|
on Dynamic General Equilibrium |
|
Issue of 2018‒08‒13
eighteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Eric Jondeau (University of Lausanne and Swiss Finance Institute); Jean-Guillaume Sahuc (Banque de France, Université Paris Ouest - Nanterre, and La Défense - EconomiX) |
| Abstract: | We quantify the capital shortfall that results from a global financial crisis by using a macro-finance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks. |
| Keywords: | Capital Shortfall, Systemic Risk, Leverage, Financial system, Euro Area, DSGE Model |
| JEL: | E32 E44 G01 G21 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1812&r=dge |
| By: | Guillaume Claveres; Jan Stráský |
| Abstract: | The discussion about a fiscal stabilisation capacity as a way of providing more fiscal integration in the euro area has strengthened in the aftermath of the European sovereign debt crisis. Among the instruments that can be used for temporary macroeconomic stabilisation in the presence of both asymmetric and area-wide shocks, a euro area unemployment insurance scheme has attracted increased attention. We build a two-region DSGE model with supply, demand and labour market frictions and introduce in it an area-wide unemployment insurance scheme that is entitled to borrow in financial markets. The model is calibrated to the euro area core and periphery data. For a country-specific negative demand shock hitting the periphery, we find the scheme to reduce the drop in Periphery output by about one fifth and the drop in union output by about a third. The scheme is effective when some households are cut from financial markets, and even more so when the national government also loses market access. |
| Keywords: | fiscal union, search and matching, Unemployment insurance, zero lower bound |
| JEL: | E32 E52 E63 J65 |
| Date: | 2018–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1498-en&r=dge |
| By: | Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda |
| Abstract: | We estimate a small-scale nonlinear DSGE model with the zero lower bound (ZLB) of the nominal interest rate for Japan, where the ZLB has constrained the country’s monetary policy for a considerably long period. We employ the time iteration with linear interpolation method to solve equilibrium and then estimate the model by using the Sequential Monte Carlo Squared method. Results of estimation suggest that (1) the Bank of Japan has been conducting monetary policy that depends on the lagged notional interest rate rather than the lagged actual interest rate and that (2) the estimated series of the natural rate of interest moves very closely to those based on the model without the ZLB. |
| Keywords: | Bayesian inference, DSGE model, Particle filter, SMC |
| JEL: | C11 C13 C61 C63 E31 E43 E52 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2018-37&r=dge |
| By: | Jaccard, Ivan |
| Abstract: | This paper studies the effects of money supply shocks in a general equilibrium model that reproduces a term premium of the magnitude observed in the data. In an environment where financial frictions are the main source of monetary non-neutrality, I find that money supply shocks are less effective at stimulating inflation in recessions than in expansions. In terms of quantitative magnitude, the impact effect on inflation of a money supply shock is about half as large during recessions than during booms. This state dependence is essentially due to the time-variation in stochastic discounting that is needed to match the data. JEL Classification: E31, E44, E58 |
| Keywords: | bond premium puzzle, euro zone economy, financial frictions, time-varying risk aversion |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182174&r=dge |
| By: | Mumtaz, Haroon (Queen Mary University); Theodoridis, Konstantinos (Cardiff Business School) |
| Abstract: | This paper uses a range of structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1979 an expansionary spending or revenue shock was associated with modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by a more active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks. |
| Keywords: | Fiscal policy shocks, Stock prices, VAR, DSGE. |
| JEL: | C5 E1 E5 E6 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2018/20&r=dge |
| By: | Leibovici, Fernando (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper studies the industry-level and aggregate implications of financial development on international trade. I set up a multi-industry general equilibrium model of international trade with heterogeneous firms subject to financial frictions. Industries differ in capital-intensity, which leads to differences in external finance dependence. The model is parameterized to match key features of firm-level data. Financial development leads to substantial reallocation of international trade shares from labor- to capital-intensive industries, with minor effects at the aggregate-level. These findings are consistent with estimates from cross-country industry-level and aggregate data. |
| Date: | 2018–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-015&r=dge |
| By: | Hans Gersbach (ETH Zurich, IZA Institute of Labor Economics, CESifo (Center for Economic Studies and Ifo Institute), and Centre for Economic Policy Research (CEPR)); Jean-Charles Rochet (University of Zurich, University of Toulouse I, and Swiss Finance Institute); Martin Scheffel (University of Cologne) |
| Abstract: | This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature. First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments. |
| Keywords: | Financial Intermediation, Capital Accumulation, Banking Crisis, Macroeconomic Shocks, Business Cycles, Bust-Boom Cycles, Managing Recoveries |
| JEL: | E21 E32 F44 G21 G28 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1738&r=dge |
| By: | Jeremy Greenwood; Pengfei Han; Juan M. Sanchez |
| Abstract: | The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, venture capitalists provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., statistics by funding round concerning the success rates, failure rates, investment rates, equity shares, and IPO values. Raising capital gains taxation reduces growth and welfare. |
| JEL: | E13 E22 G24 L26 O16 O31 O40 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24808&r=dge |
| By: | Adrian Peralta-Alva; Marina Mendes Tavares; Xuan S. Tam; Xin Tang |
| Abstract: | We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution. |
| Date: | 2018–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/146&r=dge |
| By: | Hippolyte D'Albis (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); Angela Greulich (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, INED - Institut national d'études démographiques); Grégory Ponthière (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) |
| Abstract: | During the last century, fertility has exhibited, in industrialized economies, two distinct trends: the cohort total fertility rate follows a decreasing pattern, while the cohort average age at motherhood exhibits a U-shaped pattern. This paper proposes a Unified Growth Theory aimed at rationalizing those two demographic stylized facts. We develop a three-period OLG model with two periods of fertility, and show how a traditional economy, where individuals do not invest in education, and where income rises push towards advancing births, can progressively converge towards a modern economy, where individuals invest in education, and where income rises encourage postponing births. Our findings are illustrated numerically by replicating the dynamics of the quantum and the tempo of births for cohorts 1906-1975 of the Human Fertility Database. |
| Keywords: | regime shift,fertility,childbearing age,births postponement,human capital |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01848098&r=dge |
| 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 condi-tion 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. |
| Keywords: | Ponzi scheme, rational bubble, wealth preference |
| JEL: | E13 E44 G12 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7148&r=dge |
| By: | SANGYUP CHOI (Yonsei University); MYUNGKYU SHIM (Sogang University) |
| Abstract: | Motivated by the recent empirical evidence on a strong negative relationship between the income level and hours worked across countries (Bick, Fuchs-Schundeln, and Lagakos (2018)), this paper establishes new stylized facts on labor market dynamics in developing economies. First, the response of hours worked (and employment) to a permanent technology shock- identified by a structural VAR model with long-run restrictions- is smaller in developing economies than in advanced economies. Second, the level of income per capita is strongly and robustly associated with the relative variability of hours worked and consumption to output across countries. We build a simple RBC model augmented with subsistence consumption to explain the set of new empirical findings. The minimal departure from a standard RBC model allows us to account for the salient features of business cycle fluctuations in developing economies, including their distinct labor market dynamics. |
| Keywords: | Business cycles; Developing economies; Subsistence consumption; Labor market dynamics; Long-run restrictions |
| JEL: | E21 E32 F44 J20 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2018rwp-127&r=dge |
| By: | Isabel Cairo; Jae W. Sim |
| Abstract: | We construct a general equilibrium model in which income inequality results in insufficient aggregate demand, deflation pressure, and excessive credit growth by allocating income to agents featuring low marginal propensity to consume, and if excessive, can lead to an endogenous financial crisis. This economy generates distributions for equilibrium prices and quantities that are highly skewed to the downside due to financial crises and the liquidity trap. Consequently, symmetric monetary policy rules designed to minimize fluctuations around fixed means become inefficient. A simultaneous reduction in inflation volatility and mean unemployment rate is feasible when an asymmetric policy rule is adopted. |
| Keywords: | Monetary policy ; Credit ; Financial crises ; Income inequality |
| JEL: | E32 E44 E52 G01 |
| Date: | 2018–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-48&r=dge |
| By: | Keisuke Otsu; Katsuyuki Shibayama |
| Abstract: | This paper analyzes the Postwar Japanese economy with a parsimonious neoclassical growth model that incorporates the demographic transition in Japan. We find that i) the increase in the aged-population share can account for most of the decline in employment and reduced output by 8% from its potential level, ii) workweek shortening policy led to a 20% reduction in output from its potential level by reducing hours worked over the 1988-1992 period, iii) labor income tax led to an 11% reduction in output from its potential level by discouraging hours worked, iv) the shift in the composition of government spending may have caused a slowdown in productivity growth and hence a reduction in the potential output level itself. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1809&r=dge |
| By: | Lorenzo, Cerboni Baiardi; Ahmad, Naimzada; |
| Abstract: | We consider the overlapping generation model formulated in Dioikitopoulos (2018) that tackles the problem of fiscal policy rules for debt sustainability, allowing for the presence of debt bubbles. The author gives conditions for sustainability achievement in terms of debt and capital control channels, taking into account initial conditions. Our mathematical analysis improves his study and reveals a wider spectrum of possible economic outcomes that might sometimes be opposed to the conclusions to which Dioikitopoulos (2018) comes. In detail, we reconsider the role of fiscal policy prescriptions, implemented by means of debt and capital responsiveness parameters, in determining the existence and multiplicity of stationary states. We also deepen the influence of policy parameters on local stability properties, highlighting the possible occurrence of two bifurcation scenarios and the consequent emergence of periodic and complex dynamics. Moreover, we review the role of fiscal policies in changing the fate of incoming economic scenarios and in preventing non sustainable paths from occurring. |
| Keywords: | fiscal sustainability, fiscal rules, bond financed deficit, local stability, bifurcations, basins of attraction, dynamic complexities |
| JEL: | C6 E6 H6 H30 |
| Date: | 2018–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:385&r=dge |
| By: | Enrique Mendoza (University of Pennsylvania) |
| Abstract: | Slides for plenary talk delivered at the annual meeting of the Society for Economic Dynamics. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sedpln:2018-2&r=dge |
| By: | Joseph Altonji (Yale University) |
| Abstract: | Slides for plenary talk delivered at the annual meeting of the Society for Economic Dynamics. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sedpln:2018-1&r=dge |
| By: | Nancy Stokey (University of Chicago) |
| Abstract: | Slides for plenary talk delivered at the annual meeting of the Society for Economic Dynamics. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sedpln:2018-3&r=dge |