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on Dynamic General Equilibrium |
| By: | Elmer Sánchez León (Banco Central de Reserva del Perú) |
| Abstract: | This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model that evaluates the relative importance of the easing of lending and borrowing constraints in mortgage credit markets for business cycle fluctuations in a small open emerging economy. Credit markets are characterized by partial dollarization and are subject to demand shocks, innovations to stochastic loan-to-value ratios (borrowing constraints) imposed on borrowers, and supply shocks, innovations to stochastic bank capital-to-asset ratios (lending constraints) imposed on financial intermediaries. In addition, the model features a set of real and nominal domestic shocks to demand, productivity, and fiscal and monetary policy, as well as foreign shocks. A historical decomposition conducted on household leverage ratios reveals that these variables’ cyclical dynamics were mainly driven by borrowing constraint shocks or credit demand shifts, while lending constraint shocks played a residual role. |
| Keywords: | Financial frictions, DSGE model, banking sector |
| JEL: | E37 E44 E52 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:125&r=dge |
| By: | Jonathan Heathcote (Federal Reserve Bank of Minneapolis); Gianluca Violante (Princeton University); Kjetil Storesletten (University of Oslo) |
| Abstract: | This paper studies optimal taxation of labor earnings when the degree of tax progressivity is allowed to vary with age. We analyze this question in a tractable equilibrium overlapping-generations model that incorporates a number of salient trade-offs in tax design. Tax progressivity provides insurance against ex-ante heterogeneity and earnings uncertainty that missing markets fail to deliver. However, taxes distort labor supply and human capital investments. Uninsurable risk cumulates over the life cycle, and thus the welfare gains from income compression via progressive taxation increase with age. On the other hand, average labor productivity rises with age, and thus the welfare losses from progressive taxation's distortionary impact on labor supply also increase with age. The optimal age-varying system balances these distortions. In a calibrated version of the economy, we quantify the welfare gains of moving from the optimal age-invariant to the optimal age-dependent system and find that they are negligible. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:501&r=dge |
| By: | Christopher House (University of Michigan); Christian Proebsting (EPFL); Linda Tesar (University of Michigan) |
| Abstract: | Cyclical unemployment rates differ substantially more between countries in the euro area than between states in the United States. We find that net migration is responsive to unemployment differentials, but the response is smaller in Europe relative to the U.S. This paper explores to what extent the lack of labor mobility in Europe makes it more difficult for the euro area to adjust to shocks. We develop a multi-country DSGE model of a currency union with cross-border migration and search frictions in the labor market. The model is calibrated to the 50-state U.S. economy and to the 31-country European economy and replicates, for each region, the relationship between net migration and unemployment differentials. The model allows us to quantify the benefits if Europe had enjoyed levels of labor mobility as high as those in the U.S. during the most recent crisis. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:876&r=dge |
| By: | Kathleen McKiernan |
| Abstract: | Abstract In May 1981, Chile became the first country to address the unsustainability of its pay-as-you-go Social Security program by reforming to a system of individual retirement accounts. In order to quantify the welfare impact of the Chilean reform, I use an overlapping generations model with three main components: multiple productivity types, a government policy modeled on the Chilean system, and a household decision to split working time between a taxed formal sector, an untaxed informal sector, and home production. Blue-collar workers, who pay lower payroll taxes but receive lower pensions prior to the reform, and white-collar workers, who pay higher taxes and receive more generous pensions, experience long-run welfare gains of roughly 25 and 30 percent, respectively. Transitional generations of both types experience welfare losses up to 1 percent. Economies without informality and home production exhibit lower long-run welfare gains. Excluding the options for households to work informally and at home decreases welfare gains for two reasons: (1) both informality and home production increase labor supply elasticity and cause the pay-as-you-go payroll tax to be more distortionary; and (2) informality allows workers to take advantage of long-run wage increases from the reform without facing the distortion caused by remaining labor taxation. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:253&r=dge |
| By: | Siming Liu (Indiana University) |
| Abstract: | We consider a dynamic general equilibrium model of international trade and structural transformation to explore the implications of lower trade costs for structural change in the United States. Changes in trade costs lead to structuops than during normal times. To rationalize this, I build a two-sector model with the collateral constraint on external debt. During recession, an adverse international shock reduces consumption and undermines the value of collateral. The collapsing asset price in turn tightens the financial constraint, deteriorates the real absorption, and sets-in a fully-blown debt-deflation mechanism in spirit of Mendoza's 2010. In this context, an increase in government purchase exerts a counteracting force by raising asset prices and stimulating real activities. More importantly, if the government can commit certain paths of spending in the future, the expected real appreciations further relax the financial constraint today. Lastly, I use a calibrated model to explore the multiplier effect under different exchange rate regimes, the asymmetric multipliers, and the multipliers for different shock persistence. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1027&r=dge |
| By: | Axelle Ferriere (European University Institute); Gaston Navarro (Federal Reserve Board); Ricardo Reyes-Heroles (Federal Reserve Board) |
| Abstract: | While trade openness generates aggregate welfare gains, it can have unequal effects on the wage of skilled relative to unskilled workers. In this paper, we ask how heterogeneous the welfare gains of trade openness can be in the short and the long-run. To do so, we build a dynamic heterogeneous-household life-cycle model of international trade with incomplete credit markets. The model incorporates an endogenous costly skill acquisition, which allows unskilled workers to invest in education and escape the short-run losses of trade openness. We calibrate the model to match trends in trade openness in the United States between the late 1980s and 2010. We find that poor households take the longest to acquire skills and are therefore the last to experience positive gains from trade openness, which in some cases may not realize within a life-time. We also argue that welfare for all workers increases in the long-run, and that physical capital accumulation is essential for this result. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1248&r=dge |
| By: | Leena Rudanko (Federal Reserve Bank of Philadelphia) |
| Abstract: | This paper studies a labor market with search frictions and directed search, where firms employ multiple workers and follow a firm-wage policy: a firm pays all its (equally productive) workers the same. The policy introduces a tension into the static firm problem, between setting a high wage to attract more new workers versus a low one to economize on labor costs on existing ones. The policy also introduces a time-inconsistency into the dynamic firm problem that affects equilibrium allocations. A firm with commitment plans on higher wages in the future than in the short run, where the firm takes advantage of its existing workers with a low wage. I study labor market outcomes when firms cannot commit to future wages, and show that one can, despite the time-inconsistency, analyze Markov-perfect equilibria using a standard Euler equation approach. The model generates endogenous real wage rigidity as firms raising wages to increase hiring in an expansion must raise them for all workers instead of only new hires. The commitment problem also gives a motive for firms to adjust wages only infrequently, as observed. An equilibrium where firms adjust wages infrequently can be better for welfare, especially that of workers. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1154&r=dge |
| By: | Hao Jin (Xiamen University); Chen Xiong (Xiamen University) |
| Abstract: | We study the effectiveness of macroprudential policies in mitigating credit growth in open economies. Empirically we find that macroprudential policies contain domestic credit growth but are less effective in financially more integrated economies due to greater cross-border bank borrowing. We develop a small open economy DSGE model with cross-border bank financing to interpret the empirical findings and quantitatively evaluate the macroeconomic and welfare implications of macroprudential policies. Consistent with the empirical evidence, our model shows that banks contract credits and increase the fraction of foreign financing in response to macroprudential policy tightening. This liability composition shift significantly under-mines the stabilizing effect and welfare gains of macroprudential policies, so they become less effective in financially more open economies. Our results also suggest it is desirable to implement more restrictive macroprudential regulations when capital moves more freely. |
| Keywords: | Intermediary; Financial Frictions; Financial Openness; Macroprudential Policy |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2018007&r=dge |
| By: | Abdoulaye Ndiaye (Northwestern University) |
| Abstract: | This paper studies optimal income taxes and retirement benefits in a life-cycle model with an intensive margin of labor supply and an endogenous retirement age. The government insures and redistributes resources across individuals who privately observe persistent shocks to their productivity. In this environment, the optimal labor tax is hump-shaped in age, unlike in existing models with no endogenous retirement choice, in which the optimal tax is everywhere increasing. Because of the retirement margin, the total Frisch elasticity of labor supply increases with age. This elasticity effect flattens the labor tax for old workers relative to the model without an extensive margin. In addition, as high-productivity workers retire later than low-productivity workers, the distribution of productivity in the labor force features, over time, a higher mean and lower variance than in the general population. This novel composition effect pushes for a labor tax that declines for old workers. Optimal policy balances these effects with the insurance benefits of taxation, yielding the hump-shape in tax rates. In numerical simulations, the optimum achieves sizable welfare gains that approximately optimal age-dependent taxes fail to capture under the current US Social Security system. Yet, an optimal combination of age-dependent linear taxes with increasing-in-age delayed retirement credits generates welfare gains that are close to those from the optimum. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:535&r=dge |
| By: | Axel Gottfries (University of Cambridge) |
| Abstract: | This paper studies the role of partial commitment in models with on-the-job search. Commitment is modeled as the frequency at which wages are renegotiated. The formulation nests earlier models in the literature as special cases in which the frequency of renegotiation goes to zero (full commitment) or infinity (no commitment). I show that the equilibrium wage distribution and the bargaining outcomes are unique. The degree of commitment is important for the share of the surplus captured by the worker. With no commitment, the worker value only reflects her bargaining power. With commitment, the worker receives a higher share of the surplus because a higher wage increases the total surplus by increasing the length of the match. The length of the match is more responsive to the agreed wage when the commitment is higher. When the model is calibrated, the values of the model primitives, e.g. the bargaining power of workers and the productivity distribution, differ starkly depending on the assumed degree of commitment. Further, there is only a positive spillover from an increase in the minimum wage if there is a high degree of commitment. Lastly, when the degree of commitment is endogenous, the two corner cases analyzed in the literature only arise under particular parameter values. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:567&r=dge |
| By: | Alexander Richter (Federal Reserve Bank of Dallas); Nathaniel Throckmorton (College of William & Mary) |
| Abstract: | This paper develops a new way to quantify the effect of uncertainty and other higher-order moments. First, we estimate a nonlinear model using Bayesian methods with data on uncertainty, in addition to common macro time series. This key step disciplines the model and allows us to generate data-driven policy functions for any higher-order moment. Second, we use the Euler equation to analytically decompose consumption into several terms--expected consumption, the ex-ante real interest rate and the ex-ante variance and skewness of future consumption, technology growth, and inflation--and then use the policy functions to filter the data and generate a time series for the effect of each term. We apply our method to a familiar New Keynesian model with a zero lower bound constraint on the nominal interest rate and two stochastic volatility shocks, but it is adaptable to any dynamic model. Over a 1-quarter horizon, uncertainty has a very small effect on consumption, similar to the volatility shocks in our model. Over horizons that remove the influence of expected consumption, the effect of uncertainty is an order of magnitude larger. Other higher-order moments have much smaller effects. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:565&r=dge |
| By: | Sushant Acharya (Federal Reserve Bank of New York); Keshav Dogra (Federal Reserve Bank of New York) |
| Abstract: | Does market incompleteness radically transform the properties of monetary economies? Using an analytically tractable heterogeneous agent New Keynesian (NK) model, we show that whether incomplete markets resolve `policy paradoxes' in the representative agent NK model (RANK) depends primarily on the cyclicality of income risk, rather than incomplete markets per se. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only if risk is procyclical. Acyclical or countercyclical risk amplifies these puzzles relative to RANK. Cyclicality of risk also affects determinacy: procyclical risk permits determinacy even under a peg, while countercyclical income risk generates indeterminacy even if the Taylor principle holds. Finally, we uncover a new dimension of monetary-fiscal interaction. Since fiscal policy affects the cyclicality of income risk, it influences the effects of monetary policy even when `passive'. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:539&r=dge |
| By: | Julio Carrillo (Banco de México); Enrique G. Mendoza (Department of Economics, University of Pennsylvania); Victoria Nuguer (IADB); Jessica Roldan-Pena (Banco de México) |
| Abstract: | Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen’s Rule and strategic interaction between policy-making authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority’s loss function given the other authority’s elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes. |
| Keywords: | Financial Frictions, Monetary Policy, Financial Policy |
| JEL: | E44 E52 E58 |
| Date: | 2017–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:17-002&r=dge |
| By: | Mikhail Golosov (University of Chicago); Thomas Winberry (University of Chicago) |
| Abstract: | Modern DSGE models do a good job at accounting for the dynamics of aggregate quantities. However, this success is built on a fundamental tension: asset prices play an allocative role in determining aggregate quantities, but are completely at odds with the data. We study the implications of asset pricing facts for the understanding of quantity dynamics. To do so, we estimate a stochastic discount factor from asset pricing data and compute the behavior of a neoclassical production sector given this SDF. We have two main preliminary results. First, over 99% of the variation in aggregate quantities can be accounted for using the risk-free rate alone. Hence, risk premia - which are crucial for matching asset pricing data - are unimportant in determining quantities. Second, large adjustment frictions are necessary to match quantity dynamics. The reason is that the risk-free rate is negatively correlated with productivity in the data, so it does not dampen the response of firms to productivity shocks. We explore the implications of these findings for a range of economic issues. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:214&r=dge |
| By: | Jesper Bagger (Royal Holloway and the Dale T. Mortensen Centre); Mads Hejlesen (Department of Economics and Business Economics, Aarhus University, Denmark); Kazuhiko Sumiya (Royal Holloway); Rune Vejlin (Department of Economics and Business Economics, Aarhus University, Denmark) |
| Abstract: | We study the impact of labor income taxation on workers' job search behavior and the implications it has for the equilibrium allocation of heterogenous workers across heterogenous firms. The analysis is conducted within a complete markets equilibrium on-the-job search model with two-sided heterogeneity, endogenous job search effort and hiring intensity, equilibrium wage formation, and firm entry and exit. In a nutshell, by appropriating part of the gain from finding a better paid job, income taxation reduces the return to job search effort, and distorts workers' job search effort, which, in turn, distorts the equilibrium allocation of labor. The model is estimated on Danish matched employer-employee data, and is used to evaluate a series of tax reforms in Denmark in the 1990s and 2000s, to provide new insights into the elasticity of taxable labor income, and to identify a Pareto optimal income tax reform. |
| Keywords: | Labor reallocation, Income taxation, Tax reforms, Worker heterogeneity, Firm heterogeneity, Matched employer-employee data |
| JEL: | H20 J30 J64 J63 |
| Date: | 2018–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2018-06&r=dge |
| By: | Galina Vereshchagina (Arizona State University) |
| Abstract: | This paper argues that accounting for firms' endogenous productivity growth plays an important role in understanding the link between financial and economic development. First, using a simple analytically tractable model, it shows that incorporating endogenous investment in firm productivity into the model amplifies the negative impact of borrowing constraints on output. This occurs even if the models with and without such productivity investments are calibrated to match the same value of profit to output ratio in the absence of borrowing constraints. Second, the paper embeds productivity investment into an otherwise standard variation of the Bewley-Aiyagary-Hugget model used in the existing literature to evaluate the impact of borrowing constraints on economic development. Preliminary numerical results suggest that the borrowing constraints have a considerably larger impact in the model with endogenous innovative investment, compared to the model in which the firm productivity grows exogenously (and is calibrated to match the same moments in the unconstrained benchmark). For example, under a conservative calibration in which the ratio of intangible investment to output is 5.5%, the GDP and measured TFP fall by 37% and 12.5%, respectively. In contrast, in an observationally equivalent model, in which the firm productivity follows an exogenous random process, the GDP and measured TFP fall by only 28% and 4.6%, respectively. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1107&r=dge |
| By: | Russell Cooper (The Pennsylvania State University); Immo Schott (Université de Montréal) |
| Abstract: | This paper studies the effects of cyclical capital reallocation on aggregate productivity. Frictions in the reallocation process are a source of factor misallocation and lead to variations in measured aggregate productivity over the business cycle. The effects are quantitatively important in the presence of fluctuations in the cross-sectional dispersion of plant-level productivity shocks. The cyclicality of the productivity losses depends on the joint distribution of capital and plant-level productivity. Even without aggregate productivity shocks, the model has quantitative properties that resemble those of a standard stochastic growth model: (i) persistent variation in the Solow residual, (ii) positive co-movement of output, investment and consumption and (iii) consumption smoothing. The estimated model with dispersion shocks alone accounts for nearly 85\% of the time series variation in the observed Solow residual. Contrary to a model with productivity shocks, the model driven by dispersion shocks can mimic the dynamics of reallocation and the cross sectional dispersion in average capital productivity. Instead of relying on approximative solution techniques we show analytically that a higher-order moment is needed to solve the model accurately. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:121&r=dge |
| By: | Ales Marsal (National Bank of Slovakia) |
| Abstract: | We explore asset pricing implications of productive, wasteful and utility enhancing government expenditures in a New Keynesian macro-finance model with Epstein-Zin preferences. We decompose the pricing kernel into four underlying macroeconomic factors (consumption growth, inflation, time preference shocks, long run risks for consumption and leisure) and design novel method to quantify the contribution of each factor to bond prices. Our methodology extends the performance attribution analysis typically used in finance literature on portfolio analysis. Using this framework, we show that bonds can serve as an insurance vehicle against the fluctuations in investors wealth induced by government spending. Increase in uncertainty surrounding government spending rises the demand for bonds leading to decrease in yields over the whole maturity profile. Bonds insure investors by i) providing buffer against bad times, ii) hedging inflation risk and iii) hedging real risks by putting current consumption gains against future losses. In a special case where the central bank does not respond to changes in output bonds leverage inflation risk. Spending reversals strongly reduce the sensitivity of bond prices to changes in government spending. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:107&r=dge |
| By: | Shutao Cao; Césaire A. Meh; José-Víctor Ríos-Rull; Yaz Terajima |
| Abstract: | We document that, across households, the money consumption ratio increases with age and decreases with consumption, and that there has been a large increase in the money consumption ratio during the recent era of very low interest rates. We construct an overlapping generations (OLG) model of money holdings for transaction purposes subject to age (older households use more money), cohort (younger generations are exposed to better transaction technology), and time effects (nominal interest rates affect money holdings). We use the model to measure the role of these different mechanisms in shaping money holdings in recent times. We use our measurements to assess the interest rate elasticity of money demand and to revisit the question of what the welfare cost of inflation is (which depends on how the government uses the windfall gains from the inflation tax). We find that cohort effects are quite important, accounting for half of the increase in money holdings with age. This in turn implies that our measure of the interest rate elasticity of money is -0.6, on the high end of those in the literature. The cost of inflation is lower by one-third in the model and, as a result, lower than previously estimated in the literature that does not account for the secular financial innovation. |
| Keywords: | Inflation: costs and benefits |
| JEL: | E21 E41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:18-40&r=dge |
| By: | Andrea Bonfatti (University of Padua); Sagiri Kitao (Keio University); Selahattin Imrohoroglu (University of Southern California) |
| Abstract: | Populations in all major economies have been aging; the working age population has already started to decline in some and projections for future decades describe differential timing and extent of aging. To the extent that capital markets are integrated across regions, these different demographic trends and different fiscal responses to them will have differential implications on capital accumulation, labor supplies, and capital movements across regions. This paper develops a general equilibrium model of the world in which overlapping generations of individuals populate three regions under perfect capital mobility. As mentioned earlier, our idea is to view our world economy as consisting of three regions that have very different demographic trends. The HI region is aging earlier and faster than the MI region, and, Japan has been aging even earlier and faster than the HI region. By isolating Japan as a separate region, our framework aims to highlight the quantitative importance of the differential aging mechanism in studying fiscal sustainability in the Japanese economy. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:245&r=dge |
| By: | Nguyen, Quoc Hung |
| Abstract: | We develop a tractable two-sector endogenous growth model in which heterogeneous entrepreneurs face borrowing constraints and the government collects tax to fund public eduction. This model is isomorphic to a Uzawa-Lucas model and there exists a balanced-growth path equilibrium in which the growth rate depends on the financial deepening level. We show that the policy tax rate exerts inverted U-shaped effects on the growth rate. Additionally, at the optimal policy tax rates the model's predictions are consistent with correlational regularities documented from 35 OECD countries with regards to financial deepening, factor accumulation and working hours. |
| Keywords: | Heterogeneity; Financial Deepening; Endogenous Growth |
| JEL: | E10 E22 E44 O16 |
| Date: | 2018–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88328&r=dge |
| By: | Job Boerma (University of Minnesota); Loukas Karabarbounis (University of Minnesota) |
| Abstract: | We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and a home production technology. Accounting for home production amplies welfare-based dierences across households meaning that inequality is larger than we thought. Using the optimality condition that households allocate more consumption to their more productive sector, we infer that the dispersion in home productivity across households is roughly three times as large as the dispersion in their wages. There is little scope for home production to oset dierences that originate in the market sector because productivity dierences in the home sector are large and the time input in home production does not covary with consumption expenditures and wages in the cross section of households. We conclude that the optimal tax system should feature more progressivity taking into account home production. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:157&r=dge |
| By: | Yunmin Chen (Academia Sinica); Cheng Chen Yang (Academia Sinica); YiLi Chien (Federal Reserve Bank of St. Louis) |
| Abstract: | What is the prescription of Ramsey capital taxes for the heterogeneous-agent incomplete-market economy in the long run? Aiyagari (1995) addressed the question, showing that a positive capital tax should be imposed to implement the steady-state allocation that satisfies the so-called modified golden rule. In his analysis of the Ramsey problem, a critical assumption implicitly made is the existence of steady-state allocations at the optimum. This paper revisits the issue and finds sharply different results. We demonstrate that the optimal Ramsey allocation may feature no steady state. The key to our results is embedded in the hallmark of incomplete-market models that the risk-free rate is lower than the time discount rate at the steady state in competitive equilibrium. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:59&r=dge |
| By: | Randall Wright (University of Wisconsin); Xiaolin Xiao (Economics Discipline Group); Yu Zhu (Bank of Canada) |
| Abstract: | In previous work we studied frictional markets for capital reallocation based on ex ante heterogeneity: similar firms enter the market with different capital stocks. Here we study ex post heterogeneity: firms with similar capital realize different productivity shocks. For different specifications, results are provided on existence, uniqueness, efficiency and the effects of monetary and fiscal policy. We show, e.g., how higher nominal rates can lower or raise investment, and can be desirable, despite hindering reallocation. The model can capture several stylized facts, e.g., misallocation appears countercyclical while capital reallocation and prices are procyclical. We also discuss how productivity dispersion may or may not accurately measure inefficiency and frictions. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:544&r=dge |
| By: | Nida Cakir Melek (Federal Reserve Bank of Kansas City) |
| Abstract: | This paper examines the effects of the U.S. shale oil boom in a two-country DSGE model where countries produce crude oil, refined oil products, and a non-oil good. The model incorporates different types of crude oil that are imperfect substitutes for each other as inputs into the refining sector. The model is calibrated to match oil market and macroeconomic data for the U.S. and the rest of the world (ROW). We investigate the implications of a significant increase in U.S. light crude oil production similar to the shale oil boom. Consistent with the data, our model predicts that light oil prices decline, U.S. imports of light oil fall dramatically, and light oil crowds out the use of medium crude by U.S. refiners. In addition, fuel prices fall and U.S. GDP rises. We then use our model to examine the potential implications of the former U.S. crude oil export ban. The model predicts that the ban was a binding constraint in 2013 through 2015. We find that the distortions introduced by the policy are greatest in the refining sector. Light oil prices become artificially low in the U.S., and U.S. refineries produce inefficiently high amount of refined products, but the impact on refined product prices and GDP are negligible. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:26&r=dge |
| By: | Alan Finkelstein Shapiro (Tufts University); Maria Olivero (Drexel University) |
| Abstract: | Standard labor search models face limitations in replicating the empirical volatility of unemployment and market tightness. We document a positive link between measures of credit-market distress and unemployment, and a negative link between measures of credit-market distress and labor force participation. We introduce monopolistic competition and persistent lending relationships in the banking system into an RBC search model with endogenous labor force participation. Amid aggregate productivity and financial shocks that replicate the empirical volatility of labor force participation and credit spreads, the model can replicate close to 90 percent of the volatility of unemployment and virtually all of the volatility in market tightness in the data. The interaction between endogenous participation in labor markets and long-lasting lending relationships plays a key role by providing a powerful amplification mechanism of financial shocks. We illustrate the policy relevance of accounting for labor force participation by analyzing the impact of countercyclical unemployment benefits and interest rate subsidies. We find that both are effective stabilization interventions. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1113&r=dge |
| By: | Gene Grossman (Princeton University); Elhanan Helpman (Harvard University); Ezra Oberfield (Princeton University); Thomas Sampson (LSE) |
| Abstract: | We explore the possibility that a global productivity slowdown is responsible for the widespread decline in the labor share of national income. In a neoclassical growth model with endogenous human capital accumulation a la Ben Porath (1967) and capital-skill complementarity a la Grossman et al. (2017), the steady-state labor share is positively correlated with the rates of capital-augmenting and labor-augmenting technological progress. We calibrate the key parameters describing the balanced growth path to U.S. data for the early postwar period and find that a one percentage point slowdown in the growth rate of per capita income can account for between one half and all of the observed decline in the U.S. labor share. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:169&r=dge |
| By: | Dong, Feng (Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China); Wang, Pengfei (Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong); Wen, Yi (Federal Reserve Bank of St. Louis) |
| Abstract: | As a form of investment, the importance of capital reallocation between firms has been increasing over time, with the purchase of used capital accounting for 25% to 40% of firms total investment nowadays. Cross- firm reallocation of used capital also exhibits intriguing business-cycle properties, such as (i) the illiquidity of used capital is countercyclical (or the quantity of used capital reallocation across rms is procyclical), (ii) the prices of used capital are procyclical and more so than those of new capital goods, and (iii) the dispersion of firms' TFP or MPK (or the bene t of capital reallocation) is countercyclical. We build a search-based neoclassical model to qualitatively and quantitatively explain these stylized facts. We show that search frictions in the capital market are essential for our empirical success but not sufficient---fi nancial frictions and endogenous movements in the distribution of rm-level TFP (or MPK) and interactions between used-capital investment and new investment are also required to simultaneously explain these stylized facts, especially that prices of used capital are more volatile than that of new investment and the dispersion of firm TFP is countercyclical. |
| Keywords: | Capital Reallocation; Capital Search; Fragmented Markets; Endogenous Dispersion of rmsTFP; Endogenous Total Factor Productivity; Business Cycles |
| JEL: | E22 E32 E44 G11 |
| Date: | 2018–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-017&r=dge |
| By: | Timo Boppart (IIES, Stockholm University); Hannes Malmberg (Stanford University); Per Krusell (Stockholm University) |
| Abstract: | Labor productivity differences across countries are larger in agriculture than in non-agriculture. This observation has lead the literature to look for agriculture-specific distortions/inefficiencies in poor countries. However, labor productivity is not equal to TFP, and, over time and across countries, input intensification is more rapid in agriculture than in other sectors. This paper examines to what extent intensification of land, intermediate input use, capital deepening, and skill upgrading can account for the observed pattern in labor productivities. We first turn to the aggregate U.S. time series and uncover quantitatively similar changes in capital deepening and labor productivity as suggested by the cross-country data. U.S. agricultural census data helps us to characterize and estimate an agricultural production function at the gross output level. We quantify the importance of factor intensification, and, finally, we put our theory in a dynamic general equilibrium framework that captures the structural transformation out of agriculture. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:294&r=dge |
| By: | Toan Phan (Federal Reserve Bank of Richmond); Andrew Hanson (University of North Carolina Chapel Hill); Siddhartha Biswas (University of North Carolina, Chapel Hill) |
| Abstract: | We analyze the welfare tradeoff of rational bubbles in a tractable growth model with financial frictions and downward nominal wage rigidity. The monetary authority follows an inflation targeting Taylor-type interest rate rule that is constrained by the zero lower bound. We show that competitive speculation in a risky bubbly asset can result in an excessive investment boom that precedes an inefficient bust, and a larger boom precedes a deeper bust. In particular, the collapse of a large bubble can push the economy into a “secular stagnation” equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent recession with inefficiently low employment, investment and output. The inefficiency is due to the pecuniary externality of speculative investment that arises from combination of financial frictions and nominal rigidities. The model provides a framework to evaluate macroprudential leaning-against-the-bubble policies to balance the welfare tradeoff between the boom and bust phases of bubbly episodes. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:440&r=dge |
| By: | Marcus Hagedorn (University of Oslo); Iourii Manovskii (University of Pennsylvania); Jinfeng Luo (University of Pennsylvania); Kurt Mitman (Stockholm University) |
| Abstract: | We assess the power of forward guidance—promises about future interest rates—as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters—although macro indicators suggest otherwise—has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful—generating a “forward guidance puzzle”—and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:929&r=dge |
| By: | xavier Ragot (SciencesPo); Francois Le Grand (EMLyon Business School) |
| Abstract: | We present a general equilibrium model of the world economy where sovereigns face uninsurable-idiosyncratic risks and can default on their debt, in the Eaton-Gersovitz tradition. Our contribution is to provide a welfare analysis in general equilibrium. In our model, the world interest rate is determined through the global financial market equilibrium, the amount of safe asset is endogenous and determines international risk sharing. We show that non-trivial multiple equilibria naturally arise, due to the endogeneity of the interest rate. These equilibria can be ranked according to their aggregate welfare, such that equilibria with a higher quantity of safe assets correspond to higher welfare. Due to a shortage in the safe asset supply, even the equilibrium with the highest welfare is not constrained-efficient. Finally, we prove that a world fund issuing a safe asset can reach the constrained-efficient aggregate welfare. With a standard calibration, the size of the fund is found to be around 4.1% of the world GDP. Its relationship with the Special Drawing Rights of the IMF is discussed. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:889&r=dge |
| By: | Silvio Rendon (The Federal Reserve Bank of Philadelphia); J. Ignacio García-Pérez (Universidad Pablo de Olavide) |
| Abstract: | We develop and estimate a model of family job search and wealth accumulation. Individuals' job finding and job separations depend on their partners' job turnover and wages as well as common wealth. We fit this model to data from the Survey of Income and Program Participation (SIPP). This dataset reveals a very asymmetric labor market for household members, who share that their job finding is stimulated by their partners' job separation, particularly during economic downturns. We uncover a job search-theoretic basis for this added worker effect. We also show that this effect is robust to having more children in the household, but that this effect and the interdependency between household members is underestimated if wealth and savings are not considered. Moreover, our analysis shows that the policy goal of supporting job search by increasing unemployment transfers is partially offset by the partner's cross-effect in lower unemployment and wages. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:503&r=dge |
| By: | Ryan Chahrour (Boston College); Rosen Valchev (Boston College) |
| Abstract: | The United States enjoys an “exorbitant privilege” that allows it to borrow at especially low interest rates. Meanwhile, the dollarization of world trade appears to shield the U.S. from international disturbances. We provide a new theory that links dollarization and exorbitant privilege through the need for an international medium of exchange. We consider a two-country world where international trade happens in decentralized matching markets, and must be collateralized by safe assets — a.k.a. currencies — issued by one of the two countries. Traders have an incentive to coordinate their currency choices and a single dominant currency arises in equilibrium. With small heterogeneity in traders’ information, the model delivers a unique mapping from economic conditions to the dominant currency. Nevertheless, the model delivers a dynamic multiplicity: in steady-state either currency can serve as the international medium of exchange. The economy with the dominant currency enjoys lower interest rates and the ability to run current account deficits indefinitely. Currency regimes are stable, but sufficiently large shocks or policy changes can lead to transitions, with large welfare implications. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:317&r=dge |
| By: | Camilo Morales-Jimenez (Board of Governors of the Federal Reserve System) |
| Abstract: | Wage posting models are an appealing way of studying wage growth and dispersion, as firms offer high employment values to retain and poach more workers from other companies. In this paper, I study the business cycle properties of these types of models with random search. When abstracting from firm entry and exit, I show that productivity shocks do not generate fluctuations in labor market quantities (such as unemployment) because fear of competition for workers makes wages absorb most of these shocks. Even though separation rate shocks can generate large unemployment fluctuations, they generate a positive correlation between unemployment and hires and, depending on the recruiting cost function, these shocks may also generate a positive correlation between unemployment and vacancies. I show that introducing wage rigidity into the model increases the responses of labor market quantities to aggregate productivity shocks, but the size of these responses depends on how large (relative to productivity) the flow opportunity cost of employment is. To assess these models quantitatively, I propose a new algorithm that finds the steady state and computes transitional dynamics in seconds. Hence, integrating wage posting models with random search to larger models becomes possible (and easy) with this new algorithm. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1240&r=dge |
| By: | Luca Flabbi (University of North Carolina) |
| Abstract: | We develop a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering the labor market and whether searching for a job as unemployed or as self-employed. Firms optimally decide the formality status of the job and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market parameters and institutions. We focus on an increasingly important institution: a ``dual" social protection system whereby contributory benefits in the formal sector coexist with non-contributory benefits in the informal sector. We estimate preferences for the system -- together with all the other structural parameters of the labor market -- using labor force survey data from Mexico and the time-staggered entry across municipalities of a non-contributory social program. Policy experiments show that informality may be reduced by either increasing or decreasing the payroll tax rate in the formal sector. They also show that a universal social security benefit system would decrease informality, incentivize schooling, and increase productivity at a relative fiscal cost that is similar to the one generated by the current system. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:130&r=dge |
| By: | Sushant Acharya (Federal Reserve Bank of New York); Shu Lin Wee (Carnegie Mellon University Tepper School of Business) |
| Abstract: | The share of replacement hires has risen over time from 33% in the early 1990s to about 41% in 2015 without a corresponding rise in the share of quits and vacancy posting. We build a model that reconciles these facts and use it to uncover the factors behind the rise in replacement hiring. In our model, matched firms can continually meet new applicants and replace existing workers without having to post a new vacancy or experience a quit. Replacement hires, by allowing firms to replace less productive workers, generate private productivity gains but socially inefficient outcomes as firms fail to internalize the lost value when current workers are released into unemployment. Overall, our calibrated model suggests that an increase in the ratio of old to new vacancies and an increase in firms' outside options are key factors that promoted the increase in the share of replacement hires. Furthermore, we find that welfare in our calibrated economy is 2% lower in terms of output and unemployment is 50% higher relative to the efficient benchmark. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:758&r=dge |
| By: | Berthold Herrendorf (Arizona State University); Akos Valentinyi (University of Manchester); Richard Rogerson (Princeton University) |
| Abstract: | Existing models of structural change typically assume that all of investment is produced in the goods sector. We show that this assumption is strongly counterfactual: in the postwar US, the share of services value added in investment expenditure has been steadily growing and now exceeds that of goods value added. We build a new model, which takes a unified approach to structural change in investment and consumption and yields to three new insights. First, for empirically plausible parameter values technological change is endogenously investment specific. Second, constant TFP growth in all sectors is inconsistent with structural change happening along aggregate balanced growth path. Third, the sector with the slowest TFP growth absorbs all resources asymptotically. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:88&r=dge |
| By: | Alan Finkelstein Shapiro (Tufts University); Brendan Epstein (University of Massachusetts, Lowell) |
| Abstract: | The degree of bank competition and firms' and households' participation in the domestic banking system differs considerably in developing and emerging economies (EMEs) relative to advanced economies (AEs). We build a small-open-economy model with endogenous firm entry, monopolistic banks, household and firm heterogeneity in participation in the banking system, and labor search to analyze the labor market and business cycle consequences of financial participation and banking reforms in EMEs. Our key finding is that there is a pre-reform threshold level of firm participation in the banking system below which reform implementation leads to sharper unemployment and aggregate fluctuations. Thus, for initially low (high) levels of firm and household financial participation, joint financial inclusion and bank competition reforms have adverse (beneficial) volatility effects. Our findings suggest that banking reform can reduce labor market and aggregate volatility by fostering household financial participation and bank competition in tandem, but only after a certain threshold of firm participation in the banking system is achieved. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:2&r=dge |
| By: | Carlo Pizzinelli; Francesco Zanetti; Konstantinos Theodoridis |
| 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 ï¬ nding 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-speciï¬ c 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: | 2018–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:856&r=dge |
| By: | Gauti Eggertsson (Brown University); Jacob Robbins (Brown University) |
| Abstract: | The macroeconomic data of the last thirty years has overturned at least two of Kaldor's famous stylized growth facts: constant interest rates, and a constant labor share. At the same time, the research of Piketty and others has introduced several new and surprising facts: an increase in the financial wealth-to-output ratio in the US, an increase in measured Tobin's Q, and a divergence between the marginal and the average return on capital. In this paper, we argue that these trends can be explained by an increase in market power and pure profits in the US economy, i.e., the emergence of a non-zero-rent economy, along with forces that have led to a persistent long term decline in real interest rates. We make three parsimonious modifications to the standard neoclassical model to explain these trends. Using recent estimates of the increase in markups and the decrease in real interest rates, we show that our model can quantitatively match these new macroeconomic facts. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:77&r=dge |
| By: | Miles S. Kimball; Matthew D. Shapiro; Tyler Shumway; Jing Zhang |
| Abstract: | This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance effect that depends on the distribution of wealth, and an intertemporal hedging effect. After a negative macroeconomic shock, relatively risk tolerant investors sell risky assets while more risk averse investors buy them. Owing to interactions of leverage and changing wealth, however, all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock. |
| JEL: | D53 E44 G11 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24722&r=dge |
| By: | Tingting Zhu (Unversity of California, Davis) |
| Abstract: | The recent financial crisis started with subprime loan losses in the U.S. shadow banking sector, but why did this lead to a credit contraction by traditional banks? I study the macroeconomic implications of these aspects of the modern financial market. I provide a dynamic general equilibrium model with heterogeneous banking sectors and multiple mortgage loans. I highlight a novel contagion channel even without any direct ownership relationships between banks. A subprime loan shock causes shadow banks to fire sale mortgage loans. This depresses housing prices, inducing prime loans to default. The unexpected prime loan loss endogenously triggers a regime change in traditional banks’ value at risk constraints, thereby generating a market-wide lending freeze. This channel explains why traditional banks didn’t fill the gap created by the shrinking shadow banking sector during the crisis, but instead cut lending. Banks’ unwillingness to lend also accounts for the observed rise of excess reserves. An ex-ante tighter capital requirement on traditional banks has ambiguous effects on financial stability, by shifting lending to shadow banks. A combination of sector-specific capital requirements can mitigate the dilemma. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:8&r=dge |
| By: | Leland Crane (Federal Reserve Board); Henry Hyatt (US Census Bureau); Seth Murray (University of Maryland) |
| Abstract: | We consider sorting in the labor market, that is, whether high or low productivity workers and firms tend to match with each other, and how this varies cyclically using U.S. matched employer-employee data for recent decades. Although there is considerable disagreement in the nature and extent of assortative matching among different methods for ranking workers and firms, we consistently find that the productivity composition of workers and firms moves in opposite directions over the business cycle. During and after recessions, low-productivity workers leave the labor market, while low-productivity firms gain as a share of employment, so positive assortative matching is greatest in magnitude in the early stages of economic contractions. These results are consistent with differences between workers, rather than firms, driving the value of output, which we demonstrate using a model of labor market search. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:939&r=dge |
| By: | Manuel Macera (Universidad Torcuato Di Tella); Hitoshi Tsujiyama (Goethe University Frankfurt) |
| Abstract: | This paper studies how education choices and labor market frictions interact in shaping wage inequality. The wage premium of college graduates relative to high school graduates (between-group inequality) has tripled since 1980 in the U.S., and the variance of log wages conditional on educational attainments (within-group inequality) has become about 50% larger across the board. To understand the source of this change, we construct a model with schooling investments and labor market frictions that generates supply and demand of skills and frictional wage differentials as equilibrium objects. The model features a two-sided sorting: education sorting of skilled workers into college education and labor market sorting of productive firms into the labor market for college graduates − together implying an assortative matching of high skilled workers to productive firms. A novel model-based wage decomposition of both the between- and within-group inequalities is obtained. Calibrating the model to the U.S. data, we find that the inequality trend is accounted for by worker composition and labor market friction. If there were no skill- biased technological change, the variance of log wages would be smaller, mainly due to lower within-group inequality. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:827&r=dge |
| By: | Sewon Hur (University of Pittsburgh); Christopher Telmer (Carnegie Mellon University); Siqiang Yang (University of Pittsburgh) |
| Abstract: | American households vary largely in their portfolio composition of safe and risky assets, defined as stocks, real estate, and non-corporate business. We consider a standard life-cycle model with labor income risk and portfolio choice (Cocco et al. 2005), augmented with a savings wedge that lowers the return on saving and a risky wedge that lowers the relative return on risky assets. Using the SCF (1989–2016), we compute household-level wedges that rationalize the data, in the spirit of Chari et al.(2007). This paper has three main contributions. First, we use the wedges to guide plausible frictions that researchers should consider. Second, we analyze the extent to which household characteristics can account for the wedges. For example, we find that risky wedges are decreasing in age and education, smaller for self-employed households and home owners, and larger for male and black households. Finally, in a hypothetical exercise of reducing the wedges, as in Hsieh and Klenow (2009), we investigate the changes to wealth levels and wealth inequality in the U.S. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1298&r=dge |
| By: | Hanming Fang (Department of Economics, University of Pennsylvania); Zenan Wu (Department of Economics, Peking University) |
| Abstract: | We analyze how the life settlement market - the secondary market for life insurance - may affect consumer welfare in a dynamic equilibrium model of life insurance with one-sided commitment and overconfident policyholders. As in Daily et al. (2008) and Fang and Kung (2010), policyholders may lapse their life insurance policies when they lose their bequest motives; but in our model the policyholders may underestimate their probability of losing their bequest motive, or be overconfident about their future mortality risks. For the case of overconfidence with respect to bequest motives, we show that in the absence of life settlement overconfident consumers may buy too much" reclassiffication risk insurance for later periods in the competitive equilibrium. In contrast, when consumers are overconfident about their future mortality rates in the sense that they put too high a subjective probability on the low-mortality state, the competitive equilibrium contract in the absence of life settlement exploits the consumer bias by offering them very high face amounts only in the low-mortality state. In both cases, life settlement market can impose a discipline on the extent to which overconfident consumers can be exploited by the primary insurers. We show that life settlement may increase the equilibrium consumer welfare of overconfident consumers when they are sufficiently vulnerable in the sense that they have a sufficiently large intertemporal elasticity of substitution of consumption. |
| Keywords: | life insurance, secondary market, overconfidence |
| JEL: | D03 D86 G22 L11 |
| Date: | 2017–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:17-005&r=dge |
| By: | Nicolas Caramp (UC Davis); Juan Passadore (Einaudi Institute for Economics and Fina) |
| Abstract: | What are the limits that private information and limited commitment impose on risk sharing? Previous literature considered both problems separately, or modeled the lack of commitment only as participation constraints. However, with private information, lack of commitment does not collapse to participation constraints and requires an extended notion. We argue that this narrow understanding of limited commitment is responsible for the difficulties to find a decentralization for the constrained efficient allocation, which rely on commitment of some parties or unreasonable off-the equilibrium beliefs. We propose a notion of limited commitment involving renegotiation-proofness of the contracts, which provides a more general notion of the lack of commitment in the presence of private information. We show that there can be risk sharing with ex-post efficient contracts, and we decentralize the constrained efficient allocation a la Alvarez & Jermann (2000), but with borrowing constraints that depend on the whole portfolio in all states. Finally, we derive implications for the optimal design of state-contingent sovereign debt, like GDP-linked government bonds. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:207&r=dge |
| By: | Piergallini, Alessandro |
| Abstract: | This paper analyzes global dynamics in a macroeconomic model where both monetary and fiscal policies are nonlinear, consistent with empirical evidence. Nonlinear monetary policy, in which the nominal interest rate features an increasing marginal reaction to inflation, interacting with nonlinear fiscal policy, in which the primary budget surplus features an increasing marginal reaction to debt, gives rise to four steady-state equilibria. Each steady state exhibits in its neighborhood a pair of 'active'/'passive' monetary/fiscal policies à la Leeper-Woodford, and is typically investigated in isolation within linearized monetary models. We show that, when global nonlinear dynamics are taken into account, such steady states are endogenously connected. In particular, the global dynamics reveals the existence of infinite self-fulfilling paths that originate around the steady states locally displaying either monetary or fiscal 'dominance' — and thus locally delivering equilibrium determinacy — as well as around the unstable steady state with active monetary-fiscal policies, and that converge into an unintended high-debt/low-inflation (possibly deflation) attractor. Such global trajectories — bounded by two heteroclinic orbits connecting the three out-of-the-trap steady states — are, however, obscured if the four monetary-fiscal policy mixes are studied locally and disjointly. |
| Keywords: | Nonlinear Monetary and Fiscal Policy Behavior; Evolutionary Macroeconomic Modelling; Multiple Equilibria; Global Nonlinear Dynamics; Debt-Deflation Traps. |
| JEL: | C61 C62 D91 E52 E62 E63 |
| Date: | 2018–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88336&r=dge |
| By: | Enrique G. Mendoza (Department of Economics, University of Pennsylvania); Javier Bianchi (Federal Reserve Bank of Minneapolis); Chenxin Liu (Department of Economics, UW-Madison) |
| Abstract: | We study optimal macroprudential policy in a model in which unconventional shocks, in the form of news about future fundamentals and regime changes in world interest rates, interact with collateral constraints in driving the dynamics of financial crises. These shocks strengthen incentives to borrow in good times (i.e. when \good news" about future fundamentals coincide with a low-world-interest-rate regime), thereby increasing vulnerability to crises and enlarging the pecuniary externality due to the collateral constraints. Quantitatively, an optimal schedule of macroprudential debt taxes can lower the frequency and magnitude of financial crises, but the policy is complex because it features significant variation across interest-rate regimes and news realizations. |
| Keywords: | Financial crises, macroprudential policy, systemic risk, global liquidity, news shocks |
| JEL: | D62 E32 E44 F32 F41 |
| Date: | 2016–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:15-043&r=dge |
| By: | Mark A. Aguiar; Manuel Amador |
| Abstract: | We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are: (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default; both are realistic and standard assumptions in the quantitative literature. The multiplicity is dynamic and stems from the self-fulfilling beliefs of how future creditors will price bonds; long maturity bonds are therefore a crucial component of the multiplicity. We introduce a third party with deep pockets to discuss the policy implications of this source of multiplicity and identify the potentially perverse consequences of traditional “lender of last resort” policies. |
| JEL: | F3 F34 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24683&r=dge |
| By: | Fabian Eckert (Yale University); Michael Peters (Yale University) |
| Abstract: | Abstract This paper studies the spatial implications of structural change. By shifting demand towards non-agricultural goods, the structural transformation benefits workers in urban centers and hurts rural locations. At the aggregate level, the economy can respond either through a reallocation of labor from rural to urban areas or through a reduction in agricultural employment within a given location. Using detailed spatial data for the U.S. between 1880 and 2000, we show that spatial reallocation accounts for almost none of the aggregate decline in agricultural employment. We interpret this fact through the lens of a novel quantitative theory of spatial structural change, and show that the absence of the spatial reallocation channel is primarily due to regional productivity shocks, which almost entirely offset the urban bias of the structural transformation. Frictions to labor mobility meanwhile are quantitatively unimportant. The model implies that spatial welfare differences declined substantially during the United States' structural transformation and that the spatial reallocation of factors can account for about 15% of aggregate growth since 1880. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:98&r=dge |
| By: | Nicolas Petrosky-Nadeau (FRB San Francisco); Etienne Wasmer (NYU AD); Philippe Weil (Université Libre de Bruxelles) |
| Abstract: | What is the optimal sharing of value added between consumers, producers, and labor? We study the constrained efficiency properties of a model with search frictional labor and goods markets. The social planner's allocation seeks to minimizes turnover costs in all markets. The decentralized allocation constrained efficient if Hosios conditions hold in each of the labor and goods markets. Deviations from Hosios in the labor market can lead to either over or under hiring, and either excess tightness or slack in the goods market. Deviations from Hosios in the goods market lead to either excess or insufficient tightness in the goods market, and always lead to lower labor market tightness. A calibration of the model to the US economy indicates restoring efficiency to the goods market would lower long unemployment and markups in the goods market. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:622&r=dge |
| By: | Thomas Davoine |
| Abstract: | Population aging challenges the financing of social security systems in developed economies, as the share of the working age population declines. The resulting pressure on capital-labor ratios tends to push up factor prices and production. While European countries all face this challenge, the speed at which their populations are aging differs. If capital markets are integrated, differences in population aging may lead to cross-country spillovers, as investors freely seek the best returns on their capital. Using a multi-country overlapping-generations model covering 14 European Union countries, this paper quantifies spillovers and finds that capital market integration leads to redistribution across countries over the long run. It also shows that pension reforms can change the cross-country redistribution patterns, some countries losing from capital market integration without the reform but winning with it. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econwp:_9&r=dge |
| By: | Marcelo Arbex (University of Windsor); David Wiczer (Stony Brook University); Dennis O'Dea (University of Washington) |
| Abstract: | We introduce an irregular network structure into a model of frictional, on-the-job search in which workers find jobs through their network connections or directly from firms. We show that jobs found through network search have wages that stochastically dominate those found through direct contact. In irregular networks, heterogeneity in the worker's position within the network leads to heterogeneity in wage and employment dynamics: better-connected workers climb the job ladder faster. Despite this rich heterogeneity from the network structure, the mean-field approach allows the problem of our workers to be formulated tractably and recursively. We then calibrate a quantitative version of our mechanism, showing it is consistent with several empirical findings regarding networks and labor markets: jobs found through networks have higher wages and last longer. Finally, we present new evidence consistent with our model that job-to-job switches at higher rungs of the ladder are more likely to use networks. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1195&r=dge |
| By: | Faisal Sohail (Washington University in St. Louis) |
| Abstract: | Most new firms are founded by former employees of existing firms - spinouts. This paper studies the relationship between employer size and spinout entry, size, and growth. Using data from Mexico, we document that employees from small firms are more likely to form spinouts than those from large firms. Second, spinouts from large employers start at a larger scale and grow faster than spinouts from small employers. Although a qualitatively similar relationship is observed in data from the U.S., there are large quantitative differences in the levels of spinout formation. To understand the impact of these differences on aggregate outcomes, we build a model of occupational choice and firm dynamics in which workers can learn from and adopt the productivity of their employers to form their own firms. In this framework, differences in the rates of spinout formation between Mexico and the U.S. are driven by differences in the efficiency with which employees learn from their employers. We interpret this efficiency as representing a form of managerial quality. The model, calibrated to match spinout entry rates across the two countries, can account for 13 and 19% of the cross-country variation in output per worker and firm growth respectively. These findings highlight the relevance of spinouts for aggregate outcomes, and the potential for managerial quality to not only impact incumbent firms but also future entrants. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:274&r=dge |
| By: | Eunhee Lee; Kei-Mu Yi |
| Abstract: | We assess the role of global value chains in 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. 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 trade costs with the U.S., 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., specialization across stages, is critical to this outcome. |
| JEL: | F1 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24884&r=dge |
| By: | Ray Fair |
| Abstract: | This paper examines the question whether information is contained in forecasts from DSGE models beyond that contained in lagged values, which are extensively used in the models. Four sets of forecasts are examined. The results are encouraging for DSGE forecasts of real GDP. The results suggest that there is information in the DSGE forecasts not contained in forecasts based only on lagged values and that there is no information in the lagged-value forecasts not contained in the DSGE forecasts. The opposite is true for forecasts of the GDP deflator. Keywords: DSGE forecasts, Lagged values JEL Classification Codes: E10, E17, C53 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1808.02910&r=dge |
| By: | Christian Bredemeier (University of Cologne); Andreas Schabert (University of Cologne); Christoph Kaufmann (European Central Bank) |
| Abstract: | Announcements of future monetary policy rate changes have been found to be imperfectly passed through to various interest rates. We provide evidence for rates of return on less liquid assets to respond by less than, e.g., treasury rates to forward guidance announcements of the US Federal Reserve, suggesting that single-interest-rate models tend to overestimate their macroeconomics effects. We apply a macroeconomic model with interest rate spreads stemming from differential pledgeability of assets, implying that assets provide liquidity services to different extents. Consistent with empirical evidence, announcements of future reductions in the policy rate lead to an increase in liquidity premia. The output effects of forward guidance do not increase with length of the guidance period and are substantially less pronounced than they are predicted to be by a standard New Keynesian model. We thereby provide a solution to the so-called "forward guidance puzzle". |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:491&r=dge |
| By: | Ye Li (The Ohio State University) |
| Abstract: | This paper studies financial instability in an economy where growth is driven by intangible investment. Firms' intangible investment creates new productive capital. Once created, capital can be sold to financial intermediaries. Since intangible investment is not pledgeable, firms carry cash, which is inside money issued by intermediaries (short-term safe debt). In good times, well capitalized intermediaries push up the price of capital. This motivates firms to create more capital, but to do so, they must build up cash holdings. As firms' money demand expands, the yield on inside money (i.e., intermediaries' debt cost) declines, so intermediaries increase leverage and push up capital price even further. This inside money channel generates several features shared with the U.S. economy before the Great Recession: rising corporate cash holdings, financial intermediaries growing through leverage, increasing asset prices, and declining interest rate. The model also generates endogenous risk accumulation: a longer period of boom and expansion of the financial sector predict a more severe crisis. In crises, the spiral flips, leading to sudden deleveraging of intermediaries, asset price collapse, and investment contraction. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1189&r=dge |
| By: | Jan Eeckhout (University College London and Barcelona); Xi Weng (Guanghua School of Management, Peking Un) |
| Abstract: | We ask whether and how technological change can account for the secular decline in labor market dynamism with decreasing job flows to and from unemployment and between employment. We focus on two determinants of technology broadly defined: 1. the complementarity between worker skill and firm productivity; and 2. the volatility in productivity shocks. We derive job flows in a sorting model with search frictions and endogenous search effort both on and off the job, as well as shocks that lead to mismatch. We find a decrease in complementarities between labor and technology, driven mainly by a decline in the elasticity of labor. The decrease in the labor share is largest for workers with high school education only. Instead, changes in the shock process leads a decrease in the frequency and a slight increase in the variance of those shocks. We show quantitatively that the changing nature of the technology contributes to the secular decline in labor market dynamism. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1007&r=dge |
| By: | Adrian Peralta-Alva (International Monetary Fund); Marina Mendes Tavares (ITAM and IMF); Xin Tang (International Monetary Fund and Wuhan University); Xuan Tam (City University of Hong Kong) |
| Abstract: | We quantitatively investigate the macroeconomic and distributional impacts of fiscal consolidations in low-income countries (LICs) through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We extend the standard heterogeneous agents incomplete markets model by including multiple sectors and rural-urban distinction to capture salient features of LICs. We find that overall, VAT has the least efficiency costs but is highly regressive, while PIT impacts the economy in the opposite way with CIT staying in between. Cash transfers targeting rural households mitigate the negative distributional impacts of VAT most effectively, while public investment leads to little redistribution. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:183&r=dge |
| By: | David Fuller (University of Wisconsin-Oshkosh); Damba Lkhagvasuren (Concordia University, Montreal, Canada); Stephane Auray (CREST-Ensai) |
| Abstract: | From 1989-2012, on average 23% of those eligible for unemployment insurance (UI) benefits in the US did not collect them. In a search model with matching frictions, asymmetric information associated with the UI non-collectors implies an inefficiency in non-collector outcomes. This inefficiency is characterized along with the key features of collector vs. non-collector allocations. Specifically, the inefficiency implies that non-collectors transition to employment at a faster rate and a lower wage than the efficient levels. Quantitatively, the inefficiency amounts to 1.71% welfare loss in consumption equivalent terms for the average worker, with a 3.85% loss conditional on non-collection. With an endogenous take-up rate, the unemployment rate and average duration of unemployment respond significantly slower to changes in the UI benefit level, relative to the standard model with a 100% take-up rate. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:496&r=dge |
| By: | Naoki Aizawa (University of Minnesota); Serena Rhee (University of Hawaii Manoa); Soojin Kim (Purdue University) |
| Abstract: | This paper studies how to optimally design subsidies for disabled workers, accounting for both the worker- and firm-side responses in the labor market. We first provide empirical evidence that firms design job characteristics, such as the flexibility of work hours, to screen out disabled workers. Then, we develop an equilibrium labor market model where firms post a screening contract which consists of wage and job characteristics; and workers with different levels of disability make labor supply decisions. We estimate the model using the Health and Retirement Study data, and identify the key model parameters by exploiting the exogenous policy variation on employment (hiring) subsidies for the disabled. Using the estimated model, we quantify the policy impacts on workers’ labor supply and firms’ employment contract design. Then, we characterize the optimal mix of the disability insurance and employment (hiring) subsidies for the disabled and study their implications on equilibrium labor market outcomes for workers of different health statuses. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:359&r=dge |
| By: | Feng Dong (Shanghai Jiao Tong University); Zhiwei XU (Shanghai Jiao Tong University) |
| Abstract: | Burgeoning empirical evidence suggests that credit booms may not only increase misallocation, but also sow seeds for financial crises. However, there is relative under-supply of theory accounting for these facts. To bridge the gap, we develop a unified general equilibrium banking model with heterogeneous firms to analyze the misallocation consequences of credit expansion policy both within and across sectors. The main insight is the trade-off between credit quantity and quality. On the one hand, a moderate credit expansion has a non-monotonic impact on the aggregate output. It raises credit potentially available for production at the cost of more severe productivity distortion. On the other hand, a sufficiently large credit expansion may trigger an inter-bank market crisis, generating discontinuous effect. The resulting economic recession is exacerbated by the firm-level productivity misallocation. By extending the static model to a dynamic environment, we show that an expansionary credit policy can generate endogenous boom-bust business cycles despite the absence of adverse shocks. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:444&r=dge |
| By: | Ivan Rudik (Cornell University); Derek Lemoine (University of Arizona); Maxwell Rosenthal (University of Arizona) |
| Abstract: | We integrate climate scientists into an economic model of climate change by calibrating a statistical model for updating beliefs about the climate's sensitivity to greenhouse gas emissions to the actual history of scientific progress. We find that nonconjugate priors are critical for representing the observed dynamics of scientific knowledge. In order to investigate the implications for policy, we extend recursive dynamic programming methods to allow for nonconjugate learning about an uncertain parameter. We find that today's policymaker must set emission policy without the expectation that new information will enable timely revisions to policy. Improving scientific monitoring and climate modeling to enable faster learning would be worth up to \$XX dollars. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:369&r=dge |
| By: | Domenico Ferraro (Arizona State University); Giuseppe Fiori (North Carolina State University) |
| Abstract: | The employment-to-population ratio in the United States features a marked cyclical asymmetry: deviations below trend (troughs) are larger than deviations above trend (peaks). This asymmetry generates a “scarring effect,” which reduces the average level of the employment-to-population ratio around which the economy fluctuates. To quantify this scar, we build an equilibrium business cycle model featuring search frictions and a labor force participation choice. The model, parametrized to match key observations of U.S. data, including gross worker flows between employment, unemployment, and nonparticipation, generates the observed cyclical asymmetry in the face of symmetric aggregate shocks. We quantify that the employment-to-population ratio would be 0.3 percentage points higher (or, equivalently, a gain of about a million jobs) in the absence of business cycles. Further, by dampening cyclical fluctuations, countercyclical stabilization policy can reduce the job loss by 70%. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:283&r=dge |
| By: | Erin Wolcott (Middlebury College) |
| Abstract: | Low-skilled prime-age men are less likely to be employed than high-skilled prime-age men, and the differential has increased since the 1970s. This paper investigates why. I build a labor search model encompassing three explanations: (1) factors increasing the value of leisure, such as welfare or recreational gaming/computer technology, reduced the supply of lower skilled workers; (2) automation and trade reduced the demand for lower skilled workers; and (3) factors affecting job search, such as online job posting boards, reduced search frictions for higher skilled workers. I augment the model with heterogeneous workers and occupational choice and calibrate it to match a novel empirical finding: diverging labor market tightness by skill. The empirical finding along with data on wages and worker flows enables me to separately identify effects of all three mechanisms. I find a shift in the demand away from lower skilled workers is the leading cause. A shift in the supply of lower skilled workers cannot explain diverging employment rates and search frictions actually reduced the divergence. In other words, search frictions for higher skilled workers increased, and had that not been the case, employment inequality today would be worse. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:487&r=dge |
| By: | Simeon Alder (University of Wisconsin - Madison) |
| Abstract: | We build a tractable assignment model to characterize the matching and separation patterns of CEOs and their employers. Managers learn about their own type by observing a sequence of public signals (productivity shocks). The sorting is ex ante perfect across managers of a given cohort who are not currently matched (either because they were unmatched in the previous period or because they decided to split from their previous match), but is not typically so ex post. Moreover, in the special case with frictionless matching, perfect ex ante sorting occurs across managers of a given cohort regardless of their assignment history. We calibrate the model to match empirical targets from a large matched employer-employee dataset covering the Danish labor force between 2000 and 2009. We have a particular interest in the degree of complementarity between the attributes of the manager and those of the firm in the production function and our results fill a gap in the literature on the aggregate effects of a particular form of misallocation, mismatch, the size of which depends critically on this elasticity. Moreover, in ongoing work our model connects turnover to systematic differences in the cross-sectional size distribution of firms across countries at different income levels, which has been shown to be correlated with aggregate TFP in earlier work. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1250&r=dge |
| By: | Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent |
| Abstract: | We study optimal monetary and fiscal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses differ qualitatively from those in a representative agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets. |
| JEL: | C63 E52 E63 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24710&r=dge |
| By: | Colin Caines; Fabian Winkler |
| Abstract: | We characterize optimal monetary policy when agents are learning about endogenous asset prices. Boundedly rational expectations induce inefficient equilibrium asset price fluctuations which translate into inefficient aggregate demand fluctuations. We find that the optimal policy raises interest rates when expected capital gains, and the level of current asset prices, is high. The optimal policy does not eliminate deviations of asset prices from their fundamental value. When monetary policymakers are information-constrained, optimal policy can be reasonably approximated by simple interest rate rules that respond to capital gains. Our results are robust to a wide range of belief specifications as well as to the inclusion of an investment channel. |
| Keywords: | Optimal monetary policy ; Natural real Interest rate ; Learning ; Asset price volatility ; Leaning against the wind |
| JEL: | E44 E52 |
| Date: | 2018–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1236&r=dge |
| By: | Jason Donaldson (Washington University in St Louis); Giorgia Piacentino (Columbia University); Jeongmin Lee (Washington University in St. Louis) |
| Abstract: | We present a dynamic model of the repo market in which the liquidity of collateral determines the opportunity cost of lending. Because illiquid collateral is hard to convert to cash to undertake investment opportunities, the opportunity cost of lending against it is high. Hence spreads are high on repos backed by illiquid collateral, even if default risk is not. This opportunity cost channel leads to a new amplification mechanism: a decrease in the liquidity of collateral increases the opportunity cost of capital, contracting credit and depressing asset prices. The option to buy assets at depressed prices spirals back to increase the opportunity cost further, causing a repo run. We solve for the model dynamics following a negative shock to the liquidity of collateral and use the model to assess how much the opportunity cost channel contributed to repo runs in the 2008-2009 crisis. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1180&r=dge |
| By: | Canhui Hong (Shanghai U. of Finance and Economics) |
| Abstract: | I characterize risk averse lenders' optimal bond holdings under which flight-to-quality crises can arise when there are large differences in borrowing countries' future default risks, and do this within a dynamic, stochastic general equilibrium model. In this paper, there is a substitution effect between bonds issued by different countries because they are competing with each other on international borrowing. The relative fundamentals, rather than the absolute fundamentals, determine the magnitude of the substitution effect, and thus the direction of lenders' cross-border capital movements. Specifically, when the difference in countries' fundamentals is large enough, international lenders would like to move toward countries with relatively low future default risks, which improves these countries' borrowing conditions and deteriorates other countries'. Furthermore, the safer countries accommodate lenders' capital movements by issuing more debt, which reduces the borrowing resources available to other countries, further intensifies the difficulties faced by countries with deteriorated borrowing conditions, and may finally force these countries to default. Such forces were quantitatively important in explaining the empirical evidence from the recent European Debt Crisis: European peripheries had difficulty raising funds in international markets, while in countries such as Germany, and the United States, the yields declined and the debt positions rose since 2010. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:166&r=dge |
| By: | Kartik Athreya (Federal Reserve Bank of Richmond); Felicia Ionescu (Federal Reserve Board); Ivan Vidangos (Federal Reserve Board); Urvi Neelakantan (Federal Reserve Bank of Richmond) |
| Abstract: | In an infinite horizon dynamic equilibrium model we show how fiscal decentralization in a fiscal federation can affect aggregate government debt. We model borrowing-spending decisions by central and local governmenhose whose preparedness and ability poise them for success. For some others, access to college affects well-being and mobility negligibly. This suggests that investments whose returns do not depend on individual characteristics may be more effective in improving the well-being of some individuals. The stock market, which offers comparably high returns, is a natural alternative. We find that a non-trivial fraction of high-school graduates would prefer a stock-index retirement fund to the subsidy currently flowing to college. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:975&r=dge |
| By: | German Cubas (University of Houston); Chinhui Juhn (University of Houston); Pedro Silos (Temple University) |
| Abstract: | Married women with kids that are full time workers work less and allocate more time to home production than their men counterparts. At the same time the labor market is characterized by occupations that differ in terms of the coordination of the work schedule. Workers that work in occupations that concentrate hours at peak times of the day are paid a higher wage, but relatively lower if they are women. The higher demand for family time women face restricts their occupational choice and thus drives a gap in their earnings relative to men. We incorporate these trade offs in an occupational choice model with home production in which workers have comparative advantages to work into different occupations. In the model, labor supply, the supply of family time and the occupational choice are intimately related. The effect of differences in household care responsibilities between men and women in their occupational choice explain half of the observed gender earnings gap. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:249&r=dge |
| By: | Diyue Guo (University of Maryland -College Park) |
| Abstract: | Multiproduct firms account for a large fraction of economic activity and are actively engaged in changing their product mix. In this paper, I investigate changes in product scope, the number of products that a firm offers, over the business cycle and decompose the impact of such changes on aggregate output. I use the Nielsen Retail Scanner data of U.S. consumer goods purchases for 2007-2014. I find that firm product scope is an important margin of adjustment. The changes at the new margin are procyclical on average and heterogeneous across firms. Such product scope changes affect aggregate consumption and output by changing the total number of products available in the market and by affecting firms' markups. This decomposition is shown in a model featuring heterogeneous multiproduct firms, oligopolistic competition and free firm entry. Firm and aggregate outcomes vary in different states of economic activity. In a recession state, lower average product scope implies a lower number of product varieties, which disincentivizes consumption. Additionally, since the most productive firms have higher market shares, as the data suggests, they charge higher markups as oligopolistic competitors. The implied average markup goes up and further decreases consumption. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1205&r=dge |
| By: | Jing Cynthia Wu; Ji Zhang |
| Abstract: | In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable two-country model to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between the countries. Empirically, we find the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times. |
| JEL: | E52 F00 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24714&r=dge |
| By: | Olena Rarytska (Cornell University); Viktor Tsyrennikov (IMF) |
| Abstract: | Addressing policy-makers concerns that the post-GFC international capital flows to merging economies were speculative, we build a model with information frictions and use it to analyze different forms of capital controls. We show theoretically that survival forces proliferate in multi-good economies and that limiting financial trades offers welfare gains despite inhibiting insurance possibilities. Capital controls tame speculation motives, limit movements of the net foreign asset positions, and thus reduce consumption volatility. Our numerical analysis indicates that A) welfare gains from imposing capital controls can be substantial, equivalent to a permanent consumption increase of up to 4%, or 80 times the cost of business cycles. B) Controls that activate only during large inflows or outflows are preferred to those constantly active, e.g. a transaction tax used by some emerging market economies. C) Despite improving macroeconomic stability capital controls may unintentionally lead to increased volatility in the domestic financial markets. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:371&r=dge |
| By: | Felix Kubler (University of Zurich); Simon Scheidegger (University of Zurich) |
| Abstract: | In this paper we introduce self-justi ed equilibrium as a solution concept in stochastic general equilibrium models with a large number of heterogeneous agents. In each period agents trade in assets to maximize the sum of current utility and forecasted future utility. Current prices ensure that markets clear and agents forecast the probability distribution of future prices and consumption on the basis of current endogenous variables and the current exogenous shock. The forecasts are self-justi ed in the sense that agents use forecasting functions that are optimal within a given class of functions and that can be viewed as optimally trading o the accuracy of the forecast and its complexity. We show that self-justi ed equilibria always exist and we develop a computational method to approximate them numerically. By restricting the complexity of agents' forecasts we can solve models with a very large number of heterogeneous agents. Errors can be directly interpreted. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:694&r=dge |
| By: | Yasuo Hirose (Keio University); Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Kansas City) |
| Abstract: | A large literature has established that the Fed's change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature's view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The estimated model shows an active policy response to inflation even during the Great Inflation. Moreover, a more active policy response to inflation alone does not suffice for explaining the macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. Our model empirically outperforms its canonical counterpart that is similar to models used in the literature, thus giving strong support to our view. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:219&r=dge |
| By: | Guo, Si (International Monetary Fund); Pei, Yun (University at Buffalo); Xie, Zoe (Federal Reserve Bank of Atlanta) |
| Abstract: | We build an infinite horizon equilibrium model of fiscal federation, where anticipation of transfers from the central government creates incentives for local governments to overborrow. Absent commitment, the central government over-transfers, which distorts the central-local distribution of resources. Applying the model to fiscal decentralization, we find when decentralization widens local governments’ fiscal gap, borrowings by both local and central governments rise. Quantitatively, fiscal decentralization accounts for from 19 percent to 40 percent of changes in general government debt in Spain during 1988–2006. A macroprudential tax on local borrowing that implements Pareto optimal allocation would reduce debt by 27 percent and raise welfare by 3.75 percent. |
| Keywords: | fiscal federalism; time-consistent policy; decentralization; public debt |
| JEL: | E61 E62 H74 |
| Date: | 2018–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2018-09&r=dge |
| By: | Kyle Herkenhoff (University of Minnesota); Gordon Phillips (Dartmouth College); Jeremy Lise (University of Minnesota); guido menzio (University of Pennsylvania) |
| Abstract: | We develop a theory of teams to measure the way knowledge diffuses across workers. We extend the sequential auctions framework to allow for workers to influence each other's knowledge. Workers can search on-the-job and leave their team to start a new team, carrying some of their knowledge with them. In contrast to standard sorting models, a firm's type is no longer exogenous; it is coworker human capital. Using a new methodology, we estimate the knowledge diffusion process and the degree of worker complementarities in production with micro wage data and job mobility patterns from the LEHD. Our estimated parameters imply both positive peer effects and strong production complementarities. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:457&r=dge |
| By: | John Stachurski; Alexis Akira Toda |
| Abstract: | We show that in heterogeneous-agent dynamic general equilibrium models that feature only idiosyncratic income risk, the wealth distribution inherits the tail behavior of income shocks such as light-tailedness and the Pareto exponent. Consequently, in this class of models, (i) it is impossible to generate heavy-tailed wealth distributions from light-tailed income shocks, and (ii) if income has a Pareto tail, wealth has the same Pareto exponent. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1807.08404&r=dge |
| By: | Weilong Zhang (University of Pennsylvania) |
| Abstract: | This paper develops and estimates a spatial general equilibrium job search model to study the effects of local and universal (federal) minimum wage policies. In the model, firms post vacancies in multiple locations. Workers, who are heterogeneous in terms of location and education types, engage in random search and can migrate or commute in response to job offers. I estimate the model by combining multiple databases including the American Community Survey (ACS) and Quarterly Workforce Indicators (QWI). The estimated model is used to analyze how minimum wage policies affect employment, wages, job postings, vacancies, migration/commuting, and welfare. Empirical results show that minimum wage increases in local county lead to an exit of low type (education 12 years), which generates negative externalities for workers in neighboring areas. I use the model to simulate the effects of a range of minimum wages. Minimum wage increases up to $14/hour increase the welfare of high type workers but lower welfare of low type workers, expanding inequality. Increases in excess of $14/hour decrease welfare for all workers. I further evaluate two counterfactual policies: restricting labor mobility and preempting local minimum wage laws. For a certain range of minimum wages, both policies have negative impacts on the welfare of high type workers, but beneficial effects for low type workers. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:12&r=dge |
| By: | Juan Hernandez (Inter-American Development Bank) |
| Abstract: | Many emerging economies maintain significant positions in both external sovereign debt and foreign reserves, paying spreads of over 250 basis points on average. Arguments advanced in empirical work and policy discussions suggest that governments may do this because international reserves play a role in reducing the likelihood of sovereign debt crises, improving a country’s access to debt markets. This paper proposes a model that justifies that argument. The government makes optimal choices of debt and reserves in an environment in which self-fulfilling rollover crises a-là Cole-Kehoe and external default a-là Eaton-Gersovitz coexist. This allows for both fundamental and market-sentiment-driven debt crises. Self-fulfilling crises arise because of a lender’s coordination problem when multiple equilibria are feasible. Conditional on the country’s Net Foreign Asset position, additional reserves make the sovereign more willing to service its debt even when no new borrowing is possible, which enlarges the set of states in which repayment is the dominant strategy and, hence, reduces the set of states that admit a self-fulfilling crisis. From an ex-ante perspective, reserves reduce the probability of crises in the future which lowers current sovereign spreads. Quantitatively the model can explain 50% of Mexico’s international reserves holdings, while accounting for key cyclical facts. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1203&r=dge |
| By: | Jose Asturias (Georgetown University in Qatar); Kim Ruhl (Pennsylvania State University); Sewon Hur (University of Pittsburgh); Timothy Kehoe (University of Minnesota) |
| Abstract: | Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that a larger fraction of aggregate productivity growth is due to entry and exit during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as in the data from Chile and Korea. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1139&r=dge |
| By: | Moore, Rachel; Pecoraro, Brandon |
| Abstract: | Fiscal policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate present tax law and proposed reforms. We argue that the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. In this paper, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that explicitly models key provisions in the Internal Revenue Code applied to labor income. While both approaches generate similar policy-induced patterns of economic activity, we find that the similarities mask differences in key economic aggregates and welfare due to variation in the underlying distribution of household labor supply responses. Absent sufficient tax detail, analysis of specific policy changes - particularly those involving large, discrete effects on a relatively small group of households - using heterogeneous-agent models can be unreliable. |
| Keywords: | dynamic scoring, tax policy, tax functions and calculators, heterogeneous agents |
| JEL: | C63 E62 H30 |
| Date: | 2018–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:87240&r=dge |
| By: | Jianxing Wei (Universitat Pompeu Fabra); Tong Xu (SWUFE) |
| Abstract: | This paper develops a model of financial intermediation in which the dynamic interaction between regulator supervision and banks’ loophole innovation generates credit cycles. In the model, banks’ leverages are constrained due to a risk-shifting problem. The regulator supervises the banks to ease this moral hazard problem, and its expertise in supervision improves gradually through learning-by-doing. At the same time, banks can engage in loophole innovation to circumvent supervision, which acts as an endogenous opposing force diminishing the value of the regulator’s accumulated expertise. In equilibrium, banks’ leverage and loophole innovation move together with the regulator’s supervision ability. Our model generates pro-cyclical bank leverage and asymmetric credit cycles. We show that a crisis is more likely to occur and the consequences are more severe after a longer boom. In addition, we investigate the welfare implications of a maximum leverage ratio in the environment of loophole innovation. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:610&r=dge |
| By: | Markus Pasche (FSU Jena) |
| Abstract: | Empirical tests of the quantity theory and particularly the neutrality of money are based on the idea that money growth "explains", to some extent, inflation. Modern macroeconomic theory, however, considers inflation target- ing central banks which use the interest rate as a policy tool, while money is seen as an endogenous outcome of financial intermediation, i.e. credit creation. A simple NKM model with fiat money demonstrates that money growth is tied to inflation, changes of output and interest rate changes. The latter are determined by inflation and output gap if we consider an inflation-targeting central bank. The quantity equation emerges from the macroeconomic trans- mission process but the economic causalities run from output and inflation to money creation. Hence, money growth does not explain inflation. Besides, the result does not require a sophisticated microfoundation of money demand but simply emerges from the transmission process. |
| Keywords: | quantity equation, endogenous money, New Keynesian Macroeconomics, inflation targeting, money demand |
| JEL: | E44 E51 |
| Date: | 2018–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2018-11&r=dge |
| By: | Joonkyu Choi (University of Maryland) |
| Abstract: | Despite the importance of high-growth young firms for economic growth, determinants of their growth and survival dynamics are not well understood. In this study, I develop a dynamic occupational choice model that identifies a key predictor of the early growth trajectory of young firms: the outside options of the business founders. I show that entrepreneurs with higher outside options as paid workers tend to take larger business risks, and thus exhibit a more up-or-out type of firm dynamics. I find empirical support for the model's predictions using a large founder-firm matched data set built from administrative databases of the U.S. Census Bureau. I find that controlling for past business performance, young firms operated by entrepreneurs with higher outside options exhibit (i) higher firm exit rates, (ii) more growth dispersion, and (iii) faster growth conditioning on survival. With the calibrated model, I find that deterioration in the outside options of entrepreneurs can have a sizable negative impact on aggregate output and productivity via lower risk-taking by young firms and slower growth in their life cycle. These findings indicate that the expected post-failure outcomes of entrepreneurs are an important factor that governs young firm growth as well as aggregate output and productivity. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1018&r=dge |
| By: | Moritz Lenel (University of Chicago); Martin Schneider (Stanford University); Monika Piazzesi (Stanford University) |
| Abstract: | The payment intermediary share is the share of fixed income claims held by financial intermediaries with money-like liabilities. It is higher in times of higher risk premia, such as during the 1970s and in recent recessions. This paper proposes a model of a modern monetary economy that accounts for the valuation of fixed income claims as well as their allocation inside vs outside the payment intermediaries. While all assets are valued for their risk and return properties, those held inside payment intermediaries are also valued as collateral that backs inside money. The payment-intermediary share depends on the transactions demand for inside money as well as portfolio responses to uncertainty shocks. It determines the quantitative impact of monetary policy and macro-prudential regulation on asset prices. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1257&r=dge |
| By: | Ulrike Malmendier; Demian Pouzo; Victoria Vanasco |
| Abstract: | How do macro-financial shocks affect investor behavior and market dynamics? Recent evidence suggests long-lasting effects of personally experienced outcomes on investor beliefs and investment but also significant differences across older and younger generations. We formalize experience-based learning in an OLG model, where different cross-cohort experiences generate persistent heterogeneity in beliefs, portfolio choices, and trade. The model allows us to characterize a novel link between investor demographics and the dependence of prices on past dividends, while also generating known features of asset prices, such as excess volatility and return predictability. The model produces new implications for the cross-section of asset holdings, trade volume, and investors' heterogeneous responses to recent financial crises, which we show to be in line with the data. |
| JEL: | G02 G11 G12 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24697&r=dge |
| By: | Patrick Kehoe (Stanford University); Elena Pastorino (Stanford University); Pierlauro Lopez (Banque de France); Virgiliu Midrigan (New York University) |
| Abstract: | Discount rate variation generated by slow-moving habits and amplified by human capital accumulation accumulation can generate large responses of unemployment to productivity changes. Job creation is a type of investment made by firms, who decide how many resources to invest in recruiting new workers; in their investment choice, firms respond to incentives driven by the cyclical evolution of expected future payoffs from filled vacancies and, most importantly, of the required return for bearing the associated risk. The channel we focus on is parsimonious, as it offers a unified explanation for asset pricing and business-cycle facts, and in particular for a sizable fraction of unemployment fluctuations. The economic forces that account for the ample fluctuations in stock market valuations and risk premia can also drive employers’ decisions to hire and post new vacancies. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1119&r=dge |
| By: | Dejanir Silva (UIUC); Robert Townsend (Massachusetts Institute of Technology) |
| Abstract: | We study the risk-taking behavior of entrepreneurs in an environment with two main ingredients: finite lives and uninsurable idiosyncratic risk on the business. We show that the fraction of wealth invested in the business depends on the idiosyncratic risk premium and that it declines substantially over the life cycle. The consumption-wealth ratio is U-shaped over the life cycle. We solve for the wealth distribution both across and within age groups. We show that the variance of wealth conditional on age has an inverted-U shape, initially increasing with age and eventually declining. We find support for these predictions in the data using a survey of entrepreneurial activity in Thailand. We also consider the impact of financial development and demographic transitions on asset prices, economic activity, and inequality. We show that an increase in the fraction of idiosyncratic risk entrepreneurs can insure or a decline in population growth will lead to a reduction in the idiosyncratic risk premium, an increase in the capital stock of the economy, and a decline in inequality. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1318&r=dge |
| By: | In Hwan Jo (National University of Singapore); Tatsuro Senga (Queen Mary University of London) |
| Abstract: | Government policies that attempt to alleviate credit constraints faced by small and young firms are widely adopted across countries. We study the aggregate impact of such targeted credit subsidies in a heterogeneous firm model with collateral constraints and endogenous entry and exit. A defining feature of our model is a non-Gaussian process of firm-level productivity, which allows us to capture the skewed firm size distribution seen in the Business Dynamics Statistics (BDS). We compare the welfare and aggregate productivity implications of our non-Gaussian process to those of a standard AR(1) process. While credit subsidies resolve misallocation of resources and enhance aggregate productivity, increased factor prices, in equilibrium, reduce the number of firms in production, which in turn depresses aggregate productivity. We show that the latter indirect general equilibrium effects dominate the former direct productivity gains in a model with the standard AR(1) process, as compared to our non-Gaussian process, under which both welfare and aggregate productivity increase by subsidy policies. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:955&r=dge |
| By: | Ana Figueiredo (Universitat Pompeu Fabra and Barcelona GSE) |
| Abstract: | Why does the place where children grow up shape their opportunities in life? This paper explores the role of imperfect information and local information transmission as a novel explanation. First, I uncover a new empirical fact: when the college premium is low, a higher share of college graduates living in a school-district is associated with lower college enrollment of students graduating from that district. While this pattern is hard to reconcile through models with local spillovers in the production of human capital, I show that it is consistent with a model featuring imperfect information and local learning. The key elements are uncertainty about the skill premium and learning through signals of wages earned by nearby college graduates. In this environment, more exposure to highly educated neighbors brings more information about the skill premium. However, this only translates into more education if the observed wages generate the perception of a higher skill premium. Calibrating the model to match micro data from Detroit, I find that this novel mechanism explains more than half of the college enrollment gap between children of parents with a college degree and children from parents with a lower education level. Implementing a disclosure policy that corrects inaccurate perceptions about the skill premium closes this gap substantially. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:804&r=dge |
| By: | Pablo Fajgelbaum; Cecile Gaubert (UC Berkeley) |
| Abstract: | We study optimal spatial policies in quantitative trade and geography frameworks with spillovers and sorting of heterogeneous workers. We rst characterize ecient spatial transfers and the labor subsidies that would implement them. Then, we quantify the aggregate and distributional eects of implementing these policies in the U.S. economy. Under homogeneous workers and constant-elasticity spillovers, a constant labor subsidy over space restores efficiency regardless of micro heterogeneity in fundamentals and trade costs. In that case, the quantification suggests that the observed spatial transfers in the U.S. are close to ecient. Spillovers across heterogeneous workers create an additional rationale for place-specific subsidies to attain optimal sorting. Under heterogeneous workers, the quantication suggests that optimal spatial policies may require stronger redistribution towards low-wage cities than in the data, reduce wage inequality in larger cities, weaken spatial sorting by skill, and lead to signicant welfare gains. Spillovers across dierent types of workers are a key driving force behind these results. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1319&r=dge |
| By: | Andrei Levchenko (University of Michigan); Nitya Pandalai Nayar (University of Texas, Austin) |
| Abstract: | This paper examines the role of both technology and non-technology shocks in international business cycle comovement. Using industry-level data on 30 countries and up to 28 years, we first provide estimates of utilization-adjusted TFP shocks, and an approach to infer non-technology shocks. We then set up a quantitative model calibrated to the observed international input-output and final goods trade, and use it to assess the contribution of both technology and non-technology shocks to international comovement. We show that unlike the traditional Solow residual, the utilization-adjusted TFP shocks are virtually uncorrelated across countries. Transmission of TFP shocks across countries also cannot generate noticeable comovement in GDP in our sample of countries. By contrast, non-technology shocks are highly correlated across countries, and the model simulation with only non-technology shocks generates substantial GDP correlations. We conclude that in order to understand international comovement, it is essential to both model and measure non-TFP shocks. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:449&r=dge |
| By: | Victor Leão Borges de Almeida (University of Minnesota); Carlos Esquivel (University of Minnesota); Juan Pablo Nicolini (Minneapolis Fed); Timothy Kehoe (University of Minnesota) |
| Abstract: | In 1979, the Federal Reserve Board, led by Chairman Paul Volcker, drastically raised the federal funds rate as part of their efforts for taming inflation. As a consequence of this increase, borrowing costs for Mexico rose substantially. Eventually the country suspended its debt payments in 1982, which was followed by an economic crisis and seven years of little to no access to foreign credit. In this paper we use a standard sovereign default model to explore the extent to which the rise in U.S. interest rates caused the default in Mexico. We find that, even if interest rates had remained low, Mexico would still have defaulted. We then extend the model to allow for endogenous re-entry to financial markets via debt restructuring. Within this framework we analyze whether the crisis could have been shorter and less severe had interest rates remained low. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:829&r=dge |
| By: | Axelle Ferrière; Gaston Navarro |
| Abstract: | This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model’s cross-sectional implications. |
| Keywords: | Fiscal stimulus ; Government spending ; Transfers ; Heterogeneous agents |
| JEL: | D30 E62 H23 H31 N42 |
| Date: | 2018–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1237&r=dge |
| By: | Valentin Haddad (University of California, Los Angeles); Erik Loualiche (University of Minnesota); Paul Ho (Princeton University) |
| Abstract: | Episodes of booming firm creation often coincide with intense speculation on financial markets. We show that while speculation leads to more firm entry, it might actually mitigate over-entry, leading to efficient innovative booms. More broadly, disagreement among investors completely transforms the economics of optimal firm creation. We characterize the interaction between speculation and classic entry externalities from growth theory through a general entry wedge formula for a non-paternalistic planner. The business-stealing effect is mitigated when investors believe they can identify the best firms; hence more entry goes along with less excess entry. The appropriability effect also vanishes, leaving only general equilibrium effects on input prices, aggregate demand, or knowledge. As a result, speculation reverses the role of many industry characteristics such as the labor share for efficiency. Further, economies with identical aggregate properties but a different market structure have the same efficiency with agreement, but differ in presence of bubbles. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1087&r=dge |
| By: | Felipe Meza (Instituto Tecnológico Autónomo de Méx); Carlos Urrutia (ITAM); Sangeeta Pratap (Hunter College and CUNY Graduate Center) |
| Abstract: | The objective of this paper is to document a transmission channel from credit conditions to capital accumulation at a disaggregated level. We use a simple multi-sector model of production and investment to identify investment wedges (i.e., deviations from the optimality condition implied by a stochastic Euler equation). Using a panel of observations at the 4-digit level from the Mexican manufacturing industry, we measure the corresponding dynamic distortions in capital accumulation. Our counterfactual experiments show that the behavior of capital distortions is important to account for changes in the aggregate capital stock over time. We then analyze the sources of these distortions, working with one important candidate: bank credit. We show in a simple model of investment with financial frictions that more availability and cheaper access to credit reduce capital distortions. We find some statistical support for this mechanism in the data. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:875&r=dge |
| By: | Isaac Baley (Universitat Pompeu Fabra & Barcelona GSE); Ana Figueiredo (Universitat Pompeu Fabra and Barcelona GSE); Robert Ulbricht (Toulouse School of Economics) |
| Abstract: | Using a recently developed worker-occupation mismatch measure for the US labor market, we document that mismatch is procyclical. However, there is substantial heterogeneity by previous employment status: mismatch is procyclical for workers in ongoing job relationships, consistent with the cleansing effect of recessions; but it is countercyclical for the flow of new hires from unemployment, consistent with the sullying effect of recessions. Our empirical findings show that the cleansing effect dominates. We also provide evidence that, conditional on mismatch, business cycle conditions at the start of the match are important in explaining variation in job duration. We explain these empirical patterns through a learning model à la Jovanovic (1979) augmented with adjustment costs and a learning technology that varies over the business cycle. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1098&r=dge |
| By: | Adam Blandin (Virginia Commonwealth University); Christopher Herrington (Virginia Commonwealth University) |
| Abstract: | We provide new facts about the increase in US college attainment from 1995-2015. College attendance grew more among children from low resource families than among those from high resource families (7pp vs 1pp). However, college completion grew less among low resource children than high resource children (4pp vs 13pp). We propose a theory to explain the increase in aggregate college completion since 1995 that is consistent with these trends. The theory has two key components: (i) High resource families increased pre-college investment relative to low-resource families in response to a growing college wage premium. (ii) Pre-college investment is an important determinant of college completion conditional on attendance. Consistent with this theory, we provide empirical evidence of growing gaps in pre-college investment and college preparedness between children from high and low resource families. Finally, we construct a model of intergenerational human capital investment and college attainment to quantitatively test our theory. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:446&r=dge |
| By: | Cormac O'Dea (Yale University) |
| Abstract: | Government pension spending in advanced economies can be divided into three types: (1) Social Security-style benefits that depend on earnings during working life, (2) subsidies of private pension saving and (3) means-tested income floors provided to the elderly. Using an estimated lifecycle model that accounts for each of these, as well as endogenous labour supply, private savings and realistic uncertainty, this paper investigates the optimal combination of the three approaches. For countries (such as the US and the UK) that currently provide public pensions that depend on career-average earnings, I show that large welfare gains can be obtained by increases in the level of means-tested old-age income floors that are funded by any of reducing public pensions, increasing taxes or (especially) reducing private pension subsidies. While means-tested transfers cause costly distortions, these are more than offset by the value of the insurance they provide against low lifetime earnings potential. The optimality of greater means-tested support is specific to older individuals: I find that such support to younger households should be at a much lower level than that to the elderly. These results imply that governments should provide strong work incentives for the young, but provide pensions with good insurance properties for the old. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1037&r=dge |
| By: | Joan Monras (CEMFI) |
| Abstract: | This paper investigates the causes and effects of the spatial distribution of immigrants across US cities. We document that: a) immigrants concentrate in large, high-wage, and expensive cities, b) the earnings gap between immigrants and natives is higher in larger and more expensive cities, and c) immigrants consume less locally than natives. In order to explain these findings, we develop a simple quantitative spatial equilibrium model in which immigrants consume (either directly, via remittances, or future consumption) a fraction of their income in their countries of origin. Thus, immigrants not only care about local prices, but also about price levels in their home country. Hence, if foreign goods are cheaper than local goods, immigrants prefer to live in high-wage, high-price, and high-productivity cities, where they also accept lower wages than natives. Using the estimated model we show that current levels of immigration have reduced economic activity in smaller, less productive cities by around 3 percent, while they have expanded the activity in large and productive cities by around 4 percent. This has increased total aggregate output per worker by around .15 percent. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:127&r=dge |
| By: | Christopher Erceg (Federal Reserve Board); Andrea Prestipino (Federal Reserve Board); Andrea Raffo (Federal Reserve Board) |
| Abstract: | We study the short-run macroeconomic e¤ects of trade policies that are equivalent in a frictionless economy, namely a uniform increase in import tari¤s and export subsidies (IX), an increase in value-added taxes accompanied by a payroll tax reduction (VP), and a border adjustment of corporate pro t taxes (BAT). Using a dynamic New Keynesian open-economy framework, we rst argue that IX tends to boost output and ination even under exible exchange rates, a result in sharp contrast with the conventional view of neutrality of these policies. We then provide (quite restrictive) conditions for exact neutrality of IX policies, whereby the real exchange rate appreciates enough to fully o¤set their competitive enhancing effects. Finally, we show that the equivalence among IX, VP,and BAT policies depends critically on assumptions about tax pass through. Under full pass through of taxes, IX and BAT are equivalent but VP is not. With su¢ cient price rigidities, VP is contractionary rather than expansionary. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:221&r=dge |