|
on Dynamic General Equilibrium |
|
Issue of 2018‒10‒01
thirty-six papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Harenberg, Daniel |
| Abstract: | This paper analyzes how the combination of borrowing constraints and idiosyncratic risk affects the equity premium in an overlapping generations economy. I find that introducing a zero-borrowing constraint in an economy without idiosyncratic risk increases the equity premium by 70 percent, which means that the mechanism described in Constantinides, Donaldson, and Mehra (2002) is dampened because of the large number of generations and production. With social security the effect of the zero-borrowing constraint is a lot weaker. More surprisingly, when I introduce idiosyncratic labor income risk in an economy without a zero-borrowing constraint, the equity premium increases by 50 percent, even though the income shocks are independent of aggregate risk and are not permanent. The reason is that idiosyncratic risk makes the endogenous natural borrowing limits much tighter, so that they have a similar effect to an exogenously imposed zero-borrowing constraint. This intuition is confirmed when I add idiosyncratic risk in an economy with a zero-borrowing constraint: neither the equity premium nor the Sharpe ratio change, because the zero-borrowing constraint is already tighter than the natural borrowing limits that result when idiosyncratic risk is added. |
| Keywords: | equity premium,idiosyncratic risk,aggregate risk,lifecycle |
| JEL: | G12 D91 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:229&r=dge |
| By: | Lise Clain-Chamosset-Yvrard (Univ. Lyon, Université Lumière Lyon 2, GATE UMR 5824); Thomas Seegmuller (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE) |
| Abstract: | In this paper, we are interested in the interplay between real estate bubble, aggregate capital accumulation and taxation in an overlapping generations economy with altruistic households. We consider a three-period overlapping generations model with three key elements: altruism, portfolio choice, and financial market imperfections. Households realise different investment decisions in terms of asset at different periods of life, face a binding borrowing constraint and leave bequests to their children. We show that altruism plays a key role on the existence of a productive real estate bubble, i.e. a bubble in real estate raising physical capital stock and aggregate output. The key mechanism relies on the fact that a real estate bubble raises income of retired households. Because of higher bequests, there children are able to invest more in productive capital. Introducing fiscal policy, we show that raising real estate taxation dampens capital accumulation. |
| Keywords: | bubble, altruism, real estate, credit, overlapping generations |
| JEL: | E22 E44 G11 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1821&r=dge |
| By: | Bielecki, Marcin; Stähler, Nikolai |
| Abstract: | We use a New Keynesian DSGE model with search frictions on the housing market to evaluate how financing a labor tax reduction by higher property taxation affects the real economy and welfare. Search on the housing market enables us to explicitly model stocks and flows, which is necessary to differentiate between recurrent property taxes (levied on stocks) and property transaction taxes (levied to flows). We find that using recurrent property taxation as financing instrument outperforms other instruments although all policy measures increase aggregate economy-wide welfare. Our simulations suggest that using property transaction taxation as financing instrument is the least favorable measure. |
| Keywords: | Search Frictions in Housing Markets,Property Taxation,Tax Reform,General Equilibrium |
| JEL: | E51 E6 R31 K34 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:302018&r=dge |
| By: | Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson |
| Abstract: | We study business cycle fluctuations in heterogeneous-agent general equilibrium models that feature both intensive and extensive margins of labor supply. A nonconvexity in the mapping between time devoted to work and labor services combined with idiosyncratic shocks generates operative extensive and intensive margins. We consider calibrated versions of this model that differ in the value of a key preference parameter for labor supply and the extent of heterogeneity. The model is able to capture the salient features of the empirical distribution of hours worked, including how individuals transit within this distribution. We then study how the various specifications influence labor supply responses to aggregate technology shocks. We ask to what extent our predictions for business cycle fluctuations are affected by abstracting from the intensive margin and instead assuming that adjustment occurs only along the extensive margin. We find that abstracting from intensive margin adjustment can have large effects on the volatility of aggregate hours even if fluctuations along the intensive margin are small. |
| JEL: | E24 E32 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24985&r=dge |
| By: | Meyer-Gohde, Alexander; Neuhoff, Daniel |
| Abstract: | We relax the standard assumption in the dynamic stochastic general equilibrium (DSGE) literature that exogenous processes are governed by AR(1) processes and estimate ARMA (p,q) orders and parameters of exogenous processes. Methodologically, we contribute to the Bayesian DSGE literature by using Reversible Jump Markov Chain Monte Carlo (RJMCMC) to sample from the unknown ARMA orders and their associated parameter spaces of varying dimensions. In estimating the technology process in the neoclassical growth model using post war US GDP data, we cast considerable doubt on the standard AR(1) assumption in favor of higher order processes. We find that the posterior concentrates density on hump-shaped impulse responses for all endogenous variables, consistent with alternative empirical estimates and the rigidities behind many richer structural models. Sampling from noninvertibleMA representations, a negative response of hours to a positive technology shock is contained within the posterior credible set. While the posterior contains significant uncertainty regarding the exact order, our results are insensitive to the choice of data filter; this contrasts with our ARMA estimates of GDP itself, which vary significantly depending on the choice of HP or first difference filter. |
| Keywords: | Bayesian analysis,Dynamic stochastic general equilibrium model,Model evaluation,ARMA,Reversible Jump Markov Chain Monte Carlo |
| JEL: | C11 C32 C51 C52 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:125&r=dge |
| By: | Kaas, Leo (Goethe University Frankfurt); Kimasa, Bihemo (University of Konstanz) |
| Abstract: | This paper analyzes the joint dynamics of prices, output and employment across firms. We develop a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Idiosyncratic productivity and demand shocks have distinct implications for the firms' output and price adjustments. Using panel data on prices and output for German manufacturing firms, we calibrate the model to evaluate the quantitative contributions of productivity and demand for the labor market and the dispersions of prices and labor productivity. We further analyze the impact of shocks to the first and second moments of idiosyncratic risk on macroeconomic outcomes. An increase in demand uncertainty induces sizable declines in output and employment together with rising cross-sectional dispersion of price and output growth which are typical features of recessions in our data. |
| Keywords: | firm dynamics, prices, demand, employment, uncertainty shocks |
| JEL: | D21 E24 L11 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11745&r=dge |
| By: | Haomin Wang |
| Abstract: | This paper studies the extent to which working couples can insure one another against cyclical fluctuations in the labor market and examines the implications of joint household decision-making for cyclical fluctuations in the unemployment rate. For this purpose, I provide a dynamic life-cycle model of households that make joint savings and job search decisions in the presence of aggregate shocks. I show that two key mechanisms are at play. The first is the added-worker effect, which leads to counter-cyclical search intensity because workers increase search intensity when their spouse becomes unemployed. The second is the comparative advantage effect, according to which couples’ job search efforts are coordinated based on the relative returns to search of each spouse. I estimate the model using data from the US Current Population Survey, and find that joint household decision-making contributes to the counter-cyclicality of women’s unemployment rate, but not for men. Moreover, joint household decision-making lowers the welfare costs of cyclicality. |
| Keywords: | Joint Decision-Making, Cyclical Fluctuations, Unemployment Rate, Search Intensity, Intra-Household Risk Sharing |
| JEL: | J64 E32 D10 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1760&r=dge |
| By: | Haotian Xiang (Wharton School of the University of Pennsylvania) |
| Abstract: | I investigate the impact of bank capital requirements in a business cycle model with corporate debt choice. Compared to non-bank investors, banks provide restructurable loans that reduce firm bankruptcy losses and enhance production efficiency. Raising capital requirements eliminates deposit insurance distortions but also deposit tax shields. As a result, firms cut back on both bank and non-bank borrowing while going bankrupt more frequently. Implementing an optimal capital ratio of 11 percent in the US produces limited marginal impacts on aggregate quantities and welfare. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:327&r=dge |
| By: | Petrosky-Nadeau, Nicolas (Federal Reserve Bank of San Francisco); Wasmer, Etienne (NYU Abu Dhabi); Weil, Philippe (ULB and CEPR) |
| Abstract: | This paper studies the optimal sharing of value added between consumers, producers, and labor. We first define a constrained optimum. We then compare it with the decentralized allocation. They coincide when the price maximizes the expected marginal revenue of the firm in the goods market, an outcome of the competitive search equilibrium, and when the wage exactly offsets the congestion externality of firm entry in the labor market, which is the traditional Hosios condition. Under price and wage bargaining, this allocation is achieved under a double Hosios condition combining the logic of competitive search and Hosios efficiency. The consumer receives a share of the goodsmarket trading surplus equal to the amount of externality occasioned by its search activity and the worker receives a share of the labor match surplus to offset the externality of firm entry in the matching process. A calibration of the model to the US economy indicates that the labor market is near efficient, and free-entry of consumers leads to excess excess consumer market power in setting prices. Restoring efficiency leads to a modest change in welfare. |
| JEL: | E24 E32 J63 J64 |
| Date: | 2018–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2018-13&r=dge |
| By: | Yena Park (University of Rochester) |
| Abstract: | We study how to jointly design the optimal tax system on the inherited wealth and the retirement savings in an economy where the motives for the retirement savings and the bequests are overlapping. If the retirement savings can serve for both a precautionary saving against the uncertain life cycle and a bequest to the children, the optimal tax system should consider the interaction of the two functions. When the parents are heterogeneous in their earning ability, mortality, and altruism, the correlation of these characteristics and the planner's preferences for redistribution are the key determinant of the sign and shape of the tax system. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1246&r=dge |
| By: | Sergey Ivashchenko (St. Petersburg Institute for Economics and Mathematics Russian Academy of Sciences (RAS)); Semih Emre Cekin (Department of Economics, Turkish-German University); Kevin Kotze (School of Economics, University of Cape Town); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | This paper compares the out-of-sample forecasting performance of first- and second-order perturbation approximations for DSGE models that incorporate Markov-switching behaviour in the policy reaction function and the volatility of shocks. These results are compared to those of a model that does not incorporate any regime-switching. The results suggest that second-order approximations provide an improved forecasting performance in models that do not allow for regime-switching, while for the MS-DSGE models, a first-order approximation would appear to provide better out-of-sample properties. In addition, we find that over short-horizons, the MS-DSGE models provide superior forecasting results when compared to those models that do not allow for regime-switching (at both perturbation orders). |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ctn:dpaper:2018-10&r=dge |
| By: | Cuadra Gabriel; Ramos Francia Manuel; García-Verdú Santiago |
| Abstract: | We develop a dynamic stochastic quantitative model of sovereign default featuring fiscal policy, endogenous financial aid and risk-averse foreign lenders, in order to explore the role of financial aid in a default episode. After calibrating the model, we feed output shocks into the model to show that it captures some of the most salient features of the fiscal and debt situation in Argentina during the 1998-2002 period. This underscores the economic nature of the decision to default and the role that official aid could have taken in avoiding such an event. In effect, given the economic challenges endured by Argentina, a full-fledged default took place. In addition, we discuss a number of policy implications associated with financial aid programs aimed at preventing sovereign default episodes. |
| Keywords: | Sovereign default;fiscal policy;financial aid |
| JEL: | E62 F34 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2018-15&r=dge |
| By: | Marcus Ingholt (University of Copenhagen) |
| Abstract: | I document that the elasticity of mortgage loan origination with respect to house prices is highly dependent on the change in personal incomes and vice versa, using U.S. county-level panel data. I rationalize this in a model with two occasionally binding borrowing constraints: a loan-to-value (LTV) constraint and a debt-service-to-income (DTI) constraint. A Bayesian estimation of the model infers when the LTV and DTI constraints have been binding during 1975-2017, and which shocks that caused them to bind. A macroprudential experiment shows that countercyclical LTV limits cannot dampen mortgage debt growth in expansions, but DTI limits can. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:866&r=dge |
| By: | Olivier Cardi; Romain Restout; Peter Claeys |
| Abstract: | Our paper investigates the impact of government spending shocks on relative sector size and contrasts the effects across countries. Using a panel of sixteen OECD countries over the period 1970-2007, our VAR evidence shows that a rise in government consumption i) increases the share of non tradables in labor and real GDP while lowering the share of tradables, and ii) causes a significant increase in non traded wages relative to traded wages. While the first finding reveals that the non traded sector is more intensive in the government spending shock and experiences a labor inflow that increases its relative size, the second finding suggests the presence of labor mobility costs preventing wage equalization across sectors. These labor mobility costs appear to play a key role in determining changes in relative sector size across time and space. Whilst the responses of intersectoral labor reallocation and sectoral shares are found empirically to decline over time, the share of non tradables increases more in countries where the degree of labor mobility across sectors is higher. To account for our evidence, we develop an open economy version of the neoclassical model with tradables and non tradables. Our quantitative analysis shows that the open economy model is successful in replicating the responses of sectoral output shares to a fiscal shock, as long as we allow for a difficulty in reallocating labor across sectors along with adjustment costs to capital accumulation. Finally, calibrating the model to country-specific data, we are able to generate a cross-country relationship between the degree of labor mobility and the responses of sectoral output shares which is similar to that in the data. |
| Keywords: | Fiscal policy, Labor mobility, Investment, Current account, Non tradables, Sectoral wages |
| JEL: | E22 E62 F11 F41 J31 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:244952353&r=dge |
| By: | Sebastian Di Tella (Stanford GSB) |
| Abstract: | This paper provides an equilibrium theory of liquidity traps and the real effects of money. Money provides a safe store of value that prevents interest rates from falling enough during downturns, and the economy enters a persistent slump with depressed investment. This is an equilibrium outcome—prices are flexible, markets clear, and inflation is on target—but it’s not efficient. Investment is too high during booms and too low during liquidity traps. Although money has large real effects, monetary policy is ineffective—the zero lower bound is not binding, money is superneutral, and Ricardian equivalence holds. The optimal allocation requires the Friedman rule and a tax/subsidy on capital. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:96&r=dge |
| By: | Marla Ripoll |
| Abstract: | Dynastic models common in macroeconomics use a single parameter to control the willingnessof individuals to substitute consumption both intertemporally, or across periods, and intergen-erationally, or across parents and their children. This paper defines the concept of elasticity ofintergenerational substitution (EGS), and extends a standard dynastic model in order to disen-tangle the EGS from the EIS, or elasticity of intertemporal substitution. A calibrated version ofthe model lends strong support to the notion that the EGS is significantly larger than one. Incontrast, estimates of the EIS suggests that it is at most one. What disciplines the identificationis the need to match empirically plausible fertility rates for the US. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:6397&r=dge |
| By: | HIRAGUCHI Ryoji |
| Abstract: | In this paper, we construct a continuous time endogenous growth model in which innovation is the engine of growth, and study the effect of trade restriction on the employment and the growth rate. In our model, the nominal wage rate has downward rigidity, and therefore the model may have involuntary unemployment. Monetary policy is determined by the Taylor rule. We first show that there are two balanced growth paths. In one path, the workers are fully employed and the nominal interest rate is positive. In another path, some workers are unemployed and the nominal interest rate is zero. We next show that, in the unemployment equilibrium, trade restriction by raising tariffs may lower the unemployment rate without reducing the economic growth rate. However, increasing the tariff rate excessively reduces the growth rate without improving the labor market. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:18062&r=dge |
| By: | Adrien Auclert; Matthew Rognlie; Ludwig Straub |
| Abstract: | We demonstrate the importance of intertemporal marginal propensities to consume (iMPCs) in disciplining general equilibrium models with heterogeneous agents and nominal rigidities. In a benchmark case, the dynamic response of output to a change in the path of government spending or taxes is given by an equation involving iMPCs, which we call the intertemporal Keynesian cross. Fiscal multipliers depend only on the interaction between iMPCs and public deficits. We provide empirical estimates of iMPCs and argue that they are inconsistent with representative-agent, two-agent and one-asset heterogeneous-agent models, but can be matched by models with two assets. Quantitatively, models that match empirical iMPCs predict deficit-financed fiscal multipliers that are larger than one, even if monetary policy is active, taxation is distortionary, and investment is crowded out. These models also imply larger amplification of shocks that involve private borrowing, as we illustrate in an application to deleveraging. |
| JEL: | D1 E21 E22 E23 E32 E62 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25020&r=dge |
| By: | Lewis, Vivien; Roth, Markus |
| Abstract: | We study the equilibrium properties of a business cycle model with financial frictions and price adjustment costs. Capital-constrained entrepreneurs finance risky projects by borrowing from banks. Banks, in turn, make loans using equity and deposits. Because financial contracts are not contingent on aggregate risk, bank balance sheets are hit when entrepreneurial defaults are higher than expected. Macroprudential policy imposes a positive response of the bank capital ratio to lending. Our main result is that the Taylor Principle is violated when this response is too weak. Then macroprudential policy is ineffective in stabilizing debt and monetary policy is subject to 'financial dominance'. A too aggressive response of the interest rate to inflation can lead to debt disinflation dynamics that destabilize the financial sector. |
| Keywords: | bank capital,financial dominance,interest rate rule,macroprudential policy,Taylor Principle |
| JEL: | E32 E44 E52 E58 E61 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:292018&r=dge |
| By: | Javier Bianchi (Federal Reserve Bank of Minneapolis); Jorge Mondragon (University of Minnesota) |
| Abstract: | This paper examines how an economy that belongs to a currency union is more vulnerable to a rollover crisis. We study a model of endogenous sovereign default with self-fulfilling rollover crisis and downward nominal wage rigidity. We show that a reces- sion triggered by self-fufilling beliefs about a rollover crisis pushes the economy towards more frequent defaults. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1215&r=dge |
| By: | Eran Hoffmann (Stanford University) |
| Abstract: | This paper proposes a new theory of business cycles based on the idea that financial uncertainty shocks change the nature of innovation. When investors become more risk tolerant, they fund riskier startups with greater growth potential. As these ambitious startups grow, the initial shock propagates and generates a boom in output and employment. I develop a heterogeneous firm industry model of the US business sector with countercyclical risk premia and innovation by startups and existing firms. The quantitative implementation of the model jointly matches time series properties of stock returns and macroeconomic aggregates, as well as micro evidence on firm cohort growth over the cycle. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:553&r=dge |
| By: | Hamed Ghiaie (Université de Cergy-Pontoise, THEMA) |
| Abstract: | This paper proposes a DSGE model which uses Bayesian estimations to assess an economy under the strain of borrower’s default on its obligation to intermediary agents, similar to the climate of the Great Recession. The paper finds that the treasury bond market plays an important role in such economy: the default increases the spread between the return of mortgages and deposits, as a result banks prefer to compensate their losses by making profit in the mortgage market and in turn, decreasing their treasury bond holdings. These changes transfer the shock to the real side of the economy through housing, credit, deposit and government loan channels and thereby instigate a business cycle. The model proposed in this paper accurately portrays the behaviour of key economic variables before the Great Recession; in particular housing prices, mortgages, deposits and treasury bond holdings by banks. Significantly, this model illustrates the home price downward spiral which succeeded the recession. The paper demonstrates that the specification of the credit constraint relying on house price expectations as well as frictions in housing and capital investments, which can give rise to the Paradox of Thrift, are the major delay factors in recovery. In addition, the findings argue that macroprudential policies help mitigate financial risks and reduce common exposures across markets. Such policies, however, may be inadequate for the post-crisis restoration of the economy. |
| Keywords: | Private default, Financial business cycle, Macroprudential policy, home-price downward spiral. |
| JEL: | E32 E44 E62 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2018-12&r=dge |
| By: | Pham, Ngoc-Sang |
| Abstract: | We introduce two-period general equilibrium models with heterogeneous producers and financial frictions. Any agent can borrow to realize their productive project but the debt repayment does not exceed a fraction (so-called credit limit) of the project's value. Our framework allows us to investigate the aggregate and distributional effects of credit limits and heterogeneity of agents. The connection between credit limits, welfare, and efficiency is also explored. |
| Keywords: | General equilibrium, credit limits, heterogeneity, distributional effects, welfare, efficiency, wealth distribution. |
| JEL: | D3 D5 D6 E44 G1 |
| Date: | 2018–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88736&r=dge |
| By: | Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (ESCE – International Business School) |
| Abstract: | The determinacy of dynamic stochastic general equilibrium models including fiscal, macro-prudential or Taylor rules relies on the assumption that policy instruments are forward-looking when policy targets are also forward-looking. Blanchard and Kahn (1980) determinacy condition does not forbid to assume that policy instruments are backward-looking when policy targets are forward-looking, as it is the case for Ramsey optimal policy under quasi-commitment. There is indeterminacy of determinacy unless six criteria are considered which are in favor of assuming that policy instruments are backward-looking when policy targets are forward-looking. |
| Keywords: | Determinacy,Proportional Feedback rules,Dynamic Stochastic General Equilibrium,Taylor rule,Fiscal rule,Macro-prudential rule,optimal control,Ramsey optimal policy under quasi-commitment |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01877766&r=dge |
| By: | Christopher Huckfeldt (Cornell University) |
| Abstract: | This paper documents that the earnings cost of job loss is concentrated among workers who find reemployment in lower-paying occupations, and that the incidence of such occupation displacement is higher for workers who lose their job during a recession. I propose a model where hiring is endogenously more selective during recessions, forcing some unemployed workers to search for lower-skill jobs. In accounting for the cost and cyclical incidence of occupation displacement, the model accounts for existing estimates of the present value cost of job loss during expansions and recessions, and the cost of entering the labor market during a recession. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1207&r=dge |
| By: | Hyunju Lee (University of Minnesota) |
| Abstract: | Gross capital flows, which arise from the changes in international investment positions, experienced a sudden collapse during the Great Recession in the United States and other advanced countries. This paper builds an open economy model of portfolio choice with two bonds and two non-tradable sectors. Equilibrium portfolios are long in domestic bonds and short in foreign bonds because the endogenous movements of real exchange rate make this portfolio a good hedge against non-tradable consumption risk. With a calibrated model, I find that the observed fluctuations in gross flows mitigated 4% of consumption drop during the Great Recession in the United States. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:51&r=dge |
| By: | Epstein, Brendan; Finkelstein Shapiro, Alan |
| Abstract: | We document a negative and significant relationship between domestic financial de- velopment and unemployment volatility in developing and emerging economies (DEMEs). However, there is no significant relationship between these variables in advanced economies (AEs). A labor-search model with production heterogeneity, sectoral financial frictions, and interfirm input credit can rationalize these differential cross-country results. Un- employment volatility is decreasing in financial development, but the quantitative relevance of this relationship is increasing in the extent to which input credit is prevalent in an economy. This insight is consistent with the fact that, empirically, input credit is much more prominent in DEMEs compared to AEs. |
| Keywords: | Business cycles, financial development, financial frictions, labor markets, large firms, search frictions, small firms |
| JEL: | E24 E32 E44 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88693&r=dge |
| By: | Jess Benhabib; Xuewen Liu; Pengfei Wang |
| Abstract: | Uncertainty in both financial markets and the real economy rises sharply during recessions. We develop a model of informational interdependence between financial markets and the real economy, linking uncertainty to information production and aggregate economic activities. We argue that there exists mutual learning between financial markets and the real economy. Their joint information productions determine both the allocative efficiency in the real sector and the market efficiency in the financial sector. The mutual learning creates a strategic complementarity between information production in the financial sector and that in the real sector. A self-fulfilling surge in financial uncertainty and real uncertainty can naturally arise when both sectors produce little information in anticipation of the other producing little information. At the same time, aggregate output falls as the real allocative efficiency deteriorates. In the extension to an OLG dynamic setting, our model characterizes self-fulfilling uncertainty traps with two steady-state equilibria and a two-stage economic crisis in transitional dynamics. |
| JEL: | E2 E44 G01 G20 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24984&r=dge |
| By: | Lawrence Christiano; Yuta Takahashi |
| Abstract: | We consider a model in which monetary policy is governed by a Taylor rule. The model has a unique equilibrium near the steady state, but also has other equilibria. The introduction of a particular escape clause into monetary policy works like the Taylor principle to exclude the other equilibria. We reconcile our finding about the escape clause with the sharply different conclusion reached in Cochrane (2011). Atkeson et al. (2010) study a different version of the escape clause policy, but that version is fragile in that it lacks a crucial robustness property. |
| JEL: | E5 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24949&r=dge |
| By: | Pavlos Balamatsias |
| Abstract: | We build a New Keynesian model with imperfectly competitive goods markets and heterogeneous people and examine their impact on fiscal multipliers and on the net increase in output and expenditure caused by fiscal policies, using the balanced budget multiplier. Results show that in highly unequal economies the maximum net increase in output and expenditure comes when governments increase expenditure and tax high-income workers because the adverse effects on the economy are smaller. However, when inequality decreases and enough people belong to the high-income group governments should fund expenditure by taxing low-income people. Finally, inequality also affects the welfare effects of fiscal policies. |
| Keywords: | Income inequality,Fiscal multiplier,Public Expenditure,Taxation |
| JEL: | D63 E12 E62 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:182243&r=dge |
| By: | Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres |
| Abstract: | We empirically show that after an increase in global financial risk, the response of unemployment is markedly more subdued in emerging economies (EMEs) relative to small open advanced economies (SOAEs), while the differential response of GDP and investment across the two country groups is noticeably smaller, if at all, in EMEs. A model with banking frictions, frictional unemployment, and household and firm heterogeneity in financial inclusion can help rationalize these facts. Limited financial inclusion among households is central to explaining the differ- ential response of unemployment in EMEs amid global financial risk shocks. |
| Keywords: | Emerging economies, business cycles, unemployment, labor search frictions, financial frictions, financial inclusion. |
| JEL: | E24 E32 E44 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88692&r=dge |
| By: | Luisito Bertinelli; Olivier Cardi; Romain Restout |
| Abstract: | This paper develops a tractable version of a two-sector open economy model with search frictions to disentangle the implications of workers' mobility costs and labor market institutions following higher relative productivity of tradables. Using a panel of eighteen OECD countries, our estimates show that higher productivity in tradables relative to non tradables causes a decline in non traded relative to traded wages. The fall in the relative wage reveals the presence of labor mobility costs which mitigate the appreciation in the relative price of non tradables and lower the relative unemployment rate of tradables following higher relative productivity of tradables. Whilst our evidence suggests that such responses have increased over time as the result of decreasing labor mobility costs, our estimates also reveal that the magnitude of the effects vary considerably across countries. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that both the relative wage and the relative unemployment rate of tradables decline significantly more and the relative price appreciates less in countries where labor market regulation is more pronounced. We show that these empirical findings can be rationalized in a two-sector open economy model with search in the labor market as long as we allow for an endogenous sectoral labor force participation decision. When we calibrate the model to country-specific data, numerical results reveal that the responses of the relative wage, the relative price, and to a lesser extent the relative unemployment rate display a wide dispersion across countries. Importantly, all variables display a significant negative relationship with labor market regulation. |
| Keywords: | Relative productivity of tradables, Search theory, Labor market institutions, Labor mobility, Sectoral price and wage differences, Sectoral unemployment, Current account |
| JEL: | E24 F16 F32 F41 J64 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:244952293&r=dge |
| By: | Callum Jones (International Monetary Fund) |
| Abstract: | During the Great Recession, employment declined more in regions where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model using Bayesian likelihood methods on state-level and aggregate data. Credit shocks account well for the differential rise and fall of employment across individual states. Credit shocks explain a smaller fraction of the initial drop in aggregate employment but the tightening of household credit greatly contributes to the slow recovery in the aftermath of recession. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:933&r=dge |
| By: | Yuto Iwasaki (Bank of Japan); Ichiro Muto (Bank of Japan); Mototsugu Shintani (University of Tokyo) |
| Abstract: | In recent years, advanced economies, including Japan, have experienced a weak response of wage inflation to the decline in the unemployment rate (i.e. missing wage inflation). In this study, we investigate whether downward wage rigidity (DWR) in recession periods can be a source of this weak wage response. Specifically, we jointly estimate the degree of DWR as well as the natural rate of unemployment using a nonlinear DSGE model with asymmetric adjustment costs. We show that wage adjustment costs are highly asymmetric in Japan, the euro area, and the UK; especially, a clear L-shaped wage Phillips curve between wage inflation and the unemployment gap (i.e. the actual unemployment rate minus the natural rate) is obtained in Japan. We argue that missing wage inflation is attributable to DWR and wage inflation is likely to reappear under the tight labor market conditions. |
| Keywords: | wage; natural rate of unemployment; downward wage rigidity; Phillips curve; nonliner DSGE model |
| JEL: | E24 E31 E32 |
| Date: | 2018–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojlab:lab18e03&r=dge |
| By: | Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres |
| Abstract: | Using data for a large sample of countries, we find a robust economic and quantitatively significant positive relationship between new firm density and house price volatility. A business cycle model with endogenous firm entry, housing, and housing finance constraints successfully replicates this new fact, both qualitatively and quantitatively. Greater average firm entry is associated with higher average house prices. This makes the cost of housing loans more sensitive to housing-finance shocks, leading to sharper credit and lending-spread fluctuations, and ultimately factually-sharper house price fluctuations. We find broad empirical validation for this mechanism. |
| Keywords: | Endogenous firm entry, firm dynamism, housing price dynamics, fi- nancial frictions and shocks, business cycles |
| JEL: | E30 E32 E44 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88694&r=dge |
| By: | Weijie Zhong |
| Abstract: | In this paper, I first showed that an indirect information measure is supported by expected learning cost minimization if and only if it satisfies: 1. monotonicity in Blackwell order, 2. sub-additivity in compound experiment and 3. linearity in mixing with no information. Then I studied a dynamic information acquisition problem with flexible design of information dynamics, costly waiting and costly information. When flow information measure satisfies the three conditions, dynamic problem can be solved in two steps: solving a static rational inattention problem, and implementing optimal learning dynamics. The optimal solution involves stationary Poisson direct signals: arrival of signal directly suggests optimal action, and non-arrival of signal provides no information. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.00697&r=dge |