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on Dynamic General Equilibrium |
| By: | Marcelo Veracierto (Federal Reserve Bank of Chicago) |
| Abstract: | In this paper I study the optimal provision of unemployment insurance over the business cycle. A novel feature of the paper is that, instead of performing the analysis in an environment with exogenous restrictions to risk sharing such as borrowing constraints, the paper takes a more primitive mechanism design approach. In particular, the restrictions to risk sharing arise endogenously as a consequence of search intensities being private information of the individual agents. The economy is essentially a standard real business cycle model that incorporates unemployed agents similar to those in Hopenhayn and Nicolini (1997). Output, which can be consumed or invested, is produced with a Cobb-Douglas production function that uses capital and labor subject to an aggregate productivity shock that follows an AR(1) process. This production technology is located in a single "production island" and workers must be located in this island in order to provide their labor services. Workers get separated from the production island at the beginning of the following period with a constant separation probability. Once outside the production island agents must search in order to get back to it. The probability that a worker arrives to the production island at the beginning of the following period depends on her own search intensity level. A crucial assumption is that this search intensity level is private information of the agent. Only the location of the agent at the beginning of the period (inside or outside the production island) is observed. Agents value consumption and leisure (which is obtained outside the production island) and dislike to search. In order to guarantee stationarity I assume that agents have a constant probability of surviving between consecutive time periods. When an agent dies he is immediately replaced by an offspring from which the agent derives no utility. Newborns start their life as unemployed agents (i.e. outside the production island). In this framework the social planner offers dynamic insurance contracts to the agents under full commitment. The state of the contract is given by the location of the agent at the beginning of the period and by the value that the contract promises to the agent at the beginning of the period. Given this state, the contract determines the consumption level of the agent during the current period and the contingent promised values at the beginning of the following period. These contingent promised values depend both on the realized employment status of the agent at the beginning of the following period and on the realized aggregate productivity shock at the beginning of the following period. The contract must deliver an expected lifetime discounted utility equal to the value promised at the beginning of the period (promise keeping constraint). Although search intensities are not directly observed by the social planner he takes as given the optimal choice of individual search intensities of unemployed agents as a function of the difference that they face between the expected value of becoming employed at the beginning of the following period and the expected value of continuing unemployed (incentive compatibility constraint). The state of the economy for the social planner is the aggregate productivity level, the aggregate stock of capital, and the joint distribution of old agents (i.e. those that are not newborns at the beginning of the current period) across promised values and employment states. Given this aggregate state the social planner chooses investment and the dynamic insurance contracts to maximize the weighted expected lifetime utility of the current newborns and of all future newborns (with constant relative Pareto weights), subject to promise keeping, incentive compatibility and aggregate consumption feasibility constraints. Observe that the social planner does not seek to maximize the lifetime utilities of the current old agents since these are predetermined by their dynamic insurance contracts. Computing a solution to this mechanism design problem is a complex task given the high dimensionality of the state space. I use a method that I introduced in a previous paper (Veracierto 2017) which has the important advantage of not imposing an approximation to the law of motion for the distribution of agents across individual states. The method requires carrying as a state variable a long history of spline coefficients for the decision rules that have been chosen in the past. A (large) linear rational expectations model is then obtained by linearizing all first order conditions and aggregate feasibility constraints with respect to those spline coefficients. In that paper the method was shown to reproduce some key analytical properties that could be derived in the case of logarithmic preferences, even though the computational method did not exploit any particular feature of that case. While this provided considerable confidence about the accuracy of the computational method, the logarithmic preferences corresponded to a case in which the cross sectional heterogeneity did not play an important role in aggregate fluctuations. For other preferences, the computational method still delivered numerical solutions in which the cross sectional heterogeneity did not play a crucial role. Given those results the computational method had to wait to be applied to an environment in which the cross sectional heterogeneity plays an important role for aggregate fluctuations. I expect that the model in this paper will provide such environment. The reason is that when a positive aggregate productivity shock hits the economy and the planner wants to bring people quickly out of unemployment, the only way that he can induce individual agents to increase their search intensity is by increasing the difference between the expected value of becoming employed and the expected value of continuing unemployed. That is, the planner needs to worsen the insurance that it provides to unemployed agents in order to induce them to search more. This will introduce interesting interactions between social insurance (and, therefore, inequality) and properties of the aggregate business cycle since the social planner will consequently be induced to respond less to the aggregate shocks given the negative insurance effects that such response entails. I am currently in the process of computing a solution to the optimal business cycle fluctuations. I will provide a draft of the paper with the results as soon as I have them ready. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:281&r=dge |
| By: | Bluwstein, Kristina (Bank of England); Brzoza-Brzezina, Michał (Narodowy Bank Polski); Gelain, Paolo (Federal Reserve Bank of Cleveland); Kolasa, Marcin (Narodowy Bank Polski) |
| Abstract: | We study the implications of multi-period mortgage loans for monetary policy, considering several realistic modifications — fixed interest rate contracts, lower bound constraint on newly granted loans, and possibility for the collateral constraint to become slack — to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective, and may lead to asymmetric responses to positive and negative monetary shocks. |
| Keywords: | Mortgages; fixed-rate contracts; monetary policy |
| JEL: | E44 E51 E52 |
| Date: | 2018–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0749&r=dge |
| By: | José R. Maria; Paulo Júlio |
| Abstract: | We present a DSGE model for a small euro area economy comprising a banking sector empowered with regulatory capital requirements, defaulted loans and occasionally binding endogenous credit restrictions. Under non-financial shocks no important amplifications arise due to balancing forces: while banks' equity acts as a shock absorber, the observance of regulatory capital requirements acts as a shock amplifier. Under moderately-sized "bad" financial-based shocks defaulted loans increase and banks' value drop. As a result, credit becomes supply constraint for some time, severely amplifying and protracting output downfalls. Endogenous inertia implies a slow recovery in banks' capital and thus an enduring fragility of the banking system. Defaulted loans and credit restrictions are strongly intertwined, since the former severely impact banks' value, hence leveraging the amplification size. |
| JEL: | E62 F41 H62 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201813&r=dge |
| By: | Tatsuro Senga (Queen Mary University of London); Iacopo Varotto (Queen Mary University of London) |
| Abstract: | Idiosyncratic shocks faced by large firms in the U.S. appears to be volatile. Such idiosyncratic shocks may not average out in the cross-section and thus can even generate aggregate fluctuations. In this paper, we first construct a panel of US firms using data from Compustat and show a set of stylized facts about cross-sectional and cyclical features of idiosyncratic shocks faced by large firms. Our panel data reveals that the mean and kurtosis of idiosyncratic shocks decrease with firm size, while the standard deviation and skewness increase with firm size. In particular, the distribution of idiosyncratic shocks faced by the largest firms has a negative mean and positive skew. We also show that the mean of idiosyncratic shocks faced by the largest firms is significantly countercyclical. To examine the quantitative importance of such features of idiosyncratic shocks faced by large firms, we then develop an equilibrium business cycle model wherein idiosyncratic shocks can alone alter the shape of the distribution of firms and thus can drive aggregate fluctuations. We develop a general framework to study such models, wherein the law of large number does not hold and the distribution of firms over productivities becomes a random object, rendering infeasible the use of a standard numerical method. The flexibility of this new approach allows us to isolate the two channels through which the idiosyncratic movements of the firms generate aggregate volatility: average productivity and dynamic inefficiency. In addition we quantify the relative importance of the shocks to large firms in driving the cycle. The model is estimated to match micro-level moments of firm size distribution and idiosyncratic shocks, together with standard macro moments. Consistent with existing studies, our results show that idiosyncratic shocks are a quantitatively important micro-origin of aggregate fluctuations, accounting for 25 percent of output volatility relative to the data. Large firm movements account for 11 percent of aggregate volatility, wherein 63 percent reflects dynamic inefficiency channel. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1012&r=dge |
| By: | Aubhik Khan (Ohio State University); Julia Thomas (Ohio State University); Tatsuro Senga (Queen Mary University of London) |
| Abstract: | We develop a model with endogenous entry and exit in an economy subject to aggregate total factor productivity shocks that are non-stationary. Firms exhibit a life-cycle consistent with data and our model economy reproduces both their size and age distribution. In this setting, persistent shocks to aggregate total factor productivity growth rates endogenously drive long term reductions in business formation. The economic consequences of this persistent decline in entry grows over time. In our model, individual firms vary in both the permanent and transitory components of their total factor productivity and in their capital stock. Capital adjustment is subject to one period time-to-build and involves both convex and nonconvex costs. Our dynamic stochastic general equilibrium model involves an aggregate state that includes a distribution of firms over total factor productivity and capital. Changes in this distribution, following aggregate shocks to the common component of TFP, drive persistent fluctuations in aggregate economic activity. We show that equilibrium movements in firms' stochastic discount factors, following persistent shocks to TFP growth, imply long-run declines in the value of entry. The resulting fall in the number of firms propagates a reduction in economic activity. This slows down the recovery. We apply our model to understanding the last decade of economic activity in the U.S. This period began with a large recession followed by a period of slow economic growth. At the same time there was a persistent reduction in the new business formation. Our dynamic stochastic general equilibrium analysis is consistent with relatively small reductions in the level of total factor productivity, as seen in the last recession, and large reductions in GDP and Business Fixed Investment. Moreover, the recovery from such a large recession is slowed by a persistent reduction in firm entry. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:707&r=dge |
| By: | Pedro Brinca (NovaSBE); Francesco Franco (Universidade Nova de Lisboa); Hans Holter (University of Oslo); Laurence Malafry (Stockholm University); Miguel Ferreira (Nova SBE) |
| Abstract: | Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:393&r=dge |
| By: | Lawrence J. Christiano; Martin S. Eichenbaum; Mathias Trabandt |
| Abstract: | The outcome of any important macroeconomic policy change is the net effect of forces operating on different parts of the economy. A central challenge facing policy makers is how to assess the relative strength of those forces. Dynamic Stochastic General Equilibrium (DSGE) models are the leading framework that macroeconomists have for dealing with this challenge in an open and transparent manner. This paper reviews the state of DSGE models before the financial crisis and how DSGE modelers responded to the crisis and its aftermath. In addition, we discuss the role of DSGE models in the policy process. |
| JEL: | E0 E3 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24811&r=dge |
| By: | Lorenzo Burlon; Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy) |
| Abstract: | In this paper we evaluate the effectiveness of an open-ended Asset Purchase Programme (APP) for the euro area. To this purpose, we build on the large-scale New Keynesian dynamic general equilibrium model calibrated to the euro area and the rest of the world developed in Burlon et al. (2017), but, different from that contribution, we assume that the central bank does not announce the ending date of the programme, while leaving open the possibility of extending it in future periods conditionally on inflation developments. We assume that agents form their expectations about possible additional purchases beyond the horizon of the announcement by the central bank according to a rule linking them to the expected inflation gap. It is showed that the open-ended APP is more effective in immediately stimulating macroeconomic conditions than committing ex ante to an ending date. Importantly, the open-ended dimension provides a hedge against the materialization of negative euro-area aggregate demand shocks that pushes inflation away from its path towards the target. The effectiveness is further reinforced by a forward guidance on monetary policy rates. |
| Keywords: | central bank communication, open-ended announcement, non-standard monetary policy, DSGE models, open-economy macroeconomics, euro area |
| JEL: | E43 E44 E52 E58 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1185_18&r=dge |
| By: | Nezih Guner (CEMFI); Alessandro Ruggieri (Universitat Autonoma de Barcelona, Barcelona GSE); James Tybout (Pennsylvania State University) |
| Abstract: | Over the past 40 years, labor market conditions in the United States and elsewhere have rapidly evolved. Skill premiums have grown, jobs in the middle of the skill distribution have become relatively scarce, and job and worker turnover rates have declined. At the same time, the fraction of the population attending college has grown, much of the manufacturing work force has shifted into services, and on-the-job training times have increased for high-skill workers. This paper interprets these patterns through the lens of a dynamic structural model that explains workers' human capital accumulation and earnings trajectories over their life cycles. The basic idea is as follows. Before entering the labor market, high school graduates who differ in their ability (human capital) levels decide whether to attend college. After their schooling decisions, skilled (college educated) and unskilled workers enter into the labor market and match with firms that produce different tasks. Firms that produce the same task differ in their idiosyncratic productivity levels. Once employed, workers build human capital through experience, and may also invest in on-the-job training. Both types of human capital accumulation induce wage growth over their life cycles, and this growth is augmented by the arrival of job offers from "poaching" employers, which force firms to compete for their services. But their wages fall if product market shocks throw them into unemployment, interrupting their human capital accumulation and reducing their bargaining power with potential new employers. Tasks, which are produced by one worker-one pair firms are demanded by firms that produce differentiated consumption goods. Consumption good producers can obtain different tasks they need for production from domestic or foreign markets. Tasks differ extent to which they can be obtained from foreign markets. Offshoring, and import competition affect workers' careers through all of these mechanisms. While improving productive efficiency, these shocks destroy jobs in the trade-exposed occupations, change job offer arrival rates for each worker type, and change incentives to invest in college degrees. Also, by reducing the relative demand for mid-skill occupations, they affect workers' incentives to invest in on-the-job training. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:349&r=dge |
| By: | Nikolay Iskrev |
| Abstract: | Standard economic intuition suggests that asset prices are more sensitive to news than other economic aggregates. This has led many researchers to conclude that asset price data would be very useful for the estimation of business cycle models containing news shocks. This paper shows how to formally evaluate the information content of observed variables with respect to unobserved shocks in structural macroeconomic models. The proposed methodology is applied to two different real business cycle models with news shocks. The contribution of asset prices is found to be relatively small. The methodology is general and can be used to measure the informational importance of observables with respect to latent variables in DSGE models. Thus, it provides a framework for systematic treatment of such issues, which are usually discussed in an informal manner in the literature. |
| JEL: | C32 C51 C52 E32 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201802&r=dge |
| By: | Ionut Cotoc (McMaster University); Alok Johri (McMaster University); Cesar Sosa-Padilla (Notre Dame) |
| Abstract: | We combine three international datasets containing information on the political leanings of the ruling government, sovereign debt yields, and key macroeconomic quantities. This yields new stylized facts regarding the influence of the political leanings of a country's government on their international borrowing costs as well as on fiscal policy. First, left wing governments, on average, pay 134 basis points more than right wing governments to borrow on international debt markets. Second, interest rates on left-wing government debt are 50 percent more volatile than their right-wing counterparts and 40 percent less negatively correlated with output. Third, government spending is very highly correlated with GDP with left governments showing a lower positive correlation and much less volatility than right wing governments. We proceed to build a sovereign default model in which elections determine which one of two politically heterogeneous policy makers will be in charge of the government. When the two policy makers differ in the marginal impact of their fiscal choices on their re-election probabilities, our model delivers the above-mentioned features of the data. In addition, in keeping with the data, right-wing governments display lower tax rates and government consumption to GDP shares than left-wing governments in our calibrated model. Left governments systematically default at higher income levels than right governments leading to political default events when the left replaces the right as well as higher average borrowing costs for the left government. The model implies that re-election probabilities are increasing in good times. These results are obtained without assuming any differences in the preferences of the two types of policy makers. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1125&r=dge |
| By: | Roozbeh Hosseini (University of Georgia); Kai Zhao (University of Connecticut); Karen Kopecky (Federal Reserve Bank of Atlanta) |
| Abstract: | Health and earnings are positively correlated and this is for several reasons. First, individuals who are in poor health are significantly less likely to work than healthy individuals. Second, conditional on working, individuals in poor health work fewer hours on average. Third, individuals in poor health earn lower wages on average. We document these facts using an objective measure of health called a frailty index which we construct for PSID respondents. The frailty index measures the fraction of observable health deficits an individual has. In previous work, we documented that health, as measured by the frailty index, deteriorates more rapidly and has a larger increase in dispersion with age than self-reported health. It is also more persistent over the life-cycle. These facts put together suggest that health inequality over the life cycle may be an important driver of lifetime earnings inequality. To assess this claim we develop a model of the joint dynamics of health and earnings over the life cycle. Individuals in the model face health, earnings and unemployment risk, and optimally choose labor supply on both the intensive and extensive margin. Agents are partially insured against these risks through government-run unemployment and disability insurance programs. We give agents in the model a dynamic process for frailty (health) that is estimated using the PSID data. Because of selection concerns, agents' productivity processes, including the contribution of frailty to productivity, are estimated using the model and a method of moments estimation. Targeted moments are constructed off distributions of wages, hours, and participation by frailty and age. These distributions are obtained from an auxiliary simulation model that is estimated using PSID data. We find that health inequality can account for a significant share of the variation in lifetime earnings among 70 year-olds. Most of this effect is due to the fact that unhealthy individuals exit the labor force at much younger ages than healthy ones. We find that health inequality has a larger impact on earnings inequality than previous literature for two reason. One, our model is the first in this literature that allows health to impact earnings through all three margins: participation, hours, and wages (productivity). Two, previous literature measured health using self-reported health status and thus understated the extent to with health deteriorates with age for some individuals. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1093&r=dge |
| By: | B Ravikumar (Federal Reserve Bank of St Louis); Raymond Riezman (University of Iowa); Yuzhe Zhang (Texas A&M University) |
| Abstract: | We consider a dynamic model in which a domestic firm has a positive marginal cost of production and a foreign firm has zero marginal cost. With free trade the foreign firm would serve the entire domestic market and the domestic firm would not produce. We assume that there is a social benefit for the domestic nation if the domestic firm produces. This could be, for example, because there is learning by doing at the firm level that spills over to other domestic firms. We also assume that the domestic firm can stochastically improve its technology and produce at zero cost. This probability is increasing in domestic production. However, whether the domestic firm has transitioned to zero cost or not is private information. We use a mechanism design approach to deliver optimal protection in the presence of such persistent private information. Our incentive-compatible protection policy induces the domestic firm to reveal its true cost. Our results are as follows. First, the import quota i.e., the fraction of the domestic market served by the foreign firm, increases over time. Second, when the domestic firm announces that it has transitioned to zero cost, the firm receives a one time lump sum payment. Finally, there is an endogenous cutoff date at which time the protection ends. This policy can be implemented by announcing (i) a market share policy, (ii) a domestic subsidy policy, and (iii) a tariff rate policy, and providing the domestic firm with an initial quantity of assets. The domestic firm decides whether or not to participate in the policy. If not, it exits and takes outside option of zero. If yes, it must follow the market share policy. The tariff rate is chosen such that the foreign firm makes zero profits every period. The subsidy rate is chosen such that the domestic firm's loss per unit in each period is limited to the difference between its marginal cost of production and the price charged by the foreign firm. The domestic firm would offset its loss by depleting its assets. At the time of transition to zero cost, the domestic firm would have no loss and would have the asset balance as its lump sum reward. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1016&r=dge |
| By: | Spencer G. Lyon; Michael E. Waugh |
| Abstract: | Should a nation's tax system become more progressive as it opens to trade? Does opening to trade change the benefits of a progressive tax system? We answer these question within a standard incomplete markets model with frictional labor markets and Ricardian trade. Consistent with empirical evidence, adverse shocks to comparative advantage lead to labor income losses for import-competition-exposed workers; with incomplete markets, these workers are imperfectly insured and experience welfare losses. A progressive tax system is valuable, as it substitutes for imperfect insurance and redistributes the gains from trade. However, it also reduces the incentives for labor to reallocate away from comparatively disadvantaged locations. We find that optimal progressivity should increase with openness to trade with a ten percentage point increase in openness necessitating a five percentage point increase in marginal tax rates for those at the top of the income distribution. |
| JEL: | E1 F11 H21 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24784&r=dge |
| By: | Julien BENGUI; Toan PHAN |
| Abstract: | We develop a simple model of defaultable debt and rational bubbles in the price of an asset, which can be pledged as collateral in a competitive credit pool. When the asset pledgeability is low, the down payment is high, and bubble investment is unleveraged, as in a standard rational bubble model. When the pledgeability is high, the down payment is low, making it easier for leveraged borrowers to invest in the bubbly asset. As loans are packaged together into a competitive pool, the pricing of individual default risk may facilitate risk-taking. In equilibrium, credit-constrained borrowers may optimally choose a risky leveraged investment strategy – borrow to invest in the bubbly asset and default if the bubble bursts. The model predicts joint boom-bust cycles in asset prices and securitized credit. |
| Keywords: | rational bubbles, collateral, credit pool, household debt, equilibrium default |
| JEL: | E12 E24 E44 G01 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montec:07-2018&r=dge |
| By: | Ilse Lindenlaub (Yale University); Fabien Postel-Vinay (University College London) |
| Abstract: | When heterogeneous workers sort into heterogeneous jobs on the labor market, `how many' and especially `which' skills and job attributes matter for this choice? Based on our theory of multi-dimensional sorting under random search (Lindenlaub, Postel-Vinay 2017), this paper first develops an empirical test of how many heterogeneity dimensions matter for sorting: If the data is well-approximated by N-dimensional worker and job types, any two workers with the same type should face the same job ladder and therefore the same job acceptance sets. Conversely, if the assumption of N-dimensional heterogeneity is not justified but instead $M>N$ dimensions matter for sorting, then approximating different M-dimensional worker types by the same N-dimensional worker type will produce job ladder heterogeneity within those N-dimensional worker types, revealing misspecification of worker's attributes. To assess the accuracy of this test, we first implement it via simulations, where we simulate data from a large class of multi-dimensional models that complies with our theory. We then apply model selection methods to regressions of employment-to-employment indicators (as a proxy for job acceptance sets) on a large set of potential skills and job attributes in order to recover the true dimensionality of worker and job characteristics. We show that the model selection methods quite accurately reveal the `true' worker and job heterogeneity that matters for sorting. We then implement this test on US data at different points in time, which at each given point delivers a set of worker and job attributes that matters for labor market sorting and allows us to construct the multivariate distributions of skills and job attributes in the data. Second, we propose an application of multi-dimensional sorting to the observed slow-down in US labor market dynamics. We estimate the search model with multi-dimensional types developed in (Lindenlaub, Postel-Vinay 2017) at different points in time, using our constructed skill and job attribute distributions as inputs for the estimation. We then use the estimated model to decompose the slow-down in UE and EE flows in the part that is driven by (i) changes in the multivariate skill and job distributions, (ii) changes in technology, and (iii) changes in search frictions. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1239&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); Angela Greulich (INED - Institut national d'études démographiques, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, 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 (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, 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) |
| Abstract: | During the last two centuries, 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 higher education, and where income rises push towards advancing births, can progressively converge towards a modern economy, where individuals invest in higher 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 Swedish cohorts born between 1876 and 1966. |
| Keywords: | regime shift,human capital,fertility,childbearing age,births postponement |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01452846&r=dge |
| By: | COULIBALY, Louphou |
| Abstract: | In a model featuring sudden stops and pecuniary externalities, I show that the ability to use capital controls has radical implications for the conduct of monetary policy. Absent capital controls, following an inflation targeting regime is nearly optimal. However, if the central bank lacks commitment, it will follow a monetary policy that is excessively procyclical and not desirable from an ex ante welfare prospective: it increases overall indebtedness as well as the frequency of financial crisis and reduces social welfare relative to an inflation targeting regime. Access to capital controls can correct this monetary policy bias. With capital controls, relative to an inflation targeting regime, the time-consistent regime reduces both the frequency and magnitude of crises, and increases social welfare. This paper rationalizes the procyclicality of the monetary policy observed in many emerging market economies. |
| Keywords: | Financial crises; monetary policy; capital controls; time consistency; aggregate demand externality; pecuniary externality |
| JEL: | E44 E52 F41 G01 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2018-03&r=dge |
| By: | Lakuma, Corti Paul; Mawejje, Joseph; Lwanga, Musa Mayanja; Munyambonera, Ezra |
| Abstract: | While Uganda is considered to be at low risk of debt distress, the stagnant tax effort and large planned capital expenditures might significantly alter this position. This paper employs the dynamic stochastic general equilibrium (DSGE) model to examine tax design issues that arise in addressing debt increases. The results suggest that Uganda may improve it debt position by permanently increasing tax rates by 5 percentage point. However, an increase of consumption tax rates (VAT and Excise) by this magnitude to meet debt reduction is found to be relatively more distortionary affecting consumption, especially for the poor households, in both the short and long run leading to large temporary reductions in the gross domestic product (GDP). |
| Keywords: | Industrial Organization, Public Economics |
| Date: | 2018–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eprcrs:275660&r=dge |
| By: | Simon Alder (University of North Carolina at Chapel H); Andreas Mueller (University of Essex); Timo Boppart (IIES, Stockholm University) |
| Abstract: | We propose a dynamic theory that is consistent with the long-run structural change of consumption expenditure shares in agriculture, manufacturing and services over more than a century. We first document three robust features in the long-run data for the United States, the United Kingdom, Canada and Australia: (i) a monotonic decrease in agriculture; (ii) a hump shape in manufacturing; and (iii) an accelerated rise of services. Using historical panel data on sectoral prices and nominal expenditures from 1900 to 2014, we then test what demand side theory can quantitatively explain the observed structural change. We find that the standard non-homothetic preference specifications used in the literature - the generalized Stone-Geary and the Price Independent Generalized Linearity (PIGL) specification - struggle to do so. Within our intertemporal framework, we then consider the entire class of preferences that allows for the aggregation of individual Euler equations - the class of intertemporally aggregable (IA) preferences. This general class nests the standard specifications and allows for the identification of preference parameters from aggregate data. Moreover, its expenditure system is flexible enough to capture the non-monotonic relationship between sectoral expenditure shares. Despite the flexibility, the IA preference specification is parsimonious and can be used in a multi-sector general equilibrium model with steady growth and heterogeneity in individual consumption expenditures. In the empirical analysis we show that the standard specifications are rejected against the more flexible parameterizations of IA preferences and we document the importance of flexible income effects. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:988&r=dge |
| By: | Imura, Yuko (Bank of Canada); Shukayev, Malik (University of Alberta, Department of Economics) |
| Abstract: | This paper studies the effects of monetary policy shocks on firms’ participation in exporting. We develop a two-country dynamic stochastic general equilibrium model in which heterogeneous firms make forward-looking decisions on whether to participate in the export market and prices are staggered across firms and time. We show that while lower interest rates and a currency depreciation associated with an expansionary monetary policy help to increase the value of exporting, the inflationary effects of the policy stimulus weaken the competitiveness of some firms, resulting in a contraction in firms’ export participation. In contrast, positive productivity shocks lead to a currency depreciation and an expansion in export participation at the same time. We show that, overall, the extensive margin is more sensitive to firms’ price competitiveness with other firms in the export market than to exchange rate movements or interest rates. |
| Keywords: | Exporter dynamics; monetary policy; firm heterogeneity; exchange rate |
| JEL: | E52 F12 F44 |
| Date: | 2018–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2018_011&r=dge |
| By: | Vadim Elenev; Tim Landvoigt; Stijn Van Nieuwerburgh |
| Abstract: | How much capital should financial intermediaries hold? We propose a general equilibrium model with a financial sector that makes risky long-term loans to firms, funded by deposits from savers. Government guarantees create a role for bank capital regulation. The model captures the sharp and persistent drop in macro-economic aggregates and credit provision as well as the sharp change in credit spreads observed during the Great Recession. Policies requiring intermediaries to hold more capital reduce financial fragility, reduce the size of the financial and non-financial sectors, and locally increase macro-economic volatility. They redistribute wealth from savers to the owners of banks and non-financial firms. Current capital requirements are close to optimal. |
| JEL: | E02 E1 E20 E44 E6 G12 G18 G21 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24757&r=dge |
| By: | Alban Moura; Kyriacos Lambrias |
| Abstract: | We describe LU-EAGLE, a DSGE model developed at the Banque centrale du Luxembourg. LU-EAGLE borrows its general structure from the Euro Area and GLobal Economy (EAGLE) model developed by the European System of Central Banks and also embeds specific features to capture some important characteristics of Luxembourg's economy. In particular, the model reproduces the high levels of exports and imports relative to GDP, as well as the significant share of cross-border workers in Luxembourg's labor market. We calibrate LU-EAGLE and discuss simulation results describing the effects of a set of standard shocks, originating both in Luxembourg and abroad. The model suggests that international spillovers make Luxembourg more responsive to monetary policy shocks and less responsive to fiscal policy shocks. Moreover, it highlights how fluctuations in foreign demand have a significant impact on domestic developments. |
| Keywords: | DSGE models, open economy models, policy analysis, Luxembourg. |
| JEL: | C54 E17 E32 E37 E62 F47 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp122&r=dge |
| By: | Manuel Garcia-Santana (Universitat Pompeu Fabra); Josep Pijoan-Mas (CEMFI); Lucciano Villacorta (Central Bank of Chile) |
| Abstract: | In this paper we document that the investment and saving rates follow a large and long-lived hump-shaped profile along the development path. This pattern is present both in the large panel of countries of the Penn World Tables (PWT) between 1950 and 2010 and also in the historical data recently assembled by Jorda, Schularick, and Taylor (2017). The hump of investment with development is a challenge for the standard neo-classical model of growth. We propose two simple mechanisms that can jointly explain the observed paths of investment. First, we allow for richer transitional dynamics by assuming that households value their consumption in reference to a slow-moving endogeneous standard of living of the society where they live in, and show that a calibrated model with this feature alone can reproduce the large and long-lasting hump-shaped profiles of investment with development. Second, we look at the data of each country as coming from the transitional dynamics of economies whose technology does not grow at a constant rate. In particular, we extend the model to have separate consumption and investment goods sectors and feed it with the observed paths of investment-specific technical change, total factor productivity, and investment depreciation for each country. We exploit the Euler equation of consumption with a large panel of countries to estimate the preference parameters of the model as it is standard in the micro consumption literature. The estimated model allows us to understand which forces drive the investment rates observed in the data for every country and period. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:870&r=dge |
| By: | Markus Brunnermeier (Princeton University); Oleg Itskhoki (Princeton University); Pierre-Olivier Gourinchas (UC Berkeley) |
| Abstract: | What is the relationship between trade and current account openness and growth? Can a catching-up economy borrow like Argentina or Spain and grow like China? To address these questions, we develop a model of endogenous converge growth, which we study under various policy regimes regarding trade and capital account openness. In the model, entrepreneurs adopt heterogenous projects based on their profitability. Trade openness has two effects on the relative profitability of tradable projects. First, the foreign competition effect unambiguously discourages tradable innovation. Second, the relative market size effect may favor or discourage tradable innovation. We show that balanced trade ensures that the two effects exactly offset each other, while trade deficits unambiguously favor non-tradable innovation. The increase in domestic consumption associated with international borrowing results in a relative market size effect that reinforces the foreign competition effect to discourage tradable innovation, as well as the aggregate innovation rate and the pace of productivity convergence. We further show that net exports relative to domestic absorption is a sufficient statistic for the feedback effect from aggregate allocation into sectoral productivity growth, and we find empirical support for the predictions of the model in the panel of sectoral productivity growth rates in OECD countries. A sudden stop in capital flows during the transition phase results simultaneously in a recession due to a fall in local demand and a sharp rebound in tradable productivity growth, provided the labor market can adjust flexibly via a sharp decline in the wage rate. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:198&r=dge |
| By: | Alex Clymo (University of Essex) |
| Abstract: | Can the large decline in aggregate employment during the US’s Great Recession be explained by the unusually large decline in employment of young firms? In this paper I develop a quanti- tative heterogeneous-firm model with both financial and nominal frictions and use it to analyse the recent recession through the lens of firm-level data. I first use BDS data for the US to show that 40% of the decline in aggregate employment during the recession can be accounted for by declining employment in young firms (age 0-5). While this supports the role of financial frictions in impeding employment, it still leaves 60% of the decline to be explained by old firms (age 6+). Decomposing this further into changes in average employment within firms, and the number of firms, I find that most of the total decline in employment can be accounted for by (1) a decline in the number of young firms by over 25%, and (2) a decline in employment within old firms of 7.5%. I then extend the heterogeneous firm model of Khan and Thomas (2013) to include nominally denominated firm debt, downwards nominal wage rigidity (DNWR), and the zero lower bound (ZLB). Absent nominal features, a financial shock is only able to match the response of young firms during the crisis, because declines in real factor prices reallocate resources from young to old firms. However, adding DNWR and the ZLB inhibits this fall in wages and interest rates, leading the financial crisis to spill over to old firms. This allows the model to better match the data across the whole firm age distribution. Additionally, rather than leading to the misalloca- tion of resources across firms, the crisis instead manifests as a drastic decline in employment, as occurred in the US. Finally, I show how the power of fiscal policy at the ZLB depends on the firm distribution. The government spending multiplier is larger when more firms are financially constrained, and fiscal transfers to young firms are more powerful than transfers to older firms. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:912&r=dge |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | This paper examines the question whether information is contained in forecasts from DSGE models beyond that contained in lagged values, which are extensively used in the models. Four sets of forecasts are examined. The results are encouraging for DSGE forecasts of real GDP. The results suggest that there is information in the DSGE forecasts not contained in forecasts based only on lagged values and that there is no information in the lagged-value forecasts not contained in the DSGE forecasts. The opposite is true for forecasts of the GDP deflator. |
| Keywords: | DSGE forecasts, Lagged values |
| JEL: | E10 E17 C53 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2140&r=dge |
| By: | André C. Silva; Bernardino Adão |
| Abstract: | We find that the Friedman rule is not optimal with government transfers and distortionary taxation. This result holds for heterogeneous agents, standard homogeneous preferences, and constant returns to scale production functions. The presence of transfers changes the standard optimal taxation result of uniform taxation. As transfers cannot be taxed, a positive nominal net interest rate is the indirect way to tax the additional income derived from transfers. The higher the transfers, the higher is the optimal inflation rate. We calibrate a model with transfers to the US economy and obtain optimal values for inflation substantially above the Friedman rule. |
| JEL: | E52 E62 E63 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201803&r=dge |
| By: | Carson Reeling; Richard D. Horan; Cloé Garnache |
| Abstract: | High transaction costs and thin participation plague water quality trading and prevent markets from delivering expected efficiency gains. Point sources generate a single pollutant, while nonpoint sources generate multiple, complementary pollutants. We develop a dynamic search model of point-nonpoint trading that includes transactions costs. These costs affect participation decisions and generate strategic complementarities with multiple large or small market participation levels equilibria. Integrated markets—with trading across pollutants—lead to lower transactions costs for both sources and a larger basin of attraction around the full-participation equilibrium, and thus may improve pollution trading efficiency relative to distinct markets. |
| Keywords: | credit stacking, multi-pollutant trading, participation, strategic complementarities, transactions costs |
| JEL: | Q53 Q58 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7152&r=dge |
| By: | Roozbeh Hosseini (University of Georgia); Kai Zhao (University of Connecticut); Karen Kopecky (Federal Reserve Bank of Atlanta) |
| Abstract: | Recent studies have identified health dynamics and health shocks as major sources of risk over the life cycle. Health has implications for many economic variables includ- ing asset accumulation, labor supply, and income and wealth inequality. Despite the importance of health in economic studies, there is no unified objective measure of health status. In this paper we propose such a measure: frailty, defined as the cumulative sum of all adverse health indicators observed for an individual. There is overwhelming evidence in the gerontology literature that this simple measure is a strong predictor of mortality and other health outcomes. We construct a frailty index for individuals in the PSID, HRS and MEPS separately and make the following three observations. One, our constructed frailty index is remarkably consistent across the three datasets in terms of persistence, and dynamics of its distribution. This is in contrast to the most commonly used measure of health, self-reported health status. Two, individuals’ health decays at a substantially faster pace over the lifecycle when measured by frailty as opposed to self-reported health status. Three, health status is more persistent when measured by frailty as opposed to self reported health status. We estimate a dynamic process for frailty over the life cycle and show that an important driver of increasing inequality in health with age is dispersion in growth rates of frailty across individuals. Our frailty measure and dynamic process can be used by economists to study the evolution of health status over the life cycle and its implications. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:977&r=dge |
| By: | Stephan Imhof, Cyril Monnet and Shengxing Zhang |
| Abstract: | We study the implications of liquidity regulations and monetary policy on depositmaking and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:1803&r=dge |
| By: | George Alessandria (University of Rochester); Horag Choi (Monash University); Kim Ruhl (Pennsylvania State University) |
| Abstract: | We study how the transitions following a trade reform are shaped by the time it takes for new exporters to grow in the export market. We introduce time and risk into the xed-variable cost tradeo central to general equilibrium heterogeneous rm trade models: Investing in exporting gradually and stochastically lowers the costs of exporting. The model captures the tendency of new exporters to export on a small scale, to have low survival rates, and to take time to grow into large exporters. In the model, aggregate trade dynamics arise from producer-level decisions to invest in lowering their future variable export costs, and tari reforms generate time-varying trade elasticities. We show that the gains from reducing taris arise from substituting away from rm creation and towards export capacity. This is in stark contrast to the static models that dominate the literature. The strength of this substitution is determined largely by the size of new exporters and their ability to grow into successful exporters. We calibrate the model and estimate the welfare gains from reducing taris, which dier substantially from the long-run changes in consumption or trade. We show that the welfare gain cannot be recovered from a static trade model or from formulas based on those models. Because aggregate trade grows slowly, the long-run eects are strongly discounted and, thus, are not the key determinants of the welfare gains from a change in trade policy. We also nd that policy prescriptions based on static models can predict a loss from trade reform when our dynamic model predicts a gain. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1324&r=dge |
| By: | Romanos Priftis; Srecko Zimic |
| Abstract: | This paper finds that debt-financed government spending multipliers vary considerably depending on the location of the debt buyer. In a sample of 33 countries, we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared with when government purchases are financed by issuing debt to home investors (residents). A theoretical model (with flexible or sticky prices) shows that the location of the government creditor produces these differential responses to the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, both in the model and in the data. |
| Keywords: | Debt Management, Economic models, Fiscal Policy, International financial markets |
| JEL: | E2 E62 F41 H3 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:18-32&r=dge |
| By: | Alexandros Fakos (ITAM); Plutarchos Sakellaris (Athens University of Economics and Business); Tiago Tavares (CIE ITAM) |
| Abstract: | Abstract Business fixed investment in Greece collapsed during the Great Depression. In 2014 it was about half the level it attained in 2009. The large crisis was characterized by both a drop in domestic demand and an increase in the shadow cost of capital. In a standand model, firm investment depends on the marginal product of capital which is driven by profitability and on the shadow cost of capital. What was the relative importance of these two factors for the observed investment collapse? Regarding the shadow cost of capital, was its variation mostly due to real investment adjustment costs or frictions in the credit market? To answer these questions, we use a novel, firm-level dataset of Greek manufacturing firms. We find that profitability is not enough to explain observed drop in firm investment. In addition, financing constraints on firm access to capital were the predominant friction from the capital cost side. Our strategy is to estimate a dynamic model of firm investment separately for the periods before and during the crisis. Capital adjustment cost entails both convex and non-convex adjustment costs. We also allow for debt finance subject to collateral constraints, with aggregate financial shocks affecting maximum debt capacity, as in Khan and Thomas (2013). As a first step, we estimate firm profitability and observe extensive heterogeneity both across firms and across sectors before and during the crisis. Intriguingly, while we observe a substantial drop of investment rates in all sectors, in some firm profitability does not drop during the crisis. This is an indication that variation in the cost of capital is important. Our structural estimates show a pronounced increase in the importance of capital adjustment costs during the crisis. A firm model with only real adjustment frictions adequately captures certain data moments like investment rate dispersion and inaction. However, when simulated for the crisis period, conditional on the firm distribution of capital stock and firm profitability, the model can account for less than half the observed drop in the investment rate. In a second step, we augment the model with financial frictions that can generate further variation in the cost of capital across firms. An aggregate financial shock that increases the collateral requirement for borrowing, induces some firms with a good profitability shock realization to reduce investment. Our results highlight the important role of the near collapse of the Greek banking system and extreme tightening of firm financing conditions in generating the collapse in investment during this large crisis. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1000&r=dge |
| By: | Ulrike Malmendier; Leslie Sheng Shen |
| Abstract: | We show that personal experiences of economic shocks can “scar'” consumer behavior in the long run. We first illustrate the effects of experience-based learning in a simple stochastic life-cycle consumption model with time-varying financial constraints. We then use data from the Panel Study of Income Dynamics (PSID), the Nielsen Homescan Panel, and the Consumer Expenditure Survey (CEX) to estimate the long-term effects of lifetime experiences on consumption. We show that households who have lived through times of high local and national unemployment, or who have experienced more personal unemployment, spend significantly less on food and total consumption, after controlling for income, wealth, employment, demographics, and macro-economic factors, such as the current unemployment rate. The reverse holds for past experiences of low unemployment. We also estimate significant experience-based variation in consumption within household, i. e., after including household fixed effects. At the same time, lifetime experiences do not predict individuals' future income. The Nielsen data reveals that households who have lived through times of high unemployment are particularly likely to use coupons and to purchase sale items or lower-end products. As predicted by the experience-based learning model, the effects of a given macro shock are stronger for younger than for older cohorts. Finally, past experiences predict beliefs about future economic conditions in the Michigan Survey of Consumers (MSC), implying a beliefs-based channel. Our results suggest a novel micro-foundation of fluctuations of aggregate demand, and explain long-run effects of macroeconomic shocks. |
| JEL: | D12 D83 D91 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24696&r=dge |
| By: | Claudio Michelacci (EIEF); Andrea Pozzi (EIEF); Luigi Paciello (EIEF) |
| Abstract: | We document that around one half of the cyclical variation in aggregate non-durable consumption expenditures by US households comes from changes in the products entering their consumption basket. Most of this variation is due to changes in the rate at which households add new products to their basket, while removals from the basket are relatively acyclical. These patterns hold true within narrowly defined sectors of products or quality categories and are only partly driven by changes in the price of products or their availability in the market. We rationalize this evidence by incorporating a conventional random utility model of discrete choice of products into a standard household dynamic optimization problem. Household preferences over products in her consideration set randomly vary over time and because of this a larger set reduces the welfare relevant household price index. The household can save in financial assets and decides how much to spend in experimenting for new products to be added to her consideration set. In response to income shocks the household increases savings and experiments more, which allows to smooth consumption by persistently reducing her future price index. The calibrated model predicts that experimentation expenditures fluctuate by around 15 percent from peak to bottom in the business cycle. This experimentation channel has novel implications for consumption smoothing, the measurement of household level inflation, and the role of aggregate demand stabilization policies. Motivated by this evidence, we embed a standard discrete choice model of product choice into a macro model. Random shocks to preferences cause products to be temporarily added and removed from the consumption basket, while experimentation effort by households expands their consideration set, leading to products being added to their consumption basket. This mechanism microfunds love for variety as a household's effort to expand the consideration set to better fit its random preferences. Expansions in the consideration set have long lasting effects on household welfare, as they persistently reduce the welfare-relevant price paid by the household, providing a substitute to savings in smoothing utility from consumption expenditure over time. We calibrate the model using the scanner data to show that product experimentation is pro-cyclical, acts as a substitute to savings and accounts for a large fraction of the cyclical behavior of product addition. We validate the prediction of the model by analyzing the response to an exogenous shock to income, represented by the 2008 U.S. Fiscal Stimulus in the U.S., and showing that it led to a surge in product experimentation. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1008&r=dge |
| By: | Paul Beaudry (University of British Columbia); Franck Portier (Toulouse School of Economics) |
| Abstract: | In this paper we present a generalized sticky price model which allows, depending on the parameterization, for demand shocks to maintain strong expansionary effects even in the presence of perfectly flexible prices. The model is constructed to incorporate the standard three-equation New Keynesian model as a special case. We refer to the parameterizations where demand shocks have expansionary effects regardless of the degree of price stickiness as Real Keynesian parameterizations. We use the model to show how the effects of monetary policy–for the same degree of price stickiness–differ depending whether the model parameters are within the Real Keynesian subset or not. In particular, we show that in the Real Keynesian subset, the effect of a monetary policy that tries to counter demand shocks creates the opposite tradeoff between inflation and output variability than under more traditional parameterizations. Moreover, we show that under the Real Keynesian parameterization neo-Fisherian effects emerge even though the equilibrium remains unique. We then estimate our extended sticky price model on U.S. data to see whether estimated parameters tend to fall within the Real Keynesian subset or whether they are more in line with the parameterization generally assumed in the New Keynesian literature. In passage, we use the model to justify a new SVAR procedure that offers a simple presentation of the data features which help identify the key parameters of the model. The main finding from our multiple estimations, and many robustness checks is that the data point to model parameters that fall within the Real Keynesian subset as opposed to a New Keynesian subset. We discuss both how a Real Keynesian parametrization offers an explanation to puzzles associated with joint behavior of inflation and employment during the zero lower bound period and during the Great Moderation period, how it potentially changes the challenge faced by monetary policy if authorities want to achieve price stability and favor employment stability. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:61&r=dge |
| By: | David Cuberes (Clark University); Jose V. Rodriguez Mora (University of Edinburgh); Ludo Visschers (The University of Edinburgh/Universidad); Marc Teignier (Universitat de Barcelona) |
| Abstract: | We present a model where labor supply decisions are made jointly by couples, and firms which respond to the joint nature of these decisions. In our model, parenthood requires a parent of choice to take some time out of the labor force, while a contracting friction implies that leaving the labor force imposes a cost on firms that hired them. An efficiency wages mechanism arises when there is assortative mating in the productivity level of family members, as firms know that increasing the wage of their employees makes them less likely to leave the labor force. As a consequence, no equilibrium in pure strategies without discrimination is possible. If firms can condition wages on gender there exists an equilibrium where women are paid less than men at all productivity levels, while productive women always employed but paid less than men (glass ceiling) and less productive women are not employed. If firms can not condition on wages on gender but can do so on a characteristic (even if irrelevant for productivity) another equilibrium (akin to mixed strategies) arises. In it at each productivity level workers of both genders have heterogeneous wages with identical distribution. The efficiency effects of these equilibrium are complex as it worsens allocation within families, as it adds noise inducing in occasion the most productive member to leave the market. We extent the model allowing for differences in home and market productivity of genders and show that in the gender discrimination equilibrium a decrease in the gap of productivity induces female participation increases at low productivity levels while top female wages rise. Furthermore, increases in female participation increase male wage inequality. In a dynamic version of the model we hypothesize that if in the past, productivity differences made discriminatory equilibrium unique, then as productivities converge the discriminatory equilibrium remain unique. Instead of multiple equilibrium we may observe multiple steady states that make gender differences stable in the absence of policy changes. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1138&r=dge |
| By: | Gauti Eggertsson (Brown University); Vaishali Garga (Brown University) |
| Abstract: | This paper shows that government spending multiplier at the zero lower bound (ZLB) is larger under sticky information than under sticky prices. Similarly, well known paradoxes, e.g., the paradox of toil and the paradox of flexibility become more severe under sticky information. These results depend crucially on the duration of the fiscal policy stimulus relative to the fundamental shock in the economy. Such policy coordination is all the more important in the sticky information framework. In the aftermath of the Great Recession, a number of papers documented that fiscal policy is extremely effective to increase demand at the ZLB. In particular, the classic government spending multiplier is greater than one, while under normal circumstances it is not for then monetary policy can do the job via interest rate cuts. Examples include Eggertsson (2011), Christiano, Eichenbaum and Rebelo (2009), Woodford (2011). The literature also uncovered peculiar paradoxes, such as the paradox of toil (Eggertsson (2010)) and the paradox of flexibility (Bhattarai, Eggertsson and Schoenle (2014)). These results could be interpreted either as a serious challenge to the conventional wisdom or reflect some fundamental flaws of the New Keynesian framework. These results were, however, derived under the assumption that prices are sticky, as in Calvo (1983). It has long been recognized that the Calvo model of price setting has many peculiar features. This led researchers to explore alternatives, such as information frictions. One of the most prominent proposal to replace the New Keynesian Phillips curve based upon Calvo prices is the assumption of sticky information, proposed by Mankiw and Reis (2001). According to their hypothesis, firms adjust their prices slowly because they do not continuously update their information set. Mankiw and Reis argued that this alternative assumption helps explain the data better along certain dimensions. A very natural question, in the light of the radical findings documented in the Calvo model at the ZLB, is if these results carry over to a setting where information rigidities are assumed instead of sticky prices. The main conclusion of this paper is that the answer is yes. In an important and intriguing recent paper, Kiley (2016), documents experiments in which the fiscal policy results of the Calvo model are overturned upon assuming informational frictions as in Mankiw and Reis. The thought experiment Kiley conducts is as follows: Suppose the Central Bank follows an interest rate peg for 100 periods. What happens if the government increases spending for 1, 2, . . . upto 25 periods? What happens if taxes are increased for 1 to 25 periods? Kiley documents that while under Calvo prices the predictions are in line with the existing literature at the ZLB, the predictions are different under informational frictions. In particular, the government spending multiplier is small, tax multiplier is negative and the paradox of flexibility disappears. Kiley’s experiment is referred to in this paper as an interest rate peg experiment (PEG-EX). Kiley interprets these findings as suggesting that the sticky-information model is free from policy paradoxes, and thus to be favored over the Calvo model. Here, instead, we argue that these findings are an artifact of the thought experiment considered. The paradoxes in the sticky information framework in fact get even stronger in policy experiments that correspond more closely to those considered in the existing literature. This paper compares sticky prices and sticky information doing a different experiment. This experiment is identical to the one conducted in Eggertsson (2011), Christiano, Eichenbaum and Rebelo (2009), Eggertsson (2010), Woodford (2011). The ZLB is binding due to exogenous fundamental shocks. Once the shocks are over, the policy is given by a simple inflation target (which is missed for the duration of the shocks, due to the ZLB). This experiment is referred to as ZLB experiment (ZLB-EX). This paper documents that the results derived in the literature under sticky prices in the ZLB-EX are even more extreme if sticky prices are replaced with sticky information. The government spending multiplier becomes larger, and the paradox of toil and flexibility become more pronounced. This is because in the purely forward looking sticky-price model, current policy leaves expectations of future variables unchanged. Hence, there is only a "direct" effect of current policy on current output. In the backward looking sticky-information model, however, current policy has an additional "indirect" effect on current output, which comes from its effect on the expectations of future variables. While this may seem to contradict Kiley’s findings, it does not. Instead it clarifies that Kiley’s PEG-EX is a fundamentally different experiment than done in the existing literature. What is particularly subtle – and interesting – about the comparison, and likely to trigger confusion, is that under sticky prices the ZLB-EX and PEG-EX lead to exactly the same result. It is only when assuming sticky information that the results of the ZLB-EX and the PEG-EX are different. This does not have anything to do with the nature of the nominal frictions. Instead, it is a consequence of the fact that the sticky-information model has infinite number of endogenous state variables. Meanwhile the Calvo model is purely forward looking. The presence of endogenous state variables in the sticky-information model implies that comparing the reaction of an economy assuming an exogenous interest rate peg, versus the reaction of the economy if the central bank’s policy is bounded by zero due to fundamental shocks, leads to very different results. The same does not apply for perfectly forward looking systems like the Calvo model of price stickiness. This paper first shows analytical examples that clarify the intuition behind these findings. It then moves to numerical examples that replicate Kiley’s results. These examples confirm that Kiley’s results are driven by the difference in experiments being conducted rather than anything fundamental about the assumption of price stickiness. Arguably, the ZLB-EX is more economically relevant than PEG-EX. It seems of more limited economic interest – at least in the context of the crisis that started in 2008 – to explore the behavior of New Keynesian models if the short-term interest rate is temporarily pegged for no apparent reasons. Instead, the most economically interesting experiment appears to be when the interest rate is pegged due to the fact that the ZLB is binding on account of a fundamental recessionary shock that prevents the central bank from achieving its objective of stabilizing inflation and output. In a numerical exercise, the two models are calibrated to produce a 10% drop in output and 2% annual deflation on impact. It clearly demonstrates that in the ZLB-EX, government spending is more expansionary at zero interest rate than at positive interest rate and that tax cuts are contractionary at the ZLB, in both the models of nominal stickiness. Moreover, these paradoxes are starker under sticky information. Specifically, the government spending multiplier is three times larger, and the tax multiplier is four times larger in the sticky information model relative to the sticky price model. Finally, this paper also illustrates numerically that the paradox of flexibility is starker under sticky-information. This result is harder to intuit from an analytical example, because the response of output to increased flexibility in the sticky information model depends on the persistence of the underlying fundamental rate shock. Overall, the paradoxical results for fiscal policy multiplier at the ZLB could be interpreted as reflecting a weakness of the Calvo model. This paper, however, clarifies that these paradoxes are not a product of the Calvo assumption, but rather are a fundamental feature of models with nominal rigidities, irrespective of its source, be it sticky prices or sticky information. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:577&r=dge |