nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒01‒29
thirty-two papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The dark corners of the labor market By Sterk, Vincent
  2. When Ramsey Searches for Liquidity By Wei Cui
  3. Financial market imperfections and labour market outcomes By Sepahsalari, Alireza
  4. The "Rajan Hypothesis": a counter-factual experiment By Matteo Coronese; Isabelle Salle
  5. Dealing with Misspecification in DSGE Models: A Survey By Paccagnini, Alessia
  6. Fiscal Consolidation Programs and Income Inequality By Brinca, Pedro; Ferreira, Miguel H.; Franco, Francesco; Holter, Hans A.; Malafry, Laurence
  7. Optimal Taxation with Private Insurance By Yongsung Chang; Yena Park
  8. Dynamic Bank Capital Requirements By Tetiana Davydiuk
  9. A Structural Analysis of US Entry and Exit Dynamics By Hashmat Khan; Hashmat Khan; Hashmat Khan; Jean-Christophe Poutineau
  10. Misallocation Costs of Digging Deeper into the Central Bank Toolkit By David Zeke; Robert Kurtzman
  11. Fiscal Policy, Sovereign Risk, and Unemployment By Pablo Ottonello; Ignacio Presno; Javier Bianchi
  12. Disentangling goods, labor, and credit market frictions in three European economies By Brzustowski, Thomas; Petrosky-Nadeau, Nicolas; Wasmer, Etienne
  13. Financial Intermediation, Capital Accumulation and Crisis Recovery By Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
  14. Sovereign Risk Contagion By Cristina Arellano; Yan Bai; Sandra Lizarazo
  15. The decision to move house and aggregate housing-market dynamics By Ngai, L. Rachel; Sheedy, Kevin D.
  16. Matching workers By Moen, Espen R.; Yashiv, Eran
  17. The theory of unconventional monetary policy By Farmer, Roger E.A; Zabczyk, Pawel
  18. Accounting for the Growth of Exporters By Rahul Giri; Junjie Xia; Lukasz Drozd
  19. Finance and synchronization By Cesa-Bianchi, Ambrogio
  20. Optimal automatic stabilizers By McKay, Alisdair; Reis, Ricardo
  21. The Global Multi-Country Model (GM): an Estimated DSGE Model for the Euro Area Countries By Alice, Albonico; Ludovic, Calès; Roberta, Cardani; Olga, Croitorov; Filippo, Ferroni; Massimo, Giovannini; Stefan, Hohberger; Beatrice, Pataracchia; Filippo, Pericoli; Rafal, Raciborski; Marco, Ratto; Werner, Roeger; Lukas, Vogel
  22. A Macroeconomic Model with Financial Panics By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
  23. The U.S. Shale Oil Boom, the Oil Export Ban, and the Economy: A General Equilibrium Analysis Nida By Cakir Melek, Nida; Plante, Michael D.; Yucel, Mine K.
  24. The Price of Capital, Factor Substitutability and Corporate Profits By Philipp Hergovich; Monika Merz
  25. Job displacement risk and severance pay By Cozzi, Marco; Fella, Giulio
  26. Optimal Monetary and Fiscal Policy with Migration in a Currency Union By Pedro, Gomis-Porqueras; Cathy, Zhang
  27. Optimal Asset Division Rules for Dissolving Partnerships By Piero Gottardi; Arpad Abraham
  28. Saving and Dissaving with Hyperbolic Discounting By Ivan Werning; Dan Cao
  29. Inequality, Frictional Assignment and Home-Ownership By Allen Head; Huw Lloyd-Ellis; Derek Stacey
  30. On the mechanics of New-Keynesian models By Rupert, Peter; Šustek, Roman
  31. Identifying "Default Thresholds" in Consumer Liabilities Using High Frequency Data By Don Schlagenhauf; Carlos Garriga
  32. Welfare Costs of Oil Shocks By Amir Yaron; Steffen Hitzemann

  1. By: Sterk, Vincent
    Abstract: Standard models predict that episodes of high unemployment are followed by recoveries. This paper shows, by contrast, that a large shock may set the economy on a path towards very high unemployment, with no recovery in sight. First, I estimate a reduced-form model of áows in the U.S. labor market, allowing for the possibility of multiple steady states. Next, I estimate a non-linear search and matching model, in which multiplicity of steady states may arise due to skill losses upon unemployment, following Pissarides (1992). In both cases, estimates imply a stable steady state with around 5 percent unemployment and an unstable one with around 10 percent unemployment. The search and matching model can explain observed job Önding rates remarkably well, due to its strong endogenous persistence mechanism.
    Keywords: unemployment; multiple steady states; non-linear estimation
    JEL: E24 E32 J23
    Date: 2016–01
  2. By: Wei Cui (University College London)
    Abstract: What are the optimal policies in an economy with endogenous liquidity frictions? In this paper, liquidity constraints arise because of costly search-and-matching of non-government issued assets. Government bonds, on the other hand, are fully liquid. I show how to characterize the optimal level of government debt, capital tax, and the initial price level, given an initial level of capital stock. There are two main lessons learned from policy making in such a liquidity constrained framework. Taxes on capital converges to a level that balances the trade-off between the efficiency of financing government expenditures and consumption inequality (due to search frictions). A long-run optimal debt-to-GDP ratio can be independent of the initial level of capital stock, when the economy exhibits a balanced growth path. A calibrated version of the model shows that it should be around 66%. This paper suggests that countries which have accumulated a large amount of debt since the recent financial crisis should not permanently roll over their debt.
    Date: 2017
  3. By: Sepahsalari, Alireza
    Abstract: This paper investigates the importance of credit market frictions on labour market outcomes. I build a tractable search and matching model of the labour market with firm dynamics and heterogeneity in productivity and size. Firms produce output using labour, which they hire in a frictional market modelled by a directed search approach, and capital which they rent period-by-period. First, I show that the interaction of search and financial frictions slows down the reallocation of labour and capital from low productivity to high productivity firms and therefore prolongs the recession following a financial shock. Second, I find that the credit tightening reduces the net employment of large and productive firms more than small and unproductive firms, consistent with recent empirical findings.Third, I find that the introduction of financial frictions enhances the ability of the model to explain the fluctuation and persistence observed in output and labour market flows during the great recession. In fact, the model can account for 50% of the increase in unemployment during the 2008-2010 recession.
    Keywords: labour market frictions; collateral constraints; financial shocks.
    JEL: E24 E44
    Date: 2016–01–10
  4. By: Matteo Coronese; Isabelle Salle
    Abstract: We integrate a centralized wage bargaining process into an otherwise standard DSGE model with a financial accelerator to simulate distributional shocks in the presence of financial instability. Our framework provides a counterfactual analysis of the effects of the observed decrease in the labor share when no concomitant rise in households' credit offsets the adverse effect on consumption. The result is a prolonged under-consumption recession that outweighs the initial boost in investment.
    Keywords: Income inequality; Distributional shocks; Under-consumption
    Date: 2018–01–11
  5. By: Paccagnini, Alessia
    Abstract: Dynamic Stochastic General Equilibrium (DSGE) models are the main tool used in Academia and in Central Banks to evaluate the business cycle for policy and forecasting analyses. Despite the recent advances in improving the fit of DSGE models to the data, the misspecification issue still remains. The aim of this survey is to shed light on the different forms of misspecification in DSGE modeling and how the researcher can identify the sources. In addition, some remedies to face with misspecification are discussed.
    Keywords: DSGE Models, Misspecification, Estimation, Bayesian Estimation
    JEL: C1 C11 C5 E0 E5 E50 E58 E60
    Date: 2017–11–24
  6. By: Brinca, Pedro; Ferreira, Miguel H.; Franco, Francesco; Holter, Hans A.; Malafry, Laurence
    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: 2017–11–14
  7. By: Yongsung Chang (University of Rochester / Yonsei Univ.); Yena Park (University of Rochester)
    Abstract: We derive a fully-nonlinear optimal income tax schedule in the presence of private insurance market. The optimal tax formula is expressed in terms of sufficient statistics—such as Frisch elasticity of labor supply, social preferences, and hazard rates of the income distributions—as in the standard Mirrleesian taxation without private insurance (e.g., Saez (2001)). However, in the presence of private market, the standard sufficient statistics are no longer sufficient to determine the exact shape of optimal tax schedule. The optimal tax rates also depends on how private savings interact with public insurance—through substitution and crowding in/out. Based on our formula, we compute the optimal tax schedule using a quantitative general-equilibrium model that is calibrated to reproduce the U.S. income distribution.
    Date: 2017
  8. By: Tetiana Davydiuk (Wharton School, University of Pennsylvania)
    Abstract: The Basel III Accord requires countercyclical capital buffers to protect the banking system against potential losses associated with excessive credit growth and buildups of systemic risk. In this paper, I provide a rationale for time-varying capital requirements in a dynamic general equilibrium setting. An optimal policy trades off reduced inefficient lending with reduced liquidity provision. Quantitatively, I find that the optimal Ramsey policy requires a capital ratio that mostly varies between 4% and 6% and depends on economic growth, bank supply of credit, and asset prices. Specifically, a one standard deviation increase in the bank credit-to-GDP ratio (GDP) translates into a 0.1% (0.7%) increase in capital requirements, while each standard deviation increase in the liquidity premium leads to a 0.1% decrease. The welfare gain from implementing this dynamic policy is large when compared to the gain from having an optimal fixed capital requirement.
    Date: 2017
  9. By: Hashmat Khan (Department of Economics, Carleton University); Hashmat Khan (Department of Economics, Carleton University); Hashmat Khan (Department of Economics, Carleton University); Jean-Christophe Poutineau (Université de Rennes I)
    Abstract: We report empirical evidence indicating that US business formation has recently turned more volatile, procyclical and persistent due to changes in exit dynamics. To study these stylized facts, we estimate a DSGE model with endogenous entry and exit. Business units feature heterogeneous productivity and they shut down if the present value of expected future dividends falls below the current liquidation value. The estimation results imply structural changes in US exit dynamics after 2007: the semi-elasticity of the exit rate to critical productivity has increased and the average plant-level productivity has decreased.
    Keywords: Endogenous entry and exit, DSGE models, US business cycles
    JEL: E20 E32
  10. By: David Zeke (University of Southern California); Robert Kurtzman (Federal Reserve Board of Governors)
    Abstract: This paper examines the potential misallocation of resources induced by Central Bank large-scale asset purchases, particularly the purchase of corporate bonds of nonfinancial firms, through their heterogeneous effect on firms' cost of capital. First, we analytically demonstrate the mechanism in a static model with heterogeneous agents. We then evaluate the misallocation of resources induced by corporate bond buys and the associated output losses in a calibrated DSGE model of which Gertler Karadi (2013) is a special case.
    Date: 2017
  11. By: Pablo Ottonello (University of Michigan); Ignacio Presno (Federal Reserve Board); Javier Bianchi (Federal Reserve Bank of Minneapolis)
    Abstract: How should fiscal policy be conducted in the presence of default risk? We address this question using a sovereign default model with downward wage rigidity. An increase in government spending during a recession stimulates economic activity and reduces unemployment. Because the government lacks commitment to future debt repayments, expansionary fiscal policy increases sovereign spreads making the fiscal stimulus less desirable. We analyze the optimal fiscal policy and study quantitatively whether austerity or stimulus is optimal during an economic slump.
    Date: 2017
  12. By: Brzustowski, Thomas; Petrosky-Nadeau, Nicolas; Wasmer, Etienne
    Abstract: We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In these three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of the total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: most variation in unemployment comes from the speed of matching in the labor market.
    Keywords: search; matching; financial frictions; good frictions
    JEL: R14 J01 F3 G3
    Date: 2016–06–14
  13. By: Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
    Abstract: This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature: First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments.
    Keywords: Financial intermediation; capital accumulation; banking crisis; macroeconomic shocks; business cycles; bust-boom cycles; managing recoveries
    JEL: E21 E32 G21 G28
    Date: 2018–01
  14. By: Cristina Arellano; Yan Bai; Sandra Lizarazo
    Abstract: We develop a theory of sovereign risk contagion based on financial links. In our multi-country model, sovereign bond spreads comove because default in one country can trigger default in other countries. Countries are linked because they borrow, default, and renegotiate with common lenders, and the bond price and recovery schedules for each country depend on the choices of other countries. A foreign default increases the lenders’ pricing kernel, which makes home borrowing more expensive and can induce a home default. Countries also default together because by doing so they can renegotiate the debt simultaneously and pay lower recoveries. We apply our model to the 2012 debt crises of Italy and Spain and show that it can replicate the time path of spreads during the crises. In a counterfactual exercise, we find that the debt crisis in Spain (Italy) can account for one-half (one-third) of the increase in the bond spreads of Italy (Spain).
    JEL: F3 G01
    Date: 2017–11
  15. By: Ngai, L. Rachel; Sheedy, Kevin D.
    Abstract: Using data on house sales and inventories, this paper shows that housing-market dynamics are driven mainly by listings and less so by transaction speed, thus the decision to move house is key to understanding the housing market. The paper builds a model where moving house is essentially an investment in match quality, implying that moving depends on macroeconomic developments and housing-market conditions. The endogeneity of moving means there is a cleansing effect — those at the bottom of the match quality distribution move first — which generates overshooting in aggregate variables. The model is applied to the 1995–2004 housingmarket boom.
    Keywords: housing market; search and matching; endogenous moving; match quality investment.
    JEL: D83 E22 R31
    Date: 2016–06–29
  16. By: Moen, Espen R.; Yashiv, Eran
    Abstract: This paper studies the matching of workers within the firm when the productivity of workers depends on how well they match with their co-workers. The firm acts as a coordinating device and derives value from this role. It is shown that a worker's contribution to firm value changes over time in a non-trivial way as co-workers are replaced by new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of worker flows, firm output and the distribution of firm values. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm values distribution. The paper stresses the role of horizontal differences in worker productivity, which are different from vertical, assortative matching issues. It derives the rent from organizational capital, with worker complementarities playing a key role. We compare the model to match-specific productivity models and explore the essential differences, with the emphasis laid on worker interactions and complementarities.
    JEL: D23 E23 E24 J24
    Date: 2016–05–12
  17. By: Farmer, Roger E.A; Zabczyk, Pawel
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    JEL: J1
    Date: 2016–03–25
  18. By: Rahul Giri (International Monetary Fund); Junjie Xia (Peking University); Lukasz Drozd (Federal Reserve Bank of Philadelphia)
    Abstract: We study a model of establishment dynamics in which the acquisition of customers can be endogenously sluggish due to the presence of search frictions. We use time series data of how firms respond to shocks in markets in which they already operate to discipline the key friction that can slow customer turnover. Our estimation involves fitting SVAR-derived impulse responses of wedges that characterize the distance between data and a prototype frictionless economy. Using the estimated model, we ask: Does the model account for the observed slow growth of sale after firms enter into exporting, while being consistent with other basic trade facts? Our answer is: Largely, yes. The search technology parameters that fit the data well give rise to customer base dynamics that is approximately similar to a simple word-of-mouth diffusion of matches.
    Date: 2017
  19. By: Cesa-Bianchi, Ambrogio
    Abstract: In the workhorse model of international real business cycles, financial integration exacerbates the cycle asymmetry created by country-specific supply shocks. The prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity (e.g., where depreciation rates or factor shares are different across countries). This happens because common shocks have heterogeneous consequences on the marginal products of capital across countries, which triggers international investment. In the data, filtering out common shocks requires therefore allowing for country-specific loadings. We show that finance and synchronization correlate negatively in response to such common shocks, consistent with previous findings. But fi- nance and synchronization correlate non-negatively, almost always positively, in response to purely country-specific shocks.
    Keywords: Stochastic Discount Factor; Vector Autoregression; Shocks; Technology News; Monetary Policy; Cross-section; Stock Returns; Bond Returns
    JEL: E32 F15 F36 G21 G28
    Date: 2016–04–03
  20. By: McKay, Alisdair; Reis, Ricardo
    Abstract: Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as inefficient business cycles driven by aggregate shocks through matching frictions and nominal rigidities. We derive an augmented Baily-Chetty formula showing that the optimal generosity and progressivity depend on a macroeconomic stabilization term. Using a series of analytical examples, we show that this term typically pushes for an increase in generosity and progressivity as long as slack is more responsive to social programs in recessions. A calibration to the U.S. economy shows that taking concerns for macroeconomic stabilization into account raises the optimal unemployment benefits replacement rate by 13 percentage points but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programs as automatic stabilizers affects their optimal design.
    Keywords: Counter-cyclical fiscal policy; Redistribution; Distortionary taxes.
    JEL: E62 H21 H30
    Date: 2016–06–29
  21. By: Alice, Albonico (Università degli Studi di Milano-Bicocca); Ludovic, Calès (European Commission – JRC); Roberta, Cardani (European Commission - JRC); Olga, Croitorov (European Commission - JRC); Filippo, Ferroni (Federal Reserve Bank of Chicago); Massimo, Giovannini (European Commission - JRC); Stefan, Hohberger (European Commission - JRC); Beatrice, Pataracchia (European Commission - JRC); Filippo, Pericoli (European Commission - JRC); Rafal, Raciborski (Vistula University); Marco, Ratto (European Commission - JRC); Werner, Roeger (European Commission); Lukas, Vogel (European Commission)
    Abstract: This paper presents the European Commission's Global Multi-country model (the GM model). The GM model is an estimated multi-country DSGE model, developed by the European Commission, that can be used for spillover analysis, forecasting and medium term projections. Its development is jointly performed by the Joint Research Centre and DG ECFIN. Since the GM model is developed to be flexible under different country configurations,we present the GM model in its configuration designed for EMU-countries (GM3-EMU), which has been estimated for the four largest European economies (Germany, France, Italy and Spain). We analyse business cycle properties, present the model fit and provide a quantitative assessment of the relative importance that supply, demand and international shocks as well as discretionary policy interventions had in explaining the cyclical patterns observed in each country since the establishment of the EMU.
    Keywords: DSGE; Bayesian estimation; EMU; Business cycle; Model fit; Cross-country comparison
    JEL: C51 E31
    Date: 2017–12
  22. By: Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
    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.
    JEL: E0 E44
    Date: 2017–12
  23. By: Cakir Melek, Nida (Federal Reserve Bank of Kansas City); Plante, Michael D.; Yucel, Mine K.
    Abstract: This paper examines the e ects of the U.S. shale oil boom in a two-country DSGE model where countries produce crude oil, re ned oil products, and a non-oil good. The model in- {{p}} corporates di erent types of crude oil that are imperfect substitutes for each other as inputs into the re ning sector. The model is calibrated to match oil market and macroeconomic data for the U.S. and the rest of the world (ROW). {{p}} We investigate the implications of a signicant {{p}} increase in U.S. light crude oil production similar to the shale oil boom. Consistent with the data, our model predicts that light oil prices decline, U.S. imports of light oil fall dramatically, and light oil crowds out the use of medium crude by U.S. re ners. In addition, fuel prices fall and U.S. GDP rises. We then use our model to examine the potential implications of the former U.S. crude oil export ban. The model predicts that the ban was a binding constraint in 2013 through 2015. We find that the distortions introduced by the policy are greatest in the {{p}} re ning sector. Light oil prices become arti cially low in the U.S., and U.S. re neries produce ineciently high amount of re ned products, but the impact on re ned product prices and GDP are negligible.
    Keywords: DSGE; Oil; Trade; Fuel prices; Export ban
    JEL: F41 Q38 Q43
    Date: 2017–09–01
  24. By: Philipp Hergovich; Monika Merz
    Abstract: Technical progress has contributed to a steady decline in the relative price of new capital goods and at the same time facilitated the substitutability between phys- ical capital and labor in output production. This paper studies the quantitative implications that these two changes have for the level and the variability of firms' prots, the capital-to-labor ratio, and also for labor market outcomes when profits arise from rents paid to quasi-fixed factors of production. We embed a CES pro- duction function into a model of capital accumulation and competitive search in the labor market, allowing firms to increase their size by hiring multiple workers. We use our model to disentangle the effects of the decline in the relative price of capital and increased factor substitutability. Our analysis identies each of these two changes as important drivers of the empirically observed rise in the capital- to-labor ratio and in the level and variability of firms' prots. Their overall effect on wages, employment, and the labor share of income is inconclusive, since their respective impact on each of these variables goes in the opposite direction.
    JEL: E24 G32 J64
    Date: 2018–01
  25. By: Cozzi, Marco; Fella, Giulio
    Abstract: This paper studies the matching of workers within the firm when the productivity of workers depends on how well they match with their co-workers. The firm acts as a coordinating device and derives value from this role. It is shown that a worker's contribution to firm value changes over time in a non-trivial way as co-workers are replaced by new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of worker flows, firm output and the distribution of firm values. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm values distribution. The paper stresses the role of horizontal differences in worker productivity, which are different from vertical, assortative matching issues. It derives the rent from organizational capital, with worker complementarities playing a key role. We compare the model to match-specific productivity models and explore the essential differences, with the emphasis laid on worker interactions and complementarities.
    JEL: D52 E24 J65
    Date: 2016
  26. By: Pedro, Gomis-Porqueras; Cathy, Zhang
    Abstract: We develop an open economy model of a currency union with frictional goods markets and costly migration to study optimal monetary and fiscal policy for the union. Households finance consump- tion with a common currency and can migrate across regions given regional differences in goods market characteristics and microstructure. Equilibrium is generically inefficient due to regional spillovers from migration. While monetary policy alone cannot correct this distortion, fiscal policy can help by taxing or subsidizing at the regional level. When households of only one region can migrate, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in migration. Optimal policy when households from both region can migrate is the Friedman rule and zero taxes in both regions.
    Keywords: currency unions, costly migration, search frictions, optimal monetary and fiscal policy
    JEL: D8 E4
    Date: 2018–01–07
  27. By: Piero Gottardi (European University Institute); Arpad Abraham (European University Institute)
    Abstract: We study the optimal design of the bankruptcy code in dynamic production economies with limited commitment, where investment and the accumulation of (real) assets takes place. In particular, we will focus our attention on economies where the accumulation of assets is a collective rather than an individual decision. To find the optimal bankruptcy rule, specifying how to allocate existing assets among different partners, we need to balance risk sharing between the partners and output efficiency when new profitable opportunities may arise in the future. We consider both the case of private or public (verifiable) information on outside options. One of the key inside that under private information, defaulting agents will get a smaller proportion of accumulated assets, even though we will have typically more (and some socially inefficient) separations. We also study how the option of default affects ex ante asset accumulation under private and public information. This environment has several applications including business partnerships, couples and economic unions.
    Date: 2017
  28. By: Ivan Werning (MIT); Dan Cao (Georgetown University)
    Abstract: We study Markov equilibria in the standard time-inconsistent hyperbolic discounting model set in discrete-time. We provide simple conditions under which all Markov equilibria feature saving or dissaving globally, for all wealth levels. Moreover, we show that whether the agent saves or dissaves depends on comparing the interest rate to a threshold made up of impatience parameters only. Our results provide a prediction for behavior that is robust across Markov equilibria and illustrate a well- behaved side of the model. As a corollary, we overturn indeterminacy concerns in Krusell and Smith (2003), showing that the constructions offered there are not Markov equilibria in the standard hyperbolic model. Indeed, our results can be interpreted as establishing that, whether or not the equilibrium is unique, qualitative savings behavior is uniquely determined. Similar results are likely to obtain in other dynamic games, such as in political economy models of public debt.
    Date: 2017
  29. By: Allen Head (Department of Economics, Queen's University, Kingston, Canada); Huw Lloyd-Ellis (Department of Economics, Queen's University, Kingston, Canada); Derek Stacey (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: A theory of the distribution of housing tenure in a city is developed. Heterogeneous houses are built by a competitive development industry and either rented competitively or sold to households which differ in their income and sort over housing types through a directed search process. In the absence of either financial or supply restrictions, higher income households are more likely to own and lower quality housing is more likely to be rented. The composition of the housing stock and the rate of home-ownership depend on the distribution of income, the age of the population and construction costs. When calibrated to match average features of housing markets within U.S. cities, observed differences in these variables account well for the variation observed across cities in home-ownership and the price-rent ratio. A policy designed to improve housing affordability significantly raises home-ownership among lower income households while lowering the quality supplied to high income households.
    Keywords: House Prices, Liquidity, Search, Income Inequality
    JEL: E30 R31 R10
    Date: 2018–01
  30. By: Rupert, Peter; Šustek, Roman
    Abstract: The monetary transmission mechanism in New-Keynesian models is put to scrutiny, focusing on the role of capital. We demonstrate that, contrary to a widely held view, the transmission mechanism does not operate through a real interest rate channel. Instead, as a first pass, inflation is determined by Fisherian principles, through current and expected future monetary policy shocks, while output is then pinned down by the New-Keynesian Phillips curve. The real rate largely only reflects consumption smoothing. In fact, declines in output and inflation are consistent with a decline, increase, or no change in the ex-ante real rate.
    Keywords: New-Keynesian models; monetary transmission mechanism; real interest rate channel; capital.
    JEL: E30 E40 E50
    Date: 2016–03–31
  31. By: Don Schlagenhauf (Federal Reserve Bank of St Louis); Carlos Garriga (Federal Reserve Bank of St. Louis)
    Abstract: The concept of "default threshold" captures the notion of a level of debt that it is not sustainable that results in default. This paper constructs different measures based on the dynamics of the monthly debt payment to after-tax income ratio. The preliminary examination using data from the Consumer Credit Panel suggest that some of these measures have some predictive content when compared to alternative measures based on FICO scores. A quantitative model of default behavior is constructed to replicate the dynamic patterns observed in the data.
    Date: 2017
  32. By: Amir Yaron (University of Pennsylvania); Steffen Hitzemann (The Ohio State University)
    Abstract: This paper investigates the costs of oil shocks for the economy's welfare. Using a VECM, we empirically show that domestic US oil production shocks only have a weak and temporary impact on macroeconomic variables, while the effect of global oil price shocks is persistent and economically and statistically significant. We rationalize these findings within a calibrated two-sector model in which oil is an input factor for industrial production and also part of the household's consumption bundle. Based on the model, we show that oil shocks are associated with large welfare costs for oil-importing economies. Our framework enables several experiments regarding the welfare implications of a reduced oil share in production and consumption, the strategic petroleum reserve, and technological innovations such as fracking.
    Date: 2017

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