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on Dynamic General Equilibrium |
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Issue of 2018‒08‒27
67 papers chosen by |
| By: | Lie, Denny |
| Abstract: | This paper investigates the role of observed offcial inflation-target adjustments in aggregate macroeconomic fluctuations in Indonesia, using an estimated Dynamic Sto- chastic General Equilibrium (DSGE) model. The paper finds that these adjustments or shocks play a non-trivial role in the fluctuations of inflation and nominal interest rate in Indonesia. Output fluctuations, however, are virtually unaffected. A counter- factual exercise shows that a gradual reduction in Bank Indonesia's inflation target may have not been optimal. The paper also provides additional insights on the con- tribution of various shocks in driving aggregate fluctuations in Indonesia. Technology and monetary-policy shocks are found to be the main driving factor for both output and inflation fluctuations. Movements in the nominal interest rate are mostly driven by preference and risk-premium shocks, with inflation-target shocks playing a larger role in the longer run. The inclusion of inflation-target shocks in the model is also shown to improve the model's fit and out-of-sample predictive performance.. |
| Keywords: | Inflation target, inflation-target adjustments or shocks, DSGE model for Indonesia, source of aggregate fluctuations, Bank Indonesia |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2018-01&r=dge |
| By: | José R. Maria; Paulo Júlio |
| Abstract: | We present a medium scale small-open DSGE model for an euro-area economy that encompasses a financial accelerator mechanism and a well-developed fiscal block coupled to an overlapping generations scheme. This setup endogenously triggers myopia in households' decisions, breaking the traditional Ricardian equivalence in asset holders. We use Bayesian methods to estimate the model for the Portuguese economy and compute several byproducts of interest - namely historical and variance decompositions and key Bayesian impulse response functions. Finally, we carry out parameter stability tests. |
| JEL: | C11 C13 E20 E32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201715&r=dge |
| By: | Tiago Cavalcanti (University of Cambridge); Cezar Santos (Fundacao Getulio Vargas); Georgi Kocharkov (Universidad Carlos III de Madrid) |
| Abstract: | What is the role of family planning interventions on fertility, savings, human capital investment, and development? To examine this, endogenous unwanted fertility is embedded in an otherwise standard quantity-quality overlapping generations model of fertility and growth. The model features costly fertility control and families can (partially) insure against a fertility risk by using costly modern contraceptives. In the event of unexpected pregnancies, households can also opt to abort some pregnancies, at a cost. Given the number of children born, parents decide how much education to provide and how much to save out of their income. We fit the model to Kenyan data, implement several family planning policies and decompose their aggregate effects. Our results suggest that given a small budget (up to 0.5 percent of GDP), legalizing and subsidizing the price of abortion is a more cost-effective policy for improving long-run living standards and reducing inequality than policies that either subsidize the price of modern contraceptives or subsidize basic education. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:332&r=dge |
| By: | Valerio Scalone |
| Abstract: | Estimation of non-linear DSGE models is still very limited due to high computational costs and identification issues arising from the non-linear solution of the models. Besides, the use of small sample amplifies those issues. This paper advocates for the use of Approximate Bayesian Computation (ABC), a set of Bayesian techniques based on moments matching. First, through Monte Carlo exercises, I assess the small sample performance of ABC estimators and run a comparison with the Limited Information Method (Kim, 2002), the state-of-the-art Bayesian method of moments used in DSGE literature. I find that ABC has a better small sample performance, due to the more efficient way through which the information provided by the moments is used to update the prior distribution. Second, ABC is tested on the estimation of a new-Keynesian model with a zero lower bound, a real life application where the occasionally binding constraint complicates the use of traditional method of moments. |
| Keywords: | Monte Carlo analysis; Method of moments, Bayesian, Zero Lower Bound, DSGE estimation |
| JEL: | C15 C11 E2 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:688&r=dge |
| By: | George-Marios Angeletos; Fabrice Collard; Harris Dellas |
| Abstract: | We dissect the comovement patterns of the macroeconomic data, identify a single shock that accounts for the bulk of the business-cycle volatility in the key quantities, and use its empirical properties to appraise parsimonious models of the business cycle. Through this lens, the data appears to be at odds with theories that attribute a major role to fluctuations in TFP, to news about future productivity or the long run, and to demand shocks of the New Keynesian type. Instead, it appears to favor theories that allow for demand-driven fluctuations without nominal rigidities and Philips curves. Our findings can also be of use in the evaluation of larger models that employ a multitude of shocks. In this context, we argue that leading DSGE models seem to lack the propagation mechanism observed in the data. |
| JEL: | E00 E31 E32 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24875&r=dge |
| By: | Junichi Fujimoto (National Graduate Institute for Policy Studies); Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Keio University) |
| Abstract: | To reveal a policy mandate for financial stability, we introduce a frictional credit market with a search and matching process into a standard New Keynesian model with nominal rigidities in the goods market, and then investigate optimal policy under financial frictions. We show that a second-order approximation of social welfare includes terms for credit, in addition to terms for inflation and consumption, so that any optimal policy must hold responsibility for financial and price stabilities. We highlight this issue by considering several tools for monetary and macroprudential policy. We find that optimal monetary policy requires keeping the credit market countercyclical against the real economy. Also, optimal macroprudential policy, which poses constraints on supply and demand sides of credit, reduces excessive variations in lending and contributes to both financial and price stabilities. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1200&r=dge |
| By: | Diego Comin (Dartmouth College); Ana Maria Santacreu (Federal Reserve Bank of Saint Louis and); Mark Gertler (New York University); Phuong Ngo (Cleveland State University) |
| Abstract: | This paper studies the relationship between stock prices and fluctuations in TFP. We document a strong predictability of lagged stock price growth on future TFP growth at medium horizons. To explore the sources of this co-movement, we develop a one-sector real business model augmented to allow for (i) endogenous technology through R&D and adoption, and (ii) exogenous shocks to the risk premium. Model simulations produce predictability patterns quantitatively similar to the data. A version of the model with exogenous technology produces no predictability of TFP growth. Decomposing historical TFP, we show that the predictability uncovered in the data is fully driven by the endogenous component of TFP. This finding suggests that fluctuations in risk premia impact TFP growth through their effect on the speed of technology diffusion instead of responding to exogenous fluctuations in future TFP. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1147&r=dge |
| By: | Mariacristina De Nardi (UCL, Federal Reserve Bank of Chicago, CE); Giulio Fella (Queen Mary, University of London); Gonzalo Paz Pardo (University College London) |
| Abstract: | Earnings dynamics are much richer than typically assumed in macro models with heterogenous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two household-post-tax earnings processes in a standard life-cycle model: the canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age). Allowing for richer earnings dynamics implies a substantially better fit of the evolution of the cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:156&r=dge |
| By: | Jesus Fernandez-Villaverde (University of Pennsylvania); Federico Mandelman (Federal Reserve Bank of Atlanta); Francesco Zanetti (University of Oxford); Yang Yu (Shanghai University of Finance and Economics) |
| Abstract: | This paper develops a model with search complementarities in the inter-firm matching process that entails two steady-state equilibria. An active equilibrium with strong partnership formation, large production, and low unemployment and a passive equilibrium with low partnership formation, low production, and high unemployment. Changes in fundamentals move the system between the two equilibria, generating large and persistent business cycle fluctuations. Suciently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive equilibrium while it plays a limited role in the active equilibrium. Fiscal policy has a non-monotonic effect on output in the passive equilibrium and the scal multiplier depends on the interplay between macroeconomic volatility and the magnitude of government spending. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:386&r=dge |
| By: | Lorenzo Caliendo; Fernando Parro; Alessandro Sforza; Luca David Opromolla |
| Abstract: | The economic effects from labor market integration are crucially affected by the extent to which countries are open to trade. In this paper we build a multi-country dynamic general equilibrium model with trade in goods and labor mobility across countries to study and quantify the economic effects of trade and labor market integration. In our model trade is costly and features households of different skills and nationalities facing costly forward-looking relocation decisions. We use the EU Labour Force Survey to construct migration flows by skill and nationality across 17 countries for the period 2002-2007. We then exploit the timing variation of the 2004 EU enlargement to estimate the elasticity of migration flows to labor mobility costs, and to identify the change in labor mobility costs associated to the actual change in policy. We apply our model and use these estimates, as well as the observed changes in tariffs, to quantify the effects from the EU enlargement. We find that new member state countries are the largest winners from the EU enlargement, and in particular unskilled labor. We find smaller welfare gains for EU-15 countries. However, in the absence of changes to trade policy, the EU-15 would have been worse off after the enlargement. We study even further the interaction effects between trade and migration policies and the role of different mechanisms in shaping our results. Our results highlight the importance of trade for the quantification of the welfare and migration effects from labor market integration. |
| JEL: | E24 F13 F16 F22 J61 R13 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201717&r=dge |
| By: | Herve Zeida (University of Montreal) |
| Abstract: | Should entrepreneurs be taxed preferentially over wage earners? The recent overhaul of the US tax code rekindles public debate surrounding differential taxation and fairness, since entrepreneurs receive more generous tax deductions. This paper then addresses the quantitative implications of a differential income taxation using a life cycle model with occupational choice and accumulation of entrepreneurial human capital. Calibrated to US data, the model economy shows as much heterogeneity within entrepreneurs’ group as within that of workers with respect to the effective tax burden. This provides rationale for alleviating taxation on entrepreneurs, at least, up to the median of the income distribution. When salient provisions of the Tax Cuts and Jobs Act (TCJA) are implemented, the economy experiences over a ten-year window, an average GDP growth rate of 0.64% and capital stock increases by 1.40%. These effects are reinforced in the long run given that output and capital stock grow on average by 1.7% and 4.5%, respectively. The 20%-deduction provision for entrepreneurs is the key driver of the TCJA’s effects since the corporate tax cut generates adverse outcomes. Nonetheless, economic growth is mitigated by a rise of inequality. On average, entrepreneurs are better off while workers experience welfare loss even with a wage increase of 2%. An optimal flat tax of 26.75% solely applied to entrepreneurs, surprisingly generates 2.4% reduction in output and is costly for poor-income individuals. On the welfare basis, preferential business income taxation over wage income does not have majority support. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1131&r=dge |
| By: | Nicoletta Batini (International Monetary Fund (IMF)); Giovanni Melina (International Monetary Fund (IMF)); Stefania Villa (Bank of Italy) |
| Abstract: | Focusing on Euro-Area countries, we show empirically that higher private debt leads to deeper recessions while higher public debt does not, unless its level is especially high. We then build a general equilibrium model that replicates these dynamics and use it to design a policy that can mitigate the recessionary consequences of private deleveraging. In the model, in the aftermath of financial shocks, recessions are milder and public debt is more contained when the government lends directly to those households and firms that face binding borrowing constraints. As a consequence, large fiscal buffers are critical to enhance macroeconomic resilience to financial shocks. |
| Keywords: | private debt, public debt, financial crisis, financial shocks, borrowing constraints, fiscal limits |
| JEL: | E44 E62 H63 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1186_18&r=dge |
| By: | Murat Celik (University of Toronto); Xu Tian (University of Toronto) |
| Abstract: | Whether a CEO manages the innovation efforts of the firm in line with shareholder preferences has a substantial impact on market value and firm growth, which in turn influence aggregate productivity growth and welfare. Using data on U.S. public firms, we find that (i) firms with better corporate governance tend to adopt highly incentivized contracts rich in stock options; and (ii) such contracts are more likely to lead to disruptive innovations -- patented inventions that are in the upper tail of the distribution in terms of quality and originality. We develop and estimate a new dynamic general equilibrium model of firm-level innovation with agency frictions and endogenous determination of executive contracts. The model is used to study the joint dynamics of corporate governance, managerial compensation, and disruptive innovations. Better corporate governance can reduce the influence of the CEO in the determination of the compensation structure. This leads to more incentivized contracts and boosts innovation, with substantial benefits for the shareholders, as well as the broader economy through knowledge spillovers. Shutting down the agency frictions leads to an increase in long-run output growth, which translates into a significant welfare gain in consumption equivalent terms. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:590&r=dge |
| By: | Thibaut Lamadon (University of Chicago); Costas Meghir (Yale University); Jean Marc Robin (Sciences Po); Jeremy Lise (University of Minnesota) |
| Abstract: | This paper the non-parametric identification of models with production complementarities and search frictions. We develop a model with two sided unobserved heterogeneity, mobility costs, on-the-job search and vacancy cre- ation. The mobility cost is borne by the worker. The assumption here is that the worker pays the moving cost and the firm compensates her through a higher wage. Essentially we assume that firms can make wage payments, but not lump sum payments. The mobility cost is introduced to provide a structural source of wage randomness given worker and firm heterogeneity. We develop a constructive proof for the non-parametric identification of the production function from matched employer-employee data. We evaluate the properties of the associated estimator with a Monte-Carlo simulation. We estimate the model on the matched employer-employee data from Sweden to estimate the complementarity between unobserved worker and firm hetero- geneity, decompose the sources of income inequality and quantify the output loss due to search friction |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:568&r=dge |
| By: | Luigi Bocola (Stanford University, FRB of Minneapolis); Guido Lorenzoni (Northwestern) |
| Abstract: | Modern macroeconomic models with a financial accelerator mechanism are built around two main ingredients: a collateral constraint and incomplete financial markets. The first ingredient implies that shocks affecting the balance sheet of productive agents propagate to the rest of the economy, while the second ingredient guarantees that agents cannot "hedge" these shocks. The commonly held view in the literature is that both ingredients are necessary for financial amplification. In this paper we revisit this view. We study a neoclassical model where risk averse entrepreneurs and households can trade a full set of Arrow securities, subject to a collateral constraint for entrepreneurs. We first show that, because of general equilibrium spillovers, the competitive equilibrium does not feature "perfect hedging" for entrepreneurs. Indeed, states of the world in which entrepreneurial net worth is low and the collateral constraint binds are also states in which households' income and consumption are low. Because households are risk averse, insuring those states requires a risk premium in equilibrium, a force that limits the ex-ante incentives of entrepreneurs to hedge. Numerical simulations show that this force is quantitatively relevant, as under plausible calibrations the competitive equilibrium with complete markets features the same degree of financial amplification as the one with incomplete markets. A social planner facing the same frictions can improve on the competitive equilibrium by subsidizing entrepreneurial savings toward bad states of the world. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:983&r=dge |
| By: | Runjie Geng (University of Zurich) |
| Abstract: | I provide a new way to model bounded rationality and show the existence of recursive equilibria with bounded rational agents. The existence proof applies to dynamic stochastic general equilibrium models with infinitely lived heterogeneous agents and incomplete markets. In this type of models, recursive methods are widely used to compute equilibria, yet recursive equilibria do not exist generically with rational agents. I change the rational expectation assumption and model bounded rationality as follows. Different from a rational agent, a bounded rational agent does not know the true Markov transition of the state space of the economy. In order to make decisions, the bounded rational agent would try to compute a stationary distribution of the state space using a numerical method and then use the Markov transition associated with it to maximize utility. For a certain distribution of the current period, given other agents' strategies, the agent would get its next-period transition: the distribution of the state space in the next period that results from the competitive equilibrium in the next period. However, if a distribution stays ``closer'' to its next-period transition than the minimum error the numerical method can observe, the agent would consider it as computational stationary. In equilibrium, each agent maximizes utility with a computational stationary distribution and markets clear. I use the Kantorovich-Rubinshtein norm to characterize the distance between distributions of the state space. With this set up, usual convergence criteria used in the literature can be incorporated and thus many computed equilibria in the literature using recursive methods can be categorized as bounded rational recursive equilibria in the sense of this paper. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:137&r=dge |
| By: | Juan Carlos Conesa (Stony Brook University); Akshar Saxena (Harvard University); Daniela Costa (Wharton); Gajendran Raveendranathan (McMaster University); Parisa Kamali (University of Minnesota); Timothy Kehoe (University of Minnesota) |
| Abstract: | This paper develops an overlapping generations model to study the macroeconomic implications of an aging population. We calibrate the model along a transition path from 1950 to 2100 that features rising survival probabilities, an increasing share of college graduates, and rising healthcare costs. The aging of the population leads to increased government spending on Medicare, Medicaid, and Social Security benefits. We find that the increase in the share of college graduates compensates for most of the increase in government spending. Consequently, taxes will only have to rise by a few percentage points to balance the budget in the future even if the current eligibility criteria and benefit levels for social insurance programs are preserved. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:930&r=dge |
| By: | Kei-Mu Yi (University of Houston); Eunhee Lee (University of maryland) |
| Abstract: | We assess the role of global value chains transmitting global integration shocks to aggregate trade as well as distributional outcomes. We develop a multi-country general equilibrium trade model that features multi-stage production, with different stages having different productivities and using factors (occupations) with different intensities. The model also features a Roy mechanism, in which heterogeneous workers endogenously choose their sector and occupation. Country- and worker-level comparative advantages interact. A reduction in trade costs leads to countries specializing in their comparative advantage sectors and production stages. This specialization changes labor demand and also leads to more workers shifting to their comparative advantage sectors and occupations. With a special case of our model, we show that the intensity of the global value chain (GVC) magnifies the aggregate effects of trade liberalization, but it has a non-monotonic effect on the skill premia. We calibrate our model to the U.S., China, and the rest of the world in 2000 and we simulate a decline in China’s costs of trade, designed to mimic China’s entry into the WTO. Our simulation results imply an increase in the skill premium in both the U.S. and China, and the GVC, i.e., stage-level specialization, is critical to this outcome. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:255&r=dge |
| By: | Marcin Bielecki (University of Warsaw and Narodowy Bank Polski); Marcin Kolasa (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski) |
| Abstract: | The recent literature shows that demographic trends may affect the natural rate of interest (NRI), which is one of the key parameters affecting stabilization policies implemented by central banks. However, little is known about the quantitative impact of these processes on monetary policy, especially in the European context, despite persistently low fertility rates and an ongoing increase in longevity in many euro area economies. In this paper we develop a New Keynesian life-cycle model, and use it to assess the importance of population ageing for monetary policy. The model is fitted to euro area data and successfully matches the age profiles of consumption-savings decisions made by European households. It implies that demographic trends have contributed significantly to the decline in the NRI, lowering it by 2 percentage points between 1980 and 2030. Despite being spread over a long time, the impact of ageing on the NRI may lead to a sizable and persistent deflationary bias if the monetary authority fails to account for this slow moving process in real time. We also show that, with the current level of the inflation target, demographic trends have already exacerbated the risk of hitting the lower bound (ZLB) and that the pressure is expected to continue. Delays in updating the NRI estimates by the central bank elevate the ZLB risk even further. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:810&r=dge |
| By: | Nuno Paixao (Bank of Canada) |
| Abstract: | I quantify the extent to which deterioration of bank balance sheets explains the large contraction in housing prices and consumption experienced by the U.S. during the last recession. I introduce a Banking Sector with balance sheet frictions into a model of long-term collateralized debt with risk of default. Credit supply is endogenously determined and depends on the capitalization of the entire banking sector. Mortgage spreads and endogenous down payments increase in periods when banks are poorly capitalized. I simulate an increase in the stock of housing and a negative income shock to match the decline in house prices between 2006-2009. The model generates changes in consumption, foreclosures and refinance rates similar to those observed in the U.S. between 2006 and 2009. Changes in financial intermediaries’ cost of funding explain, respectively, 38, 22 and 29 percent of the changes in housing prices, foreclosures and consumption generated by the model. These results show that the endogenous response of banks’ credit supply can partially explain how changes in housing prices affect consumption decisions. I use this framework to analyze the impact of debt forgiveness and banks’ recapitalization to mitigate the drop in housing prices and consumption. I also present empirical evidence that balance sheet mechanism implied by the model was operational during this period. In other words, I show that during the great recession, changes in the real estate prices impacted the balance sheet of the banks that reacted by contracting their mortgage credit supply. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1017&r=dge |
| By: | Mariana García-Schmidt; Javier Garcia-Cicco |
| Abstract: | A large literature estimates the exchange rate pass-through to prices (ERPT) using reducedform approaches, whose results are an important input for analyses at Central Banks. We study the usefulness of these empirical measures for actual monetary policy analysis and decision making, emphasizing two main problems that arise naturally from a general equilibrium perspective. First, while the literature describes a single ERPT measure, in a general equilibrium model the evolution of the exchange rate and prices will differ depending on the shock hitting the economy. Accordingly, we distinguish between conditional and unconditional ERPT measures, showing that they can lead to very different interpretations. Second, in a general equilibrium model the ERPT crucially depends on the expected behavior of monetary policy, but the empirical approaches in the literature cannot account for this and thus provide a misleading guide for policy makers. We first use a simple model of a small and open economy to qualitatively show the intuition behind these two critiques. We then highlight the quantitative relevance of these distinctions by means of a DSGE model of a small and open economy with sectoral distinctions, real and nominal rigidities, and a variety of driving forces; estimated using Chilean data. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:826&r=dge |
| By: | Carlo Pizzinelli (University of Oxford); Konstantinos Theodoridis (Cardiff Business School); Francesco Zanetti (Centre for Macroeconomics (CFM); University of Oxford) |
| Abstract: | This paper documents state dependence in labor market fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specific idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity. |
| Keywords: | Search and matching models, State dependence in business cycles, Threshold vector autoregression |
| JEL: | E24 E32 J64 C11 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1822&r=dge |
| By: | Alessandro Gavazza (London School of Economics); Andrea Lanteri (Duke University) |
| Abstract: | This paper studies the equilibrium dynamics arising in consumer durable goods markets in response to aggregate credit supply shocks. To this end, we develop a general-equilibrium model of durable consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints. Two novel features of our framework are that: 1) used durable goods trade on secondary markets at market-clearing prices; and 2) households endogenously choose when to scrap them. The model successfully matches several empirical patterns of U.S. car markets around the Great Recession that we document using a rich dataset on the prices of new and used vehicles as well as CEX data on households' vehicle replacement activity. After a negative credit shock (i.e., a tightening of the borrowing limit), debt-constrained households postpone the decision to scrap and upgrade their cars. The economy experiences a period of low resale prices for used cars, which reduces wealthy households' incentives to replace their cars, thereby decreasing new-car sales. We also use our framework to study the effects of aggregate income shocks, the role of cars as collateral, and to evaluate targeted fiscal stimulus policies such as the Car Allowance Rebate System in 2009 (``Cash for clunkers''). |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:384&r=dge |
| By: | David Kohn (Pontificia Universidad Católica de Chile); Fernando Leibovici (Federal Reserve Bank of St. Louis); Michal Szkup (University of British Columbia) |
| Abstract: | We investigate the extent to which financial frictions shape the effects a trade liberalization has on aggregate total factor productivity (TFP) and capital misallocation. We study a small open economy populated with heterogeneous entrepreneurs who differ in their productivity and are subject to financing constraints. Individuals choose whether to be workers or entrepreneurs, and entrepreneurs choose whether to export or not. We show how financial frictions distort these decisions and aggregate TFP. We calibrate the model to match key features of Chilean plant-level data and use it to quantify TFP losses due to misallocation. We then investigate how the presence of financial constraints affects the output and TFP gains from a trade liberalization. We find that lowering trade barriers has a stronger positive effect in less financially developed economies. The higher profits that result from a trade liberalization allow firms to accumulate assets and relax their credit constraint, which is particularly valuable in economies where firms are severely constrained. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:385&r=dge |
| By: | Finn Kydland (University of California, Santa Barbara); Nicholas Pretnar (Carnegie Mellon University) |
| Abstract: | There has been recent attention to the increasing costs to individuals and families associated with caring for people who are afflicted with diseases such as dementia, including Alzheimer’s. In this paper we ask, what are the quantitative implications of these trends for important aggregates, including going forward in time. We develop an overlapping generations general equilibrium model that features government social insurance, idiosyncratic old-age health risk, and transfers of time on a market of informal hospice care from young agents to old agents. The model implies that the decline in annual output growth in the United States since the 1950s can be partly attributed to decreases in the working-age share of the adult population. When accounting for the time young people spend caring for sick elders, positive Social Security + Medicare taxes lead to reductions in the growth rate of annual output of approximately 20 basis points. Relative to an economy with no old-age insurance systems, Social Security + Medicare taxes lead to future reductions in output of 6% by 2056 and 17% by 2096. We show that depending on the working-age share of the adult population, eliminating Social Security + Medicare is not necessarily Pareto improving, leaving those afflicted by welfare-reducing diseases worse off. Placed in the context of an aging United States population, these phenomena could have dramatic or muted impacts on future economic outcomes depending on the prevalence rate of high-cost diseases and the rate at which labor is taxed to fund old-age consumption under a pay-as-you-go social insurance system. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:271&r=dge |
| By: | J. Carter Braxton (University of Minnesota); Gordon Phillips (Dartmouth College); Kyle Herkenhoff (University of Minnesota) |
| Abstract: | Do the unemployed have access to credit markets? Yes. Do the unemployed borrow? Yes. We link administrative earnings records with credit reports and show that individuals maintain significant access to credit following job loss. Unconstrained job losers borrow, while constrained job losers default and delever. Both default and borrowing allow job losers to boost consumption, and they pay an interest rate premium to do so, i.e. the credit market acts as a limited private unemployment insurance market. We show theoretically that default costs allow credit markets to serve as a market for private unemployment insurance despite adverse selection and asymmetric information about future job loss. We then ask, given the degree of private unemployment insurance household's have in the data, what is the optimal provision of public unemployment insurance? We find that the optimal provision of public insurance is unambiguously lower as credit access expands. The median voter in our simulated economy would prefer to have the replacement rate lowered from the current US policy of 45% to 35%. However, a utilitarian planner would actually prefer to raise UI relative to current US levels, even in the presence of well-developed credit markets. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:564&r=dge |
| By: | Andrii Parkhomenko (University of Southern California, Marshall School of Business) |
| Abstract: | Regulatory restrictions on housing supply have been rising in recent decades in the U.S. and have become a major determinant of house prices. What are the implications of the rise in regulation for aggregate productivity, and for wage and house price dispersion across metropolitan areas? To answer this question, I build a general equilibrium model with multiple locations, heterogeneous workers and endogenous regulation. Regulation is decided by voting: homeowners want more regulation and renters want less. In locations with faster exogenous productivity growth, labor supply and house prices also grow more rapidly. Homeowners in these places vote for stricter regulation, which raises prices further and leads to greater price dispersion. High-skilled workers, being less sensitive to housing costs, sort into productive places, which leads to larger wage dispersion. Thus, wage and house price differences are amplified by regulation choices. To quantify this amplification effect, I calibrate the model to the U.S. economy and find that the rise in regulation accounts for 23% of the increase in wage dispersion and 85% of the increase in house price dispersion across metro areas from 1980 to 2007. I find that if regulation had not increased, more workers would live in productive areas and output would be 2% higher. I also show that policy interventions that weaken incentives of local governments to restrict supply could reduce wage and house price dispersion, and boost productivity. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:275&r=dge |
| By: | Fatih Karahan (Federal Reserve Bank of New York); Jae Song (Social Security Administration); Serdar Ozkan (University of Toronto) |
| Abstract: | Individuals that rank at the top of the lifetime earnings (LE) distribution experience almost an 8-fold increase in their annual earnings between age 30 and 55, whereas median earners only see a 50% increase. If all workers have had experienced the same earnings growth, the difference in LE between the top and the 10th percentiles of LE distribution would be 85% smaller. What explains the vast heterogeneity in lifetime earnings growth? We study both empirically and theoretically the career paths across the LE distribution. Using administrative data, we document large dispersion in job switching patterns, inci- dence of unemployment, and wage growth for stayers and switchers across the LE distri- bution. To interpret these facts, we estimate a job-ladder model featuring heterogeneity in unemployment risk, job finding rate and contact rate for employed workers, as well as returns to experience. The estimated model matches a rich set of facts including the dispersion in the career paths over the LE distribution, as well as the distribution of annual earnings changes. We use the estimated model to decompose lifetime earnings growth differences into i) ex-ante heterogeneity in unemployment risk, and offer arrival rate both on and off the job, ii) returns to experience, and iii) ex-post idiosyncratic risk. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:313&r=dge |
| By: | soyoung Lee |
| Abstract: | Over the past three decades, individual earnings inequality has seen rising alongside increases in the concentration of firm employment and revenue in the U.S. This paper studies the factors underlying these trends and their macroeconomic impacts. I extend a canonical uninsurable earnings risks model with heterogeneous firms and labor market search friction as in Lucas and Prescott (1974). There are a large number of spatially distinct labor markets - islands or firms - and workers’ earnings becomes a product of their own labor productivity and a function of employers’ productivity. Workers may leave an island by paying search cost or can be exogenously separated. Once leave, they move to a nearby island following a transition process. Through searching, better workers move to better firms. Better workers can afford search cost since they tend to be wealthy. Also once they move to a better firm, their wage increase is larger than the increase of low productivity workers. Thus productive workers engage searching, have higher chance to move up while low productive workers tend to stay where they are. The model replicates earnings distribution, firm size distribution and wealth distribution successfully. With the quantitatively disciplined model, transitional dynamics exercise is designed to measure individual and firm component in rising inequality. It shows that the individual component in wages explains the most of the rise in earnings concentration. The majority of the firm concentration is driven by the changes in firm productivity distribution. The model suggests that shifts in the productivity distributions and changes in the worker-firm matching pattern which are driving rising inequality, have important implications: They explain 22% of output growth, 15% of capital growth and a quarter of the decline in the interest rate since the 1990’s. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1155&r=dge |
| By: | Fatih Guvenen (University of Minnesota); Fatih Karahan (Federal Reserve Bank of New York); Serdar Ozkan (University of Toronto) |
| Abstract: | Recently, Guvenen et al. (2017) document three broad empirical findings on idiosyncratic earnings risk over the life cycle. First, the distribution of earnings changes displays substantial deviations from lognormality—the standard assumption in the incomplete markets literature. In particular, earnings changes display strong negative skewness and extremely high kurtosis. Second, these non-Gaussian features vary significantly both over the life cycle and with the earnings level of individuals. Third, shocks have "asymmetric mean reversion": For high income individuals positive earnings shocks are quite transitory, whereas negative shocks are very long-lasting, and vice versa for low income workers. In this paper, we study consumption-savings implications of these features of the data. For this purpose we solve and simulate a life-cycle consumption-savings model that allows for non-Gaussian income risk. The idiosyncratic income fluctuations we document generate large welfare costs, and the implications for wealth inequality and partial insurance differ from those of a Gaussian process in important ways. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:314&r=dge |
| By: | Alexei Tchistyi (University of Illinois) |
| Abstract: | We develop a tractable general equilibrium framework of housing and mortgage markets with aggregate and idiosyncratic risks, costly liquidity and strategic defaults, empirically relevant informational asymmetries, and endogenous mortgage design. We show that adverse selection plays an important role in shaping the form of an equilibrium contract. If borrowers' homeownership values are known, the equilibrium state-contingent contract depends on both aggregate wages and house prices. However, when lenders cannot observe borrowers' homeownership values, the equilibrium contract only depends on house prices and takes the form of a home equity insurance mortgage (HEIM) that eliminates the strategic default option and insures the borrower's equity position. Interestingly, we show that widespread adoption of such loans has ambiguous effects on the homeownership rate and household welfare. In economies in which recessions are expected to be severe, the HEIM equilibrium Pareto dominates the equilibrium with fixed-rate mortgages. However, if economic downturns are not severe, HEIMs can lower the homeownership rate and make some marginal home buyers worse-o¤. We also note that adjustable-rate mortgages (ARMs) may share some benefits with HEIMs. Finally, we find that unrestricted competition in contract design among lenders may lead to a non-existence of equilibrium. This suggests that government-sponsored enterprises may stabilize mortgage markets by subsidizing certain lending contracts. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:244&r=dge |
| By: | Yum, Minchul |
| Abstract: | In the United States, the employment rate is nearly flat across wealth quintiles with the exception of the first quintile. Correlations between wealth and employment are close to zero or moderately positive. However, incomplete markets models with a standard utility function counterfactually generate a strongly negative relationship between wealth and employment. Using a fairly standard incomplete markets model calibrated to match the distribution of wealth, I find that government transfers and capital income taxation increase the (non-targeted) correlations between wealth and employment substantially, bringing the model closer to the data. As the model`s fit with the distribution of wealth and employment improves, I find that the precautionary motive of labor supply is mitigated, thereby raising aggregate labor supply elasticities substantially. |
| Keywords: | Wealth distribution , employment , government transfers , capital income taxation , aggregate labor supply elasticity |
| JEL: | E24 E21 J22 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:mnh:wpaper:44432&r=dge |
| By: | Youngmin Park (Bank of Canada) |
| Abstract: | This paper studies optimal education subsidies when parental transfers for college education are unequally distributed across students and cannot be publicly observed. After documenting substantial inequality in the amount of parental transfers among American college students with similar observed family resources, I examine the implications of unobservable heterogeneity in parental transfers for efficient design of education subsidy policy that minimizes the distortions generated by borrowing constraints. When inequality in educational attainment is driven by differences in parental transfers, providing larger subsidy for lower level of schooling is optimal, because additional resources given to constrained students choosing low schooling levels reduce distortions. This force is weakened if unobservable heterogeneity in returns to schooling also leads to different schooling choices. To quantify these mechanisms, I build a model with endogenous parental transfers where inequality in parental transfers among students with similar parental economic resources and returns to education is determined by heterogeneity in parental altruism. The quantitative model is calibrated to the U.S. economy and used to solve for the optimal subsidy that may assign different amounts for each year of college and parental income quartile. The optimal policy subsidizes the first two years of college much more heavily than later years. The shift of public spending towards early years of college is more pronounced for higher parental income groups, generating little variation of subsidy amounts for the first two years of college across parental income. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:623&r=dge |
| By: | Sushant Acharya (Federal Reserve Bank of New York); Julien Bengui (Université de Montréal); Keshav Dogra (Federal Reserve Bank of New York); Shu Lin Wee (Carnegie Mellon University Tepper School of Business) |
| Abstract: | We present a model in which temporary shocks can permanently scar the economy's productive capacity. Unemployed workers lose skill and are expensive to re-train, generating multiple steady state unemployment rates. Large temporary shocks push the economy into a liquidity trap, generating deflation. With nominal wages unable to adjust freely, real wages rise, reducing hiring and catapulting the economy towards the high-unemployment steady state. Even after a short-lived liquidity trap, the economy recovers slowly at best; at worst, it falls into a permanent unemployment trap. Because monetary policy may be powerless to escape such a trap ex-post, it is especially important to avoid it ex-ante: policy should be preventive rather than curative. The model can quantitatively account for the slow recovery in the U.S. following the Great Recession. The model also suggests that lack of swift monetary accommodation by the ECB can help explain stagnation in the European periphery. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:543&r=dge |
| By: | Emilien Gouin-Bonenfant (University of California, San Diego) |
| Abstract: | In this paper, I study how the pass-through of productivity to wages depends on the distribution of productivity across firms. Using administrative data covering the universe of Canadian corporations, I document high concentration of value added within highly productive, low-labor-share firms. Importantly, these large firms do not have a higher capital-output ratio and achieve a low labor share despite paying above average salaries. To interpret these findings, I develop a tractable firm dynamics model (à la Hopenhayn 1992) with search frictions and wage posting in the labor market (à la Burdett and Mortensen 1998). In the model, more productive firms offer higher wages in order to increase their market share by poaching workers from lower paying firms. As in the data, most firms have a high labor share, routinely above one, yet the aggregate labor share is low due to the disproportionate effect of a small fraction of large, extremely productive ``superstar firms''. The model predicts that the pass-through of aggregate labor productivity to average wages is lower when productivity dispersion across firm is high, meaning that all else equal, an increase in productivity dispersion decreases the aggregate labor share. The mechanism is that an increase in the productivity differential between high and low productivity firms increases profit margins at high productivity firms, who become effectively shielded from wage competition. I test the model's prediction and mechanism using cross-country data and find support, thus suggesting that the measured rise in productivity dispersion has contributed to the decline of the global labor share. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1171&r=dge |
| By: | Michael Woodford |
| Abstract: | It is common to analyze the effects of alternative monetary policy commitments under the assumption of fully model-consistent expectations. This implicitly assumes unrealistic cognitive abilities on the part of economic decision makers. The relevant question, however, is not whether the assumption can be literally correct, but how much it would matter to model decision making in a more realistic way. A model is proposed, based on the architecture of artificial intelligence programs for problems such as chess or go, in which decision makers look ahead only a finite distance into the future, and use a value function learned from experience to evaluate situations that may be reached after a finite sequence of actions by themselves and others. Conditions are discussed under which the predictions of a model with finite-horizon forward planning are similar to those of a rational expectations equilibrium, and under which they are instead quite different. The model is used to re-examine the consequences that should be expected from a central-bank commitment to maintain a fixed nominal interest rate for a substantial period of time. “Neo-Fisherian” predictions are shown to depend on using rational expectations equilibrium analysis under circumstances in which it should be expected to be unreliable. |
| JEL: | E52 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24692&r=dge |
| By: | Lutz Hendricks (UNC Chapel Hill); Oksana Leukhina (Federal Reserve Bank of St. Louis); Tatyana Koreshkova (Concordia University) |
| Abstract: | How efficient is the sorting of college students into colleges of varying quality? We develop a general equilibrium lifecycle model of human capital accumulation that allows us to tackle this question. Our framework explicitly features the variation in college quality, which we measure in the data as the average test score of the freshmen class. Higher quality colleges provide access to a superior human capital accumulation technology, but charge higher tuition and impose stricter standards on their students. We discipline this model by matching college quality choices, college credit accumulation histories, dropout and college transfer behavior, as well as earnings histories for different types of students in NLSY 1997 cohort. These data, when viewed through the lens of the student decision making, help us identify the human capital accumulation technologies and provides insight into student sorting among colleges of varying quality. We employ the calibrated model to quantify the importance of financial constraints in generating sorting inefficiencies and compare their impact on the evolution of student sorting among colleges between the 1979 and 1997 NLSY cohorts. We then ask which policy is most effective at improving upon outcomes, focusing on merit-based and need-based financial aid. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1106&r=dge |
| By: | Sebastian Fanelli (MIT); Ludwig Straub (MIT) |
| Abstract: | This paper develops a theory of foreign exchange interventions in a small open economy with limited capital mobility. Home and foreign bond markets are segmented and intermediaries are limited in their capacity to arbitrage across markets. As a result, the central bank can implement nonzero spreads by managing its portfolio. Crucially, spreads are inherently costly, over and above the standard costs from distorting households’ consumption profiles. The extra term is given by the carry-trade profits of foreign intermediaries, is convex in the spread—as more foreign intermediaries become active carry traders—and increasing in the openness of the capital account—as foreign intermediaries find it easier to take larger positions. Optimal interventions balance these costs with terms of trade benefits. We show that they lean against the wind of global capital flows to avoid excessive currency appreciation. Due to the convexity of the costs, interventions should be small and spread out, relying on credible promises (forward guidance) of future interventions. By contrast, excessive smoothing of the exchange rate path may create large spreads, inviting costly speculation. Finally, in a multi-country extension of our model, we find that the decentralized equilibrium features too much reserve accumulation and too low world interest rates, highlighting the importance of policy coordination. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1270&r=dge |
| By: | Patrick J. Kehoe; Virgiliu Midrigan; Elena Pastorino |
| Abstract: | Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States. |
| JEL: | E13 E32 E52 E61 E62 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24741&r=dge |
| By: | Manuel Amador; Christopher Phelan |
| Abstract: | This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government's hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can default at any time, and assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. If these beliefs satisfy reasonable assumptions, in any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. Further, in such Markov equilibria (the solution to a simple pair of ordinary differential equations), there are positive gross issuances at all dates, constant net imports as long as there is a positive equilibrium probability that the government is the optimizing type, and net debt repayment only by the commitment type. For countries that have recently defaulted, the interest rate the country pays on its debt is a decreasing function of the amount of time since its last default, and its total debt is an increasing function of the amount of time since its last default. For countries that have not recently defaulted, interest rates are constant. |
| JEL: | F3 F34 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24682&r=dge |
| By: | Toshihiko Mukoyama (Department of Economics, Georgetown University) |
| Abstract: | This paper analyzes a simple search and matching model with heterogeneous jobs. First, I derive an explicit formula that ensures the social efficiency of the equilibrium outcome. This formula generalizes the well-known Hosios condition and clarifies the role of externalities across labor markets for different types of jobs. Second, business cycle fluctuations with heterogeneous jobs are analyzed. Heterogeneity in productivity and job stability plays an important role in generating strong labor-market responses to the aggregate labor market to productivity shocks. |
| Keywords: | Search and matching; Unemployment; Heterogeneous jobs; Efficiency; Business cycles |
| JEL: | D61 E24 E32 J63 J64 |
| Date: | 2018–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~18-18-01&r=dge |
| By: | Florian Exler (University of Vienna); Igor Livshits (Federal Reserve Bank of Philadelphia); James MacGee (University of Western Ontario); Michele Tertilt (University of Mannheim) |
| Abstract: | We quantitatively analyze consumer credit markets with behavioral consumers and default. Our model incorporates over-optimistic and rational borrower types into a standard incomplete markets with consumer bankruptcy framework. Lenders price credit endogenously, forming beliefs - type scores - about borrowers' types. Since over-optimistic borrowers incorrectly believe they have rational beliefs, lenders do not need to take strategic behavior into account when updating type scores. We find that the partial pooling of over-optimistic with rational borrowers results in spill-overs across types via interest rates, with over-optimists being cross-subsidized by rational consumers who have lower default rates. Higher interest rates lower the average debt level of realists compared to a world without over-optimists. Due to overestimating their ability to repay, over-optimists borrow too much. We evaluate three policies to address these frictions: reducing the cost of default, educating over-optimists about their true type, and increasing borrowing cost. Of the three, only the lower default costs improve the welfare of over-optimists. However, rational consumers are made worse off by that policy. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1064&r=dge |
| By: | Sara Aghakazemjourabbaf (Department of Economics, University of Waterloo); Margaret Insley (Economics Department, University of Waterloo) |
| Abstract: | Inadequate site clean-up and restoration by resource extraction firms leave a toxic legacy which must be dealt with by governments. This study compares the impacts of an environmental bond and a strict liability rule on a firm's incentives for cleaning up hazardous waste during resource extraction and upon termination. The firm's problem is modelled as a stochastic optimal control problem that results in a system of Hamilton Jacobi Bellman equations. The model is applied to a typical copper mine in Canada. The resource price is modelled as a stochastic differential equation, which is calibrated to copper futures prices using a Kalman filtering approach. A numerical solution is implemented to determine the optimal abatement and extraction rates as well as the critical levels of copper prices that would motivate a firm to clean up the accumulated waste under each policy. The paper demonstrates that an environmental bond provides stronger waste abatement incentives, implying that the waste is more likely to be cleaned up under the bond than the liability. The strict liability rule imposes sunk costs on a firm upon termination which would motivate it to remain inactive as a way to escape clean-up costs. However, the environmental bond raises funds ex ante for future clean-up costs and thus encourages site restoration. |
| JEL: | C61 D81 K32 Q52 Q58 |
| Date: | 2018–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:wat:wpaper:1803&r=dge |
| By: | Saroj Bhattarai (University of Texas at Austin); Konstantin Kucheryavyy (University of Tokyo) |
| Abstract: | We present a general, competitive open economy business cycle model with capital accumulation, trade in intermediate goods, production externalities in the intermediate and final goods sectors, and iceberg trade costs. Our main theoretical result shows that models developed in the modern international trade literature that feature comparative advantage, monopolistic competition and cost of entry, and firm heterogeneity and cost of exporting are isomorphic, in terms of aggregate equilibrium, to versions of this competitive dynamic model under appropriate restrictions on the externalities. In particular, the restrictions apply on the overall scale of externalities, the split of externalities between the different factors of production, and the identity of the sectors with production externalities. Our quantitative exercise assesses whether various restricted versions of the general model, in forms they are typically considered in the literature, are able to resolve the well-known aggregate empirical puzzles in international business cycle models. Our theoretical result on isomorphism between models then provides insights on why they fail to do so in many instances. We thus provide a unified theoretical and quantitative treatment of the international business cycles and trade literatures in a general dynamic framework. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1259&r=dge |
| By: | Ying Feng (University of California, San Diego); David Lagakos (University of California, San Diego); James Rauch (UCSD) |
| Abstract: | This paper draws on household survey data from countries of all income levels to measure how unemployment varies with income. We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income. To interpret these facts, we build a model with workers of heterogeneous ability and two sectors: a traditional sector, in which self-employed workers produce output without reward for ability; and a modern sector, in which rms hire in frictional labor markets, and output increases with ability. Countries dier exogenously in the productivity level of the modern sector. The model predicts that as productivity rises, the traditional sector shrinks, as progressively less-able workers enter the modern sector, leading to a rise in overall unemployment and in the ratio of low-educated to high-educated unemployment rates. A calibrated version of the model accounts for some, but not all, of the cross-country patterns we document. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:289&r=dge |
| By: | Toshihiko Mukoyama (Department of Economics, Georgetown University); Sophie Osotimehin (Department of Economics, University of Virginia) |
| Abstract: | We study how factors that hinder the reallocation of inputs across firms influence aggregate productivity growth. We extend Hopenhayn and Rogerson's (1993) general equilibrium firm dynamics model to allow for endogenous innovation. We calibrate the model using US data, and then evaluate the effects of firing taxes on reallocation, innovation, and aggregate productivity growth. In our baseline specification, we find that firing taxes reduce overall innovation and productivity growth. We also show that firing taxes can have opposite effects on the entrants' innovation and the incumbents' innovation, and thus the overall outcome depends on the relative strengths of these forces. |
| Keywords: | Innovation, R&D, Reallocation, Firing costs |
| JEL: | E24 J24 J62 O31 O47 |
| Date: | 2018–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~18-18-02&r=dge |
| By: | Edouard Schaal (Universitat Pompeu Fabra); Mathieu Taschereau-Dumouchel (Cornell University) |
| Abstract: | We embed a theory of rational herding into a real business-cycle framework. In the model, technological innovations arrive randomly over time. New innovations are not immediately productive, and there is uncertainty about how productive the technology will be. Investors receive private signals about the future productivity and decide whether to invest in the technology or not. Macroeconomic variables and prices partially aggregate private information but do not reveal the true fundamentals as the agents ignore the degree of correlation in their information sets. Herd-driven boom-bust cycles may arise in this environment when the technology is unproductive but investors' initial signals are optimistic and highly correlated. When the technology appears, investors mistakenly attribute observed high investment rates to high fundamentals, leading to a pattern of increasing optimism and investment until the economy reaches a peak, followed by a quick collapse, as agents ultimately learn their mistake. As such, the theory can shed light on bubble-like episodes in which excessive optimism about uncertain technology fueled overinvestment, and were followed by sudden recessions. We calibrate the model to the U.S. economy and show that the theory can explain various features of the data that relate to the cyclicality and the predictability of business cycles. Finally, we show that leaning-against-the-wind policies can be welfare improving as they increase the amount of private information that becomes public. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:111&r=dge |
| By: | Tyrowicz, Joanna (University of Warsaw); Makarski, Krzysztof (Warsaw School of Economics); Bielecki, Marcin (University of Warsaw) |
| Abstract: | We analyze the consumption and wealth inequality in an OLG model with mandatory pension systems. Our framework features within cohort heterogeneity of endowments and heterogeneity of preferences. We allow for population aging and gradual decline in TFP growth. We show four main results. First, increasing longevity translates to substantial increases in aggregate consumption inequality and wealth inequality. Second, a pension system reform from a defined benefit to a defined contribution works to reinforce consumption inequality and reduce wealth inequality. Third, minimum pension benefits are able to partially counteract an increase in inequality introduced by the defined contribution system, at a fiscal cost. Fourth the minimum pension benefit guarantee mostly addresses the sources of inequality which stem from differentiated endowments rather than those which stem from heterogeneous preferences. |
| Keywords: | consumption, wealth, inequality, longevity, defined contribution, defined benefit |
| JEL: | H55 E17 C60 C68 E21 D63 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11621&r=dge |
| By: | Hyeongwoo Kim; Shuwei Zhang |
| Abstract: | This paper shows that fiscal policy in the U.S. has become ineffective due to lack of coordination between monetary and fiscal policy. We present a New Keynesian model that generates strong output effects of government spending shocks only when monetary policy coordinates well with fiscal policy. Employing the post-war U.S. data, we report strong stimulus effects of fiscal policy during the pre-Volcker era, which rapidly dissipate when we shift the sample period to the post-Volcker era. Finding a negligible role of the real interest rate in the propagation of government spending shocks, we propose an alternative explanation using a consumer sentiment channel. Employing the Survey of Professional Forecasters data, we show that forecasters tend to systematically over-estimate real GDP growth in response to positive innovations in government spending when policies coordinate well with each other. On the other hand, they are likely to formulate pessimistic forecasts when the monetary authority maintains a hawkish stance that conflicts with the fiscal stimulus. The fiscal stimulus, under such circumstances, may generate consumer pessimism, which decreases private spending and ultimately weakens the output effects of fiscal policy. We also provide statistical evidence that confirms an important role of the sentiment channel under different regimes of policy coordination. |
| Keywords: | Fiscal Policy; Time-varying Effectiveness; Policy Coordination; Consumer Sentiment; Survey of Professional Forecasters |
| JEL: | E32 E61 E62 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2018-04&r=dge |
| By: | Grey Gordon (Indiana University); Pablo Guerron-Quintana (Boston College) |
| Abstract: | Migration plays a key roll in city finances with every new entrant reducing debt per person and every exit increasing it. We study the interactions between regional borrowing, migration, and default from empirical, theoretical, and quantitative perspectives. Empirically, we document that intercity migration rates are high in the U.S. (exceeding 6%), in-migration rates are negatively correlated with deficits, and many cities appear to be at or near state-imposed borrowing limits. Additionally, we show defaults can occur after booms or busts in labor productivity and population. Our quantitative model is able to rationalize these features of the data in large part because of a key externality that induces over-borrowing. Counterfactuals in the model reveal (1) Detroit should have slashed spending and raised taxes in 2008 to avoid default; (2) migration is overwhelmingly positive for the economy, boosting GDP by 18% or more and reducing income inequality; (3) a return to the high-interest rate environment prevailing in the 1990s could double default rates; and (4) halving the dispersion of geographic-specific productivity---which we document occurred from 1986 to 2000---can potentially account for all of the secular decline in migration rates from 1991 to 2011. This last finding provides additional support for the mechanism proposed in Kaplan and Schulhofer-Wohl (2017). |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:305&r=dge |
| By: | Julian Kozlowski (New York University); Laura Veldkamp (New York University); Venky Venkateswaran (New York University) |
| Abstract: | Riskless interest rates fell in the wake of the financial crisis and have remained low. We explore a simple explanation: This recession was perceived as an extremely unlikely event before 2007. Observing such an episode led all agents to re-assess macro risk, in particular, the probability of tail events. Since changes in beliefs endure long after the event itself has passed, perceived tail risk remains high, generates a demand for riskless, liquid assets, and continues to depress the riskless rate. We embed this mechanism in a simple production economy with liquidity constraints and use observable macro data, along with standard econometric tools, to discipline beliefs about the distribution of aggregate shocks. When agents observe an extreme, adverse realization, they re-estimate the distribution and attach a higher probability to such events recurring. As a result, even transitory shocks have persistent effects because, once observed, the shock stays forever in the agents' data set. We show that our belief revision mechanism can help explain the persistent nature of the fall in the risk-free rates. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1111&r=dge |
| By: | Greg Kaplan; Giovanni L. Violante |
| Abstract: | We analyze the role of household heterogeneity for the response of the macroeconomy to aggregate shocks. After summarizing how macroeconomists have incorporated household heterogeneity and market incompleteness in the study of economic fluctuations so far, we outline an emerging framework that combines Heterogeneous Agents (HA) with nominal rigidities, as in New Keynesian (NK) models, that is much better aligned with the micro evidence on consumption behavior than its Representative Agent (RA) counterpart. By simulating consistently calibrated versions of HANK and RANK models, we convey two broad messages. First, the degree of equivalence between models crucially depends on the shock being analyzed. Second, certain interesting macroeconomic questions concerning economic fluctuations can only be addressed within HA models, and thus the addition of heterogeneity broadens the range of problems that can be studied by economists. We conclude by recognizing that the development of HANK models is still in its infancy and by indicating promising directions for future work. |
| JEL: | D1 D3 E0 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24734&r=dge |
| By: | Andres Fernandez (Inter American Development Bank); Ayse Imrohoroglu (USC); Cesar Tamayo (Inter-American Development bank) |
| Abstract: | Latin American countries have long exhibited low levels of saving rates when compared to other countries in relatively similar stages of economic development (e.g., Asian economies). Motivated by this fact, this paper examines the time path of the saving rates between 1970 and 2010 in three Latin American countries –Chile, Colombia, and Mexico– through the lens of the neoclassical growth model. The findings indicate that two factors, the TFP growth rate and fiscal policy (via tax rates and government expenditure), are capable of accounting for some of the major fluctuations in saving rates observed in these years. For instance, the impressive increase in Chile’s saving rate following the early 1980s debt crisis is likely to have resulted from a combination of high TFP growth and a tax reform that substantially reduced capital taxation. Our counterfactual experiments reveal that average saving rates in Latin America could have been almost five percentage points higher, had the region experienced TFP growth rates similar to that of the Asian countries. This increase, however, is insufficient to bridge the observed gap between saving rates in the two regions. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1229&r=dge |
| By: | Alexander Monge-Naranjo (Federal Reserve Bank of St. Louis); Matias Tapia (Central Bank of Chile); Veronica Mies (Pontificia Universidad Catolica de Chile) |
| Abstract: | A worker's human capital determines his absolute and relative productivity across the different occupations. For a country as a whole, the cross-section distribution of workers determines the country's equilibrium assignment of workers to jobs and the resulting aggregate human capital. We consider a tractable general equilibrium Roy model and use it to infer, from observed data across countries and time: (i) the absolute and comparative advantage components of the different workers, (ii) the occupation intensity of a country's human capital, and (iii) the distortions in the allocation of workers to jobs. Contrary to the standard measure that implicitly assumes that human capital entails only absolute advantage, we show that the data implies that: (a) human capital has a strong comparative advantage component; (b) a higher distribution in the human capital distribution of workers lead to skill-upgrading across occupations and to a higher skill intensity of the overall human capital of countries; (c) cross-country differences in aggregate human capital explains a much larger fraction of the cross-country income differences from the standard model. We also find substantial costs from the distortions in the allocation of workers to jobs, especially for the less developed countries. Finally, we use the model to assess whether a country should direct its efforts to enhance the skills at the higher- or lower-end of the skill distribution. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1192&r=dge |
| By: | Mathias Klein; Ludger Linnemann |
| Abstract: | We estimate the effect of government spending shocks on the US economy with a time-varying parameter vector autoregression. The recent Great Recession period appears to be characterized by uniquely large impulse responses of output to fiscal shocks. Moreover, the particularity of this period is underlined by highly unusual responses of several other variables. The pattern of fiscal shock responses neither completely fits the predictions of the New Keynesian model of an economy subject to the zero lower bound on nominal interest rates, nor does it suggest regular variation of fiscal policy effects depending on the state of the business cycle. Rather, the Great Recession period seems special in that government spending shocks had a strongly negative effect on the spread between corporate and government bond yields and a strongly positive effect on consumer confidence and private consumption spending. |
| Keywords: | Fiscal policy, government spending, vector autoregression, time-varying parameters |
| JEL: | E32 E62 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1754&r=dge |
| By: | Helu Jiang (Washington University in St. Louis) |
| Abstract: | The U.S. has been experiencing a long-term decline in the rates of marriage and fertility and a steady rise in cohabitation. We use data from the the Current Population Survey to show these patterns vary across education groups. We argue such divergence is related to the changes in sources of gains from marriage. The traditional gender specialization in market work versus home production has weakened as the gender wage gap narrows and both educational attainment and labor force participation for women rise. The primary source of the gains of marriage shifts to investment in children since marriage provides strong commitment mechanism that allows parents to adopt a high-investment strategy. These changes imply that cohabitation becomes a desirable living arrangement choice for some people, in which they gain utility from living with a partner enjoying public goods but face less commitment. On the other hand, a highly educated woman, who faces a higher opportunity cost of raising a child due to higher wage compensation, also experiences a higher return of investment in children. Thus it’s crucial to examine the marital choice and fertility decision jointly. Using a two-period over-lapping-generation model, we theorize the influence of changes in labor market on females’ martial choices and fertility decisions by examining the trade-off between working, producing household service, and investing in children for different skill groups. Calibrating the simplified benchmark model using targets from period 1995 to 2008, we are able to explain over 65% of the differential fertility choices for females with different education background and marital status. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1268&r=dge |
| By: | Salvador Navarro (University of Western Ontario); Jin Zhou (University of Chicago) |
| Abstract: | We study the interaction of migration and education decisions, and their effects on labor market outcomes of individuals in sending locations. We consider the possibility that, while the level of human capital affects the migration decisions of an individual (i.e., self-selection of migrants), it is also the case that the possibility of migration itself affects the human capital accumulation decisions of agents. In particular, we first analyze how the migration option can reduce the incentives to accumulate human capital in the context of a simple Roy model with exogenous migration. As we show, even when the return to migrating is positive,if the return to education for migrants is lower in the receiving location than in the sending location, the mere possibility of migrating reduces the returns to human capital accumulation for people in the sending location. We analyze data on rural migration in China, where this pattern of returns seems to hold. We then use diff-in-diff to show that, consistent with our simple model's prediction, educational attainment in rural China slowed down compared to urban regions after an early 80's reform that relaxed the restrictions to rural migration. Finally, we build a structural model of rural-urban migration in China, where we estimate the reduction in migration costs that happened as a consequence of the reform. To quantify the effect of the policy, we simulate what would have happened had the policy not been implemented. We find that the attendance rates for high school, some college and college would have increased by 29%, 141%, and 24%, respectively. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1224&r=dge |
| By: | Edoardo Ciscato (Paris School of Economics) |
| Abstract: | The American family underwent important transformations in the last decades. Mating patterns changed, college graduates and high earners marry with each other more and more frequently. On the other hand, those at the bottom of the wage and schooling distributions have become more and more likely to stay single, and, once married or cohabiting, more likely to break up. This increasing gap in family achievements has important implications for both income and consumption inequalities, as well as intergenerational mobility. In this paper, I aim to quantify the importance of the marriage market as a channel of inequality, both at household and individual level. I build on the matching literature and set up a model of marriage, divorce and remarriage along the life- cycle in order to reproduce the afore-mentioned aggregate trends and understand the underlying drivers. In the model, risk-averse agents get married in order to benefit from joint public good expenditure, but economic gains from marriage are volatile due to labor market shocks. I show that the underlying structure of preferences and of the meeting technology are identified with matched data on the distribution of couples’ and singles’ traits, jointly with data on newlyweds and divorcees. I propose an estimation method based on indirect inference and estimate the model with PSID data. Preliminary findings suggest that differences in the productivity of household public good expenditure appear as a key driving force behind differentials in the odds of staying single, mating patterns, and, ultimately, household income inequality. |
| Keywords: | marriage market, divorce, Inequality, life-cycle, wage uncertainty, search and matching |
| JEL: | D13 J11 J12 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2018-046&r=dge |
| By: | Tobias Broer (Stockholm University); Alexandre Kohlhas (Institute for International Economic Studies, Stockholm University); Kathrin Schlafmann (Institute for International Economic Stu); Kurt Mitman (IIES) |
| Abstract: | We study the incentives of heterogeneous households to acquire information about the state of the economy. In the standard Krusell and Smith (1998) environment, where households differ in their labor productivity and asset holdings, we find that: i) when agents use current productivity and aggregate capital to condition expectations (the Krusell and Smith (1998) benchmark), expected utility losses from forming expectations equal to unconditional means correspond to less than 0:05 percent of lifetime consumption. In other words, the Krusell and Smith (1998) information structure is an equilibrium only if information is essentially free. ii) when all agents decide to not acquire information beyond the unconditional mean of the capital distribution, the capital stock is significantly more volatile. This increases the loss of not using the current capital stock to forecast future variables to between 0:5 and 3:5 percent of lifetime consumption, depending on the level of capital. iii) The individual benefits of information acquisition under ii) strongly depend on an individual’s position in the wealth distribution and the aggregate capital stock. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:752&r=dge |
| By: | Tiago Cavalcanti (University of Cambridge); Bruno Martins (Banco Central do Brasil); Cezar Santos (Fundacao Getulio Vargas); Joseph Kaboski (University of Notre Dame) |
| Abstract: | We study how dispersion in financing costs and financial contract enforcement affect entrepreneurship, firm dynamics and economic development in an economy in which financial contracts are imperfectly enforced. We use employee-employer administrative linked data combined with data on financial transactions of all formal firms in Brazil to show how interest rate spreads vary with firm size, age and loan characteristics, such as loan size and loan maturity. We present a model of economic development based on a modified version of Buera, Kaboski, and Shin (2011) which are consistent with those facts and provide evidence on the effects of financial reforms on economic development. Eliminating dispersion in financing costs leads to more credit and higher output due to cheaper credit for productive agents with low assets. Moreover, abstracting from heterogeneity in interest rate spreads understates the impacts of financial reforms that improve the enforcement of credit contracts. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:426&r=dge |
| By: | Jerome Dugast (University of Luxembourg); Pierre-Olivier Weill (University of California, Los Angeles); Semih Uslu (Johns Hopkins University) |
| Abstract: | We study the privately and socially optimal participation of investors in a centralized platform or in an over-the-counter (OTC) market. Investors incur costs to trade in the platform, in the OTC market, or in both at the same time. Investors differ from each other in risk-sharing needs and OTC market trading capacities. We show that investors with low risk-sharing needs and large trading capacities endogenously emerge as OTC intermediaries, and have the strongest private incentives to enter the OTC market vs. the trading platform. Investors with strong risk-sharing needs and low trading capacities endogenously emerge as OTC customers, and have the weakest private incentive to enter the OTC market vs. the trading platform. Turning to social welfare, we provide two necessary conditions for customers’ private incentives to be excessively large relative to their social contribution. Mandating or subsidizing trade in a centralized venue can be welfare improving only if these conditions are satisfied. First, investors must differ mostly in terms of OTC trading capacities. Second, participation costs must induce exclusive participation decisions. Based on the empirical trading patterns generated by closed-form examples of our model, we argue that the real-world OTC markets might satisfy the conditions under which mandating or subsidizing centralized trade is welfare improving. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1002&r=dge |
| By: | Lutz Hendricks (UNC Chapel Hill); Christopher Herrington (Virginia Commonwealth University); Todd Schoellman (Federal Reserve Bank of Minneapolis) |
| Abstract: | We harmonize the results of three dozen historical studies stretching back to the early 20th century to construct a time series of college attendance patterns. We find an important reversal around the time of World War II: before that, family characteristics such as income were the better predictor of college attendance; after, academic ability was the better predictor. We construct a model of college choice that can explain this reversal as a consequence of the post-War surge in the demand for college, explained by the rise in the college wage premium and declining real tuition. Although these factors affected college demand for all types of students equally, they set off a chain reaction in the model: colleges hit capacity constraints; colleges institute selective admissions; colleges become more dispersed in quality; and students apply to a broader set of colleges. High-ability students become more likely to attend college because their options become more attractive, but the opposite is true of high-income students. The driving forces and mechanisms are consistent with changes in higher education after the war, documented here and elsewhere. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:998&r=dge |
| By: | Satyajit Chatterjee (Federal Reserve Bank of Philadelphia); Dean Corbae (University of Wisconsin); Jose-Victor Rios-Rull (University of Pennsylvania); Kyle Dempsey (The Ohio State University) |
| Abstract: | We propose a theory of unsecured consumer credit where: (i) borrowers have the legal option to default; (ii) defaulters are not exogenously excluded from future borrowing; and (iii) there is free entry of lenders; and (iv) lenders cannot collude to punish defaulters. In our framework, limited credit or credit at higher interest rates following default arises from the lender's optimal response to limited information about the agent's type. The lender learns from an individual's borrowing and repayment behavior about his type and encapsulates his reputation for not defaulting in a credit score. We take the theory to data choosing the parameters of the model to match key data moments such as the overall delinquency rate. We use the model to quantify the value to having a good reputation in the credit market in a variety of ways, and also analyze the differential effects of static versus dynamic costs on credit market equilibria. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:550&r=dge |
| By: | Javier Cravino (University of Michigan); Andrei Levchenko (University of Michigan) |
| Abstract: | We combine detailed consumer expenditure data with product-level measures of price stickiness to compute the weighted median frequency of price changes in the consumption baskets of households in each percentile of the US income distribution. We show that the median duration of the prices in these baskets is U-shaped along the income distribution. The price duration of the median good in the respective consumption baskets is 10.5 months at the bottom 5% of the income distribution, 9 months at the middle of the income distribution, and 12.8 months at the top 5%. The price duration of the median good purchased by households at the bottom 5%, middle, and the top 5% of the income distribution is 10.5, 9, and 12.8 months, respectively. This suggests that monetary shocks can have distributional consequences. We cumpute income-specific price indices, and show that following a monetary policy shock, the estimated impulse response of the price index faced by high-income households is 20% lower than that of the price index faced by households in the middle of the income distribution. Finally, we use a quantitative New-Keynesian model featuring sectorial heterogeneity in the frequency of price changes and household-level heterogeneity in income and consumption patterns calibrated to our data, and show that increased income inequality can lower the effectiveness of monetary policy. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:344&r=dge |
| By: | Andrea Eisfeldt (University of California, Los Angeles); Antonio Falato (Federal Reserve Board); Mindy Z. Xiaolan (University of Texas at Austin) |
| Abstract: | Human capitalists are firm employees whose income is equity-based – i.e., for example, based on equity share grants or stock-options, and as such share into the firm’s capital gains much like non-employee capitalists. In this paper, we use theory and data to quantify their macroeconomic importance. Using two measures of non-wage income as a share of output -- hand-collected information on the number of shares reserved for employee stock option compensation (RS) or based on either selling, general, and administrative expenses (SGA) -- we show that since the 1960s human capitalists have become an increasingly important class of income earners in the US. A parsimonious model of ``technological complementary" between physical capital and human capitalists can replicate this fact as a response to investment-specific technological change. Cross-industry evidence further corroborates the key prediction of the model that there should be a negative relation between the human capitalists’ share and investment good prices. We plan to use the model to get quantitative estimates of the degree of complementarity between physical and human capital. The estimated version of the structural model will also allow us to explore the quantitative implications of the complementarity mechanism. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1110&r=dge |
| By: | Anthony Smith (Yale University) |
| Abstract: | This paper builds a highly-disaggregated global economy-climate model featuring variations in both weather (temperature) and climate (the probability distribution over weather). The model consists of approximately 19,000 1-degree-by-1-degree regions containing land. Carbon emissions from the use of energy in production increase the Earth's temperature and regional climates (average temperature) respond more or less sensitively to this increase. Regional temperatures, in turn, vary stochastically according to an empirical statistical downscaling model estimated using high-resolution panel data on temperature. Each region makes optimal consumption-savings and energy-use decisions as its productivity varies in response to changes in both weather and climate. Regions interact through global energy and financial markets and through the global carbon cycle and climate system. The relationship between climate and regional productivity has an inverse U-shape, calibrated so that the many-region model replicates estimates of aggregate global damages from global warming. Changes in productivity stemming from stochastic variations in regional temperature are calibrated to replicate relationships between temperature and regional GDP in the G-Econ database. The calibrated model serves as a laboratory in which to assess the ability of non-structural (reduced-form) methods to extract economic damages caused by variations in weather and climate from panel data on weather, climate, and GDP. The paper documents quantitatively their performance and investigates possible sources of bias. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1223&r=dge |
| By: | Md Mahbubur Rahman (McMaster University); Oksana Leukhina (Federal Reserve Bank of St. Louis); Raghav Paul (University of Washington) |
| Abstract: | It is well known that the gap in agricultural labor productivity accounts for most of the output gap between rich and poor countries. Furthermore, development economists have pointed out that the low agricultural productivity in poor countries stems from the persistence of small non-mechanized farms. We propose and quantify a novel explanation for this phenomenon. We begin with a premise that residing in a rural area provides access to a network that effectively insures its residents against income fluctuations. If living in the rural area provides access to "insurance", households are less willing to migrate to the city - where labor earnings risk is uninsured. As a result, labor remains cheap in agriculture, and the incentives for switching to capital-intensive methods of farming are weak. In order to understand the quantitative importance of this mechanism, we calibrate the model to Indian data and study an abstract policy intervention - provision of complete insurance against earnings risk in the city. Our framework successfully accounts for the urban-rural consumption gap. The policy intervention decreases the share of workers in agriculture from 0.59 to 0.52, increases capital demand per firm by 79 percent, the average farm size increases by 9 percent and the labor productivity gap between the two sectors decreases by 32 percent. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1305&r=dge |