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on Dynamic General Equilibrium |
| By: | Cipriani, Giam Pietro (University of Verona); Pascucci, Francesco (University of Verona) |
| Abstract: | We set up an overlapping generations model with endogenous fertility to study pensions policies in an ageing economy. We show that an increasing life expectancy may not be detrimental for the economy or the pension system itself. On the other hand, conventional policy measures, such as increasing the retirement age or changing the social security contribution rate could have undesired general equilibrium effects. In particular, both policies decrease capital per worker and might have negative effects on the fertility rate, thus exacerbating population ageing. |
| Keywords: | overlapping generations, pension policies, endogenous fertility, ageing |
| JEL: | H55 J13 J18 J26 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11511&r=dge |
| By: | William B. Peterman; Erick Sager |
| Abstract: | Public debt can be optimal in standard incomplete market models with infinitely lived agents, since the associated capital crowd-out induces a higher interest rate. The higher interest rate encourages individuals to save and, hence, better self-insure against idiosyncratic labor earnings risk. Even though individual savings behavior is a crucial determinant of the optimality of public debt, this class of economies abstracts from empirically observed life cycle savings patterns. Thus, this paper studies how incorporating a life cycle affects optimal public debt. We find that while the infinitely lived agent model's optimal policy is public debt equal to 24\% of output, the life cycle model's optimal policy is public savings equal to 61\% of output. Although public debt also encourages life cycle agents to hold more savings during their lifetimes, the act of accumulating this savings mitigates the potential welfare benefit. Moreover, public savings improves life cycle agents' welfare by encouraging a flatter allocation of consumption and leisure over their lifetimes. Accordingly, abstracting from the life cycle yields an optimal policy that reduces average welfare by more than 0.6% of expected lifetime consumption. Furthermore, ignoring the life cycle overstates the influence of wealth inequality on optimal policy, since optimal policy is far less sensitive to wealth inequality in the life cycle model than in the infinitely lived agent model. These results demonstrate that studying optimal debt policy in an infinitely lived agent model, which abstracts from the realism of a life cycle in order to render models more computationally tractable, is not without loss of generality. |
| Keywords: | Government debt ; Heterogeneous agents ; Incomplete markets ; Life cycle |
| JEL: | H6 E21 E6 |
| Date: | 2018–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-28&r=dge |
| By: | Acikgöz, Ömer; Hagedorn, Marcus; Holter, Hans; Wang, Yikai |
| Abstract: | In this paper we solve the dynamic optimal Ramsey taxation problem in a model with incomplete markets, where the government commits itself ex-ante to a time path of labor taxes, capital taxes and debt to maximize the discounted sum of agents' utility starting from today. Whereas the literature has bee limited mainly to studying policies that maximize steady-state welfare only, we instead characterize the optimal policy along the full transition path. We show theoretically that in the long run the capital stock satisfies the modified golden rule. More importantly, we prove that in contrast to complete markets economies, in incomplete markets economies the long run steady state resulting from an infinite sequence of optimal policy choices is independent of initial conditions. This result is not only of theoretical interest but moreover, enables us to compute the long-run optimum independently from the transition path such that a quantitative analysis becomes tractable Quantitatively we find, robustly across various calibrations, that in the long run the government debt-to-GDP ratio is high, capital is taxed at a low rate and labor income at a high rate when compared to current U.S. values. Along the optimal transition to the steady state, labor taxes initially are lowered, financed through issuing more debt and taxing capital income heavily, before they are eventually increased to their steady-state level. |
| Keywords: | Capital taxation; Dynamically Optimal Taxation; incomplete markets; Optimal Government Debt |
| JEL: | E62 H20 H60 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12952&r=dge |
| By: | Timm M. Prein (University of Konstanz, Department of Economics, Germany); Almuth Scholl (University of Konstanz, Department of Economics, Germany) |
| Abstract: | This paper develops a stochastic dynamic politico-economic model of sovereign debt to analyze the impact of bailouts on sovereign default risk and political turnover. We consider a small open economy in which the government has access to official loans conditional on the implementation of austerity policies. There is a two-party system in which both parties care about the population’s welfare but differ in an exogenous utility cost of default. Political turnover is the endogenous outcome of the individual voting behavior. In a quantitative exercise we apply the model to Greece and find that bailout episodes are characterized by an increased risk of political turnover. In the short run, stricter conditionality raises the risk of sovereign default because it reduces the participation rate in bailout programs. In the long run, however, stricter conditionality limits the accumulation of debt which lowers sovereign default risk. We show that the frequency of political turnover is U-shaped in the strength of conditionality. |
| Keywords: | sovereign default risk, political turnover, bailouts, conditionality, austerity |
| JEL: | E44 E62 F34 |
| Date: | 2018–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1804&r=dge |
| By: | Luca Brugnolini (Central Bank of Malta's Research Department); Luisa Corrado (DEF & CEIS,University of Rome "Tor Vergata") |
| Abstract: | We analyse the macroeconomic effects of a debt consolidation policy in the Euro Area mimicking the Fiscal Compact Rule (FCR). The rule requires the signatory states to target a debt-to-GDP ratio below 60%. Within the context of Dynamic Stochastic General Equilibrium models (DSGE), we augment a fully micro-founded New-Keynesian model with a parametric linear debt consolidation rule, and we analyse the effects on the main macroeconomic aggregates. To fully understand its implications on the economy, we study different debt consolidation scenarios, allowing the excess debt to be re-absorbed with different timings. We show that including a debt consolidation rule can exacerbate the effects of the shocks in the economy by imposing a constraint on the public debt process. Secondly, we note that the effect of loosening or tightening the rule in response to a shock is heterogeneous. Shocks hitting nominal variables (monetary policy shock) are not particularly sensitive. On the contrary, we prove that the same change has a more pronounced effect in case of shock hitting real variables (productivity and public spending shocks). Finally, we show that the macroeconomic framework worsens as a function of the rigidity of the debt consolidation rule. As a limiting case, we show that the effects on output, employment, real wages, inflation, and interest rates are sizable. |
| Keywords: | fiscal policy, debt consolidation, government spending, New-Keynesian, DSGE |
| JEL: | E10 E30 E62 |
| Date: | 2018–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:436&r=dge |
| By: | Jose Emilio Bosca; Rafael Domenech; Javier Ferri; Rodolfo Mendez-Marcano; Juan F. Rubio-Ramirez |
| 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. |
| Keywords: | Working Paper , Regional Analysis Spain , Spain |
| JEL: | E30 E32 E43 E51 E52 E62 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1808&r=dge |
| By: | Armel Ngami (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Thomas Seegmuller (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales) |
| Abstract: | This paper analyses the effect of a pay-as-you-go pension system on the evolution of capital and pollution, and on the efficiency of an environmental versus health policy. In an overlapping generations model (OLG), we introduce endogenous longevity that depends on pollution and health expenditures. Global dynamics may display multiple balanced growth paths (BGP). We show that by discouraging savings, a policy that promotes the pension system enlarges the environmental poverty trap. More surprisingly, the environmental policy has contrasted effects according to the significance of the pension system. If it has a low size, a raise of the environmental policy enlarges the environmental poverty trap and leads to a rise in capital over pollution at the highest stationary equilibrium. In contrast, in economies where intergenerational solidarity is well developed, capital over pollution decreases at the highest BGP. In such a case, the environmental policy does not necessarily lead to a better longevity and growth. |
| Keywords: | longevity,environment,health,pension system,growth,pollution |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01798710&r=dge |
| By: | Guangling Liu (Department of Economics, University of Stellenbosch); Thabang Molise (Department of Economics, University of Stellenbosch) |
| Abstract: | This paper develops a dynamic general equilibrium model with banking and a macroprudential authority, and studies the extent to which the Basel III bank capital regulation promotes financial and macroeconomic stability in the context of South African economy. The decomposition analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. Basel III has a pronounced impact on the financial sector compared to the real sector and is more effective in mitigating fluctuations in financial and business cycles when the economy is hit by financial shocks. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust capital requirement to changes in credit and output when implementing the counter-cyclical buffer. |
| Keywords: | Bank capital regulations, Financial stability, Counter-cyclical capital buffer, DSGE |
| JEL: | E44 E47 E58 G28 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers303&r=dge |
| By: | van Suntum, Ulrich |
| Abstract: | A simple OLG model is used to show that the natural interest rate is superior to the golden rule. This remains valid with public goods, provided these are financed in an appropriate way. In order to preserve the natural interest rate, the so-called helicopter money appears to be more appropriate than the normal credit money. Dynamic inefficiency cannot occur, if either land or neutral (helicopter) money is available as an alternative store of private wealth. Thus, the frequently proposed failure of OLG-models to satisfy the first fundamental theorem of welfare economics does not exist. The paper both generalizes and summarizes some key results from my recent book (van Suntum 2017). |
| JEL: | B22 D51 D90 E1 E4 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cawmdp:103&r=dge |
| By: | Giovanni Di Bartolomeo (University La Sapienza); Carolina Serpieri (European Commission - JRC) |
| Abstract: | This paper introduces model uncertainty into a behavioral New Keynesian DSGE framework and derives robust optimal monetary policies. We build a heterogeneous agents DSGE model, where a fraction of agents behave according to some forms of bounded rationality (boundedly rational agents), while the reminder operate on the basis of expectations that are corrected on average (rational agents). We consider two potential mechanisms of expectations formation to generate beliefs. The central bank observes the aggregate economic dynamics, but it ignores the fraction of boundedly rational agents and/or the mechanism they use to form their expectations. Non-Bayesian robust control techniques are then adopted to minimize a welfare loss derived from the second-order approximation of agents’ utilities. We account of model uncertainty considering both commitment and discretion regime. |
| Keywords: | robust techniques, optimal policy, New Keynesian DSGE models, bounded rationality. |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc111603&r=dge |
| By: | Duffie, Darrell (Stanford University); Qiao, Lei (Shanghai University of Finance and Economics); Sun, Yeneng (National University of Singapore) |
| Abstract: | We develop a general and unified model in which a continuum of agents conduct directed random searches for counterparties. Our results provide the first probabilistic foundation for static and dynamic models of directed search (including the matching-function approach) that are common in search-based models of financial markets, monetary theory, and labor economics. The agents' types are shown to be independent discrete-time Markov processes that incorporate the effects of random mutation, random matching with match-induced type changes, and with the potential for enduring partnerships that may have randomly timed break-ups. The multi-period cross-sectional distribution of types is shown to be deterministic and is calculated using the exact law of large numbers. |
| JEL: | C02 D83 E00 G10 J64 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:repec:ecl:stabus:3359&r=dge |
| By: | Hebert, Benjamin (Stanford University) |
| Abstract: | Regulations on financial intermediaries can create apparent arbitrage opportunities. Intermediaries are unable to fully exploit these opportunities due to regulation, and other agents are unable to exploit them at all due to limited participation. Does the existence of arbitrage opportunities imply that regulations are sub-optimal? No. I develop of general equilibrium model, with financial intermediaries and limited participation by other agents, in which a constrained-efficient allocation can be implemented with asset prices featuring arbitrage opportunities. Absent regulation, there would be no arbitrage; however, allocations would be constrained-inefficient, due to pecuniary externalities and limited market participation. Optimal policy creates arbitrage opportunities whose pattern across states of the world reflects these externalities. From financial data alone, we can construct perceived externalities that would rationalize the pattern of arbitrage observed in the data. By examining these perceived externalities, and comparing them to the stated goals of regulators, as embodied in the scenarios of the stress tests, we can ask whether regulations are having their intended effect. The answer, in recent data, is no. |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:repec:ecl:stabus:3632&r=dge |
| By: | Engin L. Altinoglu |
| Abstract: | I show that inter-firm lending plays an important role in business cycle fluctuations. I first build a tractable network model of the economy in which trade in intermediate goods is financed by supplier credit. In the model, a financial shock to one firm affects its ability to make payments to its suppliers. The credit linkages between firms propagate financial shocks, amplifying their aggregate effects by about 30 percent. To calibrate the model, I construct a proxy of inter-industry credit flows from firm- and industry-level data. I then estimate aggregate and idiosyncratic shocks to industries in the US and find that financial shocks are a prominent driver of cyclical fluctuations, accounting for two-thirds of the drop in industrial production during the Great Recession. Furthermore, idiosyncratic financial shocks to a few key industries can explain a considerable portion of these effects. In contrast, productivity shocks had a negligible impact during the recession. |
| Keywords: | Business cycles ; Credit network ; Financial frictions ; Great recession ; Input-output network ; Trade credit |
| JEL: | C32 C67 E23 E32 G10 |
| Date: | 2018–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-31&r=dge |
| By: | Joanna Tyrowicz (Institute for Labour Law and Industrial Relations in the European Union IAAEU), Trier University); Krzysztof Makarski (Warsaw School of Economics) |
| Abstract: | We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that, initially, in both types of pension system schemes the majority of welfare effects comes from adjustments in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result. |
| Keywords: | longevity, PAYG, retirement age, pension system reform, welfare |
| JEL: | C68 E21 J11 H55 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:iaa:dpaper:201804&r=dge |
| By: | George Economides (Athens University of Economics and Business, and CESifo); Anastasios Xepapadeas (Athens University of Economics and Business, University of Bologna) |
| Abstract: | We study monetary policy under climate change in order to answer the question of whether monetary policy should take into account the expected impacts of climate change. The setup is a new Keynesian dynamic stochastic general equilibrium model of a closed economy in which a climate module that interacts with the economy has been incorporated, and the monetary authorities follow a Taylor rule for the nominal interest rate. The model is solved numerically using common parameter values and fiscal data from the euro area. Our results, which are robust to a large number of sensitivity checks, suggest non-trivial implications for the conduct of monetary policy. |
| Keywords: | Climate change; monetary policy; new Keynesian model; Taylor rule |
| JEL: | E5 E1 Q5 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:247&r=dge |
| By: | Patrick Pintus (InSHS - CNRS - Institut des Sciences Humaines et Sociales - CNRS - INS1640, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Yi Wen (Federal Reserve Bank of St. Louis, School of Economics and Management, Tsinghua University); Xiaochuan Xing (Department of Economics, Yale University) |
| Abstract: | This paper stresses a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom in both home and foreign economies. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business-cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor’s intimate link to global financial markets. |
| Keywords: | world interest rate,international co-movement,self-fulfilling equilibria |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01797029&r=dge |
| By: | George Economides; Anastasios Xepapadeas |
| Abstract: | We study monetary policy under climate change in order to answer the question of whether monetary policy should take into account the expected impacts of climate change. The setup is a new Keynesian dynamic stochastic general equilibrium model of a closed economy in which a climate module that interacts with the economy has been incorporated, and the monetary authorities follow a Taylor rule for the nominal interest rate. The model is solved numerically using common parameter values and fiscal data from the euro area. Our results, which are robust to a large number of sensitivity checks, suggest non-trivial implications for the conduct of monetary policy. |
| Keywords: | climate change, monetary policy, new Keynesian model, Taylor rule |
| JEL: | E50 E10 Q50 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7021&r=dge |
| By: | Adam, Klaus; Woodford, Michael |
| Abstract: | We analytically characterize optimal monetary policy for a New Keynesian model with a housing sector. If one supposes that the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a "target criterion" that refers only to inflation and the output gap is optimal, as in the standard model without a housing sector. But when a policymaker seeks to choose a policy that is robust to potential departures of private sector expectations from model-consistent ones, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to "lean against" housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and similarly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between "fundamental" and "non-fundamental" movements in housing prices. |
| Keywords: | Asset price bubbles; Inflation targeting; leaning against the wind; optimal target criterion |
| JEL: | D81 D84 E52 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12937&r=dge |
| By: | Marcin Bielecki (Narodowy Bank Polski and University of Warsaw); Michał Brzoza-Brzezina (Narodowy Bank Polski and SGH Warsaw School of Economics); Marcin Kolasa (Narodowy Bank Polski and SGH Warsaw School of Economics) |
| Abstract: | The recent literature shows that demographic trends may affect the natural rate of interest (NRI), which is one of the key parameters affecting stabilization policies implemented by central banks. However, little is known about the quantitative impact of these processes on monetary policy, especially in the European context, despite persistently low fertility rates and an ongoing increase in longevity in many euro area economies. In this paper we develop a New Keynesian life-cycle model, and use it to assess the importance of population ageing for monetary policy. The model is fitted to euro area data and successfully matches the age profiles of consumption-savings decisions made by European households. It implies that demographic trends have contributed and are projected to continue to contribute significantly to the decline in the NRI, lowering it by more than 1.5 percentage points between 1980 and 2030. Despite being spread over a long time, the impact of ageing on the NRI may lead to a sizable and persistent deflationary bias if the monetary authority fails to account for this slow moving process in real time. We also show that, with the current level of the inflation target, demographic trends have already exacerbated the risk of hitting the lower bound (ZLB) and that the pressure is expected to continue. Delays in updating the NRI estimates by the central bank elevate the ZLB risk even further. |
| Keywords: | ageing, monetary policy, zero lower bound, life-cycle models |
| JEL: | E31 E52 J11 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:284&r=dge |
| By: | Jaccard, Ivan |
| Abstract: | This paper considers the implications of habit formation and financial frictions for the propagation of macroeconomic shocks. In a model that is capable of matching asset pricing moments, a short-lived shock that destroys a small fraction of the economy’s stock of pledgeable collateral generates a persistent recession, a stock market crash, and a flight-to-safety effect. This novel mechanism creates a tight link between the asset pricing implications of macroeconomic models and their ability to propagate and amplify the effects of macroeconomic shocks. JEL Classification: E32, E44, G10 |
| Keywords: | equity premium, Great Recession, liquidity constraints |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182150&r=dge |
| By: | Johanna Etner (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Natacha Raffin (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université, EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Thomas Seegmuller (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales) |
| Abstract: | Based on epidemiological evidence, we consider an economy where agents differ through their ability to procreate. Households with impaired fertility may incur health expenditures to increase their chances of parenthood. This health heterogeneity generates welfare inequalities that deserve to be ruled out. We explore three different criteria of social evaluation in the long-run: the utilitarian approach, which considers the well- being of all households, the ex-ante egalitarian criterion, which considers the expected well-being of the worst-off social group, and the ex-post egalitarian one, which only considers the realized well-being of the worst- off. In an overlapping generations model, we propose a set of economic instruments to decentralize each solution. To correct for the externality and inequalities, both a preventive (a taxation of capital) and a redistributive policy are required. |
| Keywords: | OLG model,optimal policy,egalitarianism,fairness,reproductive health |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01798983&r=dge |
| By: | Hintermaier, Thomas; Koeniger, Winfried |
| Abstract: | This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a liquid financial asset and illiquid housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across the analyzed countries, and across age groups within these countries. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission within the euro area. |
| Keywords: | European Household Portfolios, Consumption, Monetary Policy Transmission, International Comparative Finance, Housing |
| JEL: | D14 D31 E21 E43 G11 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2018:06&r=dge |
| By: | Pim B. Kastelein (University of Amsterdam); Ward E. Romp (University of Amsterdam, Netspar) |
| Abstract: | When the financial positions of pension funds worsen, regulations prescribe that pension funds reduce the gap between their assets (invested contributions) and their liabilities (accumulated pension promises). This paper quantifies the business cycle effects and distributional implications of various types of restoration policies. We extend a canonical New-Keynesian model with a tractable demographic structure and, as a novelty, a flexible pension fund framework. Fund participants accumulate real or nominal benefits and funding adequacy is restored by revaluing previously accumulated pension wealth (Defined Contribution) or changing the pension fund contribution rate on labour income (Defined Benefit). Generally, economies with Defined Contribution pension funds respond similarly to adverse capital quality shocks as economies without pension funds. Defined Benefit pension funds, however, distort labour supply decisions and exacerbate economic fluctuations. Retirees prefer Defined Benefit over Defined Contribution funds in case they face deficits, while the current and future working population prefers the opposite. |
| Keywords: | Pension Fund; Regulation; Business Cycles; Life cycle; New-Keynesian model |
| JEL: | J32 E32 D91 E21 |
| Date: | 2018–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20180053&r=dge |
| By: | Bletzinger, Tilman; von Thadden, Leopold |
| Abstract: | This paper develops a tractable model of a monetary union with a sound fiscal governance structure and shows how in such environment the design of monetary policy above and at the lower bound constraint on short-term interest rates can be linked to well-known findings from the literature dealing with single closed economies. The model adds a portfolio balance channel to a New Keynesian two-country model of a monetary union. If the monetary union is symmetric and the portfolio balance channel is not active, the model becomes isomorphic to the canonical New Keynesian three-equation economy in which central bank purchases of long-term debt (QE) at the lower bound are ineffective. If the portfolio balance channel is active, QE becomes effective and we prove that for sufficiently small shocks there exists an interest rate rule augmented by QE at the lower bound which replicates the equilibrium allocation and the welfare level of a hypothetically unconstrained economy. Shocks large enough to push the whole yield curve to the lower bound require, in addition, forward guidance. We generalise these results to an asymmetric monetary union and illustrate them through simulations, distinguishing between asymmetric shocks and asymmetric structures. In general, asymmetries give rise to current account imbalances which are, depending on the degree of financial integration, funded by private capital imports or through the central bank balance sheet channel. Moreover, our findings support that at the lower bound, as long as asymmetries between countries result from shocks, outcomes under an unconstrained policy rule can be replicated via a symmetric QE design. By contrast, asymmetric structures of the countries which matter for the transmission of monetary policy can translate into an asymmetric QE design. JEL Classification: E43, E52, E61, E63 |
| Keywords: | lower bound, monetary policy, monetary union, quantitative easing |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182156&r=dge |
| By: | John Bailey Jones; Mariacristina De Nardi; Eric French; Rory McGee; Justin Kirschner |
| Abstract: | Using dynamic models of health, mortality, and out-of-pocket medical spending (both inclusive and net of Medicaid payments), we estimate the distribution of lifetime medical spending that retired U.S. households face over the remainder of their lives. We find that at age 70, households will on average incur $122,000 in medical spending, including Medicaid payments, over their remaining lives. At the top tail, 5 percent of households will incur more than $300,000, and 1 percent of households will incur over $600,000 in medical spending inclusive of Medicaid. The level and the dispersion of this spending diminish only slowly with age. Although permanent income, initial health, and initial marital status have large effects on this spending, much of the dispersion in lifetime spending is due to events realized later in life. Medicaid covers the majority of the lifetime costs of the poorest households and significantly reduces their risk. |
| JEL: | D1 D14 E02 E2 H31 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24599&r=dge |
| By: | Julian Diaz Saavedra (Department of Economic Theory and Economic History, University of Granada.) |
| Abstract: | The 2013 Spanish Pension Reform, aimed at guaranteeing the nancial sustainability of the system, introduced, among other measures, the Pension Revaluation Index (PRI), which uncouples annual pension updates from the Consumer Price Index (CPI) increases and makes the annual rise in all pensions conditional upon the system's revenue and expenditure being balanced, with ceilings and oors set in place. This automatic adjustment mechanism, however, has posed serious concerns about future pension adequacy, this being the degree of poverty alleviation and consumption smoothing that the pensions system provides to retirees, due to the expected large future reductions in the real value of the average pension. In this paper, we use a general equilibrium life cycle model, calibrated to micro and macro data in Spain, to study the scal and welfare consequences of three options for increasing pension generosity in Spain; (i) disability and minimum pensions are again fully indexed with the CPI; (ii) minimum and lower value pensions are fully indexed with the CPI; and (iii) returning to full price indexation of all Spanish pensions. While these three reforms increase, on average, pension adequacy, the tax increases needed to nance the higher future pension expenditure di er signi cantly. Moreover, most current cohorts prefer returning to the full price indexation of all Spanish pensions, but future cohorts prefer that only disability and minimum pensions be fully indexed with the CPI. |
| Keywords: | Computable general equilibrium, social security reform, retirement. |
| JEL: | C68 H55 J26 |
| Date: | 2018–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:18/03&r=dge |
| By: | Louphou COULIBALY |
| Abstract: | In a model featuring sudden stops and pecuniary externalities, I show that the ability to use capital controls has radical implications for the conduct of monetary policy. Absent capital controls, following an inflation targeting regime is nearly optimal. However, if the central bank lacks commitment, it will follow a monetary policy that is excessively procyclical and not desirable from an ex ante welfare prospective: it increases overall indebtedness as well as the frequency of financial crisis and reduces social welfare relative to an inflation targeting regime. Access to capital controls can correct this monetary policy bias. With capital controls, relative to an inflation targeting regime, the time-consistent regime reduces both the frequency and magnitude of crises, and increases social welfare. This paper rationalizes the procyclicality of the monetary policy observed in many emerging market economies. |
| Keywords: | financial crises, monetary policy, capital controls, time consistency, aggregate demand externality, pecuniary externality |
| JEL: | E44 E52 F41 G01 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montec:06-2018&r=dge |
| By: | David M. Arseneau; Brendan Epstein |
| Abstract: | This paper presents a model in which mismatch employment arises in a constrained efficient equilibrium. In the decentralized economy, however, mismatch gives rise to a congestion externality whereby heterogeneous job seekers fail to internalize how their individual actions affect the labor market outcomes of competitors in a common unemployment pool. We provide an analytic characterization of this distortion, assess the distributional nature of the associated welfare effects, and relate it to the relative productivity of low- and high-skilled workers competing for similar jobs. |
| Keywords: | Competitive search equilibrium ; Crowding in/out ; Labor market frictions ; Skill-mismatch |
| JEL: | E24 J31 J64 |
| Date: | 2018–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-37&r=dge |
| By: | Juergen Jung; Chung Tran |
| Abstract: | We study optimal income tax progressivity in an environment where individuals are exposed to idiosyncratic income and health risks over the lifecycle. Our results, based on a calibration for the US economy, indicate that the presence of health risk combined with incomplete insurance markets amplies the social insurance role of progressive income taxes. The government is required to set higher optimal levels of tax progressivity in order to provide more social insurance for unhealthy low income individuals who have limited access to health insurance. The optimal progressive income tax system includes a tax break for income below $36; 400 and high marginal tax rates of over 50 percent for income above $200; 000: The tax progressivity (Suits) indexa Gini coecient for income tax contributions by incomeof the optimal tax system is around 0:53, compared to 0:17 in the benchmark tax system. Yet, the optimal tax system in our model is more progressive than the optimal tax systems in models abstracting from health risk (e.g., Conesa and Krueger (2006) and Heathcote, Storesletten and Violante (2017)). Importantly, the optimal level of tax progressivity is strongly aected by the design of the health insurance system. When health expenditure risk is reduced or removed from the model, the optimal tax system becomes less progressive and thus more similar to the optimal progressivity levels reported in the previous literature. |
| Keywords: | Health and income risks, Inequality, Social insurance, Tax progressivity, Suits index, Optimal taxation, General equilibrium. |
| JEL: | E62 H24 I13 D52 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2018-662&r=dge |