|
on Dynamic General Equilibrium |
|
Issue of 2018‒09‒24
fifty-four papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Ivan Sutoris |
| Abstract: | This paper studies risk premia in an incomplete-markets economy with households facing idiosyncratic consumption risk. If the dispersion of idiosyncratic risk varies over the business cycle and households have a preference for early resolution of uncertainty, asset prices will be affected not only by news about current and expected future aggregate consumption (as in models with a representative agent), but also by news about current and future changes in the cross-sectional distribution of individual consumption. I investigate whether this additional effect can help explain high risk premia in a production economy where the aggregate consumption process is endogenous and thus can potentially be affected by the presence of idiosyncratic risk. Analyzing a neoclassical growth model combined with Epstein-Zin preferences and a tractable form of household heterogeneity, I find that countercyclical idiosyncratic risk increases the risk premium, but also effectively lowers the willingness of households to engage in intertemporal substitution and thus changes the dynamics of aggregate consumption. Nevertheless, with the added flexibility of Epstein-Zin preferences, it is possible both to increase risk premia and to maintain the same dynamics of quantities if we allow for higher intertemporal elasticity of substitution at the individual level. |
| Keywords: | Idiosyncratic risk, incomplete markets, production economy, risk premium |
| JEL: | E13 E21 E44 G12 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2018/4&r=dge |
| By: | Börsch-Supan, Axel; Härtl, Klaus; Leite, Duarte; Ludwig, Alexander |
| Abstract: | We propose a unified framework to measure the effects of different reforms of the pension system on retirement ages and macroeconomic indicators in the face of demographic change. A rich overlapping generations (OLG) model is built and endogenous retirement decisions are explicitly modeled within a public pension system. Heterogeneity with respect to consumption preferences, wage profiles, and survival rates is embedded in the model. Besides the expected direct effects of these reforms on the behavior of households, we observe that feedback effects do occur. Results suggest that individual retirement decisions are strongly influenced by numerous incentives produced by the pension system and macroeconomic variables, such as the statutory eligibility age, adjustment rates, the presence of a replacement rate, and interest rates. Those decisions, in turn, have several impacts on the macro-economy which can create feedback cycles working through equilibrium effects on interest rates and wages. Taken together, these reform scenarios have strong implications for the sustainability of pension systems. Because of the rich nature of our unified model framework, we are able to rank the reform proposals according to several individual and macroeconomic measures, thereby providing important support for policy recommendations on pension systems. |
| Keywords: | population aging,pension reform,social security,life-cycle behavior,labor supply,retirement age,welfare |
| JEL: | C68 D91 E17 H55 J11 J26 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:221&r=dge |
| By: | Grzegorz Długoszek (Humboldt-Universität zu Berlin) |
| Abstract: | This paper investigates the macroeconomic effects of uncertainty originating in the financial sector by using the DSGE framework developed by Gertler and Karadi (2011). The model generates macroeconomic dynamics that are consistent with the empirical evidence. In particular, an increase in the financial uncertainty raises the risk premium and leads to a decline in output, consumption, investment and hours worked. This outcome arises mainly because of an endogenous tightening of the financial constraint, which in turn triggers the financial accelerator mechanism. Finally, nominal and real rigidities act as additional amplification mechanisms for financial uncertainty shocks. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1128&r=dge |
| By: | Holtemöller, Oliver; Schult, Christoph |
| Abstract: | In this paper, we document the forecasting performance of estimated basic dynamic stochastic general equilibrium (DSGE) models and compare this to extended versions which consider alternative expectation formation assumptions and financial frictions. We also show how standard model features, such as price and wage rigidities, contribute to forecasting performance. It turns out that neither alternative expectation formation behaviour nor financial frictions can systematically increase the forecasting performance of basic DSGE models. Financial frictions improve forecasts only during periods of financial crises. However, traditional price and wage rigidities systematically help to increase the forecasting performance. |
| Keywords: | business cycles,economic forecasting,expectation formation,financial frictions,macroeconomic modelling |
| JEL: | C32 C53 E37 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:152018&r=dge |
| By: | Juan Hatchondo (Indiana University); Francisco Roch (International Monetary Fund); Leonardo Martinez (International Monetary Fund) |
| Abstract: | We solve a sovereign default model with long-term debt assuming that the government can commit to future debt issuances. Comparing model simulations with and without commitment we nd that (i) commitment explains most of the default risk in the simulations of the model without commitment, and (ii) the government wants to commit to a scal policy that is more procyclical than the one in the model without commitment. Welfare gains from commitment can be substantial. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:927&r=dge |
| By: | Jagjit S. Chadha (Centre for Macroeconomics (CFM); National Institute of Economic and Social Research (NIESR)); Katsuyuki Shibayama (University of Kent) |
| Abstract: | Koop, Pesaran and Smith (2013) suggest a simple diagnostic indicator for the Bayesian estimation of the parameters of a DSGE model. They show that, if a parameter is well identified, the precision of the posterior should improve as the (artificial) data size T increases, and the indicator checks the speed at which precision improves. As it does not require any additional programming, a researcher just needs to generate artiÖcial data and estimate the model with increasing sample size, T. We apply this indicator to the benchmark Smets and Wouters' (2007) DSGE model of the US economy, and suggest how to implement this indicator on DSGE models. |
| Keywords: | Bayesian estimation, Dynamic stochastic general equilibrium |
| JEL: | C51 C52 E32 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1825&r=dge |
| By: | Toshihiko Mukoyama (Department of Economics, Georgetown University); Mototsugu Shintani (Faculty of Economics, The University of Tokyo); Kazuhiro Teramoto (Department of Economics, New York University) |
| Abstract: | This paper analyzes the dynamics of full-time employment and part-time employment over the business cycle. We first document basic macroeconomic facts on these employment stocks using the U.S. data and decompose their cyclical dynamics into the contributions of different flows into and out of these stocks. Second, we develop and estimate a New Keynesian search-and-matching model with two labor markets to uncover the fundamental driving forces of the cyclical dynamics of employment stocks. We find that the procyclicality of the net flow from part-time to full-time employment is essential in accounting for countercyclical patterns of part-time employment. |
| Keywords: | Part-time employment; Bayesian estimation; DSGE model; Search, matching and bargaining. |
| JEL: | E24 E32 |
| Date: | 2018–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~18-18-04&r=dge |
| By: | Gajendran Raveendranathan (McMaster University) |
| Abstract: | I build a model of revolving credit in which consumers face idiosyncratic earnings risk, and credit card firms target consumers with credit offers. Upon a match, they bargain over borrowing limits and borrowing interest rates -- fixed for the duration of the match. Using the model, I show that improved matching between consumers and credit card firms quantitatively accounts for the rise in revolving credit and consumer bankruptcies in the U.S. I also provide empirical evidence consistent with the key features in my model: directed search and bargaining. The lifetime consumption gains from improved matching are substantially large (3.55 percent). |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:112&r=dge |
| By: | Chang Ma (Johns Hopkins University) |
| Abstract: | Many emerging market economies have used macroprudential policy to mitigate the risk of financial crises and the resulting output losses. However, macroprudential policy may reduce economic growth in good times. This paper introduces endogenous growth into a small open economy model with occasionally binding collateral constraints in order to study the impact of macroprudential policy on financial stability and growth. In a calibrated version of the model, I find that optimal macroprudential policy reduces the probability of crisis by two thirds at the cost of lowering average growth by a small amount (0.01 percentage point). Moreover, macroprudential policy can generate welfare gains equivalent to a 0.06 percent permanent increase in annual consumption. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:3&r=dge |
| By: | Emmanuel Farhi (Harvard University); Ivan Werning (Massachusetts Institute of Technology) |
| Abstract: | This paper extends the benchmark New-Keynesian model by introducing two key frictions: (1) agent heterogeneity with incomplete markets, uninsurable idiosyncratic risk, and occasionally- binding borrowing constraints; and (2) bounded rationality in the form of level-k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is much more pronounced at long horizons, and offers a potential rationalization of the “forward guidance puzzle”. Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:768&r=dge |
| By: | Xiaoqing Zhou (Bank of Canada) |
| Abstract: | The consumption boom-bust cycle in the 2000s coincided with large fluctuations in the volume of home equity borrowing. Contrary to conventional wisdom, I show that homeowners largely borrowed for residential investment and not consumption. I rationalize this empirical finding using a calibrated two-goods, multiple-assets, heterogeneous-agent life-cycle model with borrowing frictions. The model replicates key features of the household-level and aggregate data. The model offers an alternative explanation of the consumption boom-bust cycle. This cycle is caused by large fluctuations in the number of borrowers and hence in total home equity borrowing, even though the fraction of borrowed funds spent on consumption is small. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:795&r=dge |
| By: | Ana Luisa Pessoa Araujo (University of Minnesota) |
| Abstract: | How much wage inequality in Brazil is caused by firing costs? To answer this question, I develop and estimate a general equilibrium search and matching model with heterogeneous layoff rates among firms. Using matched employer-employee data from Brazil, I estimate the model, and I find that it replicates the observed residual wage inequality in the data. I simulate a counterfactual removal of existing firing costs, and I find that residual wage inequality drops by 26% as measured by wage variance and by 4.4% as measured by the p95-p5 ratio among 25- to 55-year-old males working in the private sector with at most a high school degree. Worker welfare among this subgroup of households increases by almost 1% in response to the abolishment of firing costs. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:117&r=dge |
| By: | Rajesh Singh (Iowa State University) |
| Abstract: | We investigate the welfare implications of alternative monetary policy rules in a small open economy with access to world capital markets. Financial market access is costly and induces an endogenous segmentation of households into non-traders who never participate and traders who only participate intermittently in asset markets. The model can reproduce standard business cycle moments of open economies including a countercyclical current account even though the model has no capital and investment. Our main policy result is that procyclical monetary policy outperforms both the Taylor rule and inflation targeting in this environment. Given widespread evidence of endemic financial exclusion throughout the world, these results suggest caution in importing monetary policy prescriptions tailored for developed countries into emerging economies. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:76&r=dge |
| By: | Elton Dusha (University of Chile); Alexandre Janiak (Pontificia Universidad Catolica de Chile) |
| Abstract: | We build a consumption asset pricing model with search frictions on the market for assets and idiosyncratic income shocks. Search is directed and a consumption-leisure decision drives the price-liquidity tradeoff: if consumption is marginally more desirable than leisure, a seller would be willing to wait longer for a higher price. Our model is consistent with two characteristics of the housing market, where search frictions are particularly important: i) procyclical liquidity (i.e. countercyclical time to sell) and ii) prices more sensitive to demand shocks. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:524&r=dge |
| By: | Roberto Robatto (University of Wisconsin-Madison) |
| Abstract: | This paper presents a general equilibrium monetary model of fundamentals-based bank runs to study monetary injections during financial crises. When the probability of runs is positive, depositors increase money demand and reduce deposits; at the economy-wide level, the velocity of money drops and deflation arises. Two quantitative examples show that the model accounts for a large fraction of (i) the drop in deposits during the Great Depression and (ii) the $400 billion run on money market mutual funds in September 2008. In some circumstances, monetary injections have no effects on prices but reduce money velocity and deposits. Counterfactual policy analyses show that, if the Federal Reserve had not intervened in September 2008, the run on money market mutual funds would have been $141 billion smaller. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:276&r=dge |
| By: | José Ignacio López Gaviria (Universidad de los Andes); Virginia Olivella (Banque de France) |
| Abstract: | This paper discusses the relation between monetary policy and currency risk premium in the context of a model in which central banks diverge in terms of the preferences and act either under discretion or commitment. The model is able to reproduce sizable foreign currency risk premium under discretion when the central bank in the foreign country is less conservative than the monetary authority at home which leads to higher nominal interest rates and a counter-cyclical inflation in the foreign country. The model when calibrated to match key moments of real and nominal macroeconomic variables of Latin America countries can explain the excess returns of the currencies of the region. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:321&r=dge |
| By: | Varadarajan Chari (University of Minneapolis); Juan Pablo Nicolini (Minneapolis Fed); Pedro Teles (Banco de Portugal, Univ Catolica Portugu) |
| Abstract: | We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should there be restrictions to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? Can a Ramsey allocation be implemented with residence based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:806&r=dge |
| By: | Ordoñez, Guillermo; Piguillem, Facundo |
| Abstract: | The U.S. economy has recently experienced a large increase in life expectancy and in shadow banking activities. We argue that these two phenomena are intimately related. Agents rely on financial intermediaries to insure consumption during their uncertain life spans after retirement. When they expect to live longer, they rely more heavily on financial intermediaries that are riskier but offer better insurance terms - including shadow banks. We calibrate the model to replicate the level of financial intermediation in 1980, introduce the observed change in life expectancy and show that the demographic transition is critical in accounting for the boom in both shadow banking and credit that preceded the recent U.S. financial crisis. We compare the U.S. experience with a counterfactual without shadow banks and show that they may have contributed around 0.6GDP to output, four times larger than the estimated costs of the crisis. |
| Keywords: | Ageing Population; financial crisis; shadow banking |
| JEL: | E21 E44 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13144&r=dge |
| By: | Job Boerma (University of Minnesota); Ellen McGrattan (University of Minnesota) |
| Abstract: | This paper studies the design of health care and tax policies in a quantitative macroeconomic model. We theoretically and quantitatively characterize the optimal taxation on consumption, health investments, earnings and capital investments. Policies are constrained due to private information with respect to shocks to household labor productivity and health status. We compare the results to actual policies and household allocations in the Netherlands, a country with a single-payer system but vast differences in health expenditures and mortality rates across income groups. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:204&r=dge |
| By: | Andrew Glover (University of Texas Austin) |
| Abstract: | The Fair Minimum Wage Act of 2007 increased the U.S. nominal minimum wage by 41 percent immediately prior to nominal interest rates hitting the Zero Lower Bound in 2008. I study the interaction of these two events in an extension of the sticky-price New Keynesian model. The minimum wage dampens the contractionary effects of the ZLB by preventing rapid wage deflation, halting the deflationary spiral caused by low aggregate demand. For sufficiently persistent ZLB shocks, the minimum wage generates infinite output gains relative to flexible wages, while GDP losses are reduced by half in a calibrated economy. Increasing the minimum wage at the ZLB is expansionary: accumulated output gains are more than 15 percent in the calibrated economy. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1285&r=dge |
| By: | Carlo Pizzinelli (University of Oxford); Konstantinos Theodoridis (Cardiff Business School); Francesco Zanetti (University of Oxford) |
| Abstract: | This paper documents state dependence in labor market Fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specifc idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity. |
| Keywords: | Search and Matching Models, State Dependence in Business Cycles, Threshold Vector Autoregression. |
| JEL: | E24 E32 J64 C11 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkcam:1801&r=dge |
| By: | Martin Uribe (Columbia University) |
| 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 deleverage. 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. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:358&r=dge |
| By: | Neele Balke (University of Chicago; IIES) |
| Abstract: | This paper analyzes the interaction between government default decisions and labor market outcomes in an environment with persistent unemployment and financial frictions. Sovereign risk impairs bank intermediation through balance sheet effects, worsening the conditions for firms to pre-finance wages and vacancies. This generates a new type of endogenous domestic default cost -- the employment cost of default. The persistence of unemployment produces serial defaults and rationalizes high debt-to-GDP ratios. In the dynamic strategic game between the government and the private sector, anticipation effects allow the study of debt crises in addition to outright default episodes. Introducing employment subsidies and bank regulations affect the government's ability to commit to debt repayment. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1256&r=dge |
| By: | Don Schlagenhauf (Federal Reserve Bank of St Louis) |
| Abstract: | A dynamic stochastic occupational choice model with heterogeneous agents is developed to evaluate the impact of a corporate income tax reduction on employment. In this framework, the key margin is the endogenous entrepreneurial choice of legal form of organization. A reduction in the corporate income tax burden encourages adoption of the C corporporation legal form, which reduces capital constraints on firms. Improved capital re-allocation increases overall productive efficiency in the economy and therefore expands the labor market. Relative to the benchmark economy, a corporate income tax cut can reduce the non-employment rate by up to 7 percent. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:334&r=dge |
| By: | Jeremy Greenwood; Philipp Kircher; Cezar Santos; Michèle Tertilt |
| Abstract: | Twelve percent of the Malawian population is HIV infected. Eighteen percent of sexual encounters are casual. A condom is used a third of the time. To analyze the Malawian epidemic, a choice-theoretic general equilibrium search model is constructed. In the developed framework, people select between different sexual practices while knowing the inherent risk. The calibrated model is used to study several policy interventions. The analysis suggests that the efficacy of public policy depends upon the induced behavioral changes and equilibrium effects. The framework thus complements the insights provided by epidemiological studies and small-scale field experiments. |
| Keywords: | ART, circumcision, condoms, disease transmission, epidemiological studies, HIV/AIDS, homo economicus, knowledge about HIV, Malawi, marriage, policy intervention, search, small field experiments, STDs, sex markets |
| JEL: | I18 J12 O11 O55 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7205&r=dge |
| By: | Moritz Drechsel-Grau (University of Mannheim); Fabian Greimel (University of Mannheim) |
| Abstract: | We investigate the prevailing view that unequal growth combined with social comparisons have driven the boom of US household debt in the decades before the Great Recession. Thereby, non-rich households try to keep up with the rising living standards of the rich. We first develop a tractable infinite-horizon consumption network model in order to illustrate the mechanism analytically. We then introduce social comparisons into a heterogeneous agents macroeconomic model with housing and heterogeneous income profiles for a quantitative analysis. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1032&r=dge |
| By: | Zheng, Y.; Gohin, A. |
| Abstract: | This paper proposes a generalized maximum entropy (GME) approach to estimate nonlinear dynamic stochastic decision models. For these models, the state variables are latent and a solution process is required to obtain the state space representation. To our knowledge, this method has not been used to estimate dynamic stochastic general equilibrium (DSGE) or DSGE-like models. Based on the Monte Carlo experiments with simulated data, we show that the GME approach yields precise estimation for the unknown structural parameters and the structural shocks. In particular, the preference parameter which captures the risk preference and the intertemporal preference is also relatively precisely estimated. Compare to the more widely used filtering methods, the GME approach provides a similar accuracy level but much higher computational efficiency for nonlinear models. Moreover, the proposed approach shows favorable properties for small sample size data. |
| Keywords: | Agricultural and Food Policy |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:276001&r=dge |
| By: | In Hwan Jo (National University of Singapore); Tatsuro Senga (Queen Mary University of London) |
| Abstract: | Access to external finance is a major obstacle for small and young firms; thus, providing subsidized credit to small and young firms is a widely-used policy option across countries. We study the impact of such targeted policies on aggregate output and productivity and highlight indirect general equilibrium effects. To do so, we build a model of heterogeneous firms with endogenous entry and exit, wherein each firm may be subject to forward-looking collateral constraints for their external borrowing. Subsidized credit alleviates credit constraints small and young firms face, which helps them to achieve the efficient and larger scale of production. This direct effect is, however, either reinforced or offset by indirect general equilibrium effects. Factor prices increase as subsidized firm demand more capital and labor. As a result, higher production costs induce more unproductive incumbents to exit, while replacing them selectively with productive entrants. This cleansing effect reinforces the direct effect by enhancing the aggregate productivity. However, the number of firms in operation decreases in equilibrium, and this, in turn, depresses the aggregate productivity. |
| Keywords: | Firm dynamics, Misallocation, Financial frictions, Firm size and age |
| JEL: | E22 G32 O16 |
| Date: | 2016–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:809&r=dge |
| By: | Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England and Lancaster University) |
| Abstract: | This paper uses a range of structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1980 an expansionary spending or revenue shock was associated with modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative and larger in magnitude. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks |
| Keywords: | Fiscal policy shocks, Stock prices, VAR, DSGE |
| JEL: | C5 E1 E5 E6 |
| Date: | 2017–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:817&r=dge |
| By: | Julio Blanco (University of Michigan); Javier Cravino (University of Michigan) |
| Abstract: | We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI microdata for the UK, Austria and Mexico. Relative reset prices account for almost all of the real exchange rate movements in the data. This is at odds with the predictions of Sticky Price Open Economy models with complete markets, which generate volatile and persistent real exchange rates but not through movements in relative reset prices. We show that incomplete markets models featuring UIP deviations are much closer to replicating the empirical decomposition at low frequencies. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:346&r=dge |
| By: | Piergallini, Alessandro |
| Abstract: | This paper explores global dynamics in a monetary model with limited asset market participation and the zero lower bound on nominal interest rates. It is shown that a rise in government transfers to ‘non-Ricardian’ consumers financed by debt-based taxes to ‘Ricardian’ consumers is capable of escaping disinflationary paths typically convergent to a liquidity trap. Fiscal policy does not need to be unsustainable at the low inflation steady state to avoid liquidity traps, as argued in the context of the standard single representative agent setup. |
| Keywords: | Fiscal Policy; Multiple Equilibria; Global Dynamics; Liquidity Traps; Non-Ricardian Consumers. |
| JEL: | E31 E62 E63 |
| Date: | 2017–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88798&r=dge |
| By: | Cynthia Doniger (Federal Reserve Board) |
| Abstract: | I study trends in labor share and earnings inequality in the context of an on- the-job search model featuring heterogeneous wage contracts. In the model, a shift toward employment contracts with upwardly-re-negotiable wages implies a decrease in labor share and an increase in inequality. Using the German social security register, I assess the ability of this mechanism to account for trends in inequality and labor share observed in that country. I find a secular trend toward renegotiable wage contracts which accelerates in the late 1990's matching the observed series for inequality and labor share over the same horizon. Further, I find that industries in which the incidence of renegotiable contracts increases most also experience larger increases in inequality and larger declines in labor share. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:526&r=dge |
| By: | Batchimeg Sambalaibat (Indiana University) |
| Abstract: | OTC markets exhibit a core-periphery network: 10-30 central dealers trade frequently and with many dealers, while hundreds of peripheral dealers trade sparsely and with few dealers. Existing work rationalize this phenomenon with exogenous dealer heterogeneity. We build a search-based model of network formation and propose that a core-periphery network arises from specialization. Dealers endogenously specialize in different clients with different liquidity needs. The clientele difference across dealers, in turn, generates dealer heterogeneity and the core-periphery network: The dealers specializing in clients who trade frequently form the core, while the dealers specializing in buy-and-hold investors form the periphery. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1278&r=dge |
| By: | Hengjie Ai; Anmol Bhandari |
| Abstract: | This paper studies asset pricing in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can commit to these contracts; furthermore, worker-firm relationships have endogenous durations owing to costly and unobservable effort. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In the general equilibrium, exposure to the resulting tail risk generates higher risk premia, more volatile returns, and variations in expected returns across firms. Model outcomes are consistent with the cyclicality of factor shares in the aggregate, and the heterogeneity in exposures to idiosyncratic and aggregate shocks in the cross section. |
| JEL: | E24 G12 J3 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24972&r=dge |
| By: | Dan Cao (Department of Economics, Georgetown University) |
| Abstract: | This paper combines the tools developed in two important and independent literatures - one on large economies started with Aumann (1964) and the other on dynamically incomplete markets, notably Duffie et al (1994)- to study Krusell and Smith’s incomplete markets economy with both idiosyncratic and aggregate shocks. It establishes the existence of sequential competitive equilibrium, generalized recursive equilibrium, recursive equilibrium with an extended-state space, and characterizes several important properties of the equilibrium variables. The equilibrium process admits an ergodic measure, which enables the application of the ergodic theorem for the simulation and calibration of the model. Without aggregate shocks, the existence and some characterization results carry over to economies with only idiosyncratic shocks such as Huggett (1997)’s economy. However, the existence of recursive equilibrium with the natural minimal state space in Krusell and Smith's economy remains elusive, as in finite-agent incomplete markets economies. |
| Keywords: | Incomplete Markets; Large Economies; Aggregate and Idiosyncratic Shocks; Recursive Equilibrium Existence; Kakutani-Glicksberg-Fan Fixed Point Theorem; Ergodicity |
| JEL: | C62 C63 C68 D52 D91 E13 E21 E32 |
| Date: | 2018–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~18-18-13&r=dge |
| By: | Nuno Clara (London Business School) |
| Abstract: | This paper examines the joint implications of heterogeneous demand elasticities and nominal rigidities to firm fundamentals and asset prices. Nominal rigidities create operational leverage in firms and therefore create a role for demand elasticity to matter for cross-sectional differences in firm fundamentals and asset prices. I develop a novel method to estimate demand elasticities at the firm level by using high frequency Amazon product data. I find that firms with more elastic demands have lower markups and earn a return premium of 6.2% over firms with more inelastic demands. These results are consistent with a multi-sector new-keynesian model where firms face both different demand elasticities and nominal rigidities. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:790&r=dge |
| By: | Benjamin Larin (Leipzig University) |
| Abstract: | The 2007-2008 financial crisis highlighted that a turmoil in the financial sector including bursting asset price bubbles can cause pronounced and persistent fluctuations in real economic activity. This motivates the consideration of evolving and bursting asset price bubbles as another source of fluctuations in a business cycle model. In this paper rational asset price bubbles are therefore incorporated into a life-cycle RBC model as first developed by Rı́os-Rull (1996). The calibration of the model to the post-war US economy and the numerical solution show that the model is able to generate plausible bubble-driven business cycles – economic fluctuations caused by evolving and bursting asset price bubbles. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:662&r=dge |
| By: | Jean Flemming (University of Oxford) |
| Abstract: | I study the interaction between commuting and employment in the data and within a spatial model of on-the-job search. I document the link between commuting time, job-to-job transitions, and earnings empirically. The theoretical model features a city in which individuals must commute in order to work, explicitly taking into account the distributions across both space and productivity. Costly commuting causes workers to reject otherwise good matches, resulting in a higher degree of productivity mismatch between workers and firms. The rate of job-to-job transitions and wage gains within and between jobs depend crucially on the spatial elements of the model. I use the model to study how commuting costs affect unemployment, future wage growth, and aggregate output. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:100&r=dge |
| By: | Pascal Michaillat; Emmanuel Saez |
| Abstract: | This paper extends the New Keynesian model by introducing wealth, in the form of government bonds, into the utility function. The extension modifies the Euler equation: in steady state the real interest rate is negatively related to consumption instead of being constant, equal to the time discount rate. Thus, when the marginal utility of wealth is large enough, the dynamical system representing the equilibrium is a source not only in normal times but also at the zero lower bound. This property eliminates the zero-lower-bound anomalies of the New Keynesian model, such as explosive output and inflation, and forward-guidance puzzle. |
| JEL: | E31 E32 E43 E52 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24971&r=dge |
| By: | Dan Cao (Department of Economics, Georgetown University); Roger Lagunoff (Department of Economics, Georgetown University) |
| Abstract: | We examine the role of collateral in a dynamic model of optimal credit contracts in which a borrower values both housing and non-housing consumption. The borrower’s private information about his income is the only friction. An optimal contract is collateralized when in some state, some portion of the borrower’s net worth is forfeited to the lender. We show that optimal contracts are always collateralized. The total value of forfeited assets is decreasing in income, highlighting the role collateral as a deterrent to manipulation. Some assets, those that generate consumable services will necessarily be collateralized while others may not be. Endogenous default arises when the borrower’s initial wealth is low, as with subprime borrowers, and/or his future earnings are highly variable. |
| Keywords: | optimal contract, asymmetric information, collateral, forfeiture, collateralized contract |
| JEL: | D82 D86 D53 D14 G21 G22 |
| Date: | 2018–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~18-18-14&r=dge |
| By: | Dmitry Matveev (Bank of Canada) |
| Abstract: | This paper studies the effects of government debt under optimal discretionary monetary and fiscal policy when the lower bound on nominal interest rates is occasionally binding. This issue is addressed in a model with the labor income tax and long-term government debt. The risk of a binding lower bound reduces steady-state inflation. This causes an increase in government debt in the steady state. The debt increase and associated tax rate increase mitigate the reduction in inflation by raising the marginal cost of production. At the lower bound, given a fall in output, it is optimal for the government to temporarily reduce debt. This debt reduction stimulates output by lowering expected real interest rates following the liftoff of the nominal rate from the lower bound. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:310&r=dge |
| By: | Hiona Balfoussia (Bank of Greece); Harris Dellas (University of Bern, CEPR); Dimitris Papageorgiou (Bank of Greece) |
| Abstract: | We study the role of the loan-to-value (LTV) ratio instrument in a DSGE model with a rich set of financial frictions (Clerc et al., 2015). We find that a binding LTV ratio limit in the mortgage market leads to lower credit and default rates in that market as well as lower levels of investment and output, while leaving other sectors and agents largely unaffected. Interestingly, when the level of capital requirements is in the neighborhood of its optimal value, implementing an LTV ratio cap has a negative impact on welfare, even if it leads to greater macroeconomic stability. Furthermore, the availability of the LTV ratio instrument does not impact on the optimal level of capital requirements. It seems that once capital requirements have been optimally deployed to tame banks’ appetite for excessive risk, the use of the LTV ratio could prove counterproductive from a welfare point of view. |
| Keywords: | Macroprudential Policy; General Equilibrium; Greece |
| JEL: | E3 E44 G01 G21 O52 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:248&r=dge |
| By: | Vincent Anesi (University of Nottingham, School of Economics); T Renee Bowen (University of California, San Diego and NBER) |
| Abstract: | We study conditions under which optimal policy experimentation can be implemented by a committee. We consider a dynamic bargaining game in which committee members choose to implement either a risky reform or a safe alternative with known returns each period. We find that when no redistribution is allowed the unique equilibrium outcome is generically inefficient. When committee members are allowed to redistribute resources (even arbitrarily small amounts), there always exists an equilibrium that supports optimal experimentation for any voting rule with no veto players. With veto players, however, optimal policy experimentation is possible only with a sufficient amount of redistribution. We conclude that veto rights are more of an obstacle to optimal policy experimentation than constraints on redistribution. |
| Keywords: | voting, redistribution, policy experimentation |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2018-09&r=dge |
| By: | Alexandre Kohlhas (Institute for International Economic Studies, Stockholm University) |
| Abstract: | We document simultaneous over- and under-responses to new information by households, firms, and professional forecasters in survey data. Such responses are inconsistent with existing models based on behavioral bias or rational inattention. We demonstrate that a structural, component-based model of information choice can reconcile the disparate facts. We show that optimally chosen, asymmetric attention to different observables can explain the co-existence of over- and under-responses. We then embed our model of information choice into a micro-founded macroeconomic model, which generates expectations consistent with the survey data. We demonstrate that our model creates over-optimistic consumption beliefs in booms and predictability in consumption changes. We confirm auxiliary implications of the model in the data. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1040&r=dge |
| By: | Niklas Engbom (Princeton University) |
| Abstract: | I assess the impact of an aging labor force on business dynamism, labor market fluidity and economic growth. The analysis embeds endogenous growth through creative destruction in an equilibrium job ladder model, highlighting feedback between the extent of mismatch in the labor market and incentives to innovate. I calibrate the model to aggregate reallocation rates and show that the theory replicates life cycle firm and worker dynamics in the data. The model implies that labor force aging over the last 30 years in the US explains 40-50 percent of the decline in job and worker reallocation and has reduced annual economic growth by 0.3 percentage points. Using cross-state variation and instrumenting for the incidence of aging using lagged age shares, I find additional empirical support for the prediction of large effects of aging on dynamism and growth. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1009&r=dge |
| By: | Martin Wolf |
| Abstract: | This paper studies optimal policy in economies with downward nominal wage rigidity when only prudential instruments are available. The optimal policy reduces labor demand in expansions as this curtails unemployment in recessions. The cost of the intervention is that in expansions, the economy produces below potential. We characterize this trade-o theoretically and quantitatively by applying our model to Greece, 1999-2016. We and that the optimal prudential policy would have significantly reduced Greek unemployment after the downturn in 2008. Furthermore, we and large welfare gains of the optimal prudential policy, removing about one fourth of the total welfare cost of downward wage rigidity. |
| JEL: | E24 E32 F41 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1804&r=dge |
| By: | Giovannini, Massimo; Hohberger, Stefan; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas |
| 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: | Euro Area and US external adjustment, commodity markets, emerging markets |
| JEL: | F2 F3 F4 |
| Date: | 2018–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88664&r=dge |
| By: | Larry Karp (UC Berkeley); Hiroaki Sakamoto |
| Abstract: | We analyze a dynamic model of international agreements where countries cannot make long-term commitments and have no sanctions or rewards to induce participation. Countries can communicate with each other to build endogenous beliefs about the random consequences of (re)opening nego- tiation. Provided that countries are patient, many different agreements might emerge, including an effective agreement with many participants. Along the way, however, negotiation might yield a succession of short-lived agreements with a small number of participants. Beliefs are important, and negotiations matter. Our theoretical results are consistent with the existing empirical observations and they explain the `paradox of interna- tional agreements'. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:508&r=dge |
| By: | Martin Kliem (Deutsche Bundesbank); Alexander Meyer-Gohde (University of Hamburg) |
| Abstract: | Central banks are relying increasingly on multiple instruments when implementing monetary policy. This presents empirical analyses of the effects of monetary policy shocks with an ongoing identification challenge. We provide a structural, quantitatively reasonable model of the interaction between monetary policy and the term structure of interest rates to address this. Our model shows that the effects of monetary policy shocks on term premia depend crucially on whether they contain news about future monetary policy. This structural interpretation provides a plausible explanation for the discrepancy in the existing empirical literature. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:102&r=dge |
| By: | Akos Valentinyi (University of Manchester) |
| Abstract: | Multi-sector models typically rely on a numeraire to aggregate quantities whereas NIPA uses the chain index. For three popular versions of the multi-sector growth model, we provide analytical expressions for the growth of aggregate quantities under both measurement methods and establish that the compound differences are sizeable over long horizons. We show that using the chain index captures more accurately the aggregate effects of secular changes in relative prices. For example, in a standard model of structural transformation, measuring GDP growth with the chain index captures that Baumol's disease reduces welfare growth, which using a numeraire misses. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:837&r=dge |
| By: | Miguel Leon-Ledesma (University of Kent); Alessio Moro (University of Cagliari) |
| Abstract: | We investigate the effect of structural transformation on economic growth in the U.S. and in cross-country data. Measuring the outcome of a two-sector growth model by using NIPA conventions, structural transformation in the U.S. induces a decline of 36% in the aggregate marginal product of capital, of 5.4% in the real interest rate, and of 16% in the growth rate of per-capita GDP between 1950 and 2015. By retaining the U.S. calibration, the process of structural transformation can also account, per-se, for cross-country differences in real investment/GDP ratios, which are comparable to those displayed by the U.S. along its growth path. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:424&r=dge |
| By: | Qingqing Cao (Michigan State University) |
| Abstract: | In a canonical model of borrowing and lending, an exclusion technology that features full exclusion for a deterministic number of periods following default maximizes stationary equilibrium welfare. This exclusion policy maximizes the stationary volume of mutually beneficial lending transactions. It also maximizes the average welfare of the excluded. The optimal length of exclusion depends on fundamentals such as borrower patience and the direct cost of default. It also depends on incentives to default for strategic rather stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:181&r=dge |
| By: | Qingqing Cao (Michigan State University) |
| Abstract: | We study the role of multinational banks in the propagation of business cycles in host countries. In our economy, multinational banks can transfer liquidity across borders through internal capital markets. However, their scarce knowledge of local firms' collateral hinders their allocation of liquidity to firms. We find that, through the interaction between the "liquidity origination" advantage and the "liquidity allocation" disadvantage, multinational banks can act as a short-run stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1059&r=dge |
| By: | Jaroslav Borovicka (New York University); John Stachurski (Research School of Economics) |
| Abstract: | We study existence, uniqueness and stability of solutions for a class of discrete time recursive utilities models. By combining two streams of the recent literature on recursive preferences—one that analyzes principal eigenvalues of valuation operators and another that exploits the theory of monotone concave operators—we obtain conditions that are both necessary and sufficient for existence and uniqueness. We also show that the natural iterative algorithm is convergent if and only if a solution exists. Consumption processes are allowed to be nonstationary. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1275&r=dge |