nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒03‒26
24 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Intangibles, Inequality and Stagnation By Shengxing Zhang; Nobuhiro Kiyotaki
  2. Explaining International Business Cycle Synchronization By Robert Kollmann
  3. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Stefan Hohberger; Romanos Priftis; Lukas Vogel
  4. Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity By Dolado, Juan J.; Motyovszki, Gergo; Pappa, Evi
  5. Financial bubbles and capital accumulation in altruistic economies By Bosi, Stefano; Ha-Huy, Thai; Le Van, Cuong; Pham, Cao-Tung; Pham, Ngoc-Sang
  6. Are asset price data informative about news shocks? A DSGE perspective By Nikolay Iskrev
  7. Out of Sync Subnational Housing Markets and Macroprudential Policies By Michael Funke; Petar Mihaylovski; Adrian Wende
  8. A Monetary Business Cycle Model for India By Shesadri Banerjee; Parantap Basu; Chetan Ghate; Pawan Gopalakrishnan; Sargam Gupta
  9. Government Spending during Sudden Stop Crises By Siming Liu
  10. Ramsey Taxation in the Global Economy By Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
  11. Sovereign Cocos and the Reprofiling of Debt Payments By Leonardo Martinez; Juan Hatchondo
  12. Higher Education Subsidy Policy and R&D-based Growth By Takaaki Morimoto; Ken Tabata
  13. Quantifying the Losses from International Trade By Mike Waugh
  14. Sovereign Default: The Role of Expectations By Ayres,; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro
  15. Fiscal Policy in a Currency Union at the Zero Lower Bound By Cook, David; Devereux, Michael B.
  16. Three pillars of urbanization: Migration, aging, and growth By Grafeneder-Weissteiner, Theresa; Prettner, Klaus; Südekum, Jens
  17. Sub-optimality of the Friedman rule with distorting taxes By Bernardino Adao; Andre C. Silva
  18. Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms By Chu, Angus C.; Cozzi, Guido; Fan, Haichao; Furukawa, Yuichi; Liao, Chih-Hsing
  19. Occupational mobility and vocational training over the life cycle By Anthony Terriau
  20. Exchange Rate Misalignment, Capital Flows, and Optimal Monetary Policy Trade-offs By Corsetti, G.; Dedola, L.; Leduc, S.
  21. Local Market Equilibrium and the Design of Public Health Insurance System By Chao Fu; Naoki Aizawa
  22. The Disability Option: Labor Market Dynamics with Macroeconomic and Health Risks By David Wiczer; Amanda Michaud
  23. Pricing in Multiple Currencies in Domestic Markets By Andres Drenik
  24. Earnings Dynamics, Mobility Costs, and Transmission of Market-Level Shocks By Magne Mogstad; Bradley Setzler; Thibaut Lamadon

  1. By: Shengxing Zhang (London School of Economics); Nobuhiro Kiyotaki (Princeton University)
    Abstract: We examine how aggregate output and income distribution interact with accumulation of intangible capital over time and across generations. We consider an overlapping generations economy in which skill of managers (intangible capital) is essential for production along with labor, and managerial skill is acquired by young workers when they are trained by old managers on the job. Because training is costly, it becomes investment in intangible capital. We show that, when young trainees face financing constraint, a small difference in initial endowment of young workers leads to a large inequality in the assignment and accumulation of intangibles. A negative shock to endowment can generate a persistent stagnation and a rise in inequality.
    Date: 2017
  2. By: Robert Kollmann (ECARES, Université Libre de Bruxelles & CEPR)
    Abstract: The business cycles of the major advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple two-country, two-good, complete-markets dynamic general equilibrium model in which country-specific productivity shocks generate highly correlated business cycles. The structure here differs from standard open economy macro models by assuming recursive intertemporal preferences, and a weak wealth effect on labor supply. Recursive preferences magnify the terms of trade response to shocks. In the model here, a persistent productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade. When the wealth effect on labor supply is weak, this induces a rise in foreign hours worked and GDP, i.e. domestic and foreign real activity comove positively.
    Date: 2017
  3. By: Stefan Hohberger; Romanos Priftis; Lukas Vogel
    Abstract: This paper estimates an open-economy dynamic stochastic general equilibrium model with Bayesian techniques to analyse the macroeconomic effects of the European Central Bank’s (ECB’s) quantitative easing (QE) programme. Using data on government debt stocks and yields across maturities, we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to annual euro area output growth and inflation in 2015-16 of up to 0.3 and 0.6 percentage points (pp) in the linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact to up to 0.7 and 0.8 pp.
    Keywords: Economic models, Interest rates, Transmission of monetary policy
    JEL: E44 E52 E53 F41
    Date: 2018
  4. By: Dolado, Juan J.; Motyovszki, Gergo; Pappa, Evi
    Abstract: Contrary to previous beliefs, recent empirical work has found that the effects of monetary policy on inequality are far from modest. In order to improve our understanding of the channels through which monetary policy has distributional consequences, we build a New Keynesian model with incomplete asset markets, asymmetric search and matching (SAM) frictions across skilled and unskilled workers and, foremost, capital-skill complementarity (CSC) in the production function. Our main finding is that an unexpected monetary easing increases labor income inequality between high and low-skilled workers, and that the interaction between CSC and SAM asymmetry is crucial in delivering this result. This is so since the increase in labor demand driven by a monetary expansion leads to larger wage increases for high-skilled workers than for low-skilled workers since the former have smaller matching frictions (SAM-asymmetry channel). Moreover, the increase in capital demand amplifies this wage divergence due to skilled workers being more complementary to capital than substitutable unskilled workers are (CSC channel). Strict inflation targeting is often the most successful rule in stabilizing measures of earnings inequality even in the presence of shocks which introduce a trade-off between stabilizing inflation and aggregate demand.
    Keywords: capital-skill complementarity; inequality; monetary policy; Search and Matching
    JEL: E24 E25 E52 J64
    Date: 2018–02
  5. By: Bosi, Stefano; Ha-Huy, Thai; Le Van, Cuong; Pham, Cao-Tung; Pham, Ngoc-Sang
    Abstract: We consider an overlapping generations model à la Diamond (1965) with two additional ingredients: altruism and an asset (or land) bringing non-stationary positive dividends (or fruits). We study the global dynamics of capital stocks and asset values as well as the interplay between them. Asset price bubbles are also investigated.
    Keywords: Forward altruism, overlapping generations, capital accumulation, financial asset, positive dividends, rational bubbles
    JEL: C62 D50 D53 D64 E21 E44 G12
    Date: 2018–02–07
  6. By: Nikolay Iskrev
    Abstract: Standard economic intuition suggests that asset prices are more sensitive to news than other economic aggregates.This has led many researchers to conclude that asset price data would be very useful for the estimation of business cycle models containing news shocks.This paper shows how to formally evaluate the information content of observed variables with respect to unobservedshocks in structural macroeconomic models.The proposed methodology is applied to two different real business cycle models with news shocks.The contribution of asset prices is found to be relatively small.The methodology is general and can be used to measure the informational importance of observables with respect to latent variables in DSGE models.Thus,it provides a framework for systematic treatment of such issues,which are usually discussed in an informal manner in the literature.
    Keywords: DSGE models,News Shocks,Asset prices,Information,Identification
    JEL: C32 C51 C52 E32
    Date: 2018–03
  7. By: Michael Funke; Petar Mihaylovski; Adrian Wende
    Abstract: In view of regional house prices drifting apart, we examine whether regionally differentiated macroprudential policies can address financial stability concerns and moderate house price differences. To this end, we disaggregate both the household sector and the housing stock in a two-region DSGE model with out of sync subnational housing markets and compare four macroprudentail policy types: standard monetary policy by means of a standard Taylor rule, leaning against the wind monetary policy, national macroprudential policy or one that targets region-specific LTV ratios. In terms of reducing variances of house prices, regionally differentiated macroprudential policy performs best, provided the policy authorities are concerned with stabilising output and house prices rather than simply minimising the variance of inflation. Thus the findings point to a critical role for policy in regionalising macroprudential tools.
    Keywords: macroprudential policies, housing, DSGE, Great Britain
    JEL: E32 E44 E52 E58
    Date: 2018
  8. By: Shesadri Banerjee (Madras Institute of Development Studies); Parantap Basu (Durham University, Durham University Business School); Chetan Ghate (Indian Statistical Institute); Pawan Gopalakrishnan (Reserve Bank of India); Sargam Gupta (Indian Statistical Institute)
    Abstract: We build and calibrate a New Keynesian monetary business cycle model to theIndian economy to understand why the aggregate demand channel of monetary transmission is weak. Our main Önding is that base money shocks have a larger and more persistent effect on output than an interest rate shock, as in the data. We show that Önancial repression, in the form of a statutory liquidity ratio and administered interest rates, does not weaken monetary transmission. This is contrary to the consensus view in policy discussions on Indian monetary policy. We show that the presence of an informal sector hinders monetary transmission.
    Keywords: Monetary Business Cycles, Monetary Transmission, Ináation Targeting.
    JEL: E31 E32 E44 E52 E63
    Date: 2018–03
  9. By: Siming Liu (Indiana University)
    Abstract: This paper studies the effect of government spending policy during sudden stop crises. Using a quarterly dataset of 30 small open economies, I find that government spending is more effective in stimulating consumption and appreciating the real exchange rate during sudden stops than during normal times. To rationalize this, I build a two-sector model with a collateral constraint on external debt. During a recession, an adverse international shock reduces consumption and undermines the value of collateral. The collapsing asset price in turn tightens the financial constraint, deteriorates the real absorption, and sets-in a fully-blown debt-deflation mechanism. In this context, an increase in government purchases exerts a counteracting force by raising asset prices and stimulating real activities. More importantly, if the government can commit to certain paths of spending in the future, the expected real appreciation will further relax the financial constraint today. I use a calibrated model to explore the multiplier effect under different exchange rate regimes, the asymmetric multipliers, and the multipliers under different levels of shock persistence.
    Keywords: Spending Multiplier; Sudden Stop Crisis; Fisher's Debt-Deflation; Collateral Constraint; Downward Nominal Wage Rigidity
    Date: 2018–03
  10. By: Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
    Abstract: We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
    Keywords: Capital income tax; free trade; value-added taxes; border adjustment; origin- and destination-based taxation; production e
    JEL: E60 E61 E62
    Date: 2018–02
  11. By: Leonardo Martinez (International Monetary Fund); Juan Hatchondo (Indiana University)
    Abstract: We study a model of equilibrium sovereign default in which the government issues cocos (contingent convertible bonds) that stipulate a suspension of debt payments when the government has lost market access. We quantify the eects of such cocos by comparing simulations of the cocos model with the ones obtained when the government issues non-contingent debt. We nd that cocos are more likely to mitigate sovereign risk and generate welfare gains when the suspension of payments is triggered by local shocks and accompanied by conditionality, and when cocos are complemented with scal rules. We also nd that it may be optimal to complement the reproling of debt payments with haircuts.
    Date: 2017
  12. By: Takaaki Morimoto (Graduate School of Economics, Osaka University); Ken Tabata (School of Economics, Kwansei Gakuin University)
    Abstract: Employing a two-period overlapping generations model of R&D-based growth with both product development and process innovation, this paper examines how a subsidy policy for encouraging more individuals to receive higher education affects the per capita GDP growth rate of the economy. We show that when the market structure adjusts partially in the short run, the effect of an education subsidy on economic growth is ambiguous and depends on the values of the parameters. However, when the market structure adjusts fully in the long run, the education subsidy expands the number of firms but reduces economic growth. These unfavorable predictions for the education subsidy on economic growth are partly consistent with empirical findings that mass higher education does not necessarily lead to higher economic growth. A higher education subsidy policy is perhaps inappropriate for the purpose of stimulating long-run economic growth.
    Keywords: Higher Education, Occupational Choice, R&D, Product Development, Process Innovation
    Date: 2018–02
  13. By: Mike Waugh (New York University)
    Abstract: This paper studies the welfare losses associated with exposure to international import competition. Empirically, we construct a measure of consumption at the local labor market level in the US, and exploit regional variation in exposure to imports from China in the early 2000s to study the response of consumption to trade shocks. We interpret this evidence within a standard incomplete market model with Ricardian trade across countries. The model features several mechanisms of partial insurance against adverse shocks to comparative advantage: self-insurance, variable labor supply, and migration. We calibrate model to match the observed consumption and labor market response (as measured in David, Dorn, and Hanson (2013)) to Chinese import competition and then quantify how much the losers from trade actually lost.
    Date: 2017
  14. By: Ayres,; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro
    Abstract: In the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), default is driven by fundamentals alone. There is no independent role for expectations. We show that small variations of that model are consistent with multiple interest rate equilibria, similar to the ones found in Calvo (1988). For distributions of output that are commonly used in the literature, the high interest rate equilibria have properties that make them fragile. Once output is drawn from a distribution with both good and bad times, however, it is possible to have robust high interest rate equilibria.
    Keywords: Sovereign default; multiple equilibria; good and bad times.
    JEL: E44 F34
    Date: 2018–02
  15. By: Cook, David (Asian Development Bank Institute); Devereux, Michael B. (Asian Development Bank Institute)
    Abstract: When monetary policy is constrained by the zero lower bound, fiscal policy can be used to achieve macro stabilization objectives. At the same time, fiscal policy is also a key policy variable within a single currency area that allow policy makers to respond to regional demand asymmetries. How do these two uses of fiscal policy interact with one another? Is there an inherent conflict between the two objectives? How do the answers to these questions depend on the degree of fiscal space available to different members of the currency area? This paper constructs a two-country New Keynesian model of a currency union to address these questions. We find that the answers depend sensitively on the underlying internal structure of the currency union, notably the degree of trade openness between the members of the union.
    Keywords: liquidity trap; monetary policy; fiscal policy; international spillovers
    JEL: E02 E50 E60
    Date: 2018–01–26
  16. By: Grafeneder-Weissteiner, Theresa; Prettner, Klaus; Südekum, Jens
    Abstract: Economic development in industrialized countries is characterized by rising per capita GDP, increasing life expectancy, and an ever larger share of the population living in cities. We explain this pattern within a regional innovation-driven economic growth model with labor mobility and a demographic structure of overlapping generations. The model shows that there is a natural tendency for core-periphery structures to emerge in modern knowledge-based economies.
    Keywords: agglomeration,migration,innovation,growth,demography,urbanization,core-periphery structure,regional inequality
    JEL: J10 O30 O41 R23
    Date: 2018
  17. By: Bernardino Adao; Andre C. Silva
    Abstract: We find that the Friedman rule is not optimal with government transfers and distortionary taxation. This result holds for heterogeneous agents, standard homogeneous preferences, and constant returns to scale production functions. The presence of transfers changes the standard optimal taxation result of uniform taxation. As transfers cannot be taxed, a positive nominal net interest rate is the indirect way to tax the additional income derived from transfers. The higher the transfers, the higher is the optimal inflation rate. We calibrate a model with transfers to the US economy and obtain optimal values for inflation substantially above the Friedman rule. JEL codes: E52, E62, E63
    Keywords: Friedman rule, fiscal policy, monetary policy, taxes, transfers, inflation
    Date: 2017
  18. By: Chu, Angus C.; Cozzi, Guido; Fan, Haichao; Furukawa, Yuichi; Liao, Chih-Hsing
    Abstract: This study develops a Schumpeterian growth model with heterogeneous households and heterogeneous firms to explore the effects of monetary policy on innovation and income inequality. Household heterogeneity arises from an unequal distribution of wealth. Firm heterogeneity arises from random quality improvements and a cost of entry. We find that under endogenous firm entry, inflation has inverted-U effects on economic growth and income inequality. We also calibrate the model for a quantitative analysis and find that the model is able to match the growth-maximizing inflation rate and the inequality-maximizing inflation rate that we estimate using cross-country panel data.
    Keywords: inflation, income inequality, economic growth, heterogeneity
    JEL: D3 E41 O3 O4
    Date: 2018–02
  19. By: Anthony Terriau
    Date: 2018
  20. By: Corsetti, G.; Dedola, L.; Leduc, S.
    Abstract: What determines the optimal monetary trade-offs between internal objectives (inflation, and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-offs analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets–where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive a quadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under cooperation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation.
    Keywords: Currency misalignments, trade imbalances, asset markets and risk sharing, optimal targeting rules, international policy cooperation, exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2018–03–15
  21. By: Chao Fu (University of Wisconsin - Madison); Naoki Aizawa (University of Minnesota)
    Abstract: We study the design of public health insurance system and its equilibrium impacts on the labor market and the health insurance market. We develop an equilibrium model with rich heterogeneities across local markets, workers and firms; and estimate it exploiting variations across states and policy environments before and after the Affordable Care Act. The estimated model closely matches the distribution of insurance and employment status before and after the ACA. With the estimated model, we study the impacts of programs in the form of the newly proposed Medicaid block granting, which allows for state-specific Medicaid eligibility and coverage rules.
    Date: 2017
  22. By: David Wiczer (FRB St. Louis); Amanda Michaud (Indiana University)
    Abstract: In recent decades, Social Security Disability Insurance (SSDI) claims have risen rapidly. We evaluate the importance of changing macroeconomic conditions in shaping this trend. Our quantitative framework considers that economic conditions interact with individuals' health status in their decisions to apply for SSDI. Crucially, these factors are correlated through the nature of work: multiple sectors differentially expose workers to health and economic risks. Decomposing factors driving SSDI growth in a calibrated model, we find the deteriorating economic conditions and concentration of health risks account for about half of the increase in SSDI claims predicted by the model, about a third overall.
    Date: 2017
  23. By: Andres Drenik (Columbia University)
    Abstract: We document that in emerging economies a significant fraction of prices in do- mestic markets are set in dollars. The currency of prices is not homogeneous across goods. More expensive goods are more likely to be set in dollars and also take longer time to sell. We rationalize these facts using a model of price setting in multiple currencies with search frictions. Pricing in dollars prevents erosion of real prices caused by inflation at the expense of a lower willingness to pay from buyers. When goods take longer to sell the relative value of preventing price erosion is higher. Consistent with empirical evidence, our model predicts that the share of prices in foreign currency increases when domestic inflation is high.
    Date: 2017
  24. By: Magne Mogstad (University of Chicago); Bradley Setzler (University of Chicago); Thibaut Lamadon (University of Chicago)
    Abstract: We study the cost of workers reallocation between firms, industries and regions. Using IRS tax records on individuals’ earnings together with data on firms balance sheet, we estimate the pass-through of firm, region, and industry shocks to workers earnings. Using a stylized static model, link these pass-through estimates to costs of reallocating workers. Finally, we introduce long-term contracts and study the non-linear transmission of productivity shocks to earnings.
    Date: 2017

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