nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒02‒19
25 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Unemployment, Borrowing Constraints and Stabilization Policies By Auray Stéphane; Eyquem Aurélien
  2. Shadow Bank run: The Story of a Recession By Hamed Ghiaie
  3. DSGE-based Priors for BVARs & Quasi-Bayesian DSGE Estimation By Filippeli, Thomai; Harrison, Richard; Theodoridis, Konstantinos
  4. Sovereign Risk and Bank Risk-Taking By Anil Ari
  5. The Ramsey Cooperative and Non-Cooperative Unconventional Monetary Policy By Shifu Jiang
  6. Pricing Assets in a Perpetual Youth Model By Roger Farmer
  7. Uninsured Unemployment Risk and Optimal Monetary Policy By Edouard Challe
  8. Goods and factor market integration: a quantitative assessment of the EU enlargement By Caliendo, Lorenzo; Opromolla, Luca David; Parro, Fernando; Sforza, Alessandro
  9. Turbulence and unemployment in matching models By Isaac Baley; Lars Ljungqvist; Thomas J. Sargent
  10. Social Insurance and Occupational Mobility By German Cubas; Pedro Silos
  11. Financing Ventures By Jeremy Greenwood; Pengfei Han; Juan M Sanchez
  12. Dynamic Comparative Advantage, Directed Mobility Across Sectors, and Wages By Auray Stéphane; Fuller David; Lkhagvasuren Damba; Terracol Antoine
  13. Understanding Earnings, Labor Supply, and Retirement Decisions By Xiaodong Fan; Ananth Seshadri; Christopher Taber
  14. Unemployment Insurance Take-up Rates in an Equilibrium Search Model By Auray Stéphane; Fuller David; Lkhagvasuren Damba
  15. Why are Countries’ Asset Portfolios Exposed to Nominal Exchange Rates? By Jonathan J. Adams; Philip Barrett
  16. Informality and the Labor Market Effects of Financial Crises By Emilio Colombo; Lorenzo Menna; Patrizio Tirelli
  17. Managing unanchored, heterogeneous expectations and liquidity traps By Hommes, Cars H.; Lustenhouwer, Joep
  18. Monetary Policy and the Relative Price of Durable Goods By Alessandro Cantelmo; Giovanni Melina
  19. Pricing Carbon Under Economic and Climactic Risks: Leading-Order Results from Asymptotic Analysis By van den Bremer, Ton; van der Ploeg, Frederick
  20. Testing a model of UK growth - a causal role for R&D subsidies By Minford, Lucy; Meenagh, David
  21. Consumption Dynamics, Housing Collateral and Stabilisation Policies: A Way Forward for Policy Co-Ordination? By Jagjit S Chadha; Germana Corrado; Luisa Corrado
  22. Shadow Banking and Market Discipline on Traditional Banks By Anil Ari; Matthieu Darracq-Paries; Christoffer Kok; Dawid Żochowski
  23. Tenure security, human capital and soil conservation in an overlapping generation rural economy By Eskander, Shaikh M.S.U.; Barbier, Edward B.
  24. Inefficiencies in Search Models: The Case for Islamic Finance By Al-Jarhi, Mabid
  25. Fiscal consolidations and finite planning horizons By Lustenhouwer, Joep; Mavromatis, Kostas

  1. By: Auray Stéphane (CREST-ENSAI ; ULCO); Eyquem Aurélien (ENSAI-CREST ; Université Lumière Lyon 2 ; CNRS (GATE))
    Abstract: In this paper, we develop a tractable incomplete-market model with unemployment and borrowing constraints. We analyze the effects of ?scal and unemployment insurance policies in reaction to a large economic downturn. Policy instruments are government spending and the unemployment replacement rate. First, our incomplete-market model magnifies ?uctuations in the unemployment rate after various shocks, compared to a standard complete-market model. Second, in response to a large shock that replicates the effects of a crisis, we find that government spending should increase substantially and that the replacement rate should drop. The sign and size of government interventions are quite different in a model with complete markets. Unemployment and borrowing constraints happen to matter quite a lot in determining the aggregate effects of large shocks, the design of optimized policies in response to these shocks and the corresponding welfare gains/losses.
    Keywords: unemployment, borrowing constraints, incomplete markets, unemployment insurance, public spending
    JEL: D52 E21 E62 J64 J65
    Date: 2017–09–01
  2. By: Hamed Ghiaie (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper proposes a DSGE model of liquidity mismatch and bank runs, which incorporates housing and credit markets. The paper shows that a real shock is amplified by the financial sector through household balance sheets, bank balance sheets and market liquidity channels. The shock, depending on macroeconomic fundamentals, may shift the economy from a no-bank run to a bank run equilibrium. In the case of bank run equilibrium, households stop rolling over their deposits and banks are forced to liquidate their assets at fire sale prices. This paper shows that introducing the housing and credit markets shortens the sunspots’ lifetime while asset liquidity prices reduce. In addition, this paper comprehensively details the consequences of economic crises, namely the output downward spiral, home price double-dip and lengthy recovery period. Here, it is indicated that macropruential policy tools in the form of capital adequacy buffers and loan-to-value ratios safeguard the economy against extreme busts and help mitigate systemic risks by insulating asset prices.
    Keywords: Shadow banking, Bank run, Recession, Sunspot equilibrium, Double-dip.
    JEL: E23 E32 E44 G21 G33
    Date: 2018
  3. By: Filippeli, Thomai (Queen Mary University); Harrison, Richard (Bank of England); Theodoridis, Konstantinos (Cardiff Business School)
    Abstract: We present a new method for estimating Bayesian vector autoregression (VAR) models using priors from a dynamic stochastic general equilibrium (DSGE) model. We use the DSGE model priors to determine the moments of an independent Normal-Wishart prior for the VAR parameters. Two hyper-parameters control the tightness of the DSGE-implied priors on the autoregressive coefficients and the residual covariance matrix respectively. Determining these hyper-parameters by selecting the values that maximize the marginal likelihood of the Bayesian VAR provides a method for isolating subsets of DSGE parameter priors that are at odds with the data. We illustrate the ability of our approach to correctly detect incorrect DSGE priors for the variance of structural shocks using a Monte Carlo experiment. We also demonstrate how posterior estimates of the DSGE parameter vector can be recovered from the BVAR posterior estimates: a new Ôquasi-BayesianÕ DSGE estimation. An empirical application on US data reveals economically meaningful differences in posterior parameter estimates when comparing our quasi-Bayesian estimator with Bayesian maximum likelihood. Our method also indicates that the DSGE prior implications for the residual covariance matrix are at odds with the data.
    Keywords: BVAR, SVAR, DSGE, DSGE-VAR, Gibbs Sampling, Marginal Likelihood Evaluation, Predictive Likelihood Evalution, Quasi-Bayesian DSGE Estimation
    JEL: C11 C13 C32 C52
    Date: 2018–01
  4. By: Anil Ari
    Abstract: I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks' investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth, leading to a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in defaultrisky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantified using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks' funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
    Keywords: Financial crises;Banking crises;Risk-taking, Financial constraints, Sovereign debt crises, Financial Markets and the Macroeconomy, General, International Lending and Debt Problems, Government Policy and Regulation
    Date: 2017–12–14
  5. By: Shifu Jiang
    Abstract: I study the Ramsey problem for three unconventional monetary policies in a twocountry model. An equity injection into financial intermediaries is the most efficient policy. Due to precautionary effects of future risk, a central bank should exit from these policies in accordance with but slower than the speed of deleveraging in the financial sector. The optimal policy is changed considerably if cross-country policy cooperation is not imposed. In this case, the unconventional interventions tend to be too strong in one country but too weak in the other. The cooperation gain is a function of policy cost. At last, I evaluate several simple rules and find that the rule responding to gaps in asset prices mimics the optimal policy very well.
    JEL: E44 E58 F41 F42 C63
    Date: 2017–12
  6. By: Roger Farmer
    Abstract: This paper constructs a general equilibrium model where asset price fluctuations are caused by random shocks to beliefs about the future price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset price volatility.
    Date: 2018–01
  7. By: Edouard Challe (CREST; CNRS; Ecole Polytechnique)
    Abstract: I study optimal monetary policy in a New Keynesian economy wherein households precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and feedback to greater unemployment risk. I show this de?flationary feedback loop to be constrained-inefficient and to call for an accommodative monetary policy response: after a contractionary aggregate shock the policy rate should be kept signifi?cantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. If implemented, the optimal policy effectively breaks the defl?ationary feedback loop and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark.
    Keywords: Unemployment risk; imperfect insurance; optimal monetary policy
    JEL: E21 E32 E52
    Date: 2017–11–01
  8. By: Caliendo, Lorenzo; Opromolla, Luca David; Parro, Fernando; Sforza, Alessandro
    Abstract: The economic effects from labor market integration are crucially affected by the extent to which countries are open to trade. In this paper we build a multi-country dynamic general equi- librium model with trade in goods and labor mobility across countries to study and quantify the economic effects of trade and labor market integration. In our model trade is costly and features households of different skills and nationalities facing costly forward-looking relocation decisions. We use the EU Labour Force Survey to construct migration flows by skill and na- tionality across 17 countries for the period 2002-2007. We then exploit the timing variation of the 2004 EU enlargement to estimate the elasticity of migration flows to labor mobility costs, and to identify the change in labor mobility costs associated to the actual change in policy. We apply our model and use these estimates, as well as the observed changes in tariffs, to quantify the effects from the EU enlargement. We find that new member state countries are the largest winners from the EU enlargement, and in particular unskilled labor. We find smaller welfare gains for EU-15 countries. However, in the absence of changes to trade policy, the EU-15 would have been worse off after the enlargement. We study even further the interaction effects between trade and migration policies and the role of different mechanisms in shaping our results. Our results highlight the importance of trade for the quantification of the welfare and migration effects from labor market integration
    Keywords: international trade; factor mobility; market integration; EU enlargement; welfare
    JEL: E24 F13 F16 F22 J61 R13
    Date: 2017–08–01
  9. 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: 2018–01
  10. By: German Cubas (Department of Economics, University of Houston); Pedro Silos (Department of Economics, Temple University)
    Abstract: This paper studies how insurance from progressive taxation improves the matching of workers to occupations. We propose an equilibrium dynamic assignment model to illustrate how social insurance encourages mobility. Workers experiment to find their best occupational fit in a process filled with uncertainty. Risk aversion and limited earnings insurance induce workers to remain in unfitting occupations. We estimate the model using microdata from the United States and Germany. Higher earnings uncertainty explains the U.S. higher mobility rate. When workers in the United States enjoy Germany's higher progressivity, mobility rises. Output and welfare gains are large.
    Keywords: Progressive Taxation, Social Insurance, Occupational Choice
    JEL: E21 H24 J31
    Date: 2018–02
  11. By: Jeremy Greenwood (University of Pennsylvania); Pengfei Han (University of Pennsylvania); Juan M Sanchez (Federal Reserve Bank of St. Louis)
    Abstract: The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, VCs provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., statistics by funding round concerning the success rate, failure rate, investment rate, equity shares, and the value of an IPO. Raising capital gains taxation reduces growth and welfare.
    Keywords: capital gains taxation, dynamic contract, endogenous growth, evaluating, funding rounds, growth regressions, IPO, monitoring, startups, research and development, venture capital
    Date: 2018–02
  12. By: Auray Stéphane (CREST-ENSAI ; ULCO); Fuller David (University of Wisconsin-Oshkosh); Lkhagvasuren Damba (Concordia University); Terracol Antoine (Université Paris 8)
    Abstract: This paper argues that evolving comparative advantage is important not only for worker ?ows across sectors, but also for wage growth and lifetime earnings. First, the main individual-level relationship between sectoral mobility and wages is established using Panel Study of Income Dynamics. Second, a dynamic, stochastic multi-sector model with worker-sector match productivity is introduced to account for the relationship. In the model, a sector may experience simultaneous in?ows and out?ows of workers that are much larger than the corresponding net ?ows. Movers tend to have a lower wage than nonmovers both prior to, and after the move. Wages grow with sectoral tenure. Those who move more frequently tend to have lower lifetime earnings. Recent movers are more likely to move again. Labor mobility decreases with labor market experience. All these predictions of the model are consistent with data, but generated by a remarkably simple, evolving match productivity shock.
    Keywords: stochastic multi-sector model, labor mobility, sectoral mismatch, labor income shocks, lifetime earnings, return to tenure, autoregressive processes
    JEL: E24 J31 J24 J62
    Date: 2017–08–05
  13. By: Xiaodong Fan (University of New South Wales); Ananth Seshadri (University of Wisconsin-Madison); Christopher Taber (University of Wisconsin-Madison)
    Abstract: We develop and estimate a model in which individuals make decisions on consumption, human capital investment, labor supply, and retirement. Unlike all previous work, our model allows both an endogenous wage process (which is typically assumed exogenous in the human capital and earnings dynamics literature). In addition, we introduce health shocks. We estimate the model and match the life-cycle profiles of wages, hours and retirement from SIPP data. We analyze the impact of health shocks on retirement, as well as the effect of changes in payroll taxes and increases in the Normal Retirement Age on labor force participation of older Americans.
    Date: 2017–09
  14. By: Auray Stéphane (CREST-ENSAI ; ULCO); Fuller David (University of Wisconsin-Oshkosh); Lkhagvasuren Damba (Concordia University)
    Abstract: From 1989-2012, on average 23% of those eligible for unemployment insurance (UI) bene?ts in the US did not collect them. In a search model with matching frictions, asymmetric information associated with the UI non-collectors implies an inefficiency in non-collector outcomes. This inefficiency is characterized along with the key features of collector vs. non-collector allocations. Specifically, the inefficiency implies that noncollectors transition to employment at a faster rate and a lower wage than the efficient levels. Quantitatively, the inefficiency amounts to 1.71% welfare loss in consumption equivalent terms for the average worker, with a 3.85% loss conditional on non-collection. With an endogenous take-up rate, the unemployment rate and average duration of unemployment respond significantly slower to changes in the UI bene?t level, relative to the standard model with a 100% take-up rate.
    Keywords: unemployment insurance, take-up, matching frictions, search, experience rating
    JEL: E61 J32 J64 J65
    Date: 2017–07–12
  15. By: Jonathan J. Adams; Philip Barrett
    Abstract: Most countries hold large gross asset positions, lending in domestic currency and borrowing in foreign. Thus, their balance sheets are exposed to nominal exchange rates. We argue that when asset markets are incomplete, nominal exchange rate exposure allows countries to partially insure against shocks that move real exchange rates. We demonstrate that asset market incompleteness can simultaneously generate realistic gross asset positions and resolve the Backus-Smith puzzle: that relative consumptions and real exchange rates correlate negatively. We also show that local perturbation methods that use stabilizing endogenous discount factors are inaccurate when average and steady state interest rates differ. To address this, we develop a novel global solution method to accurately solve the model.
    Date: 2017–12–22
  16. By: Emilio Colombo; Lorenzo Menna; Patrizio Tirelli
    Abstract: We provide evidence, based on a large sample of countries, on the effects of financial crises on key labor market indicators, including official and unofficial employment, unemployment and the participation rate. Crises are followed by a drop in the official market participation rate and by an increase in informal employment. These responses are strongly persistent. Empirical results are then interpreted with a DSGE model which accounts for informality and for financial and labor market frictions. In this framework the informal sector acts as a buffer which absorbs workers in bad times and vice versa. Our simulations suggest the informal sector also is a crisis amplifier for the official economy. In fact, the larger the pre-crisis informal sector, the stronger the labor reallocation, i.e. the fall in the participation rate, necessary to equilibrate the labor market.
    JEL: E26 E32 G01
    Date: 2018
  17. By: Hommes, Cars H.; Lustenhouwer, Joep
    Abstract: We study the possibility of (almost) self-fulfilling waves of pessimism and selfreinforcing liquidity traps in a New Keynesian model with heterogeneous expectations. We explicitly focus on the "anchoring" of expectations that is modeled as the range of deviations from the central bank targets (and from the rational expectation equilibrium) that agents are willing to consider. We find that when the zero lower bound on the nominal interest rate is not binding, aggressive monetary policy can prevent waves of pessimism and exclude near unit root dynamics, even when expectations are unanchored. However, as shocks bring the economy to a situation with a binding zero lower bound, there is a danger of a long lasting self-reinforcing liquidity trap that arises because of the existence of multiple steady states. It turns out that in a model where the anchoring of expectations evolves endogenously, the anchoring of expectations at the time the bad shocks hit is crucial in determining whether the economy can recover from the liquidity trap. Furthermore, a higher inflation target reduces the probability that self-reinforcing liquidity traps arise.
    Keywords: Interest Rate Rules,Liquidity Traps,Heterogeneous Expectations,Bounded Rationality,Multiple Steady States
    JEL: E52 E32 C62
    Date: 2017
  18. By: Alessandro Cantelmo; Giovanni Melina
    Abstract: In a SVAR model of the US, the response of the relative price of durables to a monetary contraction is either flat or mildly positive. It significantly falls only if narrowly defined as the ratio between new-house and nondurables prices. These findings are rationalized via the estimation of a two-sector New-Keynesian (NK) models. Durables prices are estimated to be as sticky as nondurables, leading to a flat relative price response to a monetary shock. Conversely, house prices are estimated to be almost flexible. Such results survive several robustness checks and a three-sector extension of the NK model. These findings have implications for building two-sector NK models with durable and nondurable goods, and for the conduct of monetary policy.
    Keywords: Monetary policy;durables, nondurables, price stickiness, relative price, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–12–22
  19. By: van den Bremer, Ton; van der Ploeg, Frederick
    Abstract: Leading-order results from asymptotic analysis for the optimal price of carbon under uncertainty are derived from a macroeconomic continuous-time DSGE model with AK growth, energy use, adjustment costs, recursive utility and costs of global warming. We consider non-climatic productivity growth uncertainty, atmospheric carbon uncertainty, climate sensitivity uncertainty and climate damage uncertainty. Explicit expressions are derived that show the leading-order dependence of the optimal carbon price on these uncertainties, the various climate betas, risk aversion, intergenerational inequality aversion and convexity of the climate damage specification. Our solution allows for skewness and mean reversion in stochastic shocks to the climate sensitivity and damage coefficients. The resulting rule for the optimal risk-adjusted carbon price incorporates precautionary, risk-insurance and risk-exposure effects to deal with future economic and climatic risks. The stochastic processes are calibrated and used to estimate and interpret the impact of each source of uncertainty on the optimal risk-adjusted carbon price.
    Keywords: climate betas; Insurance; mean reversion; precaution; Skewness
    JEL: H21 Q51 Q54
    Date: 2018–01
  20. By: Minford, Lucy (Swansean University); Meenagh, David (Cardiff Business School)
    Abstract: We show that a DSGE model in which subsidies to private sector R&D stimulate economic growth, following the predictions of semi-endogenous growth theory, can account for the joint behaviour of UK output and total factor productivity for 1981-2010. R&D subsidies are measured as government- funded R&D performed by the private sector as a proportion of total private sector R&D. We estimate and test the performance of the model using Indirect Inference, and also investigate the robustness of the results using a Monte Carlo exercise. Our f•ndings indicate that sharp cuts in R&D subsidies tend to have highly persistent growth e¤ects in the UK.
    Keywords: R&D, subsidies, economic growth, government policy.
    JEL: E00 O00 O38 O50
    Date: 2018–01
  21. By: Jagjit S Chadha; Germana Corrado; Luisa Corrado
    Abstract: We decompose aggregate consumption of heterogeneous consumers by modelling both savers and their links to collateral constrained borrowers through a bank which prices credit risk. Savers own both firms and the commercial bank while borrowers require loans from the commercial bank to effect their consumption plans. The bank lends at a premium over the interest rate on central bank money in proportion to the riskiness of loans, the demand for loans, the asset price and the quantity of housing collateral. We show that even though house price do not represent wealth, aggregate consumption is closely related to movements in house prices. We consider the case for jointly determined macro-prudential, fiscal and monetary policies in order to minimise losses for a representative household. We consider the implications of loan default for our main results.
    Date: 2018–02
  22. By: Anil Ari; Matthieu Darracq-Paries; Christoffer Kok; Dawid Żochowski
    Abstract: We present a model in which shadow banking arises endogenously and undermines market discipline on traditional banks. Depositors' ability to re-optimize in response to crises imposes market discipline on traditional banks: these banks optimally commit to a safe portfolio strategy to prevent early withdrawals. With costly commitment, shadow banking emerges as an alternative banking strategy that combines high risk-taking with early liquidation in times of crisis. We bring the model to bear on the 2008 financial crisis in the United States, during which shadow banks experienced a sudden dry-up of funding and liquidated their assets. We derive an equilibrium in which the shadow banking sector expands to a size where its liquidation causes a fire-sale and exposes traditional banks to liquidity risk. Higher deposit rates in compensation for liquidity risk also weaken threats of early withdrawal and traditional banks pursue risky portfolios that may leave them in default. Policy interventions aimed at making traditional banks safer such as liquidity support, bank regulation and deposit insurance fuel further expansion of shadow banking but have a net positive impact on financial stability. Financial stability can also be achieved with a tax on shadow bank profits.
    Keywords: Financial crisis;United States;Western Hemisphere;Financial crises;Shadow banking;Central banks and their policies;Market discipline, Fire-sales, Financial Markets and the Macroeconomy, Government Policy and Regulation
    Date: 2017–12–22
  23. By: Eskander, Shaikh M.S.U.; Barbier, Edward B.
    Abstract: We develop an overlapping generation model of rural agricultural households to examine whether tenure security and subsistence needs influence the choice between unexploited topsoil and investment in children's human capital as the mode of transfer of wealth. A unique dataset from Bangladesh finds that tenure security is associated with greater topsoil conservation and lower human capital investment. Therefore, there exists a tradeoff between these two modes of transfer. We suggest that increased public expenditure on schooling, which substitutes private expenditure, may lower the pressure on land and soil resources.
    Keywords: Human capital; Soil conservation; Tenure security
    JEL: Q15 F3 G3
    Date: 2017–05–01
  24. By: Al-Jarhi, Mabid
    Abstract: In economies without friction, where money as a means of exchange has no role, the existence of the rate of interest would have no efficiency consequence. Once a friction that justifies the use of a means of exchange is introduced in the macroeconomic model, the inefficiencies resulting from the presence of the rate of interest become exposed. In search models, where money has a raison d’être, the use of money in trade when accompanied with conventional finance, is associated with two important inefficiencies. The first is the Friedman-Samuelson inefficiency. The payment of a positive (interest) rate of return on money, with guaranteed principle and return, motivates agents to economize on the use of cash in transactions. This reduces the volume of transactions below optimum. The substitution of real resources for cash would further reduce output. The second is Hosios inefficiency which results from the existence of externalities in search activities by agents. Failure to internalize such externalities would also reduce the volume of transactions below optimum. The paper argues that the switch to Islamic finance removes both inefficiencies.
    Keywords: search models, Samuelson-Friedman inefficiency, Hosios inefficiency, synchronization of wants, International Financial Crisis, conventional finance, interest rate, islamic finance.
    JEL: E4 E42 E43
    Date: 2017–04
  25. By: Lustenhouwer, Joep; Mavromatis, Kostas
    Abstract: We analyze fiscal consolidations using a New-Keynesian model where agents have finite planning horizons and are uncertain about the future state of the economy. Both consumers and firms are infinitely lived, but only plan and form expectations up to a finite number of periods into the future. The length of agents' planning horizons plays an important role in determining how spending cuts or tax increases affect output and inflation. We find that for low degrees of relative risk aversion spending-based consolidations are less costly in terms of output losses, in line with empirical evidence. A stronger response of monetary policy to inflation makes spending-based consolidations more favorable as well. Interestingly, for short planning horizons, our model captures the positive comovement between private consumption and government spending observed in the data.
    Keywords: Fiscal policy,Finite planning horizons,Bounded rationality
    JEL: E60 E62 E63 H63
    Date: 2017

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