nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒02‒12
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Fiscal Shocks and Helicopter Money in Open Economy By Giorgio Di Giorgio; Guido Traficante
  2. Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment By Xiaoqing Zhou
  3. Monetary policy and inequality under household heterogeneity and incomplete markets By Villarreal, Francisco G.
  4. Turbulence and Unemployment in Matching Models By Isaac Baley; Lars Ljungqvist; Thomas J. Sargent
  5. Marriage-related Policies in an Estimated Life-cycle Model of Households’ Labor Supply and Savings for Two Cohorts By Margherita Borella; Mariacristina De Nardi; Fang Yang
  6. Hyperbolic discounting can be good for your health By Strulik, Holger; Trimborn, Timo
  7. Secular Trends and Technological Progress By D�ttling, Robin; Perotti, Enrico C
  8. Quality of Schooling: Child Quantity-Quality Tradeoff, Technological Progress and Economic Growth By Saini, Swati; Keswani Mehra, Meeta
  9. Population Aging and the Real Interest Rate in the Last and Next 50 Years -- A tale told by an Overlapping Generations Model -- By Nao Sudo; Yasutaka Takizuka
  10. Social Security: Progressive Benefits but Regressive Outcome? By Monisankar Bishnu; Nick L. Guo; Cagri S Kumru
  11. The productivity slowdown and the declining labor share: a neoclassical exploration By Grossman, Gene M.; Helpman, Elhanan; Oberfield, Ezra; Sampson, Thomas
  12. Monetary policy operating procedures, lending frictions, and employment By David Florian Hoyle; Chris Limnios; Carl E. Walsh
  13. Government financing, inflation, and the financial sector By Bernardino Adao; Andre C. Silva

  1. By: Giorgio Di Giorgio (LUISS Guido Carli and CASMEF); Guido Traficante (European University of Rome and CASMEF)
    Abstract: We study the effects of expansionary fiscal shocks in a two-country DSGE model with perpetual youth. We consider two alternative financing regimes, monetary financing and debt financing, and find that a money-financed fiscal stimulus is more expansionary on output and infl ation. We investigate how the transmission mechanism is related to the open-economy dimension and how structural parameters affect macroeconomic dynamics.
    Keywords: Exchange Rate, Fiscal Shocks, Helicopter Drop.
    JEL: E32 E52 F41 F42
    Date: 2018–01
  2. By: Xiaoqing Zhou
    Abstract: The consumption boom-bust cycle in the 2000s coincided with large fluctuations in the volume of home equity borrowing. Contrary to conventional wisdom, I show that homeowners largely borrowed for residential investment and not consumption. I rationalize this empirical finding using a calibrated two-goods, multiple-assets, heterogeneous-agent life-cycle model with borrowing frictions. The model replicates key features of the household-level and aggregate data. The model offers an alternative explanation of the consumption boom-bust cycle. This cycle is caused by large fluctuations in the number of borrowers and hence in total home equity borrowing, even though the fraction of borrowed funds spent on consumption is small.
    Keywords: Credit and credit aggregates, Economic models, Housing
    JEL: D1 E2 E3
    Date: 2018
  3. By: Villarreal, Francisco G.
    Abstract: Motivated by the evidence of the effects of monetary policy on the evolution of inequality, and the importance of insurance mechanisms to deal with idiosyncratic risks, the paper explores the relationship between household inequality and monetary policy in the context of a dynamic stochastic general equilibrium model. In contrast to the traditional approach where the demand-side of the economy is summarised by a single representative agent, the model considers heterogeneous households which face idiosyncratic shocks which they can not fully insure against. The model, which is calibrated using data from Mexico, is able to capture the main features that characterise both the business cycle dynamics, as well as the distribution of income and wealth across households. The results stemming from a series of counterfactual experiments indicate that the the presence of heterogeneity impinges upon the transmission of monetary policy, and that the design of monetary policy has important distributive effects.
    Keywords: Monetary Policy, Heterogeneous Agents, Redistribution
    JEL: D31 D53 E12 E52 O11
    Date: 2016–11
  4. By: Isaac Baley; Lars Ljungqvist; Thomas J. Sargent
    Abstract: Ljungqvist and Sargent (1998, 2008) show that worse skill transition probabilities for workers who suffer involuntary layoffs (i.e., increases in turbulence) generate higher unemployment in a welfare state. den Haan, Haefke and Ramey (2005) challenge this finding by showing that if higher turbulence means that voluntary quits are also exposed to even a tiny risk of skill loss, then higher turbulence leads to lower unemployment within their matching model. We show (1) that there is no such brittleness of the positive turbulence-unemployment relationship in the matching model of Ljungqvist and Sargent (2007) even if we add such \quit turbulence", and (2) that if den Haan et al. had calibrated their productivity distribution to fit observed unemployment patterns that they miss, then they too would have found a positive turbulence-unemployment relationship in their model. Thus, we trace den Haan et al.'s finding to their assuming a narrower productivity distribution than Ljungqvist and Sargent had. Because den Haan et al. assume a distribution with such narrow support that it implies small returns to reallocating labor, even a small mobility cost shuts down voluntary separations. But that means that the imposition of a small layoff cost in tranquil times has counterfactually large unemployment suppression effects. When the parameterization is adjusted to fit historical observations on unemployment and layoff costs, a positive relationship between turbulence and unemployment reemerges.
    Keywords: matching model, skills, turbulence, unemployment, layoffs, quits, layoff costs
    JEL: E24 J63 J64
    Date: 2018–02
  5. By: Margherita Borella (University of Torino); Mariacristina De Nardi (University College London and Institute for Fiscal Studies); Fang Yang (Louisiana State University)
    Abstract: In the United States, both taxes and old age Social Security benefits explicitly depend on one's marital status. We study the effects of eliminating these marriage-related provisions on the labor supply and savings of two different cohorts. To do so, we estimate a rich life-cycle model of couples and singles using the method of simulated moments (MSM) on the 1945 and 1955 birth-year cohorts. Our model matches well the life-cycle profiles of labor market participation, hours, and savings for married and single people and generates plausible elasticities of labor supply. We find that these marriage-related provisions reduce the participation of married women over their life cycle, the participation of married men after age 55, and the savings of couples. These effects are large for both the 1945 and 1955 cohorts, even though to start with the latter had much higher labor market participation of married women.
    Date: 2017–10
  6. By: Strulik, Holger; Trimborn, Timo
    Abstract: It has been argued that hyperbolic discounting of future gains and losses leads to time-inconsistent behavior and thereby, in the context of health economics, not enough investment in health and too much indulgence of unhealthy consumption. Here, we challenge this view. We set up a life-cycle model of human aging and longevity in which individuals discount the future hyperbolically and make time-consistent decisions. This allows us to disentangle the role of discounting from the time consistency issue. We show that hyperbolically discounting individuals, under a reasonable normalization, invest more in their health than they would if they had a constant rate of time preference. Using a calibrated life-cycle model of human aging, we predict that the average U.S. American lives about 4 years longer with hyperbolic discounting than he would if he had applied a constant discount rate. The reason is that, under hyperbolic discounting, experiences in old age receive a relatively high weight in life time utility. In an extension we show that the introduction of health-dependent survival probability motivates an increasing discount rate for the elderly and, in the aggregate, a u-shaped pattern of the discount rate with respect to age.
    Keywords: discount rates,present bias,health behavior,aging,longevity
    JEL: D03 D11 D91 I10 I12
    Date: 2018
  7. By: D�ttling, Robin; Perotti, Enrico C
    Abstract: Can technological progress explain secular stagnation? We show how an excess of savings over investment arises when innovative production requires creative human capital rather than physical investment. Innovating firms cannot own human capital so they need less investment financing, but need to ensure the commitment of human capital by rewarding it gradually over time. Over time, as innovators are granted a rising income share, the supply of investable assets falls. The general equilibrium effect is declining corporate leverage, a gradual fall in interest rates and rising asset valuations. The concomitant rise in house prices and wage inequality leads to higher household leverage and mortgage default risk. We show that only a redistributive productivity shift can account for a fall in physical investment in the context of falling interest rates, consistent with major economic and financial trends since 1980.
    Keywords: excess savings; House Prices; Human Capital; Intangible Capital; mortgage credit; skill-biased technological change
    Date: 2017–12
  8. By: Saini, Swati; Keswani Mehra, Meeta
    Abstract: An overlapping generations version of an R&D-based growth model `a la Diamond (1965) and Jones (1995) is built to examine how improvement in quality of schooling impact technical progress and longrun economic growth of an economy by influencing fertility and education decisions at household level. The results indicate that improvement in schooling quality triggers a child quantity-quality trade-off at household level when quality of schooling exceeds an endogenously determined threshold. At the household level, parents invest more in education of children and have lesser number of children in response to improvement in quality of schooling. This micro-level tradeoff has two opposing effects on aggregate human capital accumulation at macro level. Higher investment in education of a child stimulates the accumulation of human capital which fosters technical progress but the simultaneous decline in fertility rate reduces the total factor productivity growth and economic growth by contracting the pool of available researchers. The first effect prevails over latter only when quality of schooling is higher than the threshold
    Keywords: Human capital;fertility ;quality of schooling; economic growth; innovation ;demographic transition
    JEL: I25 J11 J13 O31
    Date: 2017–12–17
  9. By: Nao Sudo (Bank of Japan); Yasutaka Takizuka (Bank of Japan)
    Abstract: Population aging, along with a secular decline in real interest rates, is an empirical regularity observed in developed countries over the last few decades. Under the premise that population aging will deepen further in coming years, some studies predict that real interest rates will continue to be depressed further to a level below zero. In the present paper, we address this issue and explore how changes in demographic structures have affected and will affect real interest rates, using an overlapping generations model calibrated to Japan's economy. We find that the demographic changes over the last 50 years reduced the real interest rate. About 270 out of the 640 basis points decline in real interest rates during this period was attributed to declining labor inputs and higher saving, which themselves stemmed from the lower fertility rate and increased life expectancy. As for the next 50 years, we find that demographic changes alone will not substantially increase or decrease the real interest rate from the current level. These changes reflect the fact that the size of demographic changes in years ahead will be minimal, but that downward pressure arising from the past demographic changes continue to bite in the years ahead. As Japan is not unique in terms of this broad picture of changes in demographic landscapes over the last 50 years and in the next 50 years, our results suggest that, sooner or later, a demography-induced decline in real interest rates may be contained in other developed countries as well.
    Keywords: Declining Real Interest Rates; Population Aging; Overlapping Generations Model
    JEL: E20 J11
    Date: 2018–01–31
  10. By: Monisankar Bishnu; Nick L. Guo; Cagri S Kumru
    Abstract: In this paper, we study under what conditions a Pay As You Go (PAYG) type social security program can have regressive outcomes even though the benefits of this program are designed to be progressive. Since a PAYG social security program collects payroll taxes whenever agents are working, and it pays retirement benefits as long as retirees are alive, each individual's well being depends on how long they contribute to and receive payments from this program as well as how much. Empirical evidence suggests that agents who have low income tend to start working earlier and have shorter longevity than those with middle or high income. Implications of the low income groups' shorter mortality are examined both analytically and quantitatively in this paper. We find the conditions under which a PAYG social security program may have a regressive outcome in a simple two period partial equilibrium model. Afterwards, we created a large scale quantitative OLG model calibrated to the US economy to compare aggregate and welfare implications of the US type PAYG, a no progressive PAYG, and a means tested pension program. Our results indicate that incorporating differential mortality into account change the welfare implications.
    JEL: E21 E43 G11
    Date: 2017–12
  11. By: Grossman, Gene M.; Helpman, Elhanan; Oberfield, Ezra; Sampson, Thomas
    Abstract: We explore the possibility that a global productivity slowdown is responsible for the widespread decline in the labor share of national income. In a neoclassical growth model with endogenous human capital accumulation a la Ben Porath (1967) and capital-skill complementarity a la Grossman et al. (2017), the steady-state labor share is positively correlated with the rates of capital-augmenting and labor-augmenting technological progress. We calibrate the key parameters describing the balanced growth path to U.S. data for the early post-war period and find that a one percentage point slowdown in the growth rate of per capita income can account for between one half and all of the observed decline in the US labor share
    Keywords: neoclassical growth; balanced growth; technological progress; capital-skill complementarity; labor share; capital share
    JEL: E25 O40
    Date: 2017–10–01
  12. By: David Florian Hoyle (Central Reserve Bank of Peru); Chris Limnios (Providence College); Carl E. Walsh (University of California, Santa Cruz)
    Abstract: This paper studies a channel system for implementing monetary policy when bank lending is subject to frictions. These frictions affect the spread between the interbank rate and the loan rate. We show how the width of the channel, the nature of random payment flows in the interbank market and the presence of frictions in the loan market affect the propagation of financial shocks that originate either in the interbank market or in the loan market. We study the transmission mechanism of two different financial shocks: 1) An increase in the volatility of the payment shock that banks face once the interbank market has closed and 2) An exogenous termination of loan contracts that directly affects the probability of continuation of credit relationships. Both financial shocks are propagated through the interaction of the marginal value of having excess reserves as collateral relative to other bank assets, the real marginal cost of labor for all active firms and the reservation productivity that selects the mass of producing firms. Our results suggest that financial shocks produce a reallocation of bank assets towards excess reserves as well as intensive and extensive margin effects over employment. The aggregation of those effects produce deep and prolonged recessions that are associated to fluctuations in the endogenous component of total factor productivity that appears as an additional input in the aggregate production function of the economy. We show that this wedge depends on aggregate credit conditions and on the mass of producing firms.
    Keywords: Monetary policy implementation, channel system, central bank, credit frictions
    JEL: E4 G21
    Date: 2018–02
  13. By: Bernardino Adao; Andre C. Silva
    Abstract: We calculate the effects of an increase in government spending financed with labor income taxes or inflation. We consider government spending in the form of government consumption or transfers. We use a model in which agents increase the use of financial services to avoid losses from inflation, as empirically the financial sector increases with inflation. The financial sector size is constant in standard cash-in-advance models, which implies optimal positive inflation. We reverse this result when we take into account the increase in the financial sector. In our framework, it is optimal to use taxes to finance the government. This result is robust to alternative specifications and definitions of seigniorage and government spending. JEL codes: E52, E62, E63
    Keywords: fiscal policy, monetary policy, government financing, demand for money, financial sector
    Date: 2018

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