nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒06‒11
seventeen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity By Dolado, Juan J.; Motyovszki, Gergö; Pappa, Evi
  2. Financial and Fiscal Shocks in the Great Recession and Recovery of the Spanish Economy By J. E. Boscá; R. Doménech; J. Ferri; R. Méndez; J. F. Rubio-Ramírez
  3. Marriage, Labor Supply, and Home Production By Marion Goussé; Nicolas Jacquemet; Jean-Marc Robin
  4. Inheritance taxation in a model with intergenerational time transfers By Pascal Belan; Erwan Moussault
  5. Limited Risk Sharing and International Equity Returns By Zhang, Shaojun
  6. Technology and the Two Margins of Labor Adjustment: A New Keynesian Perspective By Francesco Furlanetto; Tommy Sveen; Lutz Weinke
  7. Debt-Ridden Borrowers and Economic Slowdown (Latest version) By Keiichiro Kobayashi; Daichi Shirai
  8. Life-cycle Wealth Accumulation and Consumption Insurance By Claudio Campanale; Marcello Sartarelli
  9. Defense spending and fiscal multipliers: it's all in the variance By Jesús Rodríguez-López; Mario Solís-García
  10. Capital Income Taxation, Economic Growth, and the Politics of Public Education By Ono, Tetsuo; Uchida, Yuki
  11. Labor Market Duality in Korea By Johanna Schauer
  12. Optimal Consumption in the Stochastic Ramsey Problem without Boundedness Constraints By Yu-Jui Huang; Saeed Khalili
  13. Savings, asset scarcity, and monetary policy By Altermatt, Lukas
  14. Flexibility and frictions in multisector models By Jorge Miranda-Pinto; Eric R. Young
  15. Cross-Border Transmission of Fiscal Shocks: The Role of Monetary Conditions By Patrick Blagrave; Giang Ho; Ksenia Koloskova; Esteban Vesperoni
  16. Asymmetric Inflation Expectations, Downward Rigidity of Wages, and Asymmetric Business Cycles By Baqaee, David Rezza
  17. Is there always a Trade-off between Insurance and Incentives? The Case of Unemployment with Subsistence Constraints By Juliana Mesén Vargas; Bruno Van der Linden

  1. By: Dolado, Juan J. (European University Institute); Motyovszki, Gergö (European University Institute); Pappa, Evi (European University Institute)
    Abstract: 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. The increase in labor demand driven by such a monetary shock leads to larger wage increases for high-skilled workers than for low-skilled workers, due to the smaller matching frictions of the former (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: monetary policy, search and matching, capital-skill complementarity, inequality
    JEL: E24 E25 E52 J64
    Date: 2018–04
  2. By: J. E. Boscá; R. Doménech; J. Ferri; R. Méndez; J. F. Rubio-Ramírez
    Abstract: In this paper we develop and estimate a new Bayesian DSGE model for the Spanish economy that has been designed to evaluate different structural reforms. The small open economy model incorporates a banking sector, consumers and entrepreneurs who accumulate debt, and a rich fiscal structure and monopolistic competition in products and labor markets, for a country in a currency union, with no independent monetary policy. The model can be used to evaluate ex-ante and ex-post policies and structural reforms and to decompose the evolution of macroeconomic aggregates according to different shocks. In particular, we estimate the contribution of financial and fiscal shocks to both the crisis of the Great Recession and the recovery of the Spanish economy.
    Date: 2018–06
  3. By: Marion Goussé (Département d'Economique, Université Laval - Université Laval); Nicolas Jacquemet (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne); 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: structural estimation,Search-matching,bargaining,assortative mating,collective models,time uses,social norms,gender identity
    Date: 2017
  4. By: Pascal Belan; Erwan Moussault (Université de Cergy-Pontoise, THEMA)
    Abstract: We consider a two-period overlapping generation model with rational altruism a la Barro, where time transfers and bequests are available to parents. Starting from a steady state where public spendings are nanced through taxation on capital income and labor income, we analyze a tax reform that consists in a shift of the tax burden from capital income tax towards inheritance tax. In the standard Barro model with no time transfer and inelastic labor supply, such a policy decreases steady-state welfare. In our setting, inheritance tax modi es parent's trade-o between time transfers and bequests. We identify situations where the tax reform increases welfare for all generations. Welfare improvement mainly depends on the magnitude of the e ect of higher time transfers on the labor supply of the young.
    Keywords: family transfers, altruism, time transfers, inheritance tax.
    JEL: D64 H22 H24 J22
    Date: 2018
  5. By: Zhang, Shaojun (Ohio State University)
    Abstract: I study international risk sharing with limited stock market participation and preference heterogeneity in each country. An incomplete market model jointly generates high cross-country equity return correlation and low aggregate consumption growth correlation, while matching salient features of asset prices. The model further generates several implications that I show in the data: 1) The stockholders' cross-country consumption growth correlation is considerably higher than that of the aggregate; 2) International bond flows help agents share the labor income risk only, while the country-specific financial income fluctuations are negatively correlated with equity inflows only; 3) The stockholders' consumption risk is priced in both the home and foreign equity markets. I show that the financial integration significantly improves the stockholders' welfare without benefiting the non-stockholders.
    JEL: F30 F41 F44 G11 G12 G15
    Date: 2016–11
  6. By: Francesco Furlanetto (Norges Bank); Tommy Sveen (BI Norwegian Business School); Lutz Weinke (Humboldt-Universität zu Berlin)
    Abstract: Canova et al. (2010 and 2012) estimate the dynamic response of labor market variables to technological shocks. They show that investment-specifi?c shocks imply almost exclusively an adjustment along the intensive margin (i.e., hours worked), whereas for neutral shocks the largest share of the adjustment takes place along the extensive margin (i.e., employment). In this paper we develop a New Keynesian model featuring capital accumulation, two margins of labor adjustment and a hiring cost. The model is used to analyze a novel economic mechanism to explain that evidence.
    Keywords: Technological Shocks, Sticky Prices, Labor Market
    JEL: E22 E24 E32
    Date: 2018–05–15
  7. By: Keiichiro Kobayashi; Daichi Shirai
    Abstract: Economic growth slows for an extended period after a financial crisis. We construct a model in which the one-time buildup of debt can depress the economy persistently even when there is no shock on financial technology. We consider the debt dynamics of a firm under an endogenous borrowing constraint. When the initial debt is large, the borrowing constraint binds tight and production is inefficient for an extended period. A firm is called debt-ridden when it owes the maximum sustainable amount of debt. A debt-ridden firm pays all income every period as the interest payment on the debt. A noticeable result in the deterministic case is that a debt-ridden firm continues inefficient production permanently. Further, if the initial debt exceeds a certain threshold, the firm chooses to increase borrowing and become debt-ridden intentionally. The emergence of a substantial number of debt-ridden firms lowers economic growth persistently by reducing the growth rate of aggregate productivity. As lenders have no incentive to reduce debt, a policy intervention that provides debtridden borrowers with relief from excessive debt may thus be necessary to restore economic growth.
    Date: 2018–01
  8. By: Claudio Campanale (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Marcello Sartarelli (Departamento de Fundamentos del Analisis Economico, Universidad de Alicante, Spain.)
    Abstract: Households appear to smooth consumption in the face of income shocks much more than implied by life-cycle versions of the standard incomplete market model under reference calibrations. In the current paper we explore in detail the role played by the life-cycle profile of wealth accumulation. We show that a standard model parameterized to match the latter can rationalize between 83 and more than 97 percent of the consumption insurance against permanent earnings shocks empirically estimated by Blundell, Pistaferri and Preston (2008), depending on the tightness of the borrowing limit.
    Keywords: Precautionary savings, Epstein-Zin, Consumption insurance coefficients, Life-cycle.
    JEL: E21
    Date: 2018–05
  9. By: Jesús Rodríguez-López (U. Pablo de Olavide); Mario Solís-García (Macalester College, St. Paul, MN(USA))
    Abstract: We provide estimates of U.S. government expenditure multipliers for defense and non-defense spending over 1939-2014, using a fairly standard DSGE model that includes anticipated military spending changes ("war news shocks"), and find the following. First, our model's war news shocks compare favorably to Ramey's (2011) narrative-based "defense news" shocks. Second, war news shocks have little effect on model variables regardless of the period under examination. Unanticipated military expenditure accounts for substantial movements in output, but only when observations from 1939 to 1954 are considered. Apart from that, movements in output are entirely driven by total factor productivity shocks. Third, our structural model can generate defense expenditure multipliers above unity under two conditions: (i) the multiplier is calculated using the peak of the impulse-response function and (ii) a large number of observations before and up to the Korean War are included. When multipliers are calculated according to Mountford and Uhlig's (2009) present-value definition, they never exceed unity, regardless of the sample under analysis.
    Keywords: Business cycles, news shocks, military expenditure, government multipliers.
    JEL: E32 E62 H56
    Date: 2018–05
  10. By: Ono, Tetsuo; Uchida, Yuki
    Abstract: This study considers the politics of public education and its impacts on economic growth and welfare across generations. Public education is funded by taxing the labor income of the working generation and capital income of the retired. We employ probabilistic voting to demonstrate the politics of taxes and expenditure and show that aging results in a shift of the tax burden from the old to the young and a slowdown of economic growth. We then consider three alternative constraints that limit the choice of taxes and/or expenditure: a minimum level of public education expenditure, an upper limit of the capital income tax rate, and a combination of the two. These constraints all create a trade-off between current and future generations in terms of welfare.
    Keywords: Public education, Economic growth, Capital income tax, Political equilibrium
    JEL: D70 E24 H52
    Date: 2018–02–20
  11. By: Johanna Schauer
    Abstract: Labor market duality is a complex and critical issue for many countries that can lower productivity, contribute to inequality and result in negative externalities. In this paper, I study duality in the Korean labor market and analyze its sources and potential policy options. I find that employment protection legislations and large productivity differentials are the key drivers of Korea’s duality. In addition, applying a general equilibrium search-and-matching model and calibrating it to the Korean economy, I show that well-calibrated flexicurity policies can significantly reduce duality and inequality and raise welfare and productivity. Notably, the introduction of all three pillars—flexiblity, a strong safety net and active labor market policies—is critical for its success. If only one pillar is introduced it can result in negative side-effects and might not reduce duality.
    Date: 2018–06–01
  12. By: Yu-Jui Huang; Saeed Khalili
    Abstract: This paper investigates optimal consumption in the stochastic Ramsey problem with the Cobb-Douglas production function. Contrary to previous studies, we allow for general consumption processes, without any a priori boundedness constraint. The associated value function is characterized as the unique classical solution to a nonlinear elliptic equation, among an appropriate class of functions. An optimal consumption process, expressed in terms of the value function, is in a feedback form of the state process. The characterization of the value function relies on constructing a suitable sequence of approximating functions and employing viscosity solutions techniques. The derivation of the optimal consumption process involves a mixture of probabilistic arguments concerning the explosion and pathwise uniqueness of the controlled state process.
    Date: 2018–05
  13. By: Altermatt, Lukas (University of Basel)
    Abstract: This paper analyzes optimal monetary and fiscal policy in a model where money and savings are essential and asset markets matter. The model is able to match some stylized facts about the correlation of real interest rates and stock price-dividend ratios. The results show that fiscal policy can improve welfare by increasing the amount of outstanding government debt. If the fiscal authority is not willing or able to increase debt, the monetary authority can improve welfare of current generations by reacting procyclically to asset return shocks; however, this policy affects welfare of future generations if it is not coordinated with fiscal policy measures. The model also shows that policies like QE reduce welfare of future generations.
    Keywords: New monetarism, overlapping generations, zero lower bound, optimal stabilization
    JEL: E43 E44 E52 G12 G18
    Date: 2018–05–07
  14. By: Jorge Miranda-Pinto; Eric R. Young
    Abstract: This paper documents two facts: (i) elasticities of substitution in production vary significantly across sectors, with manufacturing sectors being generally less flexible than service sectors, and (ii) during the Great Recession the rise in bond spreads varied systematically with these elasticities. Specifically, more flexible sectors paid lower spreads during the Great Recession. Moreover, among the less-flexible manufacturing sectors, sectors with relatively high flexibility and high debt saw their spreads rise less than average, while among the more-flexible service sectors the sectors with relatively high flexibility and high debt saw their spreads rise more. We interpret these results using a simple two-sector model with working capital constraints, and show that the model replicates these observations if manufacturing sectors face constraints on their purchases of intermediates while services face constraints on their purchases of labor/capital. The dynamics of intermediate prices and quantities support our results, as does a quantitative investigation of a 62-sector version of the US economy.
    Date: 2018–05
  15. By: Patrick Blagrave; Giang Ho; Ksenia Koloskova; Esteban Vesperoni
    Abstract: Fiscal stimulus was widely advocated during the global crisis, a period characterized by monetary policy constrained by the effective lower bound (ELB) in many countries, in part because of expected positive spillovers. Standard New Keynesian models predict the cross-border transmission of fiscal shocks is stronger when monetary policy is constrained in recipients. However, the empirical evidence is scarce. This paper bridges this gap by looking at the impact of fiscal shocks in systemic (source) economies on output and demand components in a large group of (recipient) countries, under different monetary policy conditions. Empirical results are compared to simulations with a state-of-the-art estimated open-economy New Keynesian model. Our results corroborate model predictions, finding larger spillovers when recipients are at the ELB, driven by stronger responses of investment and consumption relative to normal times
    Date: 2018–05–09
  16. By: Baqaee, David Rezza
    Abstract: This paper shows that household expectations of the inflation rate are more responsive to inflationary news than to disinflationary news. This asymmetry in inflation expectations can be a source of downward nominal wage rigidity, since workers expectations adjust more quickly to inflationary shocks than disinflationary shocks. I embed asymmetric beliefs into a general equilibrium model and show that, in such a model, monetary policy has asymmetric effects on employment, output, and wage inflation consistent with the data. I microfound asymmetric household expectations using ambiguity-aversion: households, who do not know the quality of their information, overweight inflationary news since it reduces their purchasing power, and underweight deflationary news since it increases their purchasing power. Although wages are downwardly rigid in this environment, monetary policy need not have a bias towards using inflation to grease the wheels of the labor market.
    Date: 2018–05
  17. By: Juliana Mesén Vargas; Bruno Van der Linden
    Abstract: This article analyzes the behavioral effects of unemployment benefits (UB) and it characterizes their optimal level when jobless people, who can carry out a subsistence activity, only survive if they have access to a minimum consumption level. Our model shows that if the level of UB is low enough, increasing its level or providing liquidity to the agent can decrease the duration in unemployment. Extensive numerical simulations indicate that the relationship between the level of the benefits and the probability of finding a formal job is frequently inverse U-shaped. We show that rewriting the insurance gain of the Baily-Chetty formula in terms of sufficient statistics requires specific modeling assumptions. The optimal replacement rate is generally higher than when subsistence is ignored.
    Keywords: liquidity effect, scarcity, monetary costs, optimal insurance
    JEL: D91 H21 J64 J65
    Date: 2018

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