nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2018‒10‒29
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Capital Utilization and Search Unemployment in Dynamic General Equilibrium By Ian King; Frank Stähler
  2. Bubble on Real Estate: The Role of Altruism and Fiscal Policy By Lise Clain-Chamosset-Yvrard; Thomas Seegmuller
  3. Money, Inflation, and Unemployment in the Presence of Informality By Ait Lahcen, Mohammed
  4. Optimal fiscal policy with Epstein-Zin preferences and utility-enhancing government services: lessons from Bulgaria (1999-2016) By Vasilev, Aleksandar
  5. The government spending multiplier, fiscal stress, and the zero lower bound By Strobel, Felix
  6. Bayesian estimation of DSGE models: identification using a diagnostic indicator By Chadha, Jagjit S.; Shibayama, Katsuyuki
  7. Endogenous Time-Varying Volatility and Emerging Market Business Cycles By Jan-Philipp Dueber
  8. The Fiscal Theory of the Price Level in non-Ricardian Economy By Rym Aloui; Michel Guillard
  9. Closing Gender Gaps in India: Does Increasing Womens’ Access to Finance Help? By Purva Khera
  10. We develop a VAR that allows the estimation of the impact of monetary policy shocks on volatility. Estimates for the US suggest that an increase in the policy rate by 1% is associated with a rise in unemployment and inflation volatility of about 15%. Using a New Keynesian model, with search and matching labour frictions and Epstein-Zin preferences we show that these volatility effects are driven by the coexistence of agents' fears of unemployment and concerns about the (in) ability of the monetary authority to reverse deviations from the policy rule with the impact magnified by the agents' preferences. By Mumtaz, Haroon; Theodoridis, Konstantinos
  11. Technology and the Future of Work By Adrian Peralta-Alva; Agustin Roitman
  12. Falling Behind: Has Rising Inequality Fueled the American Debt Boom? By Drechsel-Grau, Moritz; Greimel, Fabian
  13. Risk Premiums, Nominal Rigidities and Limited Asset Market Participation By Lorenzo, Menna; Patrizio, Tirelli;
  14. An RBC model with Epstein-Zin (non-expected-utility) recursive preferences: lessons from Bulgaria (1999-2016) By Vasilev, Aleksandar
  15. Dynamic Scoring: An Assessment of Fiscal Closing Assumptions By Rachel, Moore; Pecoraro, Brandon
  16. Exchange rate pass-through into euro area inflation. An estimated structural model By Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  17. Unemployment Volatility in a Behavioural Search Model By Martin, Chris; Wang, Bingsong
  18. Hours risk, wage risk, and life-cycle labor supply By Jessen, Robin; König, Johannes
  19. How the Financial Market Can Dampen the Effects of Commodity Price Shocks By Myunghyun Kim
  20. Parental Time Investment and Intergenerational Mobility By Minchul Yum
  21. The Discrete Nerlove-Arrow Model: Explicit Solutions By Marc Artzrouni; Patrice Cassagnard
  22. Interest rate spreads and forward guidance By Bredemeier, Christian; Kaufmann, Christoph; Schabert, Andreas
  23. Fiscal Stimulus at the Zero Lower Bound: the role of expectations and policy coordination By Cyntia Freitas Azevedo
  24. Time varying cointegration and the UK Great Ratios By Kapetanios, George; Millard, Stephen; Price, Simon; Petrova, Katerina
  25. Sustainable Debt By Bloise, Gaetano; Polemarchakis, Herakles; Vailakis, Yiannis
  26. The Role of Shadow Banking for Financial Regulation By Gebauer, Stefan; Mazelis, Falk

  1. By: Ian King (School of Economics, The University of Queensland); Frank Stähler (School of Business and Economics, University of Tübingen)
    Abstract: We present a dynamic general equilibrium model in which both unemployment and capital utilization are determined endogenously in an environment with directed search frictions. The model allows for proportions of both labor and capital to be idle in equilibrium, where the degree of capital utilization determines its depreciation. We show that, under certain conditions, multiple steady state equilibria exist. In stable equilibria, both unemployment and capital utilization rates decline as productivity increases.
    Keywords: Search unemployment, capital utilization, multiple equilibria
    JEL: E24
  2. By: Lise Clain-Chamosset-Yvrard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    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
    Date: 2018–09
  3. By: Ait Lahcen, Mohammed
    Abstract: This paper studies the impact of informality on the long-run relationship between inflation and unemployment in developing economies. I present a dynamic general equilibrium model with informality in both labor and goods markets and where money and credit coexist. An increase in inflation affects unemployment through two channels: the entry channel (size) and the hiring channel (composition). On one hand, higher inflation reduces the surplus of monetary trades thus lowering firms entry and increasing unemployment. On the other hand, it shifts firms hiring decision from high separation informal jobs to low separation formal jobs thus reducing unemployment. The net effect depends on the difference in separation rates and the availability of credit in formal transactions. The model is calibrated to match certain long-run statistics of the Brazilian economy. Numerical results indicate that inflation has a small negative effect on unemployment while producing a significant impact on labor allocation between formal and informal jobs. These results point to the importance of accounting for informality when considering the inflation-unemployment trade-off in the conduct of monetary policy.
    Keywords: informality,Phillips curve,money,labor,search and matching
    JEL: E26 E41 J64 H26 O17
    Date: 2018
  4. By: Vasilev, Aleksandar
    Abstract: This paper explores the effects of fiscal policy in an economy with Epstein-Zin (1989, 1991) preferences, with indirect (consumption) taxes, and all (labor and capital) in- come being taxed at the same rate. To this end, a dynamic general-equilibrium model, calibrated to Bulgarian data (1999-2016), is augmented with a government sector. Two regimes are compared and contrasted - the exogenous (observed) vs. optimal policy (Ramsey) case. The focus of the paper is on the relative importance of consumption vs. income taxation, as well as on the provision of utility-enhancing public services. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the utility-enhancing public services, which are now 25% higher; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is more than fifty percent higher, as compared to the exogenous policy case.
    Keywords: Epstein-Zin preferences,consumption tax,income tax,general equilibrium,optimal (Ramsey) fiscal policy,Bulgaria
    JEL: D58
    Date: 2018
  5. By: Strobel, Felix
    Abstract: The recent sovereign debt crisis in the Eurozone was characterized by a monetary policy, which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and several countries, which faced high risk spreads on their sovereign bonds. How is the government spending multiplier affected by such an economic environment? While prominent results in the academic literature point to high government spending multipliers at the ZLB, higher public indebtedness is often associated with small government spending multipliers. I develop a DSGE model with leverage constrained banks that captures both features of this economic environment, the ZLB and fiscal stress. In this model, I analyze the effects of government spending shocks. I find that not only are multipliers large at the ZLB, the presence of fiscal stress can even increase their size. For longer durations of the ZLB, multipliers in this model can be considerably larger than one.
    Keywords: Government spending multiplier,Fiscal stress,Zero lower bound,Financial frictions
    JEL: E32 E44 E62 H30 H60
    Date: 2018
  6. By: Chadha, Jagjit S.; Shibayama, Katsuyuki
    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 identiÖed, the precision of the posterior should improve as the (artiÖcial) 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 Woutersí(2007) DSGE model of the US economy, and suggest how to implement this indicator on DSGE models
    Keywords: Bayesian estimation; dynamic stochastic general equilibrium models; identification.
    JEL: C51 C52 E32
    Date: 2018–09
  7. By: Jan-Philipp Dueber
    Abstract: Time-varying volatility plays a crucial role in understanding business cycles in emerging market economies. However, the literature treats volatility as an exogenous process. This paper endogenizes time-varying volatility in the debt premium and total factor productivity into a standard small open economy model and assesses the quality of the model by comparing it to emerging market data. An additional volatility channel that operates through the debt premium on the interest rate faced by a small open economy can generate countercyclical net exports and excess volatility in consumption as observed in data on emerging market business cycles.
    Keywords: Endogenous Volatility, DSGE, Emerging Markets
    JEL: E32 F41 F44
    Date: 2018–10
  8. By: Rym Aloui (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824. 93, Chemin des Mouilles, F-69130 Ecully, France); Michel Guillard (EPEE and TEPP (FR CNRS 3126), Université d'Evry Val d' Essonne, Boulevard François Mitterrand, 91025, Evry, France.)
    Abstract: The Fiscal Theory of the Price Level (FTPL) is an important theory that recognizes the interaction between monetary and fiscal policy. In its simplest form, the FTPL assumes that the government commits to a fixed and exogenous present value of primary surpluses implying the adjustment of the price level to equate the real government debt to the present value of primary surpluses. The FTPL relies on the presence of primary surpluses to work. We show that this condition is not necessary in a non-Ricardian economy. The FTPL still hold even when exogenous primary surpluses are null. We consider an overlapping generations of infinitely-lived dynasties model with simple fiscal and monetary policies, where the effective lower bound on nominal interest rates is taken into account. A bubble-like component of government debt appears inducing the determination of the price level by the fiscal policy, when the effective lower bound on nominal interest rates is binding and even when the government primary surpluses equal zero.
    Keywords: Wealth Effects, Liquidity Trap, Deflation, Zero Lower Bound, Fiscal Theory of the Price Level, Monetary and Fiscal Rules, Public Debt
    JEL: E63 E52
    Date: 2018
  9. By: Purva Khera
    Abstract: Gender gaps in womens’ economic opportunities—labor market and entrepreneurship—have remained high in India. Lack of adequate collateral limits women entrepreneurs’ ability to access formal finance, leaving them to rely on informal sources, constraining their growth. A small-open economy DSGE model is built to investigate the long-run macroeconomic impacts from closing gender gaps in financial access. Results suggest that an increase in women entrepreneurs access to formal credit results in higher female entrepreneurship and employment, which boosts India’s output by 1.6 percent. However, regulations and gender-specific constraints in the labor market limit potential gains as females’ access to quality jobs in the formal sector remains restricted. The paper shows that the factors influencing the number of females are different from those influencing the share of females in formal economic activity. Combining gender-targeted financial inclusion policies with policies that lower constraints on formal sector employment could boost India’s output by 6.8 percent.
    Date: 2018–09–28
  10. By: Mumtaz, Haroon (Queen Mary University); Theodoridis, Konstantinos (Cardiff Business School)
    Keywords: DSGE, Non-Linear SVAR, New Keynesian, Search and Matching Frictions, Epstein-Zin preferences, Stochastic Volatility
    JEL: E30 E40 E52 C11 C13 C15 C50
    Date: 2018–10
  11. By: Adrian Peralta-Alva; Agustin Roitman
    Abstract: This paper uses a DSGE model to simulate the impact of technological change on labor markets and income distribution. It finds that technological advances offers prospects for stronger productivity and growth, but brings risks of increased income polarization. This calls for inclusive policies tailored to country-specific circumstances and preferences, such as investment in human capital to facilitate retooling of low-skilled workers so that they can partake in the gains of technological change, and redistributive policies (such as differentiated income tax cuts) to help reallocate gains. Policies are also needed to facilitate the process of adjustment.
    Keywords: Technological innovation;Labor markets;Employment;Unemployment;Income distribution;Technology, labor markets, income distribution
    Date: 2018–09–28
  12. By: Drechsel-Grau, Moritz; Greimel, Fabian
    Abstract: We want to explain the rise of household debt in the US since 1980. We present a mechanism that is consistent with the following stylized facts: (i) Real mortgage debt, (ii) debt-service-to-income ratios and (iii) house sizes (in sqft) have increased since the 1980 across all income quintiles. This is despite (iv) real incomes have stagnated for the bottom 50% since the 1980s. Our mechanism is based on other-regarding preferences. Rich agents upgrade their houses to match their risen incomes. Poorer agents want to substitute future consumption for a bigger house today (in order to “keep up with the richer Joneses”). Holding prices constant, debt will necessarily increase since houses are durable and require large payment upfront, but only low maintenance costs in the future. We build a tractable model consistent with these facts and extend it to quantitative a model to show that the partial equilibrium results go through in general equilibrium.
    Keywords: household debt,debt boom,social comparisons,consumption network,keeping up with the Joneses
    JEL: D14 D31 E21 E44
    Date: 2018
  13. By: Lorenzo, Menna; Patrizio, Tirelli;
    Abstract: Recent developments in the asset pricing literature show that a combination of technology and distributive shocks can rationalize observed risk premia when firm ownership is concentrated in the hands of few households. We find that distributive shocks are unnecessary when nominal price rigidity is taken into account. Our results are driven by the income redistribution associated to procyclical variations in profit margins when firms ownership is concentrated, prices are sticky and technology shocks hit the economy. In this regard, standard DSGE models that allow for firm ownership concentration have the potential to replicate both business cycle facts and the moments of financial variables.
    Keywords: asset pricing, equity premium, limited asset market participa- tion, business cycle, DSGE, sticky prices.
    JEL: E32 G12
    Date: 2018–10–25
  14. By: Vasilev, Aleksandar
    Abstract: We introduce Epstein-Zin (1989, 1991) preferences into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We investigate the quantitative importance of the presence of "early resolution of uncertainty" motive for the propagation of cyclical fluctuations in Bulgaria. Allowing for Epstein-Zin preferences improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework, e.g., Vasilev (2009).
    Keywords: business cycle fluctuations,Epstein-Zin preferences,Bulgaria
    JEL: E32 E22 E37
    Date: 2018
  15. By: Rachel, Moore; Pecoraro, Brandon
    Abstract: Analysis of fiscal policy changes using general equilibrium models with forward-looking agents typically requires the modeler to assume a counterfactual adjustment to some fiscal instrument in order to achieve the debt sustainability implied by the government's intertemporal budget constraint. Since the fiscal instrument chosen to close the model can induce economic behavior unrelated to the policy change in models where Ricardian Equivalence does not hold, noise may be introduced into the analysis. In this paper we use such an overlapping generations framework to examine the impact of alternative fiscal closing assumptions on projected changes to economic aggregates over the ten-year `budget window' following a change in tax policy, assessing the extent to which the noise associated with a particular fiscal instrument can be mitigated. We find that while quantitative differences in projected macroeconomic activity can be observed across alternative fiscal instruments, these differences tend to shrink as the date that fiscal instruments begin to adjust is delayed into the future. Since the particular fiscal instrument chosen to achieve debt sustainability can then become relatively unimportant, the reliability of policy analysis obtained using this class of models may be improved.
    Keywords: dynamic scoring; fiscal closing assumptions; sustainable fiscal policy
    JEL: C63 E62 H63
    Date: 2018–10–01
  16. By: Lorenzo Burlon; Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the exchange rate pass-through (ERPT) into euro area (EA) inflation by estimating an open economy New Keynesian model with Bayesian methods. In the model ERPT is incomplete because of local currency pricing and distribution services, with the latter allowing to distinguish between ERPT at the border and ERPT at the consumer level. Our main results are the following ones. First, ERPT into EA prices is, in general, high. Second, it is particularly high in correspondence of exchange rate and monetary policy shocks. Third, the EA monetary stance is relevant for ERPT; in particular, ERPT is higher if the stance is accommodative in correspondence of expansionary demand shocks.
    Keywords: exchange rate, import prices, pass-through, monetary policy, euro area.
    JEL: C11 E40 E47 E52 F41
    Date: 2018–09
  17. By: Martin, Chris (University of Bath); Wang, Bingsong (University of Warwick)
    Abstract: Recent evidence that the opportunity cost of employment is pro cyclical implies that existing models based around search frictions in the labour market cannot match the large volatilities of unemployment and vacancies observed in the data. In this paper, we incorporate insights from behavioural economics into the search frictions framework. The resultant model can match observed volatilities even if the opportunity cost is strongly pro cyclical. The key mechanism in the model is that the pro-cyclicality of the opportunity cost has a limited impact on the reference wage of workers ; this feeds through into a limited volatility of the wage and so to a large unemployment volatility
    Keywords: behavioural economics ; search frictions ; unemployment volatilty
    JEL: E23 E32 J23 J30 J64
    Date: 2018
  18. By: Jessen, Robin; König, Johannes
    Abstract: We decompose permanent earnings risk into contributions from hours and wage shocks. In order to distinguish between hours shocks and labor supply reactions to wage shocks we use a life-cycle model of consumption and labor supply. Estimating our model with the Panel Study of Income Dynamics (PSID) shows that both permanent wage and hours shocks play an important role in explaining the cross-sectional variance in earnings growth, but wage risk has greater relevance. Allowing for hours shocks improves the model fit considerably. The empirical strategy allows for the estimation of the Marshallian labor supply elasticity without the use of consumption or asset data. We find this elasticity on average to be negative, but small. The degree of consumption insurance implied by our results is in line with recent estimates in the literature.
    Keywords: earnings risk,wage risk,Frisch elasticity,Marshallian elasticity,consumption insurance
    JEL: D31 J22 J31
    Date: 2018
  19. By: Myunghyun Kim (Economic Research Institute, The Bank of Korea)
    Abstract: Commodities have begun to function as an asset class during the past decade, as trading in commodity derivatives has increased massively since the 2000s. This paper studies the role of commodities as an asset class in accounting for the recently lessened impacts of commodity price shocks on the economy, by constructing a model with financial frictions and with financial intermediaries that own two assets ? tied to commodities as well as to capital. Simulation results of the model show that financial intermediaries¡¯ holdings of commodities as assets have contributed to the recent reduction in the effects of commodity price shocks.
    Keywords: Commodity price shocks, Commodity derivatives
    JEL: E30 E44 Q43
    Date: 2018–09–28
  20. By: Minchul Yum
    Abstract: This paper investigates di¤erences in parental time investment as a determinant of intergenerational persistence of lifetime income. Using a quantitative model that replicates a series of important untargeted aspects of the data including the U.S. income quintile transition matrix, I …nd that the parental time investment channel accounts for nearly half of the observed intergenerational income persistence. Heterogeneity in parental time investment across households strengthens intergenerational association and hinders aggregate e¢ciency. Policy experiments suggest that an e¤ective way of improving intergenerational mobility, aggregate output, and welfare is to narrow discrepancies in the quantity and quality of parental time investments.
    Keywords: Intergenerational elasticity; quintile transition matrix; parental time; college education; misallocation
    JEL: E24 I24 J22
    Date: 2018–10
  21. By: Marc Artzrouni (LMAP - Laboratoire de Mathématiques et de leurs Applications [Pau] - UPPA - Université de Pau et des Pays de l'Adour - CNRS - Centre National de la Recherche Scientifique); Patrice Cassagnard (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)
    Abstract: We use the optimality principle of dynamic programming to formulate a discrete version of the Nerlove-Arrow maximization problem. When the payoff function is concave we derive an explicit solution to the problem. If the time horizon is long enough there is a "transiently stationary" (turnpike) value for the optimal capital after which the capital must decay as the end of the time horizon approaches. If the time horizon is short the capital is left to decay after a first-period increase or decrease depending on the capital's initial value. Results are illustrated with the payoff function µK where K is the capital and 0 0. With this function, the solution is in closed form.
    Keywords: Nerlove-Arrow,dynamic programming,optimization,turnpike
    Date: 2018–09–24
  22. By: Bredemeier, Christian; Kaufmann, Christoph; Schabert, Andreas
    Abstract: We provide evidence that liquidity premia on assets that are more relevant for private agents’ intertemporal choices than near-money assets increase in response to expansionary forward guidance announcements. We introduce a structural specification of liquidity premia based on assets’ differential pledgeability to a basic New Keynesian model to replicate this finding. This model predicts that output and inflation effects of forward guidance do not increase with the length of the guidance period and are substantially smaller than if liquidity premia were neglected. This indicates that there are no puzzling forward guidance effects when endogenous liquidity premia are taken into account. JEL Classification: E32, E42, E52
    Keywords: forward guidance, liquidity premium, unconventional monetary policy
    Date: 2018–10
  23. By: Cyntia Freitas Azevedo
    Abstract: In this article, we discuss the role expectations regarding future policies play in determining the depth of a crisis when the economy hits the zero lower bound on nominal interest rates. We show that when analyzing the impact of a fiscal stimulus during a zero interest rate episode, there is more than just short-run output multipliers. We extend the analysis in Eggertsson (2011) by allowing for a transitional state in which the zero lower bound is no longer binding, but policies can be expected to credibly deviate from their steady-state values. The main result of the paper is that, to have larger positive effects on output, monetary and fiscal policies should last longer than the duration of the shock and be coordinated. This coordination is required not only during the crisis but also in the commitment to future policy actions. It is fundamental to the fiscal authority to be able to respond quickly to the shock, minimizing implementation delays and correctly signaling the duration of the stimulus. We also show that a thoughtful evaluation of a fiscal stimulus in terms of the implied welfare losses should account not only for the effects of policies on short-run output and inflation, but also for the present discounted value of output and inflation in future periods as well
    Date: 2018–10
  24. By: Kapetanios, George; Millard, Stephen; Price, Simon; Petrova, Katerina
    Abstract: We re-examine the great ratios associated with balanced growth models and ask whether they have remained constant over time. We first use a benchmark DSGE model to explore how plausible smooth variations in structural parameters lead to movements in great ratios that are comparable to those seen in the UK data. We then employ a nonparametric methodology that allows for slowly varying coefficients to estimate trends over time. To formally test for stable relationships in the great ratios, we propose a statistical test based on these nonparametric estimators devised to detect time varying cointegrating relationships. Small sample properties of the test are explored in a small Monte Carlo exercise. Generally, we find no evidence for cointegration when parameters are constant, but strong evidence when allowing for time variation. The implications are that in macroeconometric models allowance should be made for shifting long-run relationships, including DSGE models where smooth variation should be allowed in the deep structural relationships.
    Date: 2018–10–18
  25. By: Bloise, Gaetano (Yeshiva University); Polemarchakis, Herakles (University of Warwick); Vailakis, Yiannis (University of Glasgow)
    Abstract: Debt is sustainable at a competitive equilibrium due solely to the reputation of debtors for repayment; that is, even absent collateral or legal sanctions available to creditors. Under incomplete markets, when the rate of interest (net of growth) is recurrently negative, self-insurance is more costly than borrowing, and repayments on loans are enforced by he implicit threat of loss of risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money and, in general, is not valued as a speculative bubble; it is distinct from outside money. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.
    Keywords: Rate of interest ; self-enforcing debt ; reputational debt ; incomplete
    Date: 2018
  26. By: Gebauer, Stefan; Mazelis, Falk
    Abstract: Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999 – 2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. In a counterfactual analysis we compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle.
    Keywords: Macroprudential Regulation,Shadow Banking,Financial Frictions
    JEL: E12 E61 G23 G28
    Date: 2018

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