nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒07‒09
24 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Uncertainty-dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation By Efrem Castelnuovo; Giovanni Pellegrino
  2. Capital Requirements, Risk-Taking and Welfare in a Growing Economy By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  3. Housing Taxation and Financial Intermediation By Hamed Ghiaie; Jean-François Rouillard
  4. Nonlinear household earnings dynamics, self-insurance, and welfare By Mariacristina De Nardi; Giulio Fella
  5. The Role of Energy Prices in the Great Recession - A Two-Sector Model with Unfiltered Data By Aminu, Nasir; Meenagh, David; Minford, Patrick
  6. Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models By Aguiar, Mark; Amador, Manuel
  7. Sovereign Default in a Monetary Union By de Ferra, Sergio; Romei, Federica
  8. Asymmetric monetary policy responses and the effects of a rise in the inflation target By Benjamín García
  9. Evolution of Modern Business Cycles: Accounting for the Great Recession By Kehoe, Patrick J.; Midrigan, Virgiliu; Pastorino, Elena
  10. Transmission of Monetary Policy with Heterogeneity in Household Portfolios By Ralph Luetticke
  11. Balance sheets, exchange rates, and international monetary spillovers By Akinci, Ozge; Queralto, Albert
  12. Testing DSGE Models by indirect inference: a survey of recent findings By Meenagh, David; Minford, Patrick; Wickens, Michael; Xu, Yongdeng
  13. International confidence spillovers and business cycles in small open economies By Michał Brzoza-Brzezina; Jacek Kotłowski
  14. Targeting financial stability: macroprudential or monetary policy? By Aikman, David; Giese, Julia; Kapadia, Sujit; McLeay, Michael
  15. Wealth Preference and Rational Bubbles By Jean-Baptiste Michau; Yoshiyasu Ono; Matthias Schlegl
  16. Fiscal regimes and the (non)stationarity of debt By Hollmayr, Josef
  17. Economic Shocks and Internal Migration By Monras, Joan
  18. Reputation and Sovereign Default By Amador, Manuel; Phelan, Christopher
  19. Un modelo estocástico de equilibrio general de una economía pequeña y abierta para evaluar el desempeño de la política fiscal y monetaria: el caso mexicano 1990-2015 By Hernández-Ramos, Lesdy Natalie; Venegas-Martínez, Francisco
  20. Bank runs, prudential tools and social welfare in a global game general equilibrium model By Daisuke, Ikeda
  21. Equilibrium wage rigidity in directed search By Gabriele Camera; Jaehong Kim
  22. Uncertainty and economic activity: a multi-country perspective By Cesa-Bianchi, Ambrogio; Pesaran, M Hashem; Rebucci, Alessandro
  23. Debunking the Granular Origins of Aggregate Fluctuations: From Real Business Cycles back to Keynes By Giovanni Dosi; Mauro Napoletano; Andrea Roventini; Tania Treibich
  24. Optimal proportional reinsurance and investment for stochastic factor models By Matteo Brachetta; Claudia Ceci

  1. By: Efrem Castelnuovo (University of Padova); Giovanni Pellegrino (University of Melbourne)
    Abstract: We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We Â…find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE modelÂ’s ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring fiÂ…rm-speciÂ…c capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.
    Keywords: Monetary policy shocks, uncertainty, Threshold VAR, medium scale DSGE framework, minimum-distance estimation
    JEL: C22 E32 E52
    Date: 2018–06
  2. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.
    Keywords: Capital Requirements, Bank risk-taking, Investment, Financial Stability, Economic Growth, Capital Goods, Financial Regulation, Financial Intermediaries, Financial Markets, risky investments, financial stability, financial regulation
    JEL: O41 G28 E44
    Date: 2017–03
  3. By: Hamed Ghiaie (Département d'économique, Université de Cergy-Pontoise); Jean-François Rouillard (Département d'économique, Université de Sherbrooke)
    Abstract: Through the lens of a multi-agent dynamic general equilibrium model, we examine the effects of four permanent changes in housing taxes and deductions on macroeconomic aggregates and welfare. Our main result is that the presence of borrowing-constrained bankers dampen the negative consequences of housing taxation on output. The long-run tax multipliers found range from -1.02 to -0.6. The reduction in the deduction of mortgage interest payments delivers the lowest multiplier. We also implement revenue-neutral tax reforms and find that the repeal of mortgage deductibility is the only policy that generates gains in output.
    Keywords: Housing taxation, banking, dynamic general equilibrium.
    JEL: E62 G28 H24 R38
    Date: 2018–01
  4. By: Mariacristina De Nardi (UCL, Federal Reserve Bank of Chicago, IFS, CEPR, and NBER); Giulio Fella (Queen Mary University of London, CFM, and IFS)
    Abstract: Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two processes for household, post-tax earnings in a standard life-cycle model: a canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age). Allowing for richer earnings dynamics implies a substantially better t of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution.
    Keywords: Earnings risk, savings, consumption, inequality, life cycle
    JEL: D14 D31 E21 J31
    Date: 2018–06–15
  5. By: Aminu, Nasir (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: We investigate the role of energy shocks during the Great Recession. We study the behaviour of the UK energy and non-energy intensive sectors firms in a real business cycle (RBC) model using unfiltered data. The model is econometrically estimated and tested by indirect inference. Output contraction during the Great Recession was largely caused by energy price and sector-specific productivity shocks, all of which are non-stationary and hence tend to dominate the sample variance decomposition. We also found that the channel by which the energy price shock reduces output in the model is via the terms of trade: these fall permanently when world energy prices increase and as substitutes for energy inputs are strictly limited there are few reactions via production channels. Therefore, there is no other way to balance the deteriorating current account than through lower domestic absorption.
    JEL: E
    Date: 2018–06
  6. By: Aguiar, Mark (Princeton University); Amador, Manuel (Federal Reserve Bank of Minneapolis)
    Abstract: We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are: (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default; both are realistic and standard assumptions in the quantitative literature. The multiplicity is dynamic and stems from the self-fulfilling beliefs of how future creditors will price bonds; long maturity bonds are therefore a crucial component of the multiplicity. We introduce a third party with deep pockets to discuss the policy implications of this source of multiplicity and identify the potentially perverse consequences of traditional “lender of last resort” policies.
    Keywords: Sovereign debt; Self-fulfilling debt crises; Debt dilution; Multiple equilibria
    JEL: F34
    Date: 2018–05–30
  7. By: de Ferra, Sergio; Romei, Federica
    Abstract: In the aftermath of the global fi nancial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy, may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates.
    Keywords: Heterogeneous Countries; monetary union; sovereign default; zero lower bound
    JEL: F34 F42 H63
    Date: 2018–06
  8. By: Benjamín García
    Abstract: The effective lower bound (ELB) on interest rates introduces an explicit non-linearity for feasible monetary policy paths: interest rates cannot go below a certain rate. In a forward looking environment, the ELB can affect the monetary policy decisions not only when the bound is reached, but also when there is a possibility that the bound may be reached in the future. In this context, as a recommendation for monetary policy in a low-inflation environment, Reifschneider and Williams (2002 FOMC) propose an asymmetric Taylor Rule with a threshold level that automatically drives the interest rate to zero whenever they fall below one percent. I test the hypothesis that the Federal Reserve has behaved in a manner consistent with Reifschneider and Williams’ advice, finding evidence of a negative correlation between the level of the interest rate and the strength of the monetary policy response. Using an estimated nonlinear DSGE model, I show that a monetary policy which act symmetrically and asymmetrically can have significantly different consequences. In particular, I study the relevance of this behavior for the analysis of a permanent rise of the inflation target.
    Date: 2018–06
  9. By: Kehoe, Patrick J. (Federal Reserve Bank of Minneapolis); Midrigan, Virgiliu (New York University); Pastorino, Elena (Federal Reserve Bank of Minneapolis)
    Abstract: Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States.
    Keywords: New Keynesian models; Financial frictions; External validation
    JEL: E13 E32 E52 E61
    Date: 2018–06–14
  10. By: Ralph Luetticke (Centre for Macroeconomics (CFM); University College London (UCL))
    Abstract: Monetary policy affects both intertemporal consumption choices and portfolio choices between liquid and illiquid assets. The monetary transmission, in turn, depends on the distribution of marginal propensities to consume and invest. This paper assesses the importance of heterogeneity in these propensities for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different degrees of liquidity. Liquidity-constrained households have high propensities to consume but low propensities to invest, which makes consumption more and investment less responsive to monetary shocks compared to complete markets. Redistribution through earnings heterogeneity and the Fisher channel from unexpected inflation further amplifies the consumption response but dampens the investment response.
    Keywords: Monetary policy, Heterogeneous agents, General equilibrium
    JEL: E21 E32 E52
    Date: 2018–06
  11. By: Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Federal Reserve Board)
    Abstract: We use a two-country New Keynesian model with balance sheet constraints to investigate the magnitude of international spillovers of U.S. monetary policy. Home borrowers obtain funds from domestic households in domestic currency, as well as from residents of the foreign economy (the United States) in dollars. We assume agency frictions are more severe for foreign debt than for domestic deposits. As a consequence, a deterioration in domestic borrowers’ balance sheets induces a rise in the home currency’s premium and an exchange rate depreciation. We use the model to investigate how international monetary spillovers are affected by the degree of currency mismatches in balance sheets, and whether the latter make it desirable for domestic policy to target the nominal exchange rate. We find that the magnitude of spillovers is significantly enhanced by the degree of currency mismatches. Our findings also suggest that using monetary policy to stabilize the exchange rate is not necessarily more desirable with greater balance sheet mismatches and may actually exacerbate short-run exchange rate volatility.
    Keywords: financial intermediation; U.S. monetary policy spillovers; currency premium; uncovered interest rate parity condition
    JEL: E32 E44 F41
    Date: 2018–06–01
  12. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Wickens, Michael (Cardiff Business School); Xu, Yongdeng (Cardiff Business School)
    Abstract: We review recent findings in the application of Indirect Inference to DSGE models. We show that researchers should tailor the power of their test to the model under investigation in order to achieve a balance between high power and model tractability; this will involve choosing only a limited number of variables on whose behaviour they should focus. Also recent work reveals that it makes little difference which these variables are or how their behaviour is measured whether via A VAR, IRFs or Moments. We also review identification issues and whether alternative evaluation methods such as forecasting or Likelihood ratio tests are potentially helpful.
    Keywords: Pseudo-true inference, DSGE models, Indirect Inference; Wald tests, Likelihood Ratio tests; robustness
    JEL: C12 C32 C52 E1
    Date: 2018–06
  13. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Jacek Kotłowski (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: This paper draws from two observations in the literature. First, that shocks to entrepreneur or household confidence matter for economic outcomes. Second, that it is hard to explain the extent of cyclical comovement between economies taking into account their trade links only. We check empirically to what extent confidence fluctuations matter for business cycles and in particular for their comovement between economies. We focus on a large (euro area) and a small, nearby economy (Poland). Our results show that confidence fluctuations account for approximately 40% of business cycle fluctuations in the euro area. Spillovers of confidence shocks are also large. Our main finding is that the their direct impact (i.e. not via trade but through the cross-border spread of news and business sentiment) accounts for almost 40% of business cycle fluctuations in Poland.
    Keywords: International spillovers, animal spirits, sentiments, business cycle
    JEL: C32 E32 F44
    Date: 2018
  14. By: Aikman, David (Bank of England); Giese, Julia (Bank of England); Kapadia, Sujit (European Central Bank); McLeay, Michael (Bank of England)
    Abstract: This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results.
    Keywords: Macroprudential; monetary policy; financial stability; capital buffer; financial crises; credit boom
    JEL: E52 E58 G01 G28
    Date: 2018–06–08
  15. By: Jean-Baptiste Michau; Yoshiyasu Ono; Matthias Schlegl
    Abstract: We consider a neoclassical economy where households derive utility from holding wealth. We show that, under some conditions, there can be rational bubbles. Hence, we provide a microfoundation for bubbles that relies on a frictionless infinite-horizon economy without any heterogeneity across households. While our bubbly equilibria are very similar to those obtained by Tirole (1985) in an overlapping generation economy, the underlying economics is different. Turning to public debt, we show that Ponzi schemes can be sustainable. Hence, in general, the limit on the accumulation of public debt by the government is not given by its no-Ponzi condition but, instead, by the representative household's transversality condition. The Ricardian equivalence must hold in any of our equilibria. Finally, in the presence of money, the real equilibrium structure of the economy remains unchanged. We carefully investigate the effects of helicopter drops of money on the possibility of Ponzi schemes and of speculative hyperinflation or deflation.
    Date: 2018–06
  16. By: Hollmayr, Josef
    Abstract: This paper analyzes the sustainability of fiscal debt contingent on fiscal policy operating in two fiscal regimes. The first regime is characterized by active policy (not reacting to debt) and the other by passive fiscal policy (reacting to debt). The average duration for which either regime can be pursued in order to arrive at a long-run stable solution is dependent on the steady-state debt-to-GDP ratio and thus determines the cutoff point beyond which debt is non-stationary. We find that the longer an active policy regime is in force or, equivalently, the more likely fiscal policy is to remain in this regime, the lower the steady state debt-to-GDP ratio must be. This has repercussions for the overall business cycle, implying a higher volatility of inflation and output the longer fiscal policy is active for any given equilibrium debt-to-GDP level. Using the Markov-switching DSGE-model as the data generating process it is possible to apply the test by Bohn (1998) and find that it is prone to type 2 errors.
    Keywords: DSGE,Markov-Switching,Fiscal Policy,Debt Sustainability
    JEL: C62 E61 E62
    Date: 2018
  17. By: Monras, Joan
    Abstract: Internal migration can respond to local shocks through either changes in in- or out-migration rates. This paper documents that most of the response of internal migration is accounted for by variation in in-migration. I develop and estimate a parsimonious general equilibrium dynamic spatial model around this fact. I then use the model to evaluate the speed of convergence and long run change in welfare across metropolitan areas given the heterogeneous incidence of the Great Recession at the local level. The paper shows that while there are some lasting effects of the Great Recession across locations, at least 60 percent of the initial differences potentially dissipate across space within around 10 years. This is true even when locals from the most affected metropolitan areas do not out-migrate in higher proportions in response to local shocks.
    Keywords: Internal migration and local labor market dynamics
    JEL: F22 J20 J30 J43 J61 R23 R58
    Date: 2018–06
  18. By: Amador, Manuel (Federal Reserve Bank of Minneapolis); Phelan, Christopher (Federal Reserve Bank of Minneapolis)
    Abstract: This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government’s hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can default on the country’s debt at any time, and assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. We show that if these beliefs satisfy reasonable assumptions, in any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. Further, in such Markov equilibria (the solution to a simple pair of ordinary differential equations), there are positive gross issuances at all dates, constant net imports as long as there is a positive equilibrium probability that the government is the optimizing type, and net debt repayment only by the commitment type. For countries that have recently defaulted, the interest rate the country pays on its debt is a decreasing function of the amount of time since its last default, and its total debt is an increasing function of the amount of time since its last default. For countries that have not recently defaulted, interest rates are constant.
    Keywords: Sovereign debt; Sovereign default; Reputation; Learning; Debt intolerance; Serial defaulters
    JEL: F34
    Date: 2018–05–30
  19. By: Hernández-Ramos, Lesdy Natalie; Venegas-Martínez, Francisco
    Abstract: This paper is aimed at developing a stochastic general equilibrium model of a small and open economy to examine how the volatility generated by risk factors affects the performance of fiscal and monetary policies. The relevant economic and financial variables are modeled with geometric Brownian motions combined with Poisson jumps. The decision-making problems of all agents participating in the economy are solved and the general equilibrium is characterized. Finally, several econometric specifications derived from the theoretical results of the proposed model are used to assess the performance of fiscal and monetary policies in Mexico, in 1990-2015, in an environment of risk and uncertainty. La presente investigación desarrolla un modelo estocástico de equilibrio general de una economía pequeña y abierta útil para examinar cómo la volatilidad generada por diversos factores de riesgo afecta el desempeño de las políticas fiscal y monetaria. Las variables económicas y financieras relevantes son modeladas con movimientos geométricos brownianos combinadas con saltos de Poisson. Los problemas de toma de decisiones de todos los agentes participantes en la economía son resueltos y el equilibro general es caracterizado. Por último, diversas especificaciones econométricas provenientes de los resultados teóricos del modelo propuesto son utilizadas para evaluar el desempeño de las políticas fiscal y monetaria en México, en 1990-2015, en un entorno de riesgo e incertidumbre.
    Keywords: Keywords: General equilibrium, decision making under risk and uncertainty, fiscal and monetary policy. Palabras clave: Equilibrio general, toma de decisiones bajo riesgo e incertidumbre, política fiscal y monetaria.
    JEL: E62
    Date: 2018–06–30
  20. By: Daisuke, Ikeda (Bank of England)
    Abstract: I develop a general equilibrium model that features endogenous bank runs in a global game framework. A bank run probability — systemic risk — is increasing in bank leverage and decreasing in bank liquid asset holdings. Bank risk shifting and pecuniary externalities induce excessive leverage and insufficient liquidity, resulting in elevated systemic risk from a social welfare viewpoint. Addressing the inefficiencies requires prudential tools on both leverage and liquidity. Imposing one tool only causes risk migration: banks respond by taking more risk in another area. I extend the model and study risk migration in other fields including sectoral lending, concentration risk and shadow banking.
    Keywords: Bank runs; global games; capital and liquidity requirements; risk migration
    JEL: E44 G01 G21 G28
    Date: 2018–06–08
  21. By: Gabriele Camera (Economic Science Institute, Chapman University and University of Bologna); Jaehong Kim (Xiamen University)
    Abstract: Matching frictions and downward wage rigidity emerge as equilibrium phenomena in a twosided labor market where firms sustain variable wage adjustment costs. Firms post wages to attract workers and matches are endogenous. Reducing the wage relative to the wage previously posted is costly to the firm, where the cost is proportional to the size of the proposed cut. Shocks to the firm’s profitability may yield an equilibrium wage above what the firm would offer absent proportional adjustment costs. Wage cuts can be partial or full, immediate or delayed, and are non-linear in the shock size. Importantly, wages are sticky even if firms have negligible costs for cutting wages.
    Keywords: frictions; matching; sticky wages
    JEL: C70 D40 E30 J30
    Date: 2018
  22. By: Cesa-Bianchi, Ambrogio (Bank of England); Pesaran, M Hashem (Department of Economics); Rebucci, Alessandro (Johns Hopkins University)
    Abstract: Measures of economic uncertainty are countercyclical, but economic theory does not provide definite guidance on the direction of causation between uncertainty and the business cycle. This paper takes a common-factor approach to the analysis of the interaction between uncertainty and economic activity in a multi-country model without a priori restricting the direction of causality at the level of individual countries. Motivated by the observation that cross-country correlations of volatility series are much higher than cross-country correlations of GDP growth series, we set up a multi-country version of the Lucas tree model with time-varying volatility consistent with this stylized fact and use it to identify two common factors, a real and a financial one. We then quantify the absolute and the relative importance of the common shocks as well as country-specific volatility and GDP growth shocks. The paper highlights three main empirical findings. First, it is shown that most of the unconditional correlation between volatility and growth can be accounted for by shocks to the real common factor, which is extracted from world growth in our empirical model and linked to the risk-free rate in the theoretical model and in the data. Second, the share of volatility forecast error variance explained by the real common shock and by country-specific growth shocks amounts to less than 5%. Third, common financial shocks explain about 10% of the growth forecast error variance, but when such shocks occur, their negative impact on growth is large and persistent. In contrast, country-specific volatility shocks account for less than 1%-2% of the forecast error variance decomposition of country-specific growth rates.
    Keywords: Uncertainty; business cycle; common factors; real and financial global shocks; multi-country; identification; realized volatility
    JEL: E44 F44 G15
    Date: 2018–06–01
  23. By: Giovanni Dosi; Mauro Napoletano; Andrea Roventini; Tania Treibich
    Abstract: In this work we study the granular origins of business cycles and their possible underlying drivers. As shown by Gabaix (2011), the skewed nature of firm size distributions implies that idiosyncratic (and independent) firm-level shocks may account for a significant portion of aggregate volatility. Yet, we question the original view grounded on "supply granularity", as proxied by productivity growth shocks - in line with the Real Business Cycle framework-, and we provide empirical evidence of a "demand granularity", based on investment growth shocks instead. The role of demand in explaining aggregate fluctuations is further corroborated by means of a macroeconomic Agent-Based Model of the "Schumpeter meeting Keynes" family (Dosi et al., 2015). Indeed, the investigation of the possible microfoundation of RBC has led us to the identification of a sort of microfounded Keynesian multiplier.
    Keywords: business cycles, granular residual, granularity hypothesis, agent-based models, firm dynamics, productivity growth, investment growth
    Date: 2018–07–03
  24. By: Matteo Brachetta; Claudia Ceci
    Abstract: In this work we investigate the optimal proportional reinsurance-investment strategy of an insurance company which wishes to maximize the expected exponential utility of its terminal wealth in a finite time horizon. Our goal is to extend the classical Cramer-Lundberg model introducing a stochastic factor which affects the intensity of the claims arrival process, described by a Cox process, as well as the insurance and reinsurance premia. Using the classical stochastic control approach based on the Hamilton-Jacobi-Bellman equation we characterize the optimal strategy and provide a verification result for the value function via classical solutions of two backward partial differential equations. Existence and uniqueness of these solutions are discussed. Results under various premium calculation principles are illustrated and a new premium calculation rule is proposed in order to get more realistic strategies and to better fit our stochastic factor model. Finally, numerical simulations are performed to obtain sensitivity analyses.
    Date: 2018–06

This nep-dge issue is ©2018 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.