nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒05‒14
twenty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Migration and business cycle dynamics By Christie Smith; Christoph Thoenissen
  2. Devaluation with Exchange rate Floor in a Small Open Economy By David Svacina
  3. Housing and the Business Cycle Revisited By Daniel Fehrle
  4. Income Effects and the Cyclicality of Job Search Effort By M. Alper Çenesiz; Luís Guimarães
  5. How Much Consumption Insurance in Bewley Models with Endogenous Family Labor Supply? By Chunzan Wu; Dirk Krueger
  6. Innovation and Trade Policy in a Globalized World By Ufuk Akcigit; Sina T. Ates; Giammario Impullitti
  7. Heterogeneous human capital, inequality and growth: the role of patience and skills By Borissov, Kirill; Bosi, Stefano; Ha-Huy, Thai; Modesto, Leonor
  8. How can the government spending multiplier be small at the zero lower bound? By Valerio Ercolani; João Valle e Azevedo
  9. Population and house prices in the United Kingdom By Creina Day
  10. The Production of Cognitive and Non-cognitive Human Capital in the Global Economy By Chong Xiang; Stephen Yeaple
  11. Dynamic Tax Externalities and the U.S. Fiscal Transformation in the 1930s By Dirk Niepelt
  12. Dynamic Macroeconomics: A Didactic Numeric Model By Carlos Esteban Posada; Santiago Sánchez
  13. Financial Policy By Dirk Niepelt
  14. Can News and Noise Shocks Be Disentangled? By Luca Benati
  15. The New Keynesian Model with Stochastically Varying Policies By Klaus Neusser
  16. Macroéconomie et information imparfaite By Paul Hubert; Giovanni Ricco
  17. Unemployment, Income Growth and Social Security By Watanabe, Minoru; Miyake, Yusuke; Yasuoka, Masaya
  18. Explicit solutions to utility maximization problems in a regime-switching market model via Laplace transforms By Adriana Ocejo
  19. Governance, social infrastructure and productivity By del Río, Fernando
  20. Sovereign Money Reforms and Welfare By Philippe Bacchetta; Elena Perazzi

  1. By: Christie Smith; Christoph Thoenissen
    Abstract: Shocks to net migration matter for the business cycles of some countries. Using an estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy and a structural vector autoregression, we find that migration shocks account for a considerable proportion of the variability of per capita GDP. Migration shocks matter for the capital investment and consumption components of per capita GDP, but they are not the most important driver. Migration shocks are also important for residential investment and real house prices, but other shocks play a larger role in driving housing market volatility. In the DSGE model, the level of human capital possessed by migrants relative to that of locals materially affects the business cycle impact of migration. The impact of migration shocks is larger when migrants have substantially different levels of human capital relative to locals. When the average migrant has higher levels of human capital than locals, as seems to be common in most OECD economies, a migration shock has an expansionary effect on per capita GDP and its components.
    Keywords: Migration, macroeconomics, business cycle fluctuations, Bayesian estimation, structural vector autoregression
    JEL: E44 E61 F42
    Date: 2018–05
  2. By: David Svacina (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: In recent years, central banks in the Czech Republic and Switzerland used exchange rate floor commitment to use unlimited FX interventions to keep the exchange rate above the declared floor rate to persistently devalue their currency and stimulate inflation. Central banks in other small open economies, such as Sweden and Israel, faced similar challenges and could have chosen this instrument as well. In this paper, I develop an extension to dynamic stochastic general equilibrium (DSGE) models that could be used to esimate impact of such devaluations with exchange rate floor. As an illustration, I apply the extension to models estimated for Sweden and the Czech Republic. In particular, I simulate impact of a 5 percent devaluation with the exchange rate floor used as an unconventional monetary policy instrument with interest rates at the zero lower bound. In the first year after the devaluation, the annual consumer price in inflation increases by 0.8 percent in Sweden and 1.8 percent in the Czech Republic. The long-term exchange rate pass-through to consumer prices is 40 percent and 65 percent, respectively. The increase in inflation is highly dependent on the persistent nature of the devaluation.
    Keywords: Exchange Rate Floor, Devaluation of Currency, Unconventional Monetary Policy Instrument, Dynamic Stochastic General Equilibrium Models, Exchange Rate Pass-Through
    JEL: E31 E37 E58 F41
    Date: 2018–02
  3. By: Daniel Fehrle
    Abstract: In this paper, I present a multi-sectoral DSGE-model with housing, real rigidities and variable capital utilization that generates aggregate and sectoral co-movements due to sector specic shocks. Furthermore, the model accounts for two puzzles: First, residential investment correlates positively with house prices, and second, GDP residential and business investment tend toward the empirically observed lead-lag pattern. I show that, except for relative prices, all co-movements and the lead-lag pattern of different investment types are endogenous in the calibrated model and independent of the properties of the shock. In a second step, I estimate the these properties with Bayesian techniques. As it turns out, shocks to sectors with similar elasticities in the nal good sectors playa role related to aggregated shocks. In contradiction to a standard assumption in the literature, shocks to the construction sector seem to be lower than others.
    Keywords: Housing market, sectoral and aggregate co-movements
    JEL: E13 E32 O41 R31
    Date: 2018–05
  4. By: M. Alper Çenesiz (cef.up, Faculdade de Economia, Universidade do Porto); Luís Guimarães (cef.up, Faculdade de Economia, Universidade do Porto)
    Abstract: The canonical matching model predicts procyclical job search effort while recent evidence suggests that it is not. In this paper, we assess whether accounting for income effects in a model with matching frictions reconciles it with the evidence. We find that: (i) low income effects imply procyclical search effort; (ii) moderate income effects imply acyclical search effort but also acyclical unemployment; and (iii) high income effects imply countercyclical search effort but also procyclical unemployment. In our experiments, only fully rigid wages or excessively high replacement rate of unemployment benefits improves the predictions of the model. In short, the predictions of the model with income effects are sound under unsound assumptions.
    Keywords: Matching Frictions; Job Search Effort; Income Effects.
    JEL: E24 E32 J64
    Date: 2018–05
  5. By: Chunzan Wu; Dirk Krueger
    Abstract: We show that a calibrated life-cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri and Saporta-Eksten (2016) in U.S. data. With additively separable preferences, 43% of male and 23% of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 34% and 20%. With non-separable preferences the model predicts more consumption insurance, with pass-through rates of 29% and 16%. Most of the consumption insurance against permanent male wage shocks is provided through the labor supply response of the female earner.
    JEL: D31 E21
    Date: 2018–03
  6. By: Ufuk Akcigit; Sina T. Ates; Giammario Impullitti
    Abstract: How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions, we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, and, therefore, market leadership and trade flows, in a world with two large open economies at different stages of development. Firms’ R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) has ambiguous effects on welfare, while, dynamically, intensified globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, and only when introduced unilaterally. Tariffs generate large welfare losses in the medium and long run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally, our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.
    JEL: F13 O4
    Date: 2018–04
  7. By: Borissov, Kirill; Bosi, Stefano; Ha-Huy, Thai; Modesto, Leonor
    Abstract: We extend the Lucas' 1988 model introducing two classes of agents with heterogeneous skills, discount factors and initial human capital endowments. We consider two regimes according to the planner's political constraints. In the first regime, that we call meritocracy, the planner faces individual constraints. In the second regime the planner faces an aggregate constraint, redistributing. We find that heterogeneity matters, particularly with redistribution. In the meritocracy regime, the optimal solution coincides with the BGP found by Lucas (1988) for the representative agent's case. In contrast, in the redistribution case, the solution for time devoted to capital accumulation is never interior for both agents. Either the less talented agents do not accumulate human capital or the more skilled agents do not work. Moreover, social welfare under the redistribution regime is always higher than under meritocracy and it is optimal to exploit existing differences. Finally, we find that inequality in human capital distribution increases in time and that, in the long run, inequality always promotes growth.
    Keywords: human capital, heterogenous patience and skills, inequality and growth.
    JEL: E24 O4 O41
    Date: 2018–04
  8. By: Valerio Ercolani (Bank of Italy); João Valle e Azevedo (Bank of Portugal & Nova School of Business and Economics)
    Abstract: Some recent empirical evidence questions the typically large size of government spending multipliers when the nominal interest rate is stuck at zero, finding output multipliers of around 1 or even lower, with an upper bound of around 1.5 in some circumstances. In this paper, we use a recent estimate of the degree of substitutability between private and government consumption in an otherwise standard New Keynesian model to show that this channel significantly reduces the size of government spending multipliers obtained when the nominal interest rate is at zero. All else being equal, the relationship of substitutability makes a government spending shock crowd out private consumption while being less inflationary, thus limiting the typically expansionary effect of the fall in the real interest rate. Subject to the nominal interest rate being constrained at zero, the model generates output multipliers ranging from 0.8 to 1.6.
    Keywords: non-separable government consumption, substitutability, zero lower bound, fiscal multipliers
    JEL: E32 E62
    Date: 2018–04
  9. By: Creina Day
    Abstract: Real house prices rise in the United Kingdom amid growing concern of an impending correction. The rate of household formation has increased with strong population growth, due to elevated rates of natural increase and net migration, and lack of growth in average household size, due to a rise in single-person households with population ageing. This paper presents an overlapping generations model of housing, endogenous labour, savings and growth to analyse the effect of an increase in the household formation rate and speculative demand under rational expectations on house prices in a general equilibrium. We find that real house prices rise over time if the rate of household formation outstrips the rate of housing supply, but do not follow a speculative bubble path in the long run. The results explain why the upward trend in real house prices reflects market fundamentals and has continued despite population ageing as the number of working and retired households grows relative to the number of older people seeking to sell.
    Date: 2018–05
  10. By: Chong Xiang; Stephen Yeaple
    Abstract: A country’s welfare depends on its ability to accumulate cognitive and noncognitive human capital. However, we do not fully understand what makes some countries successful at producing human capital and even struggle with measurement. e.g. international test scores are informative about the cognitive dimension but neglect the non-cognitive dimension. In this paper, we develop a multi-country, open-economy general-equilibrium framework in which countries’ ability to turn resources into human capital along the cognitive and non-cognitive dimensions is revealed by the endogenous educational and occupational choices of its citizens and their subsequent performance on international exams. Our model allows us to estimate countries’ underlying productivities of cognitive and non-cognitive human capital. We find that high test scores do not necessarily imply high cognitive productivities (e.g. Switzerland, Hong Kong) and that many countries with low test scores have high non-cognitive productivities (e.g. the U.S. and U.K.). We then aggregate over these two dimensions to construct a single educational quality index, and illustrate its intuition using an iso-education-quality curve. We use our model to decompose variation in output per capita across countries into a component involving the educational quality index and another involving output TFP. This exact decomposition shows that the differences in cognitive and noncognitive productivities across countries have large implications for differences in output per worker. These results help quantify the potential payoffs of education policies and clarify their objective; e.g. excessive attention to test scores may decrease aggregate output. International trade plays an important role in our model because the gains from trade help to compensate a country for uneven productivity across human capital types. In counterfactual exercises, we show that if barriers to trade are completely eliminated, we would obtain a very different iso-education-quality curve. This implies large improvements of overall education quality, and large gains from trade, for the countries with strong comparative advantages in producing cognitive (e.g. S. Korea would gain 30.1% to 44.1% of its output) or non-cognitive human capital (e.g. the Netherlands would gain 18.8% to 55.6%).
    JEL: F16 I21 I25 O15 O43 O47
    Date: 2018–04
  11. By: Dirk Niepelt
    Abstract: We propose a theory of tax centralization in politico-economic equilibrium. Taxation has dynamic general equilibrium implications which are rationally internalized at the federal, but not at the regional level. The political support for taxation therefore differs across levels of government. Complementarities on the spending side decouple the equilibrium composition of spending and taxation and create a role for inter governmental grants. The model provides an explanation for the centralization of revenue, introduction of grants, and expansion of federal income taxation in the U.S. around the time of the New Deal. Quantitatively, it accounts for between 30% and 100% of the federal revenue share’s doubling in the 1930s, and for the long-term increase in federal grants.
    Keywords: Fiscal policy, Federalism, Politico-economic equilibrium, Markov equilibrium, Public goods, Grants, Political Economy
    JEL: D72 E62 H41 H77
    Date: 2018–03
  12. By: Carlos Esteban Posada; Santiago Sánchez
    Abstract: Teaching Dynamic Macroeconomics at undergraduate courses relies exclusively on intuitive prose and graphics depicting behaviours and steady states of the main markets of the economy. But when the case of forward-looking agents and the macroeconomic implications of their actions are discussed, intuitions and graphical representations offered to students may lead to unsupported conclusions. This happens even if the teacher and students use the chapter upon a dynamic macroeconomic model of one of the most didactic and ordered texts ever published: Williamson (2014). In this paper we try to sustain this assertion.
    Keywords: Dynamic Macroeconomics, Forward-looking agents, General equilibrium, Competitivemarkets, Total factor productivity, Public expenditure multiplier.
    JEL: A22 A23 C61 C63 E00 E17
    Date: 2018–04–25
  13. By: Dirk Niepelt
    Abstract: This paper reviews theoretical results on financial policy. We use basic accounting identities to illustrate relations between gross assets and liabilities, net debt positions and the appropriation of (primary) budget surplus funds. We then discuss Ramsey policies, answering the question how a committed government may use financial instruments to pursue its objectives. Finally, we discuss additional roles for financial policy that arise as a consequence of political frictions, in particular lack of commitment.
    Date: 2018–03
  14. By: Luca Benati
    Abstract: Chahrour and Jurado (2018) have shown that news and noise shocks are observationally equivalent when the econometrician only observes a fundamental process and agents’ expectations about it. We show that the observational equivalence result no longer holds when the econometrician observes a fundamental process and a noisy signal of it. Working with an RBC model with noise about TFP, we further show that, even if the signal is not directly observed by the econometrician, it can be inferred through its impact on other macroeconomic variables, since they are optimally chosen by agents conditional on all information, including the signal itself. In particular, we show that under these circumstances news and noise shocks can be exactly recovered in population. Our results demonstrate that news and noise shocks are not observationally equivalent for an econometrician exploiting all the information contained in standard macroeconomic time series.
    Date: 2018–05
  15. By: Klaus Neusser
    Abstract: The Multiplicative Ergodic Theorem provides a novel general method- ology to analyze rational expectations models with stochastically vary- ing coecients. The approach is applied for the first time to economics and analyzes the canonical New Keynesian model with a Taylor rule which switches randomly between an aggressive and a passive reaction to in ation. The paper delineates the trade-o of the central bank of being passive in some periods and aggressive in others. Moreover, it is shown how this trade-o depends on the stochastic process governing the randomness in the central bank's policy. Finally, explicit solution formulas are derived in the case of determinateness as well as inde- terminateness. In doing so he paper considerably extends the current approach.
    Keywords: time{varying rational expectations models, New Keynesian model, Taylor rule, Lyapunov exponents, multiplicative ergodic theorem
    JEL: C02 C61 E40 E52
    Date: 2018–03
  16. By: Paul Hubert (Observatoire français des conjonctures économiques); Giovanni Ricco (Observatoire français des conjonctures économiques)
    Abstract: Cet article présente les contributions théoriques et empiriques récentes à la littérature macroéconomique qui remettent en question l'hypothèse d’information parfaite. En prenant en compte les frictions informationnelles rencontrées par les agents économiques, il est possible d'expliquer certaines des régularités empiriques qui ne peuvent pas être expliquées par le cadre standard des anticipations rationnelles avec information parfaite. À titre d’exemple, nous montrons que l’estimation du signe, de l’ampleur et de la persistance des effets des politiques monétaires et budgétaires peuvent varier lorsque l’on prend en compte les frictions informationnelles auxquelles sont confrontés les acteurs économiques.
    Keywords: Frictions informationnelles; Information imparfaite; Politiques économiques
    Date: 2017–12
  17. By: Watanabe, Minoru; Miyake, Yusuke; Yasuoka, Masaya
    Abstract: Considering the sustainability of social security in an aging society with fewer children, income growth and population growth are important factors. With a decrease in income growth or population growth, social security transfers such as pension benefits cannot be provided. The intergenerational social security benefit is being reassessed in some OECD countries. In Japan, social security benefits for younger people are small because of an aging society. This paper presents description of an unemployment model with a minimum wage and social security benefits and presents examination of how unemployment benefits for the younger people affect income growth, fertility, and welfare. The results described herein demonstrate that unemployment benefits raise the capital stock and income level per capita. Therefore, this benefit should be provided to maintain the tax revenue for social security. Moreover, this benefit can increase social welfare.
    Keywords: Minimum wage, Social security, Unemployment
    JEL: E24 H55 J64
    Date: 2018–04–12
  18. By: Adriana Ocejo
    Abstract: We study the problem of utility maximization from terminal wealth in which an agent optimally builds her portfolio by investing in a bond and a risky asset. The asset price dynamics follow a diffusion process with regime-switching coefficients modeled by a continuous-time finite-state Markov chain. We consider an investor with a Constant Relative Risk Aversion (CRRA) utility function. We deduce the associated Hamilton-Jacobi-Bellman equation to construct the solution and the optimal trading strategy and verify optimality by showing that the value function is the unique constrained viscosity solution of the HJB equation. By means of a Laplace transform method, we show how to explicitly compute the value function and illustrate the method with the two- and three-states cases. This method is interesting in its own right and can be adapted in other applications involving hybrid systems and using other types of transforms with basic properties similar to the Laplace transform.
    Date: 2018–04
  19. By: del Río, Fernando
    Abstract: I develop a neoclassical growth model in which the government accumulates contestable social infrastructure. In this framework, both a more accountable and more fairness governance encourages governmental accumulation of social infrastructure which fosters productivity. According to the calibrated model, for a country in the lower decile of the distribution of the index of social infrastructure, improving governance fairness by one standard deviation increases, on average, social infrastructure by 84% and GDP per worker by around 38%. However, the quantitative impact of improving governance accountability on social infrastructure and productivity is negligible.
    Keywords: Governance, productivity, rent-seeking, social infrastructure.
    JEL: O10 O43 O47
    Date: 2018–04–16
  20. By: Philippe Bacchetta; Elena Perazzi
    Abstract: A monetary reform is submitted for vote to the Swiss people in 2018. The Sovereign Money Initiative proposes that all sight deposits should be controlled by the Swiss National Bank (SNB) and that the SNB could distribute its additional resources. While a sovereign money reform would clearly a ect the structure of the banking sector, it would also have macroeconomic implications, in particular because it transfers resources from banks to the central bank. The objective of this paper is to analyze these macroeconomic implications using a simple infinite-horizon open-economy model calibrated to the Swiss economy. While we consider several policy experiments, we find that there is a key trade-o between a reduction in distortionary labor taxes and an increase in the opportunity cost of holding money. However, in the proposed Swiss reform it is this latter cost that dominates and we find that the reform unambiguously lowers welfare.
    Date: 2018–04

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