nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒10‒08
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. An Estimated DSGE Model with a Deflation Steady State By Yasuo Hirose
  2. Banking and Financial Participation Reforms, Labor Markets, and Financial Shocks By Epstein, Brendan; Finkelstein Shapiro, Alan
  3. Households' balance sheets and the effect of fiscal policy By Javier Andrés; José E. Boscá; Javier Ferri; Cristina Fuentes-Albero
  4. Predetermined Interest Rates in a Analytical RBC model By Fève, Patrick; Moura, Alban; Pierrard, Olivier
  5. Search and Credit Frictions in the Housing Market By Victor Ortego-Marti; Miroslav Gabrovski
  6. Forecasting with Second-Order Approximations and Markov Switching DSGE Models By Sergey Ivashchenko; Semih Emre Çekin; Kevin Kotzé; Rangan Gupta
  7. 'Health and Knowledge Externalities: Implications for Growth and Public Policy ' By Pierre-Richard Agénor
  8. Endogenous Altruism, Learning by Doing Effect and Impact of Domestic Policies on Child Labour By Chakraborty, Kamalika; Chakraborty, Bidisha
  9. Optimal Reinsurance for Gerber-Shiu Functions in the Cramer-Lundberg Model By Michael Preischl; Stefan Thonhauser
  10. Offshoring, Mismatch, and Labor Market Outcomes By Arseneau, David; Epstein, Brendan
  11. Effect of Aging on Urban Land Prices in China By Sun, Tianyu; Chand, Satish; Sharpe, Keiran
  12. Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs By Fabian Kindermann; Lukas Mayr; Dominik Sachs
  13. Public Debt Frontier. A toolkit for analyzing fiscal policy and debt sustainability By Gonzalo F. de-Córdoba; Benedetto Molinari; José L. Torres
  14. Quarterly Projection Model for Croatia By Rafael Ravnik; Nikola Bokan

  1. By: Yasuo Hirose (Faculty of Economics, Keio University)
    Abstract: Benhabib et al. (2001) argue that there exists a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, positive shocks to households' preferences and wage markup, and a negative shock to monetary policy do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that sunspot shocks have a limited effect on Japan's output fluctuations and rather contribute to stabilizing the economy after the global financial crisis.
    Keywords: Deflation, Zero interest rate, Equilibrium indeterminacy, Bayesian estimation
    JEL: E31 E32 E52
    Date: 2018–09–10
  2. By: Epstein, Brendan; Finkelstein Shapiro, Alan
    Abstract: The degree of bank competition as well as firms’ and households’ participation in the domestic banking system differ considerably in emerging economies (EMEs) relative to advanced economies (AEs). We build a small-open-economy model with endogenous firm entry, monopolistic banks, household and firm heterogeneity in par- ticipation in the banking system, and labor search to analyze the labor market and aggregate consequences of financial participation and banking reforms in EMEs. We find that there is a pre-reform threshold of firm participation in the banking system below which reform implementation leads to sharper unemployment and aggregate fluctuations amid foreign interest rate and aggregate productivity shocks. Our find- ings suggest that comprehensive banking reforms that foster household participation and bank competition in tandem can reduce labor market and aggregate volatility, but only under a high-enough pre-reform level of firm participation in the banking system and a non-negligible increase in bank competition.
    Keywords: Emerging economies, structural reforms, foreign interest rate shocks, business cycles, banking sector, unemployment, financial participation.
    JEL: E24 E32 E44 F41 G21
    Date: 2017
  3. By: Javier Andrés (University of Valencia); José E. Boscá (University of Valencia and FEDEA); Javier Ferri (University of Valencia and FEDEA); Cristina Fuentes-Albero (Federal Reserve Board of Governors)
    Abstract: Using households’ balance sheet composition in the Panel Survey of Income Dynamics, we identify six household types. Since 1999, there has been a decline in the share of patient households and an increase in the share of impatient households with negative wealth. Using a six-agent New Keynesian model with search and matching frictions, we explore how changes in households’ shares affect the transmission of government spending shocks. We show that the relative share of households in the left tail of the wealth distribution plays a key role in the aggregate marginal propensity to consume, the magnitude of fiscal multipliers, and the distributional consequences of government spending shocks. While the output and consumption multipliers are positively correlated with the share of households with negative wealth, the size of the employment multiplier is negatively correlated. Moreover, our calibrated model delivers jobless fiscal expansions.
    Keywords: panel survey of income dynamics, household balance sheet, fiscal policy, six-agent New Keynesian model, search and matching.
    JEL: E21 E62
    Date: 2018–10
  4. By: Fève, Patrick; Moura, Alban; Pierrard, Olivier
    Abstract: We solve a version of the analytical Real Business Cycle (RBC) model with a predetermined rate of return on household saving. The solution differs from that of the benchmark RBC model along two dimensions: (i) Policy functions depend on the variance of the technology shock. (ii) There is a suboptimal pattern of excess saving. We discuss the economic intuition underlying these properties. We also demonstrate that unconditional welfare can be higher in the suboptimal model with predetermined interest rates, providing a clear illustration of the pitfall with unconditional welfare comparisons.
    Keywords: RBC model; predetermined interest rates; over-saving; conditional and unconditional welfare
    JEL: E21 E32 E43
    Date: 2018–09
  5. By: Victor Ortego-Marti (Department of Economics, University of California Riverside); Miroslav Gabrovski (University of Hawaii at Manoa)
    Abstract: This paper develops a model of the housing market with search and credit frictions. The interaction between the two frictions gives rise to a novel channel through which the financial sector affects prices and liquidity in the housing market. Furthermore, an interesting feature of the model is that both frictions combined lead to multiple equilibria. A numerical exercise suggests that credit shocks have a relatively larger impact on mortgage debt and liquidity than on prices.
    Keywords: Housing market; Credit Frictions; Search and Matching; Multiple Equilibria; Mort- gages
    JEL: E2 E32 R21 R31
    Date: 2018–09
  6. By: Sergey Ivashchenko (The Institute of Regional Economy Problems (Russian Academy of Sciences), St. Petersburg, Russia; National Research University Higher School of Economics, St. Petersburg, Russia; The Faculty of Economics of Saint-Petersburg State University, St. Petersburg, Russia and Financial Research Institute, Ministry of Finance, Russian Federation, Moscow, Russia.); Semih Emre Çekin (Department of Economics, Turkish-German University, Istanbul, Turkey); Kevin Kotzé (School of Economics, University of Cape Town, Rondebosch, South Africa.); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    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).
    Keywords: Regime-switching, second-order approximation, non-linear MS-DSGE estimation, forecasting
    JEL: C13 C32 E37
    Date: 2018–09
  7. By: Pierre-Richard Agénor
    Abstract: Interactions between knowledge and health are studied in a three-period overlapping generations model with health persistence. Reproductive agents face a non-zero probability of death in adulthood. In addition to working, adults allocate time to child rearing. Growth dynamics are shown to depend in critical ways on the externalities associated with knowledge and health. Depending on the strength of these externalities, the best policy to improve education outcomes may be to spend relatively more on children's health. Trade-offs between education and health spending can be internalized by setting the optimal composition of expenditure so as to maximize the growth rate. With an endogenous adult survival rate, multiple growth paths may emerge. A reallocation of public spending from education to health may shift the economy from a low-growth equilibrium to a high-growth path.
    Date: 2018
  8. By: Chakraborty, Kamalika; Chakraborty, Bidisha
    Abstract: This paper builds an overlapping generations household economy model where child labour is present. We argue that the degree of parental altruism is determined by the level of schooling of the parent. A more educated parent has more willingness to invest in human capital formation of child. These differences in preferences of parent towards offspring’s schooling bear significant effects on the long run dynamics of schooling. In this context, we study the efficacy of child labour ban vis-a-vis education subsidy in enhancing schooling and reducing child labour. In an extension of the basic model, we also study the dynamics of schooling in the presence of learning by doing effect in unskilled work.
    Keywords: child labour, schooling, human capital, child labour ban, education subsidy
    JEL: I21 J22 J24 J82
    Date: 2018–09–29
  9. By: Michael Preischl; Stefan Thonhauser
    Abstract: Complementing existing results on minimal ruin probabilities, we minimize expected discounted penalty functions (or Gerber-Shiu functions) in a Cramer-Lundberg model by choosing optimal reinsurance. Reinsurance strategies are modelled as time dependant control functions, which leads to a setting from the theory of optimal stochastic control and ultimately to the problem's Hamilton-Jacobi-Bellman equation. We show existence and uniqueness of the solution found by this method and provide numerical examples involving light and heavy tailed claims and also give a remark on the asymptotics.
    Date: 2018–09
  10. By: Arseneau, David; Epstein, Brendan
    Abstract: We study the role of labor market mismatch in the adjustment to a trade liberalization that results in the offshoring of high-tech production. Our model features two-sided heterogeneity in the labor market: high- and low-skilled workers are matched in a frictional labor market with high- and low-tech frms. Mismatch employment occurs when high-skilled workers choose to accept a less desirable job in the low-tech industry. The main result is that this type of job displacement is actually benefcial for the labor market in the country doing the o¤shoring. The reason is that mismatch allows this economy to reallocate domestic high-skilled labor across both high- and low-tech industries. In doing so, this reallocation dampens both the increase in the aggregate unemployment rate and the decline in aggregate wages that come as a consequence of shifting domestic production abroad. From a policy perspective, this result is perhaps counter-intuitive because it suggests that some degree of job dislocation is actually desirable as it helps facilitate adjustment in the labor market following a trade liberalization.
    Keywords: search and matching; unemployment; vacancies; trade.
    JEL: E24 F16 J63
    Date: 2017
  11. By: Sun, Tianyu; Chand, Satish; Sharpe, Keiran
    Abstract: This paper investigates the effect of demographic changes on land prices in urban China using an Overlapping Generation (OLG) model. The model suggests that the rapid rise in land prices could be explained by the rise in per capita income and demographic changes. This finding is validated by fitting the historical data of China. We then simulate land price dynamics for China from 2000 to 2100. The simulation indicates that the rate of rising in land prices is softening. From 2035 to 2055, the effect of demographic changes on urban land prices in China will be close to zero. After 2055, the effect will turn to negative until the end of this century; however, a meltdown is unlikely.
    Keywords: Aging Population; OLG Model; Urban Land Prices; Forecast
    JEL: E21 E31 J11 R21 R31
    Date: 2018–06–26
  12. By: Fabian Kindermann (Universität Bonn); Lukas Mayr (University of Essex); Dominik Sachs (University of Munich)
    Abstract: The taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future labor income tax revenue on top of direct bequest tax revenue. We first show in a theoretical model that a simple back-of-the-envelope calculation, based on existing estimates for the reduction in earnings after wealth transfers, fails: the marginal propensity to earn out of unearned income is not a sufficient statistic for the calculation of this effect because (i) heirs anticipate the reduction in net bequests and adjust their labor supply already prior to inheriting, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to the implied change in their distribution of net bequests. We quantitatively elaborate the size of the overall revenue effect due to labor supply changes of heirs by using a state of the art life-cycle model that we calibrate to the German economy. Besides the joint distribution of income and inheritances, quasi-experimental evidence regarding the size of wealth effects on labor supply is a key target for this calibration. We find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 9 Cents of labor income tax revenue (in net present value) through higher labor supply of (non-) heirs.
    Keywords: bequests, taxation, life-cycle, Labor Supply, dynamic scoring
    JEL: C68 D91 H22 H31 J22
    Date: 2018–09
  13. By: Gonzalo F. de-Córdoba (University of Malaga, Spain); Benedetto Molinari (University of Malaga, Spain; Rimini Centre for Economic Analysis); José L. Torres (University of Malaga, Spain)
    Abstract: This paper provides a twofold contribution. First, it proposes a synthetic and visual indicator to assess public debt sustainability. This indicator summarizes in a single diagram the linkage between economic activity, government’s budget, and the maximum amount of public debt that is sustainable in the long run. The backing theory is a neoclassical growth model augmented with endogenous tax revenues, disaggregated public spending, different production technologies for public and private goods, non-atomistic wage setters in public labor (unions), and a fully specified maturity curve for public bonds. The second contribution of the paper is to develop and present a stand-alone software that analyzes public debt sustainability in response to variations of fiscal policy. This toolkit is useful for managing public debt or to place an additional constraint on government’s budget. We provide an example of its usage for the emblematic case of Greece during the last public debt crisis.
    Keywords: Fiscal policy, Public debt sustainability, Endogenous Tax revenues, DSGE model, Debt-dependent government spending, Python
    JEL: E13 H61 E62 H63 H81 H30
    Date: 2018–09
  14. By: Rafael Ravnik (The Croatian National Bank, Croatia); Nikola Bokan (European Central Bank)
    Abstract: This paper provides the documentation for a Quarterly Projection Model (QPM) used in regular forecasting exercises in the Croatian National Bank. The proposed model is a reduced-form representation of an Open Economy New Keynesian general equilibrium model, expanded with some ad hoc features in order to capture empirical evidence about the Croatian economy. Special attention is paid to open economy features of the model, financial stability issues related to the high degree of credit euroization and monetary policy modeling. The main contribution to the existing literature is the monetary policy rule, which is represented by an exchange rate reaction function with a slow-moving exchange rate target. The simulation and forecasting exercises conducted in this paper show that the model is able to produce precise forecasts of the main macroeconomic variables and to explain important relationships and the transmission mechanisms of the Croatian economy.
    Keywords: projection model, unconventional monetary policy rule, nominal exchange rate, euroization
    JEL: E37 E47 E52 F33 F41 H68
    Date: 2018–09

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