nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒04‒23
thirty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Trends, Cycles and Lost Decades: Decomposition from a DSGE Model with Endogenous Growth By Hasumi, Ryo; Iibsoshi, Hirokuni; Nakamura, Daisuke
  2. R&D Growth and Business Cycles Measured with an Endogenous Growth DSGE Model By Hasumi, Ryo; Iiboshi, Hirokuni; Nakamura, Daisuke
  3. Intertemporal equilibrium with heterogeneous agents, endogenous dividends and collateral constraints By Pham, Ngoc-Sang; Le Van, Cuong; Bosi, Stefano
  4. Do Financial Frictions Explain Chinese Firms’ Saving and Misallocation? By Yan Bai; Dan Lu; Xu Tian
  5. A stochastic estimated version of the Italian dynamic General Equilibrium Model (IGEM) By Nicola Acocella; Giorgio Alleva; Elton Beqiraj; Giovanni Di Bartolomeo; Fabio Di Dio; Marco Di Pietro; Francesco Felici; Brunero Liseo
  6. Regional Consumption Responses and the Aggregate Fiscal Multiplier By Dupor, William D.; Karabarbounis, Marios; Kudlyak, Marianna; Mehkari, M. Saif
  7. Mortgage Design in an Equilibrium Model of the Housing Market By Adam M. Guren; Arvind Krishnamurthy; Timothy J. McQuade
  8. The Global Macrofinancial Model By Francis Vitek
  9. Does a financial accelerator improve forecasts during financial crises?: Evidence from Japan with Prediction Pool Methods By Hasumi, Ryo; Iiboshi, Hirokuni; Matsumae, Tatsuyoshi; Nakamura, Daisuke
  10. Sovereign risk and bank risk-taking By Ari, Anil
  11. Wealth Distribution in the Endogenous Growth Model with Idiosyncratic Investment Risk By HIRAGUCHI Ryoji
  12. Marriage, Labor Supply, and Home Production By Marion Goussé; Nicolas Jacquemet; Jean-Marc Robin
  13. Real Interest Rates and Productivity in Small Open Economies By Monacelli, Tommaso; Sala, Luca; Siena, Daniele
  14. Complementarity, Income, and Substitution: A U(C,N) Utility for Macro By Bilbiie, Florin Ovidiu
  15. Financial Intermediary Capital By Rampini, Adriano A.; Viswanathan, S.
  16. Age Gap in Voter Turnout and Size of Government Debt By Ryo Arawatari; Tetsuo Ono
  17. Trade in Commodities and Business Cycle Volatility By Kohn, David; Leibovici, Fernando; Tretvoll, Hakon
  18. Optimal Capital Taxation with Incomplete Markets and Schumpeterian Growth By Marco Cozzi
  20. Network Search: Climbing the Job Ladder Faster By Marcelo Arbex; Dennis O'Dea; David Wiczer
  21. Medical Expenses and Saving in Retirement: The Case of U.S. and Sweden By Nakajima, Makoto; Telyukova, Irina A.
  22. Endogenous Growth and Real Effects of Monetary Policy: R&D and Physical Capital Complementarities in a Cash-in-Advance Economy By Pedro Mazeda Gil; Gustavo Iglésias,
  23. Money in the Production Function By Prescott, Edward C.; Wessel, Ryan
  24. Financial Bubbles in Interbank Lending By Luisa Corrado; Tobias Schuler
  25. Slow Convergence in Economies with Organization Capital By Luttmer, Erzo G. J.
  26. On the effects of ranking by unemployment duration By Fernandez-Blanco, Javier; Preugschat, Edgar
  27. Monetary Policy obeying the Taylor Principle Turns Prices into Strategic Substitutes By Camille Cornand; Frank Heinemann
  28. Dynamic Responses to Immigration By Colas, Mark
  29. Designing UISAs for Developing Countries By Cirelli, Fernando; Espino, Emilio; Sanchez, Juan M.
  30. Monetary Policy and Liquid Government Debt By Andolfatto, David; Martin, Fernando M.
  31. Evaluating the Aggregate Effects of Tax and Benefit Reforms By Michal Horvath; Matus Senaj; Zuzana Siebertova; Norbert Svarda; Jana Valachyova

  1. By: Hasumi, Ryo; Iibsoshi, Hirokuni; Nakamura, Daisuke
    Abstract: In this paper we incorporate endogenous productivity growth into a medium-scale new Keynesian dynamic stochastic general equilibrium (DSGE) model, to which a new shock regarding R&D activities is added. By matching the model parameters to the Japanese economy from 1980:Q2 to 2013:Q4 and decomposing the output into trend and cycle components, we find that the stagnation of the so-called lost decades was caused by a decline in economic growth as well as major recessions in the business cycle. The common trend estimated by our model is based on multiple time series data and is much more volatile than the trend extracted by either the Hodrick-Prescott or the band-pass filter.
    Keywords: endogenous TFP growth, New Keynesian DSGE, trend shift, technological change
    JEL: C32 E32 O47
    Date: 2018–01–31
  2. By: Hasumi, Ryo; Iiboshi, Hirokuni; Nakamura, Daisuke
    Abstract: We consider how and the extent to which a pure technology shock driven by R&D activities impacts on business cycles as well as economic growth, using a medium-scale neo-classical dynamic stochastic general equilibrium (DSGE) model following Comin and Gertler (2006). We try to identify a pure technology shock by adopting "intellectual property product" first entered in 2008 SNA which can be regarded as R&D activity, and by assuming "time to build" by Kydland and Prescott (1982) in the process converting from innovations to products. Our empirical result based on a Bayesian analysis reports a common stochastic trend driven by the pure technology shock is likely to be procyclical, and it accounts for nearly half of variation of the real GDP whose remaining is explained by business cycle components. Meanwhile, a TFP shock, substituting for the R&D shocks, seems to move the common trend independently with business cycle.
    Keywords: R&D shock, technology shock, dynamic stochastic general equilibrium model, common stochastic trend, endogenous growth model
    JEL: C32 E32 O47
    Date: 2017–08–24
  3. By: Pham, Ngoc-Sang; Le Van, Cuong; Bosi, Stefano
    Abstract: We build a dynamic general equilibrium model with heterogeneous producers and financial frictions (collateral constraints and incompleteness). First, we provide a characterization to check whether a sequence is an equilibrium or not. Second, we study the effects of financial imperfections on output and land prices. Third, we develop a theory of valuation of land by introducing the notion of endogenous land dividends (or yields) and different concepts of land-price bubbles. Some examples of bubbles are provided in economies with and without short-sales.
    Keywords: Infinite-horizon, general equilibrium, collateral constraint, incomplete markets, asset valuation, rational bubbles.
    JEL: D5 D52 D9 E44 G1
    Date: 2018–03–11
  4. By: Yan Bai; Dan Lu; Xu Tian
    Abstract: We use firm-level data to identify financial frictions in China and explore the extent to which they can explain firms' saving and capital misallocation. We first document the features of the data in terms of firm dynamics and debt financing. State-owned firms have higher leverage and pay much lower interest rates than non-SOEs. Among privately owned firms, smaller firms have lower leverage, face higher interest rates, and operate with a higher marginal product of capital. We then develop a heterogeneous-firm model with two types of financial frictions, default risk, and a fixed cost of issuing loans. Our model generates endogenous borrowing constraints as banks consider the firm's productivity, asset, and debt when providing a loan. Using evidence on the firm size distribution and financing patterns, we estimate the model and find it can explain aggregate firms' saving and investment and around 50 percent of the dispersion in the marginal product of capital within private firms, which translates into a TFP loss as high as 12%.
    JEL: E2 G3
    Date: 2018–03
  5. By: Nicola Acocella; Giorgio Alleva; Elton Beqiraj; Giovanni Di Bartolomeo; Fabio Di Dio; Marco Di Pietro; Francesco Felici; Brunero Liseo
    Abstract: We estimate with Bayesian techniques the Italian dynamic General Equilibrium Model (IGEM), which has been developed at the Italian Treasury Department, Ministry of Economy and Finance, to assess the effects of alter-native policy interventions. We analyze and discuss the estimated effects of various shocks on the Italian economy. Compared to the calibrated version used for policy analysis, we find a lower wage rigidity and higher adjustment costs. The degree of prices and wages indexation to past inflation is much smaller than the indexation level assumed in the calibrated model. No substantial difference is found in the estimated monetary parameters. Estimated fiscal multipliers are slightly smaller than those obtained from the calibrated version of the model.
    Keywords: Dynamic General equilibrium model, Bayesian estimation, simulation analysis, Italy
    JEL: E27 E30 E60
    Date: 2018–04
  6. By: Dupor, William D. (Federal Reserve Bank of St. Louis); Karabarbounis, Marios; Kudlyak, Marianna; Mehkari, M. Saif
    Abstract: We use regional variation in the American Recovery and Reinvestment Act (2009-2012) to analyze the effect of government spending on consumer spending. Our consumption data come from household-level retail purchases in Nielsen and auto purchases from Equifax credit balances. We estimate that a $1 increase in county-level government spending increases consumer spending by $0.18. We translate the regional consumption responses to an aggregate fiscal multiplier using a multi-region, New Keynesian model with heterogeneous agents and incomplete markets. Our model successfully generates the estimated positive local multiplier, a result that distinguishes our incomplete markets model from models with complete markets. The aggregate consumption multiplier is 0.4, which implies an output multiplier higher than one. The aggregate consumption multiplier is almost twice the local estimate because trade linkages propagate government spending across regions.
    Keywords: Consumer Spending; Fiscal Multiplier; Regional Variation; Heterogeneous Agents
    JEL: E21 E62 H31 H71
    Date: 2018–03–16
  7. By: Adam M. Guren; Arvind Krishnamurthy; Timothy J. McQuade
    Abstract: How can mortgages be redesigned to reduce housing market volatility, consumption volatility, and default? How does mortgage design interact with monetary policy? We answer these questions using a quantitative equilibrium life cycle model with aggregate shocks, long-term mortgages, and an equilibrium housing market, focusing on designs that index payments to monetary policy. Designs that raise mortgage payments in booms and lower them in recessions do better than designs with fixed mortgage payments. The welfare benefits are quantitatively substantial: ARMs improve household welfare relative to FRMs by the equivalent of 0.83 percent of annual consumption under a monetary regime in which the central bank lowers real interest rates in a bust. Among designs that reduce payments in a bust, we show that those that front-load the payment reductions and concentrate them in recessions outperform designs that spread payment reductions over the life of the mortgage. Front-loading alleviates household liquidity constraints in states where they are most binding, reducing default and stimulating housing demand by new homeowners. To isolate this channel, we compare an FRM with a built-in option to be converted to an ARM with an FRM with an option to be refinanced at the prevailing FRM rate. Under these two contracts, the present value of a lender's loan falls by roughly an equal amount, as these contracts primarily differ in the timing of expected repayments. The FRM that can be converted to an ARM, which front loads payment reductions, improves household welfare by four times as much.
    JEL: E4 G0 G01 G2
    Date: 2018–03
  8. By: Francis Vitek
    Abstract: This paper documents the theoretical structure and empirical properties of the latest version of the Global Macrofinancial Model (GFM). This dynamic stochastic general equilibrium model of the world economy, disaggregated into forty national economies, was developed to support multilaterally consistent macrofinancial policy, risk and spillover analysis. It features a range of nominal and real rigidities, extensive macrofinancial linkages, and diverse spillover transmission channels. These macrofinancial linkages encompass bank and capital market based financial intermediation, with financial accelerator mechanisms linked to the values of the housing and physical capital stocks. A variety of monetary policy analysis, fiscal policy analysis, macroprudential policy analysis, spillover analysis, and forecasting applications of the GFM are demonstrated. These include quantifying the monetary, fiscal and macroprudential policy transmission mechanisms, accounting for business cycle fluctuations, and generating relatively accurate forecasts of inflation and output growth.
    Date: 2018–04–09
  9. By: Hasumi, Ryo; Iiboshi, Hirokuni; Matsumae, Tatsuyoshi; Nakamura, Daisuke
    Abstract: Using a Markov-switching prediction pool method (Waggoner and Zha, 2012) in terms of density forecasts, we assess the time-varying forecasting performance of a DSGE model incorporating a financial accelerator a la Bernanke et al. (1999) with the frictionless model by focusing on periods of financial crisis including the so-called "Bubble period" and the "Lost decade" in Japan. According to our empirical results, the accelerator improves the forecasting of investment over the whole sample period, while forecasts of consumption and inflation depend on the fluctuation of an extra financial premium between the policy interest rate and corporate loan rates. In particular, several drastic monetary policy changes might disrupt the forecasting performance of the model with the accelerator. A robust check with a dynamic pool method (Del Negro et al., 2016) also supports these results.
    Keywords: Density forecast, Optimal prediction pool, Markov-switching prediction pool, Dynamic prediction pool, Bayesian estimation, Markov Chain Monte Carlo, Financial Friction.
    JEL: C3 C32 C53 E3 E32 E37
    Date: 2018–03
  10. By: Ari, Anil
    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 default-risky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quanti…ed using Portuguese data and accounts for macroeconomic dynamics in Portugal in 20102016. Policy interventions face a trade-o¤ 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. JEL Classification: E44, F30, F34, G01, G21, G28, H63
    Keywords: banking crises, financial constraints, risk-taking, sovereign debt crises
    Date: 2018–04
  11. By: HIRAGUCHI Ryoji
    Abstract: In this paper, we study the continuous time Uzawa-Lucas growth model with physical and human capital accumulation, and study the relationship between economic growth and wealth inequality. Human capital accumulation is deterministic, but investment in physical capital is subject to the idiosyncratic risk. There exists a unique balanced growth path, and the stationary wealth distribution along the path is double Pareto. We show that the increase in efficiency in human capital accumulation raises economic growth, and further equalizes wealth distribution. We also consider a case with linear tax on risky physical capital, and show that capital tax reduces the degree of wealth inequality.
    Date: 2018–02
  12. By: Marion Goussé (Département d'Economique, Université Laval - Université Laval); Nicolas Jacquemet (PSE - Paris School of Economics); Jean-Marc Robin (Sciences Po Paris, Department of Economics)
    Abstract: We develop a search model of marriage where men and women draw utility from private consumption and leisure, and from a non-market good that is produced in the home using time resources. We condition individual decisions on wages, education, and an index of family attitudes. A match-specific, stochastic bliss shock induces variation in matching given wages, education, and family values, and triggers renegotiation and divorce. Using BHPS (1991–2008) data, we take as given changes in wages, education, and family values by gender, and study their impact on marriage decisions and intra-household resource allocation. The model allows to evaluate how much of the observed gender differences in labor supply results from wages, education, and family attitudes. We find that family attitudes are a strong determinant of comparative advantages in home production of men and women, whereas education complementarities induce assortative mating through preferences.
    Keywords: Search-matching,bargaining,assortative mating,collective models,time uses,social norms,gender identity,structural estimation
    Date: 2017
  13. By: Monacelli, Tommaso; Sala, Luca; Siena, Daniele
    Abstract: In emerging market economies (EMEs), capital inflows are associated to productivity booms. However, the experience of advanced small open economies (AEs), like the ones of the Euro Area periphery, points to the opposite, i.e., capital inflows lead to lower productivity, possibly due to capital misallocation. We measure capital flow shocks as (exogenous) variations in (world) real interest rates. We show that, in the data, the misallocation narrative fits the evidence only for AEs: lower real interest rates lead to lower productivity in AEs, whereas the opposite holds for EMEs. We build a business cycle model with firms' heterogeneity, financial imperfections and endogenous productivity. The model combines a misallocation effect, stemming from capital inflows, with an original sin effect, whereby capital inflows, via a real exchange rate appreciation, affect the borrowing ability of the incumbent, marginally more productive firms. The estimation of the model reveals that a low trade elasticity combined with high (low) firms' productivity dispersion in EMEs (AEs) are crucial ingredients to account for the different effects of capital inflows across groups of countries. The relative balance of the misallocation and the original sin effect is able to simultaneously rationalize the evidence in both EMEs and AEs.
    JEL: F32 F41
    Date: 2018–03
  14. By: Bilbiie, Florin Ovidiu
    Abstract: In business-cycle, macro models the elasticity of intertemporal substitution (EIS) governs the economy's response to demand shocks and policy changes ("multipliers"). With general non-separable preferences, the EIS is determined by consumption-hours complementarity and the income effect on hours. Complementarity helps generate business-cycle co-movement following demand shocks, fiscal multipliers, and allows reconciling low EIS with low income-wealth effects. Yet existing utility functions restrict either complementarity, or income effects---or both---and artificially imply that EIS is exclusively a function of either. I propose a novel utility function where both complementarity and the income effect are arbitrary and can be calibrated separately.
    Keywords: business-cycle co-movement; consumption-hours complementarity; elasticity of intertemporal substitution; Fiscal multipliers; income and wealth effects; news shocks
    JEL: D11 E21 E62 H31
    Date: 2018–03
  15. By: Rampini, Adriano A.; Viswanathan, S.
    Abstract: We propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households, that is, have a collateralization advantage. Intermediaries require capital as they have to finance the additional amount that they can lend out of their own net worth. The net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity, such as investment, and financing. The accumulation of net worth of intermediaries is slow relative to that of the corporate sector. The model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch, namely, their severity, their protractedness, and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns. The model captures the tentative and halting nature of recoveries from crises.
    Keywords: Collateral; Financial constraints; Financial crises; Financial Intermediation; investment
    JEL: E32 E44 G21 G32
    Date: 2018–03
  16. By: Ryo Arawatari (Graduate School of Economics, Nagoya University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: We consider a cross-country difference of age gap in voter turnout and its im-pact on fiscal policymaking in a multi-country, overlapping-generations model. We present con ict over fiscal policy between successive generations (i.e., the young and elderly). We show that higher turnout of the elderly in voting may have a non- monotone effect on the size of government debt, depending on voters' inter-temporal elasticity of substitution of public expenditure.
    Keywords: fiscal policy; voter turnout; public debt; probabilistic voting; small open economies.
    JEL: D70 E62 H63
    Date: 2016–10
  17. By: Kohn, David; Leibovici, Fernando (Federal Reserve Bank of St. Louis); Tretvoll, Hakon
    Abstract: This paper studies the role of the patterns of production and international trade on the higher business cycle volatility of emerging economies. We study a multi-sector small open economy in which firms produce and trade commodities and manufactures. We estimate the model to match key cross-sectional differences across countries: emerging economies run trade surpluses in commodities and trade deficits in manufactures, while sectoral trade flows are balanced in developed economies. We find that these differences amplify the response of emerging economies to fluctuations in commodity prices. We show evidence consistent with these findings using cross-country data.
    Keywords: International business cycles; output volatility; emerging economies
    JEL: E32 F4 F41 F44
    Date: 2018–03–01
  18. By: Marco Cozzi (Department of Economics, University of Victoria)
    Abstract: This paper characterizes quantitatively the optimal capital income tax rate in an OLG economy with uninsurable income risk, incomplete markets and endogenous Schumpeterian growth. Contrary to the most recent literature, it is found that it is virtually never optimal to tax capital: under the optimal scheme, in a series of cases, the highest proportional tax rate on capital is found to be less than 0.2%. The reason for this result lies in the reduced GDP (and wage) growth rate stemming from a higher capital tax rate. In General Equilibrium, the interest rate rises, and the increased cost of capital reduces the endogenous rate of innovation, leading to a negative response of the growth rate. Although the equilibrium effect on the growth rate is found to be quantitatively modest (approximately half a percentage point), it still has a first order consequence on welfare. The results show that moving to the optimal income tax schedule entails large welfare gains, approximately 5% in consumption equivalent. The results are robust along a number of dimensions, including the specification of preferences. An alternative formulation of the utility function,taken from a class consistent with a Balanced Growth Path, is calibrated to obtain an empirically plausible value for the Frisch elasticity of 0.5, and confirms all the results, both qualitatively and quantitatively. JEL Classification: D15, E21, H21, O41
    Keywords: Capital and Income Taxation, Heterogeneous Agents, Incomplete Markets,Endogenous Growth, Welfare.
    Date: 2018–04–17
    Date: 2018
  20. By: Marcelo Arbex; Dennis O'Dea; David Wiczer
    Abstract: We introduce an irregular network structure into a model of frictional, on-the-job search in which workers find jobs through their network connections or directly from firms. We show that jobs found through network search have wages that stochastically dominate those found through direct contact. In irregular networks, heterogeneity in the worker’s position within the network leads to heterogeneity in wage and employment dynamics: better-connected workers climb the job ladder faster. Despite this rich heterogeneity from the network structure, the mean-field approach allows the problem of our workers to be formulated tractably and recursively. We then calibrate a quantitative version of our mechanism, showing it is consistent with several empirical findings regarding networks and labor markets: jobs found through networks have higher wages and last longer. Finally, we present new evidence consistent with our model that job-to-job switches at higher rungs of the ladder are more likely to use networks.
    Date: 2018
  21. By: Nakajima, Makoto (Federal Reserve Bank of Minneapolis); Telyukova, Irina A. (Intensity Corporation)
    Abstract: Many U.S. households have significant wealth late in life, contrary to the predictions of a simple life-cycle model. In this paper, we document stark differences between U.S. and Sweden regarding out-of-pocket medical and long-term-care expenses late in life, and use them to investigate their role in discouraging the elderly from dissaving. Using a consumption-saving model in retirement with significant uninsurable expense risk, we find that medical expense risk accounts for a quarter of the U.S.-Sweden difference in retirees' dissaving patterns. Furthermore, medical expense risk affects primarily financial assets, while its impact on housing is limited.
    Keywords: Household finance; Aging; Retirement saving; Health; Cross-country analysis
    JEL: D14 E21 J14 J26
    Date: 2018–04–10
  22. By: Pedro Mazeda Gil (University of Porto, Faculty of Economics, and cef.up); Gustavo Iglésias, (University of Porto, Faculty of Economics)
    Abstract: We study the real long-run effects of inflation and of the structural stance of monetary policy in the context of a monetary model of R&D-driven endogenous growth complemented with physical capital accumulation. We look into the effects on a set of real macroeconomic variables that have been of interest to policymakers – the economic growth rate, the real interest rate, the physical investment rate, R&D intensity, and the velocity of money –, and which have been analysed from the perspective of different, separated, strands of the theoretical and empirical literature. Additionally, we analyse the theoretical predictions of our model as regards the effects of inflation on the effectiveness of real industrial policy shocks and on the market structure, assessed namely by the average firm size, and present novel cross-country evidence on the empirical relationship between the latter and the long-run inflation rate.
    Keywords: Keywords: Endogenous growth, R&D, physical capital, firm size, cash-in-advance, inflation, money.
    JEL: O41 O31 E41
    Date: 2018–04
  23. By: Prescott, Edward C. (Federal Reserve Bank of Minneapolis); Wessel, Ryan (Arizona State University)
    Abstract: Businesses hold large quantities of cash reserves, which have average returns well below their investments in tangible capital. Businesses do this because these monetary assets provide services. One implication is that money services is a factor of production in capital theoretic valuation equilibrium models. Our aggregate production function is consistent with both the classical demand for money function relationship and with extended periods of near zero short-term nominal interest rates. In our model economy, there is a 100 percent reserve requirement on all demand deposits. Demand deposits are legal tender. We find (i) money services in the production function necessitates revisions in the national accounts; (ii) monetary and fiscal policy cannot be completely separated; (iii) for a given policy, equilibrium is either unique or does not exist; and (iv) Friedman’s monetary satiation is not optimal. We make quantitative comparisons between interest rate targeting regimes and between inflation rate targeting regimes. The best inflation rate target was 2 percent. {{p}} This paper is related to but fundamentally different from Staff Report 530: "Fiat Value in the Theory of Value.”
    Keywords: 100 percent reserve banking; Money in production function; Interest rate targeting; Inflation rate targeting; Friedman monetary satiation; zero lower bound
    JEL: E0 E4 E5 E6
    Date: 2018–04–10
  24. By: Luisa Corrado (DEF & CEIS,University of Rome "Tor Vergata"); Tobias Schuler (Ifo Institute)
    Abstract: As a result of the global financial crisis countercyclical capital requirements have been discussed to prevent financial bubbles generated in the banking sector and to mitigate the adverse effects of financial repression after a bubble burst. This paper analyses the effects of an endogenous capital requirement based on the credit-to-GDP gap along with other policy instruments. We develop a macroeconomic framework which endogenizes market expectations on asset values and allows for interbank transactions. We then show how a bubble in the banking sector relaxes financing constraints. In policy experiments we find that an endogenous capital requirement can effectively reduce the impact of a financial bubble. We show that central bank intervention ("leaning against the wind") instead has only a minor effect.
    Keywords: Financial bubbles, credit-to-GDP gap, endogenous capital requirement, stabilization policies
    JEL: E44 E52
    Date: 2018–04–06
  25. By: Luttmer, Erzo G. J. (Federal Reserve Bank of Minneapolis)
    Abstract: Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of capital accumulation-organization capital. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This means that most capital accumulation must be accounted for by incumbent firms. This paper describes a range of circumstances in which this implies aggregate convergence rates that are only about half of what they are in the standard Cass-Koopmans economy. Through the lens of the models described in this paper, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital.
    Keywords: Business cycles; Firm size distribution; Slow recoveries; Zipfs law
    JEL: E32 L11
    Date: 2018–01–19
  26. By: Fernandez-Blanco, Javier; Preugschat, Edgar
    Abstract: We propose a theory based on the firm’s hiring behavior that rationalizes the observed significant decline of callback rates for an interview and exit rates from unemployment and the mild decline of reemployment wages over unemployment duration. We build a directed search model with symmetric incomplete information on worker types and non-sequential search by firms. Sorting due to firms’ testing of applicants in the past makes expected productivity fall with duration, which induces firms to rank applicants by duration. In equilibrium callback and exit rates both fall with unemployment duration. In our numerical exercise using U.S. data we show that our model can replicate quite well the observed falling patterns, with the firm’s ranking decision accounting for a sizable part.
    Keywords: Ranking Sorting Directed search
    JEL: J64
    Date: 2017–03
  27. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Frank Heinemann (TUB - Technische Universität Berlin)
    Abstract: Monetary policy affects the degree of strategic complementarity in firms' pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms' pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications. Abstract Monetary policy affects the degree of strategic complementarity in firms' pricing decisions if it responds to the aggregate price level. In normal times, when monopolis-tic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms' pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications.
    Keywords: monopolistic competition, monetary policy rule, pricing decisions, strategic complementarity, strategic substitutability
    Date: 2018–04–05
  28. By: Colas, Mark (Federal Reserve Bank of Minneapolis)
    Abstract: I analyze the dynamic effects of immigration by estimating an equilibrium model of local labor markets in the US. The model includes firms in multiple cities and sectors which combine capital, skilled and unskilled labor in production, and forward-looking workers who choose their sector and location each period as a dynamic discrete choice. A counterfactual unskilled immigration inflow leads to an initial wage drop for unskilled workers and a wage increase for skilled workers. These effects dissipate rapidly as unskilled workers migrate away from heavily affected cities and workers shift toward unskilled intensive industries. Effects on lifetime utility are small.
    Keywords: Immigration; Labor market dynamics; Local labor markets
    JEL: J2 J31 J62
    Date: 2018–01–29
  29. By: Cirelli, Fernando; Espino, Emilio; Sanchez, Juan M. (Federal Reserve Bank of St. Louis)
    Abstract: The benefits of implementing Unemployment Insurance Savings Accounts (UISAs) are studied in the presence of the multiple sources of information frictions often existing in developing countries. A benchmark incomplete markets economy is calibrated to Mexico in the early 2000s. The unconstrained optimal allocation would imply very large welfare gains relative to the benchmark economy (similar to an increase in consumption of 23% in every period). More importantly, in presence of multiple sources of information frictions, about half of those potential gains can be accrued through the implementation of UISAs with replacement rates between 40-50%, contribution rates between 10-15%, an initial liquidity transfer of about 20 quarters of average income, and higher payroll taxes to finance those initial stocks.
    Keywords: Unemployment Insurance; Informality; Moral Hazard; UISA.
    JEL: D82 H55 I38 J65
    Date: 2018–04–16
  30. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Martin, Fernando M. (Federal Reserve Bank of St. Louis)
    Abstract: We examine the conduct of monetary policy in a world where the supply of outside money is controlled by the fiscal authority-a scenario increasingly relevant for many developed economies today. Central bank control over the long-run inflation rate depends on whether fiscal policy is Ricardian or Non-Ricardian. The optimal monetary policy follows a generalized Friedman rule that eliminates the liquidity premium on scarce treasury debt. We derive conditions for determinacy under both fiscal regimes and show that they do not necessarily correspond to the Taylor principle. In addition, Non-Ricardian regimes may suffer from multiplicity of steady-states when the government runs persistent deficits.
    Keywords: monetary policy; in ation; Taylor rule; determinacy; Ri- cardian; liquid bonds
    JEL: E40 E52 E60 E63
    Date: 2018–01–16
  31. By: Michal Horvath (University of York); Matus Senaj (Council for Budget Responsibility); Zuzana Siebertova (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility); Jana Valachyova (Council for Budget Responsibility)
    Abstract: The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. The approach involving polynomial approximation to aggregated output from behavioural microsimulation permits the solution for the long-run steady state and the transition path in one numerical simulation of the dynamic aggregate economy. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms in the context of Slovakia.
    Keywords: microsimulation, dynamic general equilibrium, unemployment, labour supply elasticity, tax reform
    JEL: E24 H24 H31 J22
    Date: 2018–04

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