|
on Dynamic General Equilibrium |
|
Issue of 2018‒09‒17
fifty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Brant Abbott (Institute for Fiscal Studies); Giovanni Gallipoli (Institute for Fiscal Studies and University of British Columbia); Costas Meghir (Institute for Fiscal Studies and Yale University); Giovanni L. Violante (Institute for Fiscal Studies) |
| Abstract: | This paper examines the equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life cycle model with education, labor supply, and consumption/saving decisions. Cognitive and non-cognitive skills of children depend on the cognitive skills and education of parents, and affect education choice and labor market outcomes. Driven by both altruism and paternalism, parents make transfers to their children which can be used to fund education, supplementing grants, loans and the labor supply of the children themselves during college. The crowding out of parental transfers by government programs is sizable and thus cannot be ignored when designing policy. The current system of federal aid is valuable: removing either grants or loans would each reduce output by 2% and welfare by 3% in the long-run. An expansion of aid towards ability-tested grants would be markedly superior to either an expansion of student loans or a labor tax cut. This result is, in part, due to the complementarity between parental education and ability in the production of skills of future generations. A previous version of this working paper is available here. |
| Keywords: | Ability Transmission, Altruism, Credit Constraints, Education, Equilibrium, Financial Aid, Intergenerational Transfers, Paternalism |
| Date: | 2018–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:18/16&r=dge |
| By: | Christie Smith; Christoph Thoenissen (Reserve Bank of New Zealand) |
| Abstract: | We examine the business cycle effects that arise from an expansion of the population due to migration. We identify the contribution that migration shocks make to cyclical fluctuations, and illustrate their dynamic impact. The analysis presented here is conducted in per capita terms. We develop a dynamic stochastic general equilibrium (DSGE) model to explore the consequences of migration. Households consume foreign- and domestically-produced goods, and housing. Domestically-produced goods are produced using effective labour and physical capital, where effective labour is a composite of physical labour and human capital. The level of human capital is particularly important for the dynamics of the migration shock as it amplifies the labour supply impact of a migration impulse. The model also embodies other frictions. Physical capital, for example, has a variable utilisation rate and adjusting the stock of capital is costly. Variable utilisation and capital adjustment costs are important for the dynamics of shocks. Variable utilisation provides an extra margin of adjustment in response to a shock, while capital adjustment costs serve to slow the propagation of shocks to investment. The model has three stocks of capital: physical capital; housing; and human capital. A migration inflow erodes the per capita stock of physical and housing capital, but the effect on the stock of human capital is ambiguous because migrants may have more or less human capital than domestic residents. The stock of migrant human capital relative to local resident human capital has a material impact on the dynamics of the migration impulse and on the contribution that migrant shocks make to business cycle fluctuations. Using the estimated DSGE model, we show that migration shocks account for a considerable portion of the variability of per capita gross domestic product (GDP). While migration shocks matter for the capital investment and consumption components of per capita GDP, there are other drivers of cyclical fluctuations in these expenditure components that are even more important. Migration shocks also matter for residential investment and real house prices, but once again other shocks play a larger role in driving volatility. In the DSGE model, the level of human capital possessed by migrants relative to that of locals materially affects the business cycle impact of migration. The impact of migration shocks is larger when migrants have substantially different – larger or smaller – levels of human capital relative to locals. When the average migrant has higher levels of human capital than locals, as seems to be common in most OECD economies, a migration shock has an expansionary effect on per capita GDP and its components, which also accords with the evidence from a restricted structural vector autoregression. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2018/7&r=dge |
| By: | Nobuhiro Kiyotaki (Princeton University); Shengxing Zhang (London School of Economics) |
| Abstract: | We examine how aggregate output and income distribution interact with accumulation of intangible capital over time and across individuals. We consider an overlapping generations economy in which managerial skill (intangible capital) is essential for production, and it is acquired by young workers through on-the-job training by old managers. We show that, when young trainees are not committed to staying in the same firms and repaying their debt, a small difference in initial endowment and ability of young workers leads to a large inequality in accumulation of intangibles and lifetime income. A negative shock to endowment or the degree of commitment generates a persistent stagnation and a rise in inequality. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:110&r=dge |
| By: | Tuzemen, Didem (Federal Reserve Bank of Kansas City); Van Zandweghe, Willem (Federal Reserve Bank of Kansas City) |
| Abstract: | We document that labor force participation declines in the short run following a positive technology shock. The countercyclical response of labor force participation to a technology shock contrasts with the well documented mild procyclical behavior of labor force participation in the business cycle. In a search model of the labor market that incorporates a participation choice, we show that a positive technology shock reduces labor force participation in the short run under a reasonable calibration. In the calibrated model, discount factor shocks induce a procyclical response of labor force participation. As a result, the model can generate both the countercyclical response to technology shocks and the procyclical behavior, consistent with the evidence. Our results indicate an important role of nontechnology shocks for explaining labor market fluctuations. |
| Keywords: | Labor Force Participation; Unemployment; Technology Shocks; Discount Factor Shocks |
| JEL: | E24 E32 J22 J64 |
| Date: | 2018–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp18-08&r=dge |
| By: | Nils Mattis Gornemann (International Finance Board of Governors) |
| Abstract: | We study the design of coordinated labor market and monetary policy in a heterogeneous agent model with incomplete markets, search frictions, and nominal rigidities. We allow for self-insurance through savings and moral hazard in search behavior. In such a model a rise in labor market risk during a recession causes an increase in desired precautionary savings by households leading to a fall in aggregate demand which amplifies the initial downturn. Increasing unemployment benefits or cutting interest rates can both help to counteract this amplification effect. Therefore, gains from coordinating policies arise which are the focus of our analysis. Extending recent methods for the solution of heterogeneous agent models with aggregate risk we solve a sequence of Ramsey problems with a varying sets of policy instruments in this economy to quantify the effects of policy coordination and optimal policy behavior over the business cycle. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1252&r=dge |
| By: | Jingting Fan (Penn State University); Wenlan Luo (Tsinghua University) |
| Abstract: | This paper develops a quantitative framework to study the determinants and welfare implications of MNCs, considering jointly the transfer of technological capital and financial capital. The framework integrates two main ingredients: capital accumulation under financial constraint in dynamic models (Moll 2014), and cross-country entry decisions in static studies of multinationals (Arkolakis et al. 2015). We calibrate the model to an economy with 25 major developed and developing countries. We perform counterfactual experiments to understand: 1) the importance of financial development in driving the FDI patterns; 2) the transitional dynamics after financial reforms; 3) the interaction between welfare gains from openness to MNCs and domestic financial institution. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1277&r=dge |
| By: | Adrien Auclert (Stanford); Kurt Mitman (IIES) |
| Abstract: | We study the effect of consumer default policy on macroeconomic stabilization. We focus on an economy with nominal rigidities, incomplete financial markets and heterogeneous households. Households face uninsurable idiosyncratic risk and have access to unsecured borrowing with limited commitment to repay. By adjusting the leniency of the bankruptcy code, the government can affect the extent of redistribution between high MPC borrowers and low MPC savers in downturns. If monetary policy cannot fully accommodate negative shocks, giving rise to an aggregate demand externality, macroprudential default policy can be welfare improving. We explore the welfare gains from both state-dependent and state-independent default policies. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1085&r=dge |
| By: | Larry Karp (UC Berkeley); Armon Rezai (WU Vienna University of Economics and Bu) |
| Abstract: | People might reduce carbon emissions to protect themselves, their wealth, or future generations from climate damage. An overlapping generations climate model with endogenous asset price and investment levels disentangles these incentives. Asset markets capitalize the future effects of policy, regardless of people’s concern for future generations. These markets can lead self-interested agents to undertake significant abatement. A small climate policy that raises the price of capital increases old agents’ welfare and also increases welfare of young agents with a high intertemporal elasticity of substitution. Climate policy can also have subtle distributional effects across the currently living generations. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:595&r=dge |
| By: | Marco Brianti (Boston College); Tzuo Hann Law (Boston College) |
| Abstract: | We study the effects of unemployment insurance (UI) and underemployment insurance (EI) in a general equilibrium model of search and matching featuring financial frictions and risk-averse workers. Equilibrium is inefficient because the market insures risk-averse workers through low-unemployment and low-wage jobs. Additionally, our model features underemployment risk which manifests in two ways. First, employed workers inefficiently separate because firms cannot retain workers due to financial frictions. Second, employed workers face wage uncertainty. Underemployment risk further lowers capital utilization. UI alleviates unemployment risk but exacerbates underemployment risk. EI is required to restore efficiency even when workers are risk neutral. UI and EI together restore efficiency when workers are risk averse. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1303&r=dge |
| By: | Stephan Imhof; Cyril Monnet; Shengxing Zhang |
| Abstract: | We develop a theoretical model to study the implications of liquidity regulations and monetary policy on deposit-making and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2018-13&r=dge |
| By: | Hidehiko Matsumoto (University of Maryland) |
| Abstract: | This paper develops a quantitative small-open-economy model to assess the optimal pace of foreign reserve accumulation by developing countries. The model features endogenous growth with foreign direct investment (FDI) entry and sudden stops of capital inflows to incorporate benefits of reserve accumulation. Reserve accumulation depreciates the real exchange rate and attracts FDI, which endogenously promotes productivity growth. When a sudden stop happens, the government uses accumulated reserves to prevent a severe economic downturn. The calibrated model shows that two factors are the key determinants of the optimal pace of reserve accumulation: the elasticity of the foreign borrowing spread with respect to debt, and the entry cost for FDI. The model suggests that these two factors can explain a substantial amount of the cross-country variation in the observed pace of reserve accumulation. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:237&r=dge |
| By: | Mark Gertler (New York University); Andrea Prestipino (Federal Reserve Board); Nobuhiro Kiyotaki (Princeton University) |
| Abstract: | This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:113&r=dge |
| By: | Edouard Challe (CREST & Ecole Polytechnique) |
| Abstract: | I study optimal monetary policy in a New Keynesian economy wherein house- holds precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and ul- timately feed back to greater unemployment risk. I show this deationary feedback loop to be constrained-ine¢ cient and to call for an accommodative monetary policy response: after a contractionary aggregate shock the policy rate should be kept signi cantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. If implemented, the optimal policy e¤ectively breaks the deflationary feedback loop and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:9&r=dge |
| By: | Ryan Chahrour (Boston College); Robert Ulbricht (Toulouse School of Economics) |
| Abstract: | We develop a methodology to characterize equilibrium in DSGE models, free of parametric restrictions on information. First, we define a “primal” economy in which deviations from full information are captured by wedges in agents' expectations. Then, we provide conditions ensuring some information-structure can implement these wedges. We apply the approach to estimate a business cycle model where firms and households have dispersed information. The estimated model fits the data, attributing the majority of fluctuations to a single shock to households' expectations. The responses are consistent with an implementation in which households become optimistic about local productivities and gradually learn about others' optimism. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:240&r=dge |
| By: | Joseph Steinberg (University of Toronto) |
| Abstract: | U.S. president Trump’s administration has threatened to leave the North American Free Trade Agreement, and policymakers need answers about the effects that will materialize if this threat is carried out. How much would each country and industry gain or lose? Would trade imbalances within the region diminish? What would be the short-run costs of adjusting to new production and expenditure patterns? I use a dynamic general equilibrium model with a detailed input-output production structure and endogenous, time-varying trade elasticities to provide quantitative answers to these questions. If NAFTA is terminated, trade between NAFTA members will fall dramatically, particularly in sectors like agriculture where tariffs trade elasticities are high, and production in the transportation sector would decline. The macroeconomic and welfare consequences of NAFTA termination, however, are minor, and trade imbalances in the region would not decline. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:753&r=dge |
| By: | Ariel Mecikovsky (Universitaet Bonn); Felix Wellschmied (ITAM and Universidad Carlos III de Madrid) |
| Abstract: | We study trends in US male labor market risk over the last three decades accounting for workers’ endogenous employment and job mobility decisions. The risk stemming from permanent shocks to idiosyncratic productivity and heterogeneity in pay across offered jobs has increased for most workers. These increases explain 75 percent of the increase in residual wage inequality. On-the-job search decisions of high skilled workers and labor market participation decisions of low skilled workers provide effective insurance mechanisms leading to moderate welfare changes. Unemployment benefits and disability insurance have become more valuable, but scaling back their generosity would still be welfare improving. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:52&r=dge |
| By: | Merlin, Giovanni Tondin |
| Abstract: | I propose a simple method to solve a heterogeneous agent model with entrepreneurship, financial frictions and aggregate uncertainty. Aggregate shocks, in this context, induce potential entrepreneurs to save in order to slack their financial constraints, leading to a significant increase in aggregate savings, pushing up wages and lowering interest rates. This channel can be strong enough to more than offset the effect of fluctuations on consumption, leading to welfare gains of business cycles. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:484&r=dge |
| By: | Rohan Kekre (University of Chicago); Moritz Lenel (University of Chicago) |
| Abstract: | We study the consequences of heterogeneity in risk tolerance in a New Keynesian environment with incomplete markets. When markets are incomplete, the distribution of net worth affects the economy's effective price of risk; when monetary policy is non-neutral, the price of risk affects investment rather than the risk-free rate. Redistribution towards the risk-tolerant or shocks which facilitate greater risk-sharing can reduce the price of risk and raise economic activity. The transmission mechanism of monetary policy operates in part through the endogenous adjustment in the risk premium. Because agents do not internalize the effect of private porfolios on aggregate investment, aggregate demand externalities generate scope for Pareto improvements. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:617&r=dge |
| By: | Vladimir Asriyan (CREi, UPF, and Barcelona GSE) |
| Abstract: | Balance sheet recessions result from concentration of macroeconomic risks on the balance sheets of leveraged agents. In this paper, I argue that information dispersion about the future states of the economy combined with trading frictions in financial markets can explain why such concentration of risk may be privately but not socially optimal. I show that borrowers face a tradeoff between the insurance benefits of financing with macro contingent contracts and the rents they need to pay creditors for holding such claims. In aggregate, as borrowers sacrifice contingency in order to provide liquidity, the severity of macroeconomic fluctuations becomes endogenously linked to the magnitudes of information dispersion and trading frictions. In this setting, I study the problem of a constrained social planner and show that policies promoting both issuance and trade of contingent contracts can be Pareto improving. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:205&r=dge |
| By: | Mike Waugh (New York University) |
| Abstract: | Should a nation’s tax system become more progressive as it opens to trade? Does opening to trade change the benefits of a progressive tax system? We answer these question within a standard incomplete markets model with frictional labor markets and Ricardian trade. Consistent with empirical evidence, adverse shocks to comparative advantage lead to labor income loses for import-competition-exposed workers; with incomplete markets, these workers are imperfectly insured and experience welfare losses. A progressive tax system is valuable as it substitutes for imperfect insurance and redistributes the gains from trade. However, it also reduces the incentives to work and for labor to reallocate away from comparatively disadvantaged locations. We find that progressivity should increase with openness to trade and that progressivity is an important tool to mitigate the negative consequences of globalization. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1210&r=dge |
| By: | anmol bhandari (university of minnesota); Ellen McGrattan (University of Minnesota) |
| Abstract: | This paper uses theory disciplined by U.S.~national accounts and business census data to measure private business sweat equity, which is the value of time to build customer bases, client lists, and other intangible assets. We estimate an aggregate sweat equity value of 0.65 times GDP, with little cross-sectional dispersion in valuations when compared to business net incomes and large cross-sectional dispersion in rates of return. Our estimate of sweat equity is close to the estimate of marketable fixed assets used in production by private businesses, implying a high ratio of intangible to total assets. We use the model to evaluate the impact of greater tax compliance of private businesses and lower tax rates on the net income of both privately held and publicly traded businesses. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:415&r=dge |
| By: | George-Marios Angeletos (M.I.T.); Chen Lian (MIT) |
| Abstract: | This paper develops a novel theory of how a drop in consumer spending, or aggregate demand, can trigger a series of feedback loops between spending, employment, and income, ultimately leading to a sizable recession. Unlike the one embedded in the New Keynesian framework, our theory does not hinge on nominal rigidities and on the failure of monetary policy to replicate flexible prices. Instead, it is based on the idea that firms and consumers alike are unable to disentangle idiosyncratic from aggregate shocks and to reach common knowledge of the latter. This in turn could be either because of an information friction or because of bounded rationality. As a result, our theory bypasses the empirical failings of old and new Philips curves. It also allows for sizable fiscal multipliers without commensurate inflationary pressures. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:372&r=dge |
| By: | Cristina Lafuente (University of Edinburgh) |
| Abstract: | I propose a novel mechanism called search capital to explain long term unemployment patters across different ages: workers who have been successful in finding jobs in the recent past become more efficient at finding jobs in the present. Search ability increases with search experience and depreciates with tenure if workers do not search often enough. This leaves young (who have not gained enough search experience) and older workers in a disadvantaged position, making them more likely to suffer long term unemployment. I focus on the case of Spain, as its dual labour market structure favours the identification of search capital. I provide empirical evidence that search capital affects unemployment duration and wages at the individual level. Then I propose a search model with search capital and calibrate it using Spanish administrative data. The addition of search capital helps the model match the dynamics of unemployment and job finding rates in the data, specially for younger workers. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:427&r=dge |
| By: | Massimo Giovannini; Stefan Hohberger; Robert Kollmann; Lucas Vogel; Marco Ratto; Werner Roeger |
| Abstract: | The trade balances of the Euro Area (EA) and of the US have improved markedly after the Global Financial Crisis. This paper quantifies the drivers of EA and US economic fluctuations and external adjustment, using an estimated (1999-2017) three-region (US, EA, rest of world) DSGE model with trade in manufactured goods and in commodities. In the model, commodity prices reflect global demand and supply conditions. The paper highlights the key contribution of the post-crisis collapse in commodity prices for the EA and US trade balance reversal. Aggregate demand shocks originating in Emerging Markets too had a significant impact on EA and US trade balances. The broader lesson of this paper is that Emerging Markets and commodity shocks are major drivers of advanced countries’ trade balances and terms of trade. |
| Keywords: | EA and US external adjustment, commodity markets, emerging markets |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/276452&r=dge |
| By: | Juan Carlos Conesa; Begona Dominguez |
| Abstract: | Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an innitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero at steady state from the point of view of any agent. However, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For Pareto weights that lead to Pareto-improving reforms, we find that labor tax rates should be eliminated while dividend tax rates should be increased to around 36 percent at steady state. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:nys:sunysb:18-10&r=dge |
| By: | Stephanie Schmitt-Grohé, Martín Uribe |
| Abstract: | This paper establishes the existence of multiple equilibria in infinite-horizon open- economy models in which the value of tradable and nontradable endowments serves as collateral. In this environment, the economy is shown to display self-fulfilling financial crises in which pessimistic views about the value of collateral induce agents to delever- age. The paper shows that under plausible calibrations, there exist equilibria with underborrowing. This result stands in contrast to the overborrowing result stressed in the related literature. Underborrowing emerges in the present context because in economies that are prone to self-fulfilling financial crises, individual agents engage in excessive precautionary savings as a way to self-insure. |
| Keywords: | Pecuniary externalities, collateral constraints, overborrowing, underborrowing, financial crises, capital controls |
| JEL: | E44 F41 G01 H23 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nva:unnvaa:wp03-2018&r=dge |
| By: | Ton S. van den Bremer; Rick van der Ploeg |
| Abstract: | Leading-order results from asymptotic analysis for the optimal price of carbon under uncertainty are derived from a macroeconomic continuous-time DSGE model with AK growth, energy use, adjustment costs, recursive utility and costs of global warming. We consider non-climatic productivity growth uncertainty, atmospheric carbon uncertainty, climate sensitivity uncertainty and climate damage uncertainty. Explicit expressions are derived that show the leading-order dependence of the optimal carbon price on these uncertainties, the various climate betas, risk aversion, intergenerational inequality aversion and convexity of the climate damage specification. Our solution allows for skewness and mean reversion in stochastic shocks to the climate sensitivity and damage coefficients. The resulting rule for the optimal risk-adjusted carbon price incorporates precautionary, risk-insurance and risk-exposure effects to deal with future economic and climatic risks. The stochastic processes are calibrated and used to estimate and interpret the impact of each source of uncertainty on the optimal risk-adjusted carbon price. |
| Keywords: | social cost of carbon, precaution, insurance, economic and climatic uncertainties, skewness, mean reversion, climate betas, risk aversion, prudence, intertemporal substitution, intergenerational inequality aversion, convex damages, DSGE |
| JEL: | H21 Q51 Q54 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:203&r=dge |
| By: | Alisdair McKay (Boston University); Ricardo Reis (London School of Economics) |
| Abstract: | If the natural rate of interest is lower in the future, monetary policy may be more constrained and discretionary fiscal policy may come with larger multipliers. Does this imply that countercyclical fiscal policy should be more active, or that there should be a larger role for automatic stabilizers? This paper investigates if this is so by analyzing a business cycle model with heterogeneous agents and nominal rigidities, which frequently hits the zero lower bound. If markets are complete, then fiscal policy should be more active in a low r∗ world only if its precision is large enough. If markets are incomplete, there may be a tradeoff between more active policy or more aggressive automatic stabilizers. We quantify these effects in a model calibrated to the U.S. economy. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:621&r=dge |
| By: | Xu Zhang (University of California, San Diego) |
| Abstract: | This paper evaluates the effects of forward guidance and large-scale asset purchases (LSAP) when the nominal interest rate reaches the zero lower bound. I investigate the effects of the two policies in a dynamic new Keynesian model with financial frictions adapted from Gertler & Karadi (2011, 2013), with changes implemented so that the framework delivers realistic predictions for the effects of each policy on the entire yield curve. I then match the change that the model predicts would arise from a linear combination of the two shocks with the observed change in the yield curve in a high-frequency window around Federal Reserve announcements, allowing me to identify the separate contributions of each shock to the effects of the announcement. My estimates correspond closely to narrative elements of the FOMC announcements. My estimates imply that forward guidance was more important in influencing inflation, while LSAP was more important in influencing output. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:894&r=dge |
| By: | M.Emranul Haque; Paul Middleditch; Shuonan Zhang |
| Abstract: | This paper investigates the contrasting business cycle characteristics of China and the US, speci cally in terms of economic activity and total factor productivity. To help explain the differing pro les for these two variables for both countries, we build and estimate a DSGE model with extended fi nancial markets and endogenous technology creation to identify key structural parameters, comparing the decomposition of the shock processes in our analysis. We reveal stark differences in the contributing factors of business cycle fluctuations for both countries, and demonstrate the importance of the stock market for economic recovery after a sizable and persistent financial shock. Macroeconomic intervention in China works well but is unable to smooth total factor productivity (TFP) due to the presence of multiple shocks transmitted through the endogenous technology creation channel. Whilst the US achieves a similar pro le for economic activity with less volatility in TFP, it also contends with additional risks, fed in by the existence of the stock market. The stock market allows firms to hedge fi nance during periods of fi nancial instability, though this is not cost free. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:244&r=dge |
| By: | Michelle Petersen Rendall (Monash University); Andrew Rendall (University of Zurich) |
| Abstract: | Standard SBTC is a powerful mechanism in explaining the increasing wage gap between educated and uneducated individuals. However, SBTC cannot explain within-group wage inequality in the US. This paper provides an explanation for the observed intra-college group inequality by showing that the top decile earners’ significant wage growth is underpinned by the link between ex ante ability, math-heavy college majors and highly quantitative occupations. We develop a general equilibrium model with multiple education outcomes, where wages are driven by individuals’ ex ante abilities and acquired math skills. A large portion of within-group and general wage inequality is explained by math-biased technical change (MBTC). |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:654&r=dge |
| By: | George Bratsiotis |
| Abstract: | This paper examines the role of precautionary liquidity (reserves) and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. Through the deposits channel and balance sheet channel either of these determinants can explain a number of effects including, (i) zero-bound optimal policy rates, (ii) a negative deposit rate spread, but also (iii) determinacy at the lower-zero bound. Similarly, through its effect on the deposits channel and balance sheet channel the interest on reserves can act as the main tool of monetary policy, that is shown to provide higher welfare gains in relation to a simple Taylor rule. This result is shown to hold at the zero-bound and it is independent of precautionary liquidity, or the fiscal theory of the price level. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:243&r=dge |
| By: | Eduardo Davila (New York University); Thomas Philippon (New York University) |
| Abstract: | This paper studies the effects of shocks to the degree of market completeness. We present a dynamic stochastic economy where agents can trade in complete markets in normal times, but where financial markets can stochastically become incomplete. When this happens, agents cannot trade in state contingent assets and cannot re-hedge their risks. Our model formalizes a new type of purely financial shock, which we call an incompleteness shock. Even if we allow our agents to hedge the incompleteness shock itself, we find that these shocks are sufficient to trigger a recession with misallocation of capital, lower aggregate output, and consumption. Our results imply that financial market disruptions will unavoidably generate a recession, even if they are perfectly anticipated and agents can freely reallocate resources ex-ante. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:109&r=dge |
| By: | Felix Feng (University of Notre Dame) |
| Abstract: | This paper studies dynamic compensation and risk management when firms face cash flow volatility shock. Back-loaded compensation with a penalty upon the arrival of the shock is used to incentivize effort and prudence from managers. Thus, implications of the volatility shock depend critically on firms’ ability to commit to future compensa- tion: firms with full commitment power impose high pay-performance sensitivity and large penalties to implement low risk, and defer compensation more when volatility becomes higher. In contrast, firms with limited commitment ability optimally allow excessive risk-taking from managers in exchange for a low pay-performance sensitivity; they expedite compensation when volatility is higher because commitment to future payments becomes less feasible. These predictions shed light on empirical observations particularly the controversial compensation practices during the recent financial crisis. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:159&r=dge |
| By: | Pavel Krivenko (Stanford) |
| Abstract: | This paper evaluates the role of unemployment scarring and fear thereof for the recent U.S. housing bust. I study a quantitative lifecycle model of the housing market, which features an income process that is consistent with the large and long-lasting impact of unemployment on future earnings documented in recent empirical work. The model features exogenous moving shocks consistent with survey evidence which shows that many households move for reasons unrelated to their financial situation. These shocks reduce the selection into moving, thereby amplifying the quantitative importance of unemployment shocks and tighter credit conditions in the recent bust. The reason is that movers are more sensitive to labor market and credit conditions because they are younger, have lower wealth, and less secure jobs. Housing policies such as mortgage subsidies help stabilize prices and reduce foreclosures, even if only a small fraction of homeowners receive them. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:579&r=dge |
| By: | Jan Werner (University of Minnesota) |
| Abstract: | This paper develops a general theory of speculative bubbles and speculative trade in dynamic asset markets with short sales restrictions when agents have heterogeneous beliefs and are risk neutral. Speculative bubble arises when the price of an asset exceeds every trader's valuation measured by her willingness to pay if obliged to hold the asset forever. Speculative bubble indicates speculative trade - whoever holds the asset intends to sell it at a later date. We identify a sufficient condition on agents' heterogeneous beliefs for speculative bubbles in equilibrium. Our main focus is on heterogeneous beliefs arising from updating different prior beliefs in Bayesian model of learning. The sufficient condition for beliefs in Bayesian model is that no single prior dominates other agents' priors in the sense of monotone likelihood ratio order. We study asymptotic properties of speculative bubbles in light of merging of conditional beliefs and consistency of priors. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1216&r=dge |
| By: | Masolo, Riccardo (Bank of England); Winant, Pablo (Bank of England) |
| Abstract: | Since the Great Recession policy rates have been extremely low, but neither absolutely constant, nor exactly set to zero. We thus augment a standard zero lower bound model to study the effects of a stochastic lower bound (SLB) on policy rates. We find that a less predictable SLB helps keep inflation closer to target by lowering expectations of future values of the SLB when interest rate cuts are not an option. |
| Keywords: | Zero lower bound; DSGE |
| JEL: | E31 E52 |
| Date: | 2018–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0754&r=dge |
| By: | Juliana Salomao (University of Minnesota); Liliana Varela (University of Warwick) |
| Abstract: | This paper develops a firm-dynamics model with endogenous currency debt composition to study financing and investment decisions in developing economies. In our model, foreign currency borrowing arises from a trade-off between exposure to currency risk and growth. There is cross-sectional heterogeneity in these decisions in two dimensions. First, there is selection into foreign currency borrowing, as only productive firms employ it. Second, there is heterogeneity in firms’ share of foreign currency loans, driven by their potential growth. We assess econometrically the pattern of foreign currency borrowing using firm-level census data on Hungary, calibrate the model and quantify its aggregate impact. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:523&r=dge |
| By: | Javier Turen (UCL) |
| Abstract: | This paper develops a model in which firms acquire costly information to make pricing decisions. Prices are set by tracking an unobserved target whose volatility depends on a persistent state of the economy. Firms are Rationally Inattentive since they face different information processing costs when learning the target. By embedding heterogeneous time-invariant information costs in this persistent volatility setting, I show that the model endogenously generates countercyclical dispersion in price changes, as documented by re- cent empirical findings. Costly information generates a delay in the rate at which firms’ recognize any change of state, leading to different pricing decisions through the transition. Endogenous information and heterogeneous costs alone are enough to replicate the empirical time-varying evolution of the dispersion of price changes, as well as the positive co-movement between the dispersion and frequency of price changes. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:796&r=dge |
| By: | David Perez-Reyna (Universidad de los Andes); Filippo Rebessi (California State University, East Bay) |
| Abstract: | In this paper we rationalize the observation that in emerging markets an exchange rate devaluation might have a negative effect on production, due to the fact that the increase in the value of liabilities denominated in foreign currency causes a tightening in the domestic financial conditions, potentially offsetting the effect of an increase in the value of exports. We build on \cite{Melitz2003} to propose a model with heterogeneous firms in a small open economy where firms face financial frictions when borrowing from abroad. Depending on how strong the friction is, a foreign shock that results in an exchange rate devaluation might translate into lower output, even if exports increase. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1118&r=dge |
| By: | David Berger (Northwestern University); Alessandro Dovis (University of Pennsylvania); Luigi Bocola (Stanford University, FRB of Minneapolis) |
| Abstract: | 10 years ago, Chari, Kehoe and MaGrattan (2007) proposed a framework to guide business cycle research. They measured the importance of distortions ("wedges") between macroeconomic data and what was implied by a benchmark neoclassical growth model and used these wedges to evaluate models of the business cycle. In this paper, we extend CKM to allow for distortions at the micro level and use this framework to understand and measure the importance of heterogeneity over the business cycle. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:588&r=dge |
| By: | Belot, Michele (European University Institute); Kircher, Philipp (School of Economics, University of Edinburgh); Muller, Paul (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We study how job seekers respond to wage announcements by assigning wages randomly to pairs of otherwise similar vacancies in a large number of professions. High wage vacancies attract more interest, in contrast with much of the evidence based on observational data. Some applicants only show interest in the low wage vacancy even when they were exposed to both. Both findings are core predictions of theories of directed/competitive search where workers trade o_ the wage with the perceived competition for the job. A calibrated model with multiple applications and on-the-job search induces magnitudes broadly in line with the empirical findings. |
| Keywords: | online job search; directed search; wage competition; field experiments |
| JEL: | C93 J31 J63 J64 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0739&r=dge |
| By: | Deeksha Gupta (University of Pennsylvania) |
| Abstract: | During the housing boom, mortgage markets became increasingly concentrated with the government-sponsored enterprises (GSEs) being exposed to over 40 percent of U.S. mortgages in the 2000s. Research on the causes of the pre-crisis rise in risky lending has largely overlooked this trend. I develop a theory where this concentration in mortgage holdings can explain key features of the housing boom and bust. In the model, large lenders with many outstanding mortgages have incentives to extend risky credit to prop up house prices. An increase in concentration can lead to a credit boom with worsening credit quality and a subsequent bust with widespread defaults. The model can generate a negative correlation between credit and income growth across areas (such as ZIP codes) while maintaining a positive correlation between them across borrowers reconciling empirical evidence that has previously seemed contradictory. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:512&r=dge |
| By: | Merlin, Giovanni Tondin |
| Abstract: | Using a heterogeneous agent model with incomplete markets and entrepreneurship, I show that development banks can generate significant and positive impacts in an economy if they target the infrastructure sector and are funded through low distortionary taxes. Calibrating the model for the Brazilian economy, I assess that a better credit policy by the Brazilian Development Bank (BNDES) can generate a welfare gain around 10%. However, with the current format, the subsidy policies in Brazil are, at best, useless to foster development, besides transferring welfare from the poor to the rich. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:483&r=dge |
| By: | Klaus Adam (University of Mannheim); Henning Weber (Bundesbank) |
| Abstract: | We present a sticky-price model incorporating heterogeneous firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous firms: (1) the optimal steady- state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to es- timate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:782&r=dge |
| By: | Vito Gala (University of Pennsylvania); Hongxun Ruan (Wharton School); Joao Gomes (University of Pennsylvania) |
| Abstract: | We use a dynamic stochastic model of firm investment to investigate quantitatively the causes behind the ongoing decline in corporate investment. Our analysis focuses on three of the most commonly proposed explanations: (i) a secular decline in productivity growth; (ii) a tightening of financial constraints in the period surrounding the Great Depression; and (iii) the recent increase in policy uncertainty. We find that all three factors are important to account for the sharp decline in investment during the Great Recession. However only slow productivity growth can best account for the long term decline in investment. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:269&r=dge |
| By: | Richard Rogerson (Princeton University); Johanna Wallenius (Stockholm School of Economics) |
| Abstract: | Using the Consumption Activities Mail Survey (CAMS) module in the HRS we document how time allocations change for individuals within a household when one or more members transitions from full time work to not working. Our basic finding is that the ratio of home production to leisure time is approximately constant for both family members. We then build a model of household labor supply to understand the implications of this finding for preferences and the home production function. We conclude that this fact suggests a relatively large elasticity of substitution between the leisure of the two members. For commonly used preference specifications, this also implies a large (i.e., greater than one) intertemporal elasticity of substitution for leisure. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:90&r=dge |
| By: | Philippe Bacchetta (University of Lausanne); Eric van Wincoop (University of Virginia) |
| Abstract: | This objective of this paper is to show that the proposal by Froot and Thaler (2000) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all the moments related to these puzzles. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:675&r=dge |
| By: | Sara Moreira (Northwestern University) |
| Abstract: | The main contribution of this paper is to consider sector-specific productivity and factor-specific productivity effects in the analysis of the evolution of the skill wage premium. I use data on wages and employment for 30 industries that compose the U.S. economy to examine the evolution of employment and skill-intensity by sector. To guide the empirical work, I construct a simple two-sector model that explores the role of heterogenous technology in the process of structural change. I show that the college premium depends crucially on industry-specific elasticities of substitution between skilled and unskilled labor and on the nature of the factor augmenting technology. The model allows me to derive closed form expressions for the aggregate elasticity of substitution and estimate its evolution. I find that the degree of skilled-unskilled labor substitutability is diminishing as sectors with low flexibility (e.g. services) are becoming increasingly important. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:850&r=dge |
| By: | Joao Ramos (University of Southern California); Tomasz Sadzik (UCLA) |
| Abstract: | In this paper we analyze a continuous-time model of partnership with persistence. In the model, agents exert private efforts affecting persistent internal capital, which drives the profitability of the partnership. We characterize the optimal equilibrium with a novel Hamilton-Jacobi-Bellmann equation. It describes the maximal incentives for the partners, as a function of continuation values net of the internal capital. We show that imperfect monitoring of the internal capital discontinuously helps the agents. Even a partnership with high level of internal capital may unravel as a consequence of a short spell of bad outcomes. Good profit outcomes increase effort when partnership is doing badly, but decrease effort when partnership is doing well. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1264&r=dge |
| By: | Marco Bassetto (Federal Reserve Bank of Chicago); Wei Cui (University College London) |
| Abstract: | A central equation for the fiscal theory of the price level (FTPL) is the government budget constraint (or "government valuation equation"), which equates the real value of government debt to the present value of fiscal surpluses. In the past decade, the governments of most developed economies have paid very low interest rates, and there are many other periods in the past in which this has been the case. In this paper, we revisit the implications of the FTPL in a world where the rate of return on government debt may be below the growth rate of the economy, considering different sources for the low returns: dynamic inefficiency, the liquidity premium of government debt, or its favorable risk profile. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:574&r=dge |