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on Dynamic General Equilibrium |
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Issue of 2018‒02‒05
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | X. Liu; A.R. Pagan; T. Robinson |
| Abstract: | We describe methods for assessing estimated Dynamic Stochastic General Equilibrium (DSGE) models. One involves the computation of alternative impulse responses from models constrained to have an identical likelihood and the same contemporaneous signs as responses in the DSGE model. Others ask how well the model matches the data generating process; whether there is weak identification; the consequences of including measurement error with growth rates of non-stationary variables; and whether the model can reproduce features of the data that involve combinations of moments. The methods are applied to a large-scale small-open economy DSGE model, typical of those used at policy institutions. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2018-04&r=dge |
| By: | Paweł Borys (SGH Warsaw School of Economics, Narodowy Bank Polski); Paweł Doligalski (University of Bristol); Paweł Kopiec (Narodowy Bank Polski) |
| Abstract: | Modeling labor markets in a search and matching framework became a standard approach in DSGE studies. However, there is an expanding strand of literature arguing that similar frictions characterize the product market. When households are required to exert costly shopping effort in order to enjoy consumption, shifts in households preferences tend do have a larger impact on product and employment than in otherwise standard RBC model. We construct a general equilibrium model with frictions both in the labor and the product markets and confirm that in case of the US, preference shocks are the main driver of the business cycle. Moreover, we verify if presence of shopping frictions affects the relation between labor market institutions and unemployment, both in terms of its steady-state level and volatility. However, we find that most results are qualitatively in line with studies treating the product market as frictionless. Higher unemployment benefits and wage rigidity tend to increase variance of unemployment, while benefits also promote higher unemployment in the long run. Firing taxes contribute to lower level and volatility of unemployment. Surprisingly, while effects of recruitment cost on steady state allocation are comparable to the impact of firing cost, the former rises the volatility of unemployment in our simulations for the US. |
| Keywords: | Unemployment, Labor Market Institutions, Business Cycle. |
| JEL: | D50 E02 E32 J65 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:275&r=dge |
| By: | Gajendran Raveendranathan |
| Abstract: | I build a model of revolving credit in which consumers face idiosyncratic earnings risk, and credit card firms direct their search to consumers. Upon a match, they bargain over borrowing limits and borrowing interest rates — fixed for the duration of the match. Using the model, I show that improved matching between consumers and credit card firms, calibrated to match the rise in the population with credit cards, accounts for the rise in revolving credit and consumer bankruptcies in the United States. I also provide empirical evidence consistent with the two key features in my model: directed search and bargaining. The lifetime consumption gains from improved matching are 3.55 percent— substantially larger than those previously estimated by alternative explanations for the rise in revolving credit and consumer bankruptcies (0.03-0.57 percent). Finally, I analyze how the credit card firm’s bargaining power impacts the welfare of introducing stricter bankruptcy laws. |
| Keywords: | revolving credit, consumer bankruptcy, matching, directed search, bargaining |
| JEL: | E20 G20 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2018-05&r=dge |
| By: | Inhwan So (International Department, The Bank of Korea) |
| Abstract: | This paper investigates how the openness of banking sector influences the transmission channels of home and foreign monetary policy shocks in small open economies. For the analysis, I construct a small open economy DSGE model enriched with a banking sector. I consider two forms of bank globalization: international bank capital finance and foreign loan account import. From the analysis, I find that bank globalization leads to a significant attenuation of domestic monetary policy transmission. On the other hand, opening of the banking sector intensifies the impact of foreign interest rate shocks on the local bank activities. |
| Keywords: | Bank globalization, Monetary policy, Dynamic stochastic general equilibrium model, Small open economies |
| JEL: | E32 E44 E52 E58 F36 |
| Date: | 2017–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1733&r=dge |
| By: | Lorenza Rossi (Department of Economics and Management, University of Pavia) |
| Abstract: | Using U.S.quarterly data we show that in response to a positive productivity shock:i) firms creation increases ii) firms destruction reduces at impact,it then overshoots its long run level,peaking three years later above its steady state. iii) banks markup reduces.To address these three facts,we provide an NK-DSGE model where firms dynamics is endogenous, the banking sector is monopolistic competitive and defaulting firms do not repay loans to banks. We show that the interaction between firms and banks is key to replicate the empirical evidence. Contrary to the conventional wisdom,in the baseline model thee efects of the shock are dampened with respect to a model without banks. |
| Keywords: | firms creation, firms destruction, monopolistic banks,countercyclical banks, markup, productivity shocks,overshooting of firms destruction, BVAR. |
| JEL: | E32 E44 E52 E58 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0147&r=dge |
| By: | Frankovic, Ivan; Kuhn, Michael; Wrzaczek, Stefan |
| Abstract: | We study medical progress within an economy of overlapping generations subject to endogenous mortality. Individuals demand health care with a view to lowering mortality over their life-cycle. We characterise the individual optimum and the general equilibrium of the economy and study the impact of improvements in the effectiveness of health care. We find that general equilibrium effects dampen strongly the increase in health care usage following medical innovation. Moreover, an increase in savings offsets the negative impact on GDP per capita of a decline in the support ratio. |
| Keywords: | life-cycle model,longevity,health care,medical innovation,overlapping generations,value of life |
| JEL: | D91 I11 I12 J11 J17 O31 O41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuweco:082017&r=dge |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:32398&r=dge |
| By: | Madeira, João; Palma, Nuno Pedro G. |
| Abstract: | We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule. |
| Keywords: | Bayesian estimation; Business Cycles; DSGE; interest rates; New Keynesian models; sticky prices |
| JEL: | E32 E37 E50 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12553&r=dge |
| By: | Hwan Koo Kang (Economic Research Institute, The Bank of Korea) |
| Abstract: | Since the global financial crisis, long term trend of global inflation remains low in spite of the fact that major developed countries implemented long-lasting intensively accommodating policies. One possible explanation is that demographic change such as population aging has affected the long term trend of inflation. Japanese 'lost decades' could be a persuasive evidence of the effect of demographic change on long term inflation. Recent literature on this topic provides much evidence that population aging could affect growth and inflation rate through the various and complicated channels such as labor supply, savings rate, real wage, labor productivity, asset prices and fiscal burdens. However, a unified conclusion is not reached from the theoretical and empirical literature since the direction and extent of the effects are different from country to country depending on the stage and type of the demographic change. This study presents some simulation results based on a dynamic general equilibrium monetary model in which demographic changes are captured by the change of working population ratio. The simulation results show that in case of South Korea where the working population ratio is starting to decline from this year, the effect of population aging on long term trend of inflation is being realized since mid 2020's as a weak but long-lasting downside pressure. These results tell us that the effects of demographic changes on long term inflation should be considered when making a long term inflation target. They also gives an implication that those effects could not be counter-acted by the short term demand management policy. As a result, it would be better to focus on the policies for structural reform to minimize the negative consequences of the demographic change. |
| Keywords: | Demographic change, Long term trend of inflation, Inflation target, Cash-in-advance constraint |
| JEL: | E30 E58 J11 |
| Date: | 2017–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1711&r=dge |
| By: | Jean-Christophe Poutineau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine) |
| Abstract: | In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union-wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries. |
| Abstract: | A l'aide d'un modèle MEGIS estimé pour la zone euro tenant compte des différences économiques entre le coeur et la périphérie de la zone Euro, nous constatons que les mesures macroprudentielles conduites à l'échelle national mènent à des gains de bien-être importants par rapport à une règle de politique uniforme qui réagit aux développements financiers à l'échelle fédérale. Cependant, ces mesures macroprudentielles ne sont pas bénéfiques pour tous les participants: les gains de bien-être sont principalement obtenus pour les pays périphériques alors que les pays du coeur peuvent être perdants suite à la mise en place cette nouvelle politique de stabilité financière. |
| Keywords: | Macroprudential policy,Euro Area,Financial Accelerator,DSGE Two-Country Model,Bayesian Estimation |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01619806&r=dge |
| By: | Takaaki Morimoto (Graduate School of Economics, Osaka University); Yuta Nakabo (Graduate School of Economics, Osaka University); Ken Tabata (School of Economics, Kwansei Gakuin University) |
| Abstract: | Employing a two-period OLG model with labor market frictions and PAYG pension, this paper examines the effects of population aging on the unemployment rate and the per capita output of the economy. We show that in economies in which the population growth rate is already low and the size of PAYG pension is relatively large, a further decline in the population growth rate reduces the unemployment rate and increases the per capita output of the economy in the short run, but it increases the unemployment rate and reduces the per capita output of the economy in the long run. |
| Keywords: | Population aging, Labor market frictions, Unemployment, PAYG pension |
| JEL: | D91 E24 H55 O41 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:172&r=dge |
| By: | Kwanghwan Kim (School of Economics, Yonsei University); Sukgee Choi (Monetary Policy Department, The Bank of Korea) |
| Abstract: | This paper shows the role of wage stickiness in the transmission of credit supply shock in a two-sector New Keynesian model with a collateral constraints. In the vector autoregression(VAR) analysis, durable goods and nondurable goods comove in response to a credit supply shock. However, in a two-sector New Keynesian model with flexible wage, the output of nondurables decreases, while the output of durables and total output increase in response to a negative credit supply shock(LTV ratio tightening). Therefore, the comovement problem in two-sector New Keynesian model arises to a credit supply shock. If we introduce the nominal wage stickiness, the output of nondurables and durables decrease together and, as a result, total output also decreases. This result is robust to the degree of wage stickiness and to durable price stickiness. The share of borrowers also does not influence the main result. |
| Keywords: | Credit supply shock, Durable goods, Comovement, Sticky wage |
| JEL: | E32 E51 |
| Date: | 2017–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1709&r=dge |
| By: | Keqiang Hou; Alok Johri |
| Abstract: | Corporate profit is six times more volatile than output. We estimate a dynamic general equilibrium model with intangible capital (IC) using aggregate data on output, investment and hours and find that it generates profits that are over five times as volatile as output. A similar model without IC relies on preference shocks to generate profits that are 3.5 times as volatile as output. Variance decomposition analysis reveals that shocks to IC productivity account for 85 % of the variance of output, and over 50 % of hours and investment. The increased volatility of profits is associated with a time-varying wedge between wages and the marginal product of labor which is shown to be highly correlated with the data-based labor wedge. The estimation identifies the sixties and the nineties as periods of rapid IC accumulation. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2018-01&r=dge |
| By: | Sebastian Di Tella |
| Abstract: | This paper provides an equilibrium theory of liquidity traps and the real effects of money. Money provides a safe store of value that prevents interest rates from falling enough during downturns, and the economy enters a persistent slump with depressed investment. This is an equilibrium outcome—prices are flexible, markets clear, and inflation is on target—but it’s not efficient. Investment is too high during booms and too low during liquidity traps. Although money has large real effects, monetary policy is ineffective—the zero lower bound is not binding, money is superneutral, and Ricardian equivalence holds. The optimal allocation requires the Friedman rule and a tax/subsidy on capital. |
| JEL: | E3 E4 E5 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24205&r=dge |
| By: | Elena Afanasyeva; Jochen Guntner |
| Abstract: | This paper investigates the risk channel of monetary policy through banks' lending standards. We modify the classic costly state verification (CSV) problem by introducing a risk-neutral monopolistic bank, which maximizes profits subject to borrower participation. While the bank can diversify idiosyncratic default risk, it bears the aggregate risk. We show that, in partial equilibrium, the bank prefers a higher leverage ratio of borrowers, when the profitability of lending increases, e.g. after a monetary expansion. This risk channel persists when we embed our contract in a standard New Keynesian DSGE model. Using a factor-augmented vector autoregression (FAVAR) approach, we find that the model-implied impulse responses to a monetary policy shock replicate their empirical counterparts. |
| Keywords: | Lending standards ; Credit supply ; Costly state verification ; Risk channel ; Monetary policy |
| JEL: | D53 E44 E52 |
| Date: | 2018–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-06&r=dge |
| By: | David Lagakos (University of California, San Diego); Mushfiq Mobarak (Yale University); Michael Waugh (New York University) |
| Abstract: | This paper studies the welfare effects of encouraging rural-urban migration in the developing world. To do so, we build a dynamic incomplete-markets model of migration in which heterogeneous agents face seasonal income fluctuations, stochastic income shocks, and disutility of migration that depends on past migration experience. We calibrate the model to replicate a field experiment that subsidized migration in rural Bangladesh, leading to significant increases in both migration rates and consumption for induced migrants. The model’s welfare predictions for migration subsidies are driven by two main features of the model and data: first, induced migrants tend to be negatively selected on income and assets; second, the model’s non-monetary disutility of migration is substantial, which we validate using newly collected survey data from this same experimental sample. The average welfare gains are similar in magnitude to those obtained from an unconditional cash transfer, and greater than from policies that discourage migration, though migration subsidies lead to larger gains for the poorest households, which have the greatest propensity to migrate. |
| Keywords: | rural-urban migration |
| JEL: | J61 O11 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2018-002&r=dge |
| By: | Kolm, Ann-Sofie (Stockholm University); Larsen, Birthe (Department of Economics, Copenhagen Business School) |
| Abstract: | We build a general equilibrium model in terms of a search and matching model with an informal sector. We consider the impact of the traditional policy instruments considered in the tax evasion literature, such as changes in the tax- and punishment system as well as changes in the employment protection legislation and concealment costs, on labour market outcomes. To this end, we set-up a model which allows workers to allocate their search for formal and informal sector jobs optimally. We calibrate and simulate the model to fit the North and the South of Europe, where the share of informal sector workers is equal to three percent in the North and more than 4 times as high in the South. We consider the impact of concealment costs, as there are large differences in terms of tax administration procedures between the South and the North, in terms of that Northern countries make more extensively use of third-party reporting. We also examine whether stricter employment protection legislation in Southern Europe may explain the observed fact. |
| Keywords: | informal economy; tax policy; tax evasion; Northern Europe; Southern Europe; |
| JEL: | E24 E26 H26 |
| Date: | 2018–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cbsnow:2018_001&r=dge |
| By: | Boppart, Timo; Krusell, Per; Mitman, Kurt |
| 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. |
| Keywords: | computation; Heterogeneous Agents; linearization; MIT shock. |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12520&r=dge |
| By: | Raouf Boucekkine (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); Giorgio Fabbri (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne); Patrick A. Pintus (DGEI-DEMFI-POMONE – Banque de France) |
| Abstract: | This paper aims at clarifying the analytical conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on an open-economy AK model in which the capital-deepening effect of financial globalization boosts growth in a in permanent but entails an entry cost in order to access international credit markets. We show that constrained borrowing triggers substantial welfare gains, even at small levels of international financial integration, provided that the autarkic growth rate is larger than the world interest rate. Such conditional welfare benefits boosted by stronger growth - long-run gain - arise in our preferred model without investment commitment and they range, relative to autarky, from about 2% in middle-income countries to about 13% in OECD-type countries under international financial integration. Sizeable benefits emerge despite the fact that consumption initially falls - short-run pain - which is however shown not to dwarf positive growth changes. |
| Keywords: | Endogenous Growth,Welfare Gains,Collateral-Constrained Borrowing,International Financial Integration,Growth Breaks |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00790569&r=dge |
| By: | Stefano Fasani (University of Milan Bicocca); Lorenza Rossi (Department of Economics and Management, University of Pavia) |
| Abstract: | This note considers the Leduc and Liu (JME, 2016) model and studies the effects of their uncertainty shock under different Taylor-types rules. It shows that both the responses of real and nominal variables highly depend on the Taylor rule considered. Remarkably,in?flation reacts positively so that uncertainty shocks look more like supply shocks, once an empirically plausible degree of interest rate smoothness is taken into account. This result is reinforced with less reactive monetary rules. Overall, these rules bring about a less severe recession. |
| Keywords: | Uncertainty Shocks, DSGE Model, Search and Matching frictions, Taylor rules, In?flation Dynamics |
| JEL: | E12 E21 E22 E24 E31 C32 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0148&r=dge |
| By: | Sumru Altug (Koc University, Istanbul and Centre for Economic Policy Research, London); Melih Can Firat (Johns Hopkins University, Maryland) |
| Abstract: | The Turkish macroeconomic experience since 2002 has been characterized by three striking trends: (1) an accelerated growth rate of income, (2) a sharp decline in the real interest rate, and (3) a sustained fall in the saving rate of different age-groups. During the same period, there has also been a significant increase in access to credit by Turkish households. In this paper, we argue that a model which incorporates a borrowing constraint mechanism together with the observed increases in the expected growth rate of income and the substantial declines in the real interest rate is able to explain the change in saving across cohorts in Turkey over the last decade. We provide both micro-level evidence on the age-saving profile for Turkey as well as quantitative results from a simple three-period OLG framework with borrowing constraints to account for the change in the saving rate for different age-groups between 2004 and 2014. |
| Keywords: | Borrowing constraints, life-cycle household saving, nonlinear estimation, Turkey. |
| JEL: | C78 D61 D78 I20 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1804&r=dge |