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on Dynamic General Equilibrium |
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Issue of 2018‒12‒03
eighteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Grajales Olarte, Anderson (Tilburg University, School of Economics and Management) |
| Abstract: | The dissertation aims to shed light on the identification, measurement, macrodynamic consequences and policy implications of nominal wage rigidity. In the first chapter, a New-Keynesian DSGE model with heterogeneity in price and wage setting behavior is estimated using Bayesian techniques for the United States economy from 1955 to 2008. The estimation results show the relevance of heterogeneity in wage setting among households. Qualitative and quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and wage inflation, are identified. Standard New Keynesian model with only Calvo-type wage rigidity fails to achieve these features. In the second chapter, the stability and welfare effects of greater wage flexibility in an economy with limited asset market participation (LAMP) are analyzed. The results show that once LAMP is considered, greater wage flexibility increases the volatility of key macroeconomic variables. The volatility increases even more when the zero lower bound restricts the monetary policy. In a context of LAMP, greater wage flexibility is welfare improving only for implausible initial high degrees of wage rigidity; but the gains are small. Except that extreme case, greater wage flexibility reduces welfare when even a small fraction of households are financially constrained. In the third chapter, nominal wage rigidity in the Netherlands during the Great Recession is studied. The data used has three unique features: high-frequency, high-quality, and high coverage. Substantial heterogeneity in the frequency of wage changes due to explicit terms of the labor contract was found, and also between industries, year and months. It was found that wage changes have a time and state dependency component. The response of wage changes to the time and state component is heterogeneous across the different type of contracts. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:990778b6-974d-45bd-a294-64d47e0921c4&r=dge |
| By: | Ferreira, Pedro Cavalcanti; Parente, Rafael Machado |
| Abstract: | We study, in a life-cycle economy with three sectors - formal, informal and public – and endogenous retirement, the macroeconomic and occupational impacts of social security reforms in an economy with multiple pension systems. In a model calibrated to Brazil, we simulate and assess the long-run impact of reforms being discussed and/or implemented in different economies. Among them, the unification of pension systems and the increase of minimum retirement age. These reforms are found to affect the decision to apply to a public job, savings and skill composition across sectors. They also lead to higher output, less informality and welfare gains. |
| Date: | 2018–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:803&r=dge |
| By: | Górajski Mariusz (Faculty of Economics and Sociology, University of Lodz); Kuchta Zbigniew (Faculty of Economics and Sociology, University of Lodz) |
| Abstract: | This paper presents a new approach to measure the parameter uncertainty for optimal simple monetary policy rules in the New Keynesian dynamic stochastic general equilibrium models. More precisely, we propose a new algorithm which enables to directly introduce parameter uncertainty into the optimal simple precommitment rule problem. As a result we find distributions of the optimal monetary policy reactions and the minimized welfare losses. To compare the distributions of the monetary policy parameters and the welfare losses we apply the first order stochastic dominance ordering (SD1). The SD1 inequality between the probability distribution is verified by means of the Kolmogorov-Smirnov test. The proposed algorithms are applied to the Erceg, Henderson and Levine (2000) small-scale closed economy model estimated for the Polish economy. For the welfare-loss-minimizing central bank, we examine three types of the dynamic specification of its policy rule: backward-, current- and forward-looking. Finally, for a given set of optimal and implementable monetary policy rules, we show that the fully specified forward-looking monetary policy rule with interest rate smoothing mechanism minimizes the welfare-loss in the sense of the stochastic ordering SD1. |
| Keywords: | optimal monetary policy, DSGE, uncertainty |
| JEL: | E47 E52 |
| Date: | 2018–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:ann:wpaper:6/2018&r=dge |
| By: | Rujiwattanapong, W. Similan |
| Abstract: | This paper quantifies the effects of the increasing maximum unemployment insurance (UI) duration during recessions on the drop in the correlation between output and labour productivity in the U.S. since the early 1980’s - the so-called productivity puzzle. Using a general equilibrium search and matching model with stochastic UI duration, heterogeneous match quality, variable search intensity and on-the-job search, I demonstrate that the model can explain over 40 percent of the drop in this correlation (28 percent when the Great Moderation is taken into account). More generous UI extensions during recent recessions cause workers to be more selective with job offers and lower job search effort. The former channel raises the overall productivity in bad times. The latter prolongs UI extensions since in the U.S. they are triggered by high unemployment. |
| Keywords: | business cycles; labour productivity; unemployment insurance |
| JEL: | E32 J24 J64 J65 |
| Date: | 2018–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:90872&r=dge |
| By: | Eleni Iliopulos; Erica Perego; Thepthida Sopraseuth (Université de Cergy-Pontoise, THEMA) |
| Abstract: | We study the international transmission of shocks when agents form expectations under adaptive learning and imperfect information. To this aim we consider a two-country model featuring financial frictions, nominal rigidities, learning and Home information bias (as a source of information imperfection). We show that the more pronounced the Home information bias, the less agents track the international transmission of shocks, as it would otherwise be the case under rational expectations. The model succeeds in matching the low business cycle synchronization of consumption, while generating a positive output co-movement. In doing so, the model takes the theory closer to the data with respect to the output-consumption co-movement anomaly. The model also exhibits departure from the Uncovered Interest rate Parity. |
| Keywords: | financial frictions, interdependent economies, learning, uncovered interest rate parity. |
| JEL: | D84 E44 E51 F41 F42 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2018-13&r=dge |
| By: | Colla-De-Robertis, Esteban; Da-Rocha, Jose-Maria; García-Cutrin, Javier; Gutiérrez, María-José; Prellezo, Raul |
| Abstract: | What would have happened if a relatively looser fisheries policy had been implemented in the European Union (EU)? Using Bayesian methods a Dynamic Stochastic General Equilib- rium (DSGE) model is estimated to assess the impact of the European Common Fisheries Policy (CFP) on the economic performance of a Galician (north-west of Spain) fleet highly dependant on the EU southern stock of hake. Our counterfactual analysis shows that if a less effective CFP had been implemented during the period 1986-2012, ‘fishing opportunities” would have increased, leading to an increase in labor hours of 4.87%. However, this increase in fishing activity would have worsened the profitability of the fleet, dropping wages and rental price of capital by 6.79% and 0.88%, respectively. Welfare would also be negatively affected since, in addition to the increase in hours worked, consumption would have reduced by 0.59%. |
| Keywords: | CFP, Bayesian Estimation, DSGE, Spanish Fleet |
| JEL: | Q22 |
| Date: | 2018–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:89944&r=dge |
| By: | Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Philton Makena (Department of Economics, University of Pretoria, Pretoria, South Africa) |
| Abstract: | We provide an alternative theoretical explanation to the tax evasion-inflation relationship by endogenizing the discount factor in a standard overlapping generations endowment economy. When the discount factor is a positive function of non-productive public expenditure, then inflation is bound to increase seigniorage, leading to an increase in public expenditure. In consequence, old age consumption increases in importance such that tax evasion among young-age agents increases to enhance the interest income from savings. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201872&r=dge |
| By: | Yang, Guanyi |
| Abstract: | How much does inequality in life depend on conditions established at age 18? What role does post-18 higher education play? I use an education choice model with exogenous conditions from family wealth, established human capital at age 18 and shocks to human capital to examine these questions. Family wealth and established human capital at age 18 determine the post-18 education choices. Education builds up human capital and reduces future earnings volatility. Absent this transmission channel, previous studies dramatically underestimate the importance of initial family wealth in explaining lifetime earnings inequality. My model finds that family wealth at age 18 explains up to 15% of lifetime earnings inequalities, and human capital at age 18 explains 72%. Policy counterfacutals that encourage college education by providing financial aid reduce inequality and improve welfare. |
| Keywords: | Lifecycle inequality, college enrollment, human capital accumulation, idiosyncratic uncertainty, general equilibrium, heterogeneous agents, quantitative macroeconomics. |
| JEL: | C6 D31 D91 E24 E64 J22 J24 J31 |
| Date: | 2018–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:89638&r=dge |
| By: | Frédéric Dufourt (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Alain Venditti (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE & EDHEC Business School); Rémi Vives (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE) |
| Abstract: | We investigate the extent to which standard one sector RBC models with positive externalities and variable capacity utilization can account for the large hump- shaped response of output when the model is submitted to a pure sunspot shock. We refine the Benhabib and Wen (2004) model considering a general type of additive separable preferences and a general production function. We provide a detailed theoretical analysis of local stabilities and local bifurcations as a function of various structural parameters. We show that, when labor is infinitely elastic, local indeterminacy occurs through Flip and Hopf bifurcations for a large set of values for the elasticity of intertemporal substitution in consumption, the degree of increasing returns to scale and the elasticity of capital- labor substitution. Finally, we provide a detailed quantitative assessment of the model and conclude with mixed results. We show that although the model is able theoretically to generate a hump-shaped dynamics of output following an i.i.d. sunspot shock under realistic parameter values, the hump is too persistent for the model to be considered fully satisfactory from an empirical point of view. |
| Keywords: | Indeterminacy, real business cycles, sunspot shock, capacity utilization, externalities |
| JEL: | C62 E32 O41 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1827&r=dge |
| By: | Aitor Erce; Enrico Mallucci |
| Abstract: | Governments issue debt both domestically and abroad. This heterogeneity introduces the possibility for governments to operate selective defaults that discriminate across investors. Using a novel dataset on the legal jurisdiction of sovereign defaults that distinguishes between defaults under domestic law and default under foreign law, we show that selectiveness is the norm and that imports, credit, and output dynamics are different around different types of default. Domestic defaults are associated with contractions of credit and are more likely in countries with smaller credit markets. In turn, external defaults, are associated with a sharp contraction of imports and are more likely in countries with depressed import markets. Based on these regularities, we construct a dynamic stochastic general equilibrium model that we calibrate to Argentina. We show that the model replicates well the behavior of the Argentinean economy and rationalizes these empirical findings. |
| Keywords: | Sovereign Default ; Selective Defaults ; Domestic Debt ; External Debt ; Credit ; Imports |
| JEL: | F34 F41 H63 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1239&r=dge |
| By: | Wei Cui (University College London (UCL); Centre for Macroeconomics (CFM)); Vincent Sterk (University College London (UCL); Centre for Macroeconomics (CFM)) |
| Abstract: | Is Quantitative Easing (QE) an effective substitute for conventional monetary policy? We study this question using a quantitative heterogeneous-agents model with nominal rigidities, as well as liquid and partially liquid wealth. The direct effect of QE on aggregate demand is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to the model and empirical studies. A comparison of optimal QE and interest rate rules reveals that QE is indeed a very powerful instrument to anchor expectations and to stabilize output and inflation. However, QE interventions come with strong side effects on inequality, which can substantially lower social welfare. A very simple QE rule, which we refer to as Real Reserve Targeting, is approximately optimal from a welfare perspective when conventional policy is unavailable. We further estimate the model on U.S. data and find that QE interventions greatly mitigated the decline in output during the Great Recession. |
| Keywords: | Monetary policy, Large-scale asset purchases, HANK |
| JEL: | E21 E30 E50 E58 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1830&r=dge |
| By: | Kyle Herkenhoff (University of Minnesota); Jeremy Lise (University College London); Guido Menzio (University of Pennsylvania); Gordon Phillips (Dartmouth College Tuck School of Business) |
| Abstract: | The effect of coworkers on the learning and the productivity of an individual is measured combining theory and data. The theory is a frictional equilibrium model of the labor market in which production and the accumulation of human capital of an individual are allowed to depend on the human capital of coworkers. The data is a matched employer-employee dataset of US firms and workers. The measured production function is supermodular. The measured human capital function is non-linear: Workers catch up to more knowledgeable coworkers, but are not dragged down by less knowledgeable ones. The market equilibrium features a pattern of sorting of coworkers across teams that is inefficiently positive. This inefficiency results in low human capital individuals having too few chances to learn from more knowledgeable coworkers and, in turn, in a stock of human capital and a flow of output that are inefficiently low. |
| Keywords: | human capital, knowledge diffusion, search frictions |
| JEL: | E24 J24 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2018-088&r=dge |
| By: | Stephan Lauermann; Georg Nöldeke; Thomas Tröger |
| Abstract: | Most of the literature that studies frictional search-and-matching models with heterogeneous agents and random search investigates steady states. Steady state requires that the flows of agents into and out of the population of unmatched agents balance. Here, we investigate the structure of this steady-state condition. We build on the ``fundamental matching lemma'' for quadratic search technologies in Shimer and Smith (2000) and establish the existence, uniqueness, and comparative-static properties of the solution to the steady-state condition for any search technology that satisfies minimal regularity conditions. |
| Keywords: | Search, Matching, Steady States |
| JEL: | C78 D83 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_055_2018&r=dge |
| By: | Michèle Belot; Philipp Kircher; Paul Muller |
| Abstract: | We study how job seekers respond to wage announcements by assigning wages randomly to pairs of otherwise similar vacancies in a large number of professions. High wage vacancies attract more interest, in contrast with much of the evidence based on observational data. Some applicants only show interest in the low wage vacancy even when they were exposed to both. Both findings are core predictions of theories of directed/competitive search where workers trade off the wage with the perceived competition for the job. A calibrated model with multiple applications and on-the-job search induces magnitudes broadly in line with the empirical findings. |
| Keywords: | online job search, directed search, wage competition, field experiments |
| JEL: | J31 J63 J64 C93 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7302&r=dge |
| By: | Michele Dell'Era; Luca David Opromolla; Luís Santos-Pinto |
| Abstract: | This paper studies the impact of optimism on occupational choice using a general equilibrium framework. The model shows that optimism has four main qualitative effects: it leads to a misallocation of talent, drives up input prices, raises the number of entrepreneurs, and makes entrepreneurs worse off. We calibrate the model to match U.S. manufacturing data. This allows us to make quantitative predictions regarding the impact of optimism on occupational choice, input prices, the returns to entrepreneurship, and output. The calibration shows that optimism can explain the empirical puzzle of the low mean returns to entrepreneurship compared to average wages. |
| Keywords: | general equilibrium, entrepreneurship, optimism |
| JEL: | D50 H21 J24 L26 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7300&r=dge |
| By: | Gilles Lafforgue (Toulouse Business School); Luc Rouge (Toulouse Business School) |
| Abstract: | We present a general equilibrium growth model in which the use of a non renewable resource yields waste. Recycling waste produces materials of poor quality. These materials can be reused for production only once a dedicated R&D activity has made their quality reach a certain minimum threshold. The economy then switches to a fully recycling regime. We refer to this switch as the technological breakthrough. We analyze the optimal trajectories of the economy and interpret the Ramsey-Keynes and Hotelling conditions in this specific context. We characterize the determinants of the date of the breakthrough, which is endogenous, as well as the discontinuity in the variables' paths that is induced by this breakthrough. We show, in particular, that the availability of a recycling technology leads to an over-exploitation of the resource and possibly to lower levels of consumption before the breakthrough. We also find that the breakthrough can have a negative impact on utility over a finite period. |
| Keywords: | Recycling, Non-renewable resource, Technical change, Growth, |
| JEL: | C61 O44 Q32 Q53 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2018.14&r=dge |
| By: | Cantore, Christiano; Ferroni, Filippo; León-Ledesma, Miguel A. |
| Abstract: | The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but with a wide variety of NK models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken down. |
| Keywords: | labor share; monetary policy shocks; DSGE models |
| JEL: | C52 E23 E32 |
| Date: | 2018–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:90873&r=dge |
| By: | Marta Aloi; Huw D. Dixon; Anthony Savagar |
| Abstract: | We develop a model of sluggish firm entry to explain short-run labor responses to technology shocks. We show that the labor response to technology and its persistence depend on the degree of returns to labor and the rate of firm entry. Existing empirical results support our theory based on short-run labor responses across US industries. We derive closed-form transition paths that show the result occurs because labor adjusts instantaneously whilst firms are sluggish, and closed-form eigenvalues show that stricter entry regulation results in slower convergence to steady state. |
| Keywords: | deregulation, dynamic entry, endogenous entry costs |
| JEL: | E20 L11 O33 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7275&r=dge |