paper aims to develop a model that can account for the observed changes in dynamism among existing establishments. The paper builds upon the framework in Cooper and Haltiwanger (2006) in which frictions associated with adjustment costs of labor interact with idiosyncratic productivity shocks and have strong implications for the empirical moments documented above. Using the lens of the structural model, implied changed in adjustment costs parameters can be estimated in order to evaluate the productivity losses from changes in frictions. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1273&r=dge |
| By: | Drechsel, Thomas; Tenreyro, Silvana |
| Abstract: | Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country’s borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. The model structure nests various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which is smaller, although not negligible. |
| JEL: | E13 E32 F43 O11 O16 |
| Date: | 2017–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:86152&r=dge |
| By: | Chen, Damiaan; van Wijnbergen, Sweder |
| Abstract: | Abstract In a pension system with uniform policies for contribution and accrual, each participant has the same contribution rate and accrual rate independent of the age at the time of payment. This is not actuarially fair because the investment horizon of young participants is longer than the investment horizon of the elderly. This paper shows the presumably unintended redistributive effects of a uniform contribution system and the consequences of switching from uniform policies to an actuarially fair system. We first analyze a stylized model with three overlapping generations to show the intuition behind these effects. Then, we quantify these effects in a more detailed model with multiple overlapping generations, realistic parameters and more detailed information on the income distribution, calibrated on the Dutch funded pension system. We first use this model to show that there is a substantial transfer of income from poor to wealthy participants under a pension scheme with uniform policies: about 10 billion euros are transferred from poor to wealthy participants under the current uniform contribution policies in the Netherlands. We then calculate the gross aggregate transition effect of abolishing the uniform policy pension for an actuarially fair system to be about 37 billion euros (or about 5% of the Dutch GDP). We discuss the four main drivers of this estimate of the transition effect. For each cohort, the redistributive effects are less than 5% of their total pension. |
| Keywords: | Income inequality; pension funds; transition; uniform contribution policies |
| JEL: | G23 J32 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12497&r=dge |
| By: | Luca Spataro, Luciano Fanti and Pier Mario Pacini |
| Abstract: | In an OLG model of a small open economy we analyse the characteristics of saving and fertility under two different public policies: i) constant per capita taxes (and endogenous public debt) and ii) constant per-capita debt (and endogenous stabilizing taxes). Our analysis highlights that a fertility recovery (reduction resp.) requires always a reduction (increase resp.) of taxes, although the implications for public debt management are not trivial, since they depend on the regime the economy is experiencing, i.e. on the relationship between the interest rate and the fertility rate in absence of taxes. |
| Keywords: | overlapping generations, endogenous fertility, savings, small open economy, public national debt |
| JEL: | H63 J13 |
| Date: | 2017–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2017/230&r=dge |
| By: | Andreas Irmen (CREA, Université du Luxembourg) |
| 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. |
| JEL: | D91 J22 O33 O41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:17-23&r=dge |
| By: | LEFEBVRE Mathieu (Université de Strasbourg); PESTIEAU Pierre (Université de Liège and CORE); PONTHIERE Gregory (Université Paris Est) |
| Abstract: | Following Kanbur and Mukherjee (2007), a solution to the “missing poor” problem (i.e. selection bias in poverty measures due to income-differentiated mortality) consists in computing hypothetical poverty rates while assigning a fictitious income to the prematurely dead. However, in a dynamic general equilibrium economy, doing “as if” the prematurely dead were still alive is likely to affect wages, output and capital accumulation, with an uncertain effect on poverty. We develop a 3-period OLG model with income-differentiated mortality, and compare actual poverty rates with hypothetical poverty rates that would have prevailed if everyone faced the survival conditions of the top income class. Including the prematurely dead has an ambiguous impact on poverty, since it affects income distribution through capital dilution, composition effets and horizon effects. Our results are illustrated by quantifying the impact of income-differentiated mortality on poverty measures for France (1820-2010). |
| Keywords: | income-differentiated mortality, poverty measures, missing poor, OLG models, capital accumulation |
| JEL: | E13 E21 I32 |
| Date: | 2017–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2017016&r=dge |
| By: | Yu Zhang (Princeton University) |
| Abstract: | Home price movements received increasing academic and public attention in recent years. In this paper, I propose a novel explanation for large housing booms in emerging markets that highlights the effect of household wealth accumulation on housing prices under liquidity constraints, using the recent Chinese housing boom as an example. In China, housing prices grew 170% during 2003–2012 in real terms. Returns on housing commanded a 12% premium annually over the risk-free rate. Across Chinese cities, increases in the value of housing are closely associated with increases in household wealth, whether measured with or without housing. I argue that the high Chinese housing return premium results from an upward transition in household wealth from a low initial condition interacted with liquidity constraints. Specifically, low initial household wealth, under liquidity constraints, limits housing prices to be low in 2003; but as household wealth quickly rises aided by high household savings, housing prices also quickly increase. I quantitatively assess this explanation using an otherwise standard consumption-housing two-asset dynamic portfolio choice model, augmented with realistic liquidity constraints and low initial wealth, with housing priced in industry equilibrium. The model matches the high housing return premium and explains 92% of the observed increase in housing prices. The model also generates other intriguing predictions, including an investment motive that helps explain the high Chinese household saving rate puzzle. It also predicts that a permanent slowdown in Chinese economic growth might only lead to a temporary dip in Chinese housing prices. The analysis in this paper also provides insights for understanding other episodes in emerging housing markets for which there are both liquidity constraints and low initial household wealth. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1217&r=dge |
| By: | Emanuela Cardia (Universite de Montreal and CIREQ); Paul Gomme (Concordia University and CIREQ) |
| Abstract: | Raising children takes considerable time, particularly for women. Yet, the role of childcare time has received scant attention in the macroeconomics literature. We develop a life-cycle model in which the time dimension of childcare plays a central role. An important contribution of the paper is estimation of the parameters of a childcare production function using data on primary and secondary childcare time as reported in the American Time Use Survey (2003--2015). The model does a better job matching the observed life-cycle patterns of womens' time use than a model without childcare. Our counterfactual experiments show that the increase in the relative wage of women since the 1960s is an important factor in the increase in womens' work time; changes in fertility associated with the baby boom play a smaller role, and changes in the price of durables are found to have a negligible effect. We consider the effects of cheaper daycare. Not surprisingly, this experiment leads to greater use of daycare and more time allocated to market work. A knock-on effect of cheaper daycare is a substantial decline in primary childcare time. |
| Keywords: | Household Technology; Childcare; Women Labor Force Participation; Home Production |
| JEL: | D13 E24 J13 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:15007&r=dge |
| By: | Craighead, William |
| Abstract: | This paper introduces intermediate goods trade into a two-country real business cycle model and examines its implications for real exchange rate behavior. Intermediate goods trade is shown to reduce “exchange rate disconnect” by increasing the volatility of the real exchange rate relative to output and weakening the link between the real exchange rate and output. Intermediate goods trade also raises international output correlations and reduces the correlation between the trade balance and output. |
| Keywords: | Exchange Rate Disconnect Intermediate Goods |
| JEL: | F31 F41 |
| Date: | 2017–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83075&r=dge |
| By: | Timo Boppart; Per Krusell; Kurt Mitman |
| Abstract: | We propose a new method for computing equilibria in heterogeneous-agent models with aggregate uncertainty. The idea relies on an assumption that linearization offers a good approximation; we share this assumption with existing linearization methods. However, unlike those methods, the approach here does not rely on direct derivation of first-order Taylor terms. It also does not use recursive methods, whereby aggregates and prices would be expressed as linear functions of the state, usually a very high-dimensional object (such as the wealth distribution). Rather, we rely merely on solving nonlinearly for a deterministic transition path: we study the equilibrium response to a single, small "MIT shock'' carefully. We then regard this impulse response path as a numerical derivative in sequence space and hence provide our linearized solution directly using this path. The method can easily be extended to the case of many shocks and computation time rises linearly in the number of shocks. We also propose a set of checks on whether linearization is a good approximation. We assert that our method is the simplest and most transparent linearization technique among currently known methods. The key numerical tool required to implement it is value-function iteration, using a very limited set of state variables. |
| JEL: | C68 E1 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24138&r=dge |
| By: | Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J. |
| Abstract: | We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities’ ability to rescue the economy from stagnation. |
| Keywords: | External shock; Great Recession; Exchange rate; Zero lower bound; Exchange rate peg; Currency union; Fiscal Multiplier; Benign coincidence |
| JEL: | E31 F41 F42 |
| Date: | 2017–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:86154&r=dge |
| By: | Liu, Tao-Xiong; Liu, Jun |
| Abstract: | We build up a three-period overlapping generation model to explore the effectiveness of fertility policy and the corresponding factors affecting the fertility choices in China. The results show that there is a significant U-shaped relationship between female income and the two-child fertility choice, and a significant positive relationship between male income and the two-child fertility choice, and the relationship between the price of other child care services and the two-child fertility choice is negatively correlated. The analysis of the effectiveness of the current universal two-child policy suggests that there exists a threshold of the fertility policy estimated to be between 1 and 2. Therefore, even if the two-child policy is further relaxed to a three child policy, it will exert little influence on fertility choice. Thus other forms of fertility policy should be combined to improve fertility rate. |
| Keywords: | two-child policy; male and female income; threshold of the fertility policy |
| JEL: | J13 J18 J31 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82934&r=dge |