|
on Dynamic General Equilibrium |
| By: | Christoph Bierbrauer (Hochschule Darmstadt) |
| Abstract: | We present an analytically tractable two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping generations structure of the Blanchard (1985)-Yaari (1965) type. It enables us to study the transmission and spillover effects of a wider range of fiscal shocks in comparison to the standard model. We show that, depending on the financing decision of the government, fiscal policy measures can have very different effects on key macroeconomic variables such as consumption and output. Moreover, the spillovers of national fiscal policy depend on the composition of government spending, the type of the fiscal measure and the cross-country substitutability between goods. |
| Keywords: | Overlapping generations; New open economy macroeconomics; Public Debt; Decentralized fiscal policy; Monetary union |
| JEL: | E62 F33 F41 H31 H50 H63 |
| Date: | 2017–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:iee:wpaper:wp0109&r=dge |
| By: | Alessandro Di Nola (University of Konstanz); Georgi Kocharkov (Goethe University Frankfurt); Almuth Scholl (University of Konstanz); Anna-Mariia Tkhir (University of Konstanz) |
| Abstract: | There is a sizable overall tax gap in the U.S., albeit tax non-compliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may hide a share of their business income but face the risk of being detected by the tax authority. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, self-employment, and tax evasion. Our quantitative ndings suggest that tax evasion leads to a larger self-employment sector but it depresses the average size and productivity of self-employed businesses. Tax evasion generates positive aggregate welfare effects because it acts as a subsidy for the self-employed. Workers, however, suffer from substantial welfare losses. |
| Keywords: | Tax evasion, Self-employment, Wealth inequality, Tax policy |
| JEL: | H24 H25 H26 C63 E62 E65 |
| Date: | 2018–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1806&r=dge |
| By: | William Ginn (FAU - Friedrich-Alexander Universität Erlangen-Nürnberg); Marc Pourroy (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers) |
| Abstract: | Food price subsidies are a prevalent means by which fiscal authorities may counteract food price volatility in middle-income countries (MIC). We develop a DSGE model for a MIC that captures this key channel of a policy induced price smoothing mechanism that is different to, yet in parallel with, the classic Calvo price stickiness approach, which can have consequential effects for monetary policy. We then use the model to address how the joint fiscal and monetary policy responds to an increase in inflation driven by a food price shock can affect welfare. We show that, in the presence of credit constrained households and households with a significant share of food expenditures , a coordinated reaction of fiscal and monetary policies via subsidized price targeting can improve aggregate welfare. Subsidies smooth prices and consumption, especially for credit constrained households, which can consequently result in an interest rate reaction less intensely with subsidized price targeting compared with headline price targeting. |
| Keywords: | Monetary Policy,Fiscal Policy,Food subsidies,DSGE Model,Subsidies,Commodities,Middle income countries |
| Date: | 2018–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01830769&r=dge |
| By: | IHARA Ryusuke |
| Abstract: | The productivity in cities is enhanced by the interaction between heterogeneous workers who are born and raised in various regions and countries. However, such benefit does not last forever because the composition of workers in cities becomes homogenized over generations. To evaluate the agglomeration economies and diseconomies of labor heterogeneity, this paper constructs a two-region non-overlapping generations model. Workers are assumed to be differentiated in terms of their birthplaces. Although they may migrate from their home regions to other regions to work as foreigners, they should incur an adjustment cost due to cultural differences. Assuming that the distribution of workers' births depends on their previous generation's residency choices, this study obtained the following results: (i) In the short run, residency choice leads workers to disperse across regions in each period. In the long run, however, the accumulation of residency choices over time makes birth distributions concentrated in a single region. Consequently, the composition of the workers becomes homogenized and they continue to reside in one region in a steady-state equilibrium. (ii) Social welfare is maximized by an even distribution of births involving a persistent circulation of heterogeneous labor. A comparison between the social optimum and the steady-state equilibrium indicates a dynamic inefficiency due to generational transition. (iii) When housing consumption is introduced as a dispersion force, social welfare can be maximized in a steady-state equilibrium with an equal distribution. (iv) Contrarily, even when another agglomeration economy is introduced on account of the quantity of labor, distribution of births in a steady-state equilibrium is still concentrated in comparison to the social optimum. |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:18038&r=dge |
| By: | Daruich, Diego (New York University); Kozlowski, Julian (Federal Reserve Bank of St. Louis) |
| Abstract: | Poor families have more children and transfer less resources to them. This suggests that family decisions about fertility and transfers increase income inequality and dampen intergenerational mobility. To evaluate the quantitative importance of this mechanism, we extend the standard heterogeneous-agent life-cycle model with earnings risk and credit constraints to allow for endogenous fertility, family transfers, and education. The model, estimated to the US in the 2000s, implies that a counterfactual at income-fertility profile would-through the equalization of initial conditions-reduce intergenerational persistence and income inequality by about 10%. The impact of a counterfactual constant transfer per child is twice as large. |
| Keywords: | Inequality; Intergenerational mobility; Quantitative model; Fertility |
| JEL: | D91 J13 J24 J62 |
| Date: | 2016–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-011&r=dge |
| By: | Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Faculty of Economics, Seikei University) |
| Abstract: | This study presents an overlapping-generations model with physical and human capital accumulation and considers probabilistic voting over capital and labor taxes and public debt to finance public education expenditure. Our analysis shows that the greater political power of the old induces the government to raise the labor tax on the young and lower the capital tax on the old as well as issue debt. The analysis also shows that the introduction of a debt ceiling rule calls for a rise in the labor tax and thus lowers the welfare of the currently working generation. However, it increases the growth rate, and this growth effect raises the welfare of future generations. These benefits last for a long period even if the rule is imposed only for a limited time. |
| Keywords: | Capital taxation, Public debt, Economic growth, Probabilistic vot- ing, Overlapping-generations model |
| JEL: | D70 E24 H63 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1822&r=dge |
| By: | Andreas Irmen (Uni.lu - Université du Luxembourg, PSE - Paris School of Economics, CESifo - CESifo - Munich, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | At least since 1870 hours worked per worker declined and real wages increased in many of today's industrialized countries. The dual nature of technological progress in conjunction with a consumption-leisure complementarity explains these stylized facts. Technological progress drives real wages up and expands the amount of available consumption goods. Enjoying consumption goods increases the value of leisure. Therefore, individuals demand more leisure and supply less labor. This mechanism appears in an OLG-model with two-period lived individuals equipped with per-period utility functions of the generalized log-log type proposed by Boppart-Krusell (2016). The optimal plan is piecewise defined and hinges on the wage level. Technological progress moves a poor economy out of a regime with low wages and an inelastic supply of hours worked into a regime where wages increase further and hours worked continuously decline. |
| Keywords: | Technological Change,Capital Accumulation,Endogenous Labor Supply,OLG-model |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01667017&r=dge |
| By: | Burkhard Heer; Vito Polito; Michael Wickens |
| Abstract: | We study the sustainability of pension systems using a life-cycle model with distortionary taxation that sets an upper limit to the real value of tax revenues. This limit implies an endogenous threshold dependency ratio, i.e. a point in the cross-section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees. We quantify the threshold using a computable life-cycle model calibrated on the United States and fourteen European countries which have dependency ratios among the highest in the world. We examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems. New tax data on dynamic Laffer effects are provided. |
| Keywords: | dependency ratio, fiscal space, Laffer effects, pensions, fiscal policy sustainability |
| JEL: | E62 H20 H55 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7121&r=dge |
| By: | Chugh, Sanjay K. (Boston College); Lechthaler, Wolfgang (Kiel Institute for the World Economy); Merkl, Christian (University of Erlangen-Nuremberg) |
| Abstract: | This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the "tax-smoothing" results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-model-consistent wedges and inefficiencies in order to understand optimal tax volatility. |
| Keywords: | labor market frictions, hiring costs, efficiency, optimal taxation, labor wedge, zero intertemporal distortions |
| JEL: | E24 E32 E50 E62 E63 J20 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11600&r=dge |
| By: | Kozlowski, Julian (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper develops a theory of investment and maturity choices and studies its implications for the macroeconomy. The novel ingredient is an explicit secondary market with trading frictions which leads to a liquidity spread which increases with maturity and generates an upward sloping yield curve. As a result, trading frictions induce firms to borrow and invest at shorter horizons than in a frictionless benchmark. Economies with more severe frictions exhibit a steeper yield curve which further affects maturity and investment choices of rms. A model calibrated to match cross-country moments suggests that reductions in trading frictions-a new channel of financial development-can promote economic development. A policy intervention with government-backed financial intermediaries in the secondary market can improve liquidity and reduce the cost of long-term finance which promotes investment in longer-term projects and generates substantial welfare gains. |
| Keywords: | Debt maturity; Over-the-counter market; Liquidity; Secondary markets |
| JEL: | E44 G30 O16 |
| Date: | 2017–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-012&r=dge |
| By: | Richard Clarida |
| Abstract: | This paper highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. Using a standard two country DSGE model, we derive a structural decomposition in which the nominal exchange rate is a function of the expected present value of future neutral real interest rate differentials plus a business cycle factor and a PPP factor. Country specific "r*" shocks in general require optimal monetary policy to pass these through to the policy rate, but such shocks will also have exchange rate implications, with an expected decline in the path of the real neutral policy rate reflected in a depreciation of the nominal exchange rate. We document a novel empirical regularity between the equilibrium error in the VECM representation of the empirical Holston Laubach Williams (2017) four country r* model and the value of the nominal trade weighted dollar. In fact, the correlation between the dollar and the 12 quarter lag of the HLW equilibrium error is estimated to be 0.7. Global shocks to r* under optimal policy require no exchange rate adjustment because passing though r* shocks to policy rates 'does all the work' of maintaining global equilibrium. We also study a richer model with international spill overs so that in theory there can be gains to international policy cooperation. In this richer model we obtain a similar decomposition for the nominal exchange rate, but with the added feature that r* in each country is a function global productivity and business cycle factors even if these factors are themselves independent across countries. We argue that in practice, there could well be significant costs to central bank communication and credibility under a regime formal policy cooperation, but that gains to policy coordination could be substantial given that r*'s are unobserved but are correlated across countries. |
| Keywords: | monetary policy, policy coordination, exchange rates, r* |
| JEL: | E4 E5 F3 F31 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:732&r=dge |
| By: | Marc Fleurbaey (Princeton University); Marie-Louise Leroux (UQAM - Université du Québec à Montréal - UQAM - Université du Québec à Montréal); Pierre Pestieau (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain, PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Grégory Ponthière (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12); Stephane Zuberk (PSE - Paris School of Economics) |
| Abstract: | While little agreement exists regarding the taxation of bequests in general, there is a widely held view that accidental bequests should be subject to a confi…scatory tax. We propose to reexamine the optimal taxation of accidental bequests in an economy where individuals care about what they leave to their offspring in case of premature death. We show that, whereas the conventional 100 % tax view holds under the standard utilitarian social welfare criterion, it does not hold under the ex post egalitarian criterion, which assigns a strong weight to the welfare of unlucky short-lived individuals. From an egalitarian perspective, it is optimal not to tax, but to subsidize accidental bequests. We examine the robustness of those results in a dynamic OLG model of wealth accumulation, and show that, whereas the sign of the optimal tax on accidental bequests depends on the form of the joy of giving motive, it remains true that the 100 % tax view does not hold under the ex post egalitarian criterion. |
| Keywords: | mortality,accidental bequests,optimal taxation,egalitarianism,OLG models |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01649527&r=dge |
| By: | Walentin, Karl (Research Department, Central Bank of Sweden); Westermark, Andreas (Research Department, Central Bank of Sweden) |
| Abstract: | We show that business cycles reduce welfare through a decrease in the average level of employment in a labor market search model with learning on-the-job and skill loss during unemployment. A negative correlation between unemployment and vacancies implies, via the concavity of the matching function, that business cycles reduce the average number of new jobs and employment. Learning on-the-job implies that the decrease in employment reduces aggregate human capital. This, in turn, reduces the incentives to post vacancies, further decreasing employment and human capital. We quantify this mechanism and nd large output and welfare costs of business cycles. |
| Keywords: | Search and matching; labor market; human capital; stabilization policy; skill loss |
| JEL: | E32 J64 |
| Date: | 2018–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0353&r=dge |
| By: | Pintus, Patrick A. (CNRS-InSHS and Aix-Marseille University); Wen, Yi (Federal Reserve Bank of St. Louis); Xing, Xiaochuan (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 today, 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 world business-cycle factor documented by recent empirical studies through dynamic factor analysis and such a factor’s intimate link to global financial markets. |
| Keywords: | World Interest Rate; International Co-Movement; Self-Fulfilling Equilibria |
| JEL: | E21 E22 E32 E44 E63 |
| Date: | 2018–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-009&r=dge |
| By: | Yuto Iwasaki (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuto.iwasaki@boj.or.jp)); Ichiro Muto (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Head of Price Statistics Division, Research and Statistics Department), Bank of Japan (E-mail: ichirou.mutou@boj.or.jp)); Mototsugu Shintani (Research Center for Advanced Science and Technology, University of Tokyo (E-mail: shintani@econ.rcast.u-tokyo.ac.jp)) |
| Abstract: | During the recovery from the global financial crisis, most advanced economies have experienced a surprisingly weak response of wage inflation to the decline in unemployment. In this study, we investigate whether downward wage rigidity (DWR) is the source of the flattening wage Phillips curve and the lack of wage inflation in the four advanced economies: Japan, the euro area, the UK, and the US. Specifically, we apply Markov chain Monte Carlo methods with a particle filter to estimate a nonlinear New Keynesian dynamic stochastic general equilibrium model incorporating asymmetric wage adjustment costs. This enables us to jointly estimate the degree of DWR as well as the natural rate of unemployment, that is, the rate of unemployment expected in the absence of (downward) wage rigidity. Our results indicate that wage adjustment costs are highly asymmetric in Japan, the euro area, and the UK, but not in the US. Especially, an L-shaped wage Phillips curve between wage inflation and the unemployment gap clearly emerges in Japan, due to the presence of DWR. As for the US, wage adjustment costs are large but symmetric, which means that wages are inherently quite sticky both in an upward and downward direction. Our results suggest that missing wage inflation in Japan, the euro area, and the UK is attributable largely to DWR, but not in the US. |
| Keywords: | downward wage rigidity, natural rate of unemployment, Phillips curve, particle filter |
| JEL: | E24 E31 E32 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:18-e-08&r=dge |
| By: | Raquel Fonseca; Pierre-Carl Michaud; Arie Kapteyn; Titus Galama |
| Abstract: | We estimate a stochastic life-cycle model of endogenous health spending, asset accumulation and retirement to investigate the causes behind the increase in health spending and longevity in the U.S. over the period 1965-2005. We estimate that technological change and the increase in the generosity of health insurance on their own may explain 36.3% of the rise in health spending (technology 31.5% and insurance 4.8%), while income explains only 4.4%. By simultaneously occurring over this period, these changes may have led to complementarity effects which explain an additional 59% increase in health spending. The estimates suggest that the elasticity of health spending with respect to changes in both income and insurance is larger with co-occurring improvements in technology. Technological change, taking the form of increased health-care productivity at an annual rate of 1.7%, explains almost all of the rise in life expectancy at age 25 over this period. Welfare gains are substantial and most of the gain appears to be due to technological change (47% out of a total gain of 67%). |
| Keywords: | health spending, longevity, life-cycle models, technological change |
| JEL: | I10 I38 J26 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:criacr:1806&r=dge |
| By: | Michael Woodford |
| Abstract: | It is common to analyze the effects of alternative monetary policy commitments under the assumption of fully model-consistent expectations. This implicitly assumes unrealistic cognitive abilities on the part of economic decision makers. The relevant question, however, is not whether the assumption can be literally correct, but how much it would matter to model decision making in a more realistic way. A model is proposed, based on the architecture of artificial intelligence programs for problems such as chess or go, in which decision makers look ahead only a finite distance into the future, and use a value function learned from experience to evaluate situations that may be reached after a finite sequence of actions by themselves and others. Conditions are discussed under which the predictions of a model with finite-horizon forward planning are similar to those of a rational expectations equilibrium, and under which they are instead quite different. The model is used to re-examine the consequences that should be expected from a central-bank commitment to maintain a fixed nominal interest rate for a substantial period of time. Neo-Fisherian predictions are shown to depend on using rational expectations equilibrium analysis under circumstances in which it should be expected to be unreliable. |
| Keywords: | forward guidance, neo-Fisherianism, Fisher equation, bounded rationality |
| JEL: | E52 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7108&r=dge |
| By: | Christoph Bierbrauer (Hochschule Darmstadt) |
| Abstract: | We present a two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping generations structure of the Blanchard (1985)-Yaari (1965) type as well as monopolistic frictions and staggered adjustment in the goods and labor market. We allow for public investment and distortionary taxation. We study the effects of fiscal policy measures such as public spending, tax cuts targeted to households and public investment as suggested by the European Commission (2008). In particular, we explore the effects of fiscal policy as a function of the financing decision of the implementing government. We find that the impact of fiscal measures on national variables as well as the spillovers depend on the assumed degree of household myopia and again, the financing decision of the government. However, the introduction of a complex fiscal sector which enables the government to choose between alternative financing schemes is an important determinant of the effects of fiscal expansions on key macroeconomic variables such as, output and consumptions. Thus, modeling a complex fiscal sector on both sides of the budgets is crucial for the results and therefore the effectiveness of fiscal stimulus packages. |
| Keywords: | Overlapping generations; New open economy macroeconomics; Public Debt; Decentralized fiscal policy; Monetary union |
| JEL: | E62 F33 F41 H31 H50 H63 |
| Date: | 2017–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:iee:wpaper:wp0110&r=dge |
| By: | Carmen Camacho (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Agustín Pérez-Barahona (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Dynamic spatial theory has been a fruitful approach to understand economic phenomena involving time and space. However, this new field has opened a set of questions still unresolved in the literature. For instance, the identification of the social optimal allocation of economic activity across time and space has not been ensured yet in economic growth. By means of a monotone method, we study in this paper the optimal solution of spatial Ramsey-type models. We analytically prove, under fairly general assumptions, the existence of a unique social optimum. The iterative nature of this approach also allows us to present a new algorithm to simulate the optimal trajectories of the economy. We provide two economic illustrations of our method. Firstly, we apply our existence result to the spatial growth model and to a framework for optimal land-use planning, concluding that these problems are well-posed. We then consider the spatial growth model in order to investigate the importance of capital mobility in economic growth. We particularly underline the spatial dynamic implications of this feature on social welfare and income inequality. |
| Keywords: | Control,Spatial dynamics,Ramsey model,Partial differential equations |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01670532&r=dge |
| By: | Chin, Michael (Norges Bank Investment Management); Graeve, Ferre De (KU Leuven); Filippeli, Thomai (Queen Mary University); Theodoridis, Konstantinos (Cardiff Business School) |
| Abstract: | Long-term interest rates of small open economies correlate strongly with the US long-term rate. Can central banks in those countries decouple from the US? An estimated DSGE model for the UK (vis-`a-vis the US) establishes three structural empirical results. (1) Comovement arises due to nominal fluctuations, not through real rates or term premia. (2) The cause of comovement is the central bank of the small open economy accommodating foreign inflation trends, rather than systematically curbing them. (3) Small open economies may find themselves much more affected by changes in US inflation trends than the US itself. |
| Keywords: | DSGE Model, Small Open Economy, Yield Curve, Long-Term Interest Rates, Term Premia, Comovement |
| JEL: | E43 E44 F30 F44 G15 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2018/19&r=dge |
| By: | Monika Piazzesi; Martin Schneider |
| Abstract: | This paper studies a modern monetary economy: trade in both goods and securities relies on money provided by intermediaries. While money is valued for its liquidity, its creation requires costly leverage. In ation, security prices and the transmission of monetary policy then depend on the institutional details of the payment system. The price of a security is higher if it helps back inside money, and lower if more inside money is used to trade it. In ation can be low in security market busts if bank portfolios suffer, but also in booms if trading absorbs more money. The government has multiple policy tools: in addition to the return on outside money, it affects the mix of securities used to back inside money. |
| Keywords: | payments, monetary policy, liquidity trap, liquidity, asset prices, collateral premium, leverage, leverage costs, convenience yield, banking, scarce reserves, abundant reserves |
| JEL: | E00 E13 E41 E42 E43 E44 E51 E52 E58 G1 G12 G21 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:734&r=dge |
| By: | Basu, Susanto; Bundick, Brent (Federal Reserve Bank of Kansas City) |
| Abstract: | de Groot, Richter, and Throckmorton (2018) argue that the model in Basu and Bundick (2017) can match the empirical evidence only because the model assumes an asymptote in the economy’s response to an uncertainty shock. In this Reply, we provide new results showing that our model’s ability to match the data does not rely either on assuming preferences that imply an asymptote nor on a particular value of the intertemporal elasticity of substitution. We demonstrate that shifting to preferences that are not vulnerable to the Comment’s critique does not change our previous conclusions about the propagation of uncertainty shocks to macroeconomic outcomes. |
| Keywords: | Uncertainty shocks; Monetary policy; Sticky-price models |
| JEL: | E32 E52 |
| Date: | 2018–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp18-05&r=dge |
| By: | Chari, V. V. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal) |
| Abstract: | We revisit the question of how capital should be taxed, arguing that if governments are allowed to use the kinds of tax instruments widely used in practice, for preferences that are standard in the macroeconomic literature, the optimal approach is to never distort capital accumulation. We show that the results in the literature that lead to the presumption that capital ought to be taxed for some time arise because of the initial confiscation of wealth and because the tax system is restricted. |
| Keywords: | Capital income tax; Long run; Uniform taxation |
| JEL: | E60 E61 E62 |
| Date: | 2018–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:752&r=dge |
| By: | Jonas E. Arias; Guido Ascari; Nicola Branzoli; Efrem Castelnuovo |
| Abstract: | This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates. |
| Keywords: | trend inflation, determinacy, monetary policy |
| JEL: | E52 E30 C22 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7122&r=dge |
| By: | Dong, Feng (Antai College of Economics and Management, Shanghai Jiao Tong University); Wen, Yi (Federal Reserve Bank of St. Louis) |
| Abstract: | We develop a N-sector business cycle network model a la Long and Plosser (1983), featuring heterogenous money demand a la Bewley (1980) and Lucas (1980). Despite incomplete markets and a well-defined distribution of real money balances across heterogeneous households, the enriched N-sector network model remains analytically tractable with closed-form solutions up to the aggregate level. Relying on the tractability, we establish several important results: (i) The economy's input-output network linkages become endogenously time-varying over the business cycle—thanks to the influence of the endogenous distribution of money demand on cross-sector allocations of commodities. (ii) Despite flexible prices, money is neither neutral nor superneutral and transitory monetary injections can generate highly persistent effects on sectoral output, thanks to the time-varying distribution of money demand and its effect on input-output coefficients. (iii) Although money injection is distributed equally across households by design, the real effects are asymmetric across production sectors, e.g., the impact of money is strongest on downstream sectors that purchase intermediate goods from the rest of the economy, but weakest on upstream sectors that supply intermediate goods to the other sectors, in sharp contrast to the case of sectoral technology shocks and government spending shocks. Our model also shows that movements in the distribution of money demand could be an important source of the measured labor wedge documented by the business cycle accounting literature. |
| Keywords: | Production Networks; Distributional Effect of Monetary Policy; Heterogeneous Money Demand; Incomplete Markets; Time-Varying Velocity of Money; Time-Varying Labor Wedge |
| JEL: | E12 E13 E23 E31 E32 E41 E43 E51 |
| Date: | 2018–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-008&r=dge |
| By: | Kuo-Hsuan Chin (Department of Economics, Feng Chia University); Xue Li (Department of Economics, Institute of Chinese Financial Studies, Southwestern University of Finance and Economics) |
| Abstract: | We evaluate the performance of the individual and combination forecasts in the estimated Bayesian VARs with economic and non-economic information. Specifically, we conduct an out-of-sample forecasting experiment in the model with statistical and/or DSGE priors over the time period before and after the financial crisis. In the most of cases, we obtain the unbiased forecasts of the interest rate but the biased forecasts of output growth and inflation rates under the unbiasedness test. In particular, we find the estimation of Bayesian VARs with economic information about the financial friction is helpful to improve the forecasting performance of the interest rate, evaluated in terms of the modified DM test, point and density forecasts. Moreover, the combination forecasts of the interest rate generated from the model with both statistical and DSGE priors are unbiased, and they also perform better than the combination or the individual forecasts generated with only statistical priors at statistically significant level of 5%. The selection of the weighting-scheme in forecast combination, adopting equal weights for the simple average or the log predictive likelihoods in Bayesian model averaging, is irrelevant to the conclusion made above. |
| Keywords: | Bayesian Model Averaging, DSGE-VAR, Financial Friction, Forecast Combination. |
| JEL: | E37 E44 E47 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:5408084&r=dge |
| By: | Dvorkin, Maximiliano (Federal Reserve Bank of St. Louis); Sanchez, Juan M. (Federal Reserve Bank of St. Louis); Sapriza, Horacio (Federal Reserve Board); Yurdagul, Emircan (Universidad Carlos III) |
| Abstract: | Sovereign debt crises generally involve debt restructurings characterized by a mix of face-value haircuts and debt maturity extensions. We develop a quantitative model of endogenous sovereign debt maturity choice and restructuring that captures key stylized facts of debt over the business cycle and during restructuring episodes, including the variation of haircuts, maturity extensions and default duration found in the data. We also find that policy interventions implementing minimum haircuts and redistributing losses away from holders of short term debt improve the outcome of distressed debt restructurings and reduce the frequency of debt distress events. Methodologically, the use of dynamic discrete choice solution methods allows us to smooth decision rules on default and debt portfolio choices, rendering the problem tractable. |
| Keywords: | Crises; Default; Sovereign Debt; Restructuring; Rescheduling; Country Risk; Maturity; International Monetary Fund; Dynamic Discrete Choice |
| JEL: | F34 F41 G15 |
| Date: | 2018–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-013&r=dge |
| By: | Ignacio Lozano-Espitia (Banco de la República de Colombia); Fernando Arias-Rodríguez (Banco de la República de Colombia) |
| Abstract: | En este documento se estiman las curvas de Laffer para los impuestos al trabajo, al capital y al consumo en Colombia. Se utiliza un modelo neoclásico de crecimiento con capital humano del tipo insinuado por Trabandt y Uhlig (2011), el cual es calibrado con la información de las cuentas nacionales para el período 1994 a 2015. Los resultados permiten, por una parte, comparar las tarifas impositivas efectivas actuales sobre los factores de producción frente aquellas que maximizaría los recaudos del gobierno y, por consiguiente, derivar el espacio fiscal que eventualmente tiene el gobierno por el lado de los impuestos. Por otra, permiten simular ejercicios de la política fiscal mediante el uso de sus principales instrumentos y, finalmente, contrastar las tarifas tributarias efectivas y las curvas de Laffer en Colombia frente a la de los países de la OECD. **** This paper estimates the Laffer curves in Colombia for taxes on labor income, capital gains, and consumption. We used a neoclassical growth model with human capital, as that suggested by Trabandt and Uhlig (2011), inputting data from the national accounts system, for the period 1994 to 2015. The results permit to compare the current effective tax rates on the factors of production against that which would maximize the government's revenues, and therefore derive the government's possible taxrelated fiscal space. Furthermore, they help us perform some fiscal-policy simulations employing the policy's main tools, and they let us contrast Colombia's effective tax rates and Laffer curves with those of the OECD countries. Classification JEL: E13, E62, H20, H30, H60 |
| Keywords: | Curva de Laffer, Política Fiscal, Impuestos al Trabajo, Impuestos al Capital, Impuestos al Consumo, Laffer curves, Fiscal Policy, Taxes on Consumption, Taxes on labor and capital incomes |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1045&r=dge |
| By: | De Rezende, Rafael B. (Monetary Policy Department, Central Bank of Sweden); Ristiniemi, Annukka (Financial Stability Department, Central Bank of Sweden) |
| Abstract: | We propose a shadow rate that measures the expansionary (contractionary) interest rate effects of unconventional monetary policies that are present when the lower bound is not binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro-area and the UK, and find that they fall (rise) when market participants expect monetary policy to become more expansionary (contractionary), and price this information into the yield curve. This ability of the shadow rate to track the stance of monetary policy is identified on announcements of policy rate cuts (hikes), balance sheet expansions (contractions) and forward guidance, with shadow rates responding timely, and in line with government bond yields. We show two applications for our shadow rate. First, we decompose shadow rate responses to monetary policy announcements into conventional and unconventional monetary policy surprises, and assess the pass-through of each type of policy to exchange rates. We find that exchange rates respond more to conventional than to unconventional monetary policy. Lastly, a counterfactual experiment in a DSGE model suggests that inflation in Sweden would have been around 0.47 percentage points lower had the Riksbank not used unconventional monetary policy since February 2015. |
| Keywords: | unconventional monetary policy; monetary policy stance; term structure of interest rates; short-rate expectations; term premium |
| JEL: | E43 E44 E52 E58 |
| Date: | 2018–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0355&r=dge |
| By: | Girsberger, Esther Mirjam (University of Lausanne); Rinawi, Miriam (Swiss National Bank); Krapf, Matthias (University of Basel) |
| Abstract: | How skills acquired in vocational education and training (VET) affect wages and employment is not clear. We develop and estimate a search and matching model for workers with a VET degree. Workers differ in interpersonal, cognitive and manual skills, while firms require and value different combinations of these skills. Assuming that match productivity exhibits worker-job complementarity, we estimate how interpersonal, cognitive and manual skills map into job offers, unemployment and wages. We find that firms value cognitive skills on average almost twice as much as interpersonal and manual skills, and they prize complementarity in cognitive and interpersonal skills. The average return to VET skills in hourly wages is 9%, similar to the returns to schooling. Furthermore, VET appears to improve labour market opportunities through higher job arrival rate and lower job destruction. Workers thus have large benefits from acquiring a VET degree. |
| Keywords: | occupational training, vocational education, labor market search, sorting, multidimensional skills |
| JEL: | E24 J23 J24 J64 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11586&r=dge |