|
on Dynamic General Equilibrium |
|
Issue of 2018‒12‒10
twenty-six papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Fabio Canetg |
| Abstract: | This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research questions is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-o between a stable in ation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. My main result shows that the central bank is willing to implement past policy commitments if a sucient fraction of agents is not aware of the exact end date of the policy commitment. This nding challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality. |
| Keywords: | optimal monetary policy, strategic deviations, forward guidance |
| JEL: | E42 E52 E58 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1817&r=dge |
| By: | Hess Chung; Taisuke Nakata; Matthias Paustian |
| Abstract: | In this article, we explore the implications of attenuating the power of forward guidance for the optimal conduct of forward guidance policy in a quantitative DSGE model of the U.S. economy. |
| Date: | 2018–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2018-10-19&r=dge |
| By: | José Alves |
| Abstract: | As recognized, taxation is not only an instrument for government to collect revenues from the economic agents but also an instrument of fiscal policy to influence the agents’ behaviour. In this work, we develop a DSGE model to assess the macroeconomic impact of three tax items (taxes on individual income, on firms’ income and on consumption) on the dynamics of both individual tax items and on the aggregate revenues as well. Moreover, we also intend to evaluate how macroeconomic aggregates behave in a presence of stochastic shocks in taxation. |
| Keywords: | DSGE models; Tax effects; Fiscal Policy; Optimal taxation |
| JEL: | D58 E62 H21 H30 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0622018&r=dge |
| By: | Willem Devriendt; Freddy Heylen (-) |
| Abstract: | Demographic change forces governments in all OECD countries to reform the public pension system. Increased sensitivity to rising inequality in society has made the challenge for policy makers only greater. In this paper we evaluate alternative reform scenarios. We employ an overlapping generations model for an open economy with endogenous hours worked, human and physical capital, output, and welfare. Within each generation we distinguish individuals with high, medium or low ability to build human capital. Frequently adopted reforms in many countries such as an increase of the normal retirement age or a reduction in the pension benefit replacement rate can guarantee the financial sustainability of the system, but they fail when the objective is also to improve macroeconomic performance and aggregate welfare without raising intergenerational or intragenerational welfare inequality. Our results prefer a reform which combines an increase of the retirement age with an intelligent design of the linkage between the pension benefit and earlier labour earnings. First, this design conditions pension benefits on past individual labour income, with a high weight on labour income earned when older and a low weight on labour income earned when young. Second, to avoid rising welfare inequality this linkage is complemented by a strong rise in the benefit replacement rate for low ability individuals (and a reduction for high ability individuals). |
| Keywords: | demographic change, population ageing, pension reform, retirement age, heterogeneous abilities, inequality, overlapping generations |
| JEL: | E6 H55 J22 J26 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:18/948&r=dge |
| By: | Hong, Sungki (Federal Reserve Bank of St. Louis); Moon, Terry S. (Princeton University, Department of Economics and Industrial Relations Section) |
| Abstract: | This paper quantifies the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, which face discrete capital gains tax rates based on their firm size. We calibrate our model by targeting important micro moments as well as the difference-in-differences estimate of the capital elasticity based on our institutional setting in Korea. We find that the firm-size reform that reduced the capital gains tax rates from 24 percent to 10 percent for the affected firms increased aggregate investment by 1.22 percent in the steady state, with the short-run effects overstating the effects by 1.18 percentage points. Additionally, a counterfactual analysis where we set the uniformly low tax rate of 10 percent reveals that aggregate investment rose by 7 percent in the long-run. We also find that general equilibrium effects through prices are substantial in our simulation. Taken together, our findings suggest that reducing capital gains tax rates would substantially increase investment in the short-term, and accounting for dynamic and general equilibrium responses is important for understanding the aggregate effects of capital gains taxes. |
| Keywords: | Capital; Fiscal Policy; Investment Decisions; Business Taxes and Subsidies; Saving and Capital Investment |
| JEL: | E22 E62 G11 H25 O16 |
| Date: | 2018–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-031&r=dge |
| By: | De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald |
| Abstract: | Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline. |
| Keywords: | Eurozone; haircuts; money markets; unsecured interbank market |
| JEL: | E44 E58 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13335&r=dge |
| By: | Federico Etro |
| Abstract: | We augment a flexible price dynamic general equilibrium model with any symmetric intratemporal preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle and market inefficiencies. Endogenous markups can magnify the impact of shocks on consumption and labor supply through intertemporal substitution mechanisms, and the optimal fiscal policy requires a variable labor income subsidy and a capital income tax that converges to zero in the long run. With an endogenous number of goods and strategic interactions, also entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize equilibrium and efficient market structures and derive optimal tax rules for a variety of preferences, including a new type of general additive preferences that nest direct, indirect, implicit and homothetic additivity |
| Keywords: | Business cycles, Monopolistic competition, Optimal taxation, variable markups. |
| JEL: | E1 E2 E3 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2018_25.rdf&r=dge |
| By: | Thomas Drechsel |
| Abstract: | Micro evidence on US corporate borrowing suggests a strong connection between firms' current earnings and their access to debt. This paper formalizes this link through an earnings-based constraint on firm borrowing and studies its macroeconomic implications. Introducing the proposed constraint in a business cycle model alters the transmission of shocks relative to an asset-based collateral constraint, which has become a standard building block in macroeconomics. In response to positive investment shocks, corporate debt expands when earnings-based constraints are present, while it contracts with collateral constraints, as the shock reduces the relative value of capital. The paper empirically verifies these theoretical predictions using both aggregate and firm-level data. The responses of debt to investment shocks in the data support the aggregate relevance of the earnings-based constraint, and heterogeneous borrowing dynamics at the firm-level are in line with the mechanism. In an estimated quantitative model with nominal rigidities, earnings-based constraints dampen the output response to fiscal shocks, whereas monetary shocks have stronger but less persistent effects relative to counterfactual estimations without the constraint. |
| JEL: | E22 E32 E44 G32 |
| Date: | 2018–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2018:pdr141&r=dge |
| By: | Jiayi Wen (Xiamen University) |
| Abstract: | Under skill-biased technical change, jobs are becoming less physically demanding whereas require increasing cognitive abilities. However, existing research does not pay sufficient attention on the role of cognitive health in older people's labor supply, nor to the occupation-dependent labor supply effects of physical and cognitive health. This paper reveals several facts about the heterogeneity of physical and cognitive health, as well as their relationship with older people's labor supply across occupations. Based on these facts, this paper proposes and estimates a dynamic programming structural model of individual retirement and saving decisions. The model allows labor supply effects of physical and cognitive health to differ across occupations via four channels respectively: disutility of working, wage, medical expenditure and life expectancy . I estimate the model with the U.S. Health and Retirement Study data by Indirect Inference. The counterfactual experiments suggest cognitive health has little retirement effect for manual workers. However, for clerical workers, the effect is almost as large as the one of physical health. The counterfactual experiment also reveals the mechanisms through which physical and cognitive health affects labor supply respectively. Finally, this paper quantifies the distributional effects of proposed Social Security changes on retirement, benefits and welfare across occupations. |
| Keywords: | Cognition, Retirement, Social Security |
| Date: | 2018–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:002390&r=dge |
| By: | Yoosoon Chang (Indiana University); Junior Maih (Norges Bank and BI Norwegian Business School); Fei Tan (Department of Economics, Chaifetz School of Business, Saint Louis University and Center for Economic Behavior and Decision-Making, Zhejiang University of Finance and Economics) |
| Abstract: | This article studies the estimation of state space models whose parameters are switching endogenously between two regimes, depending on whether an autoregressive latent factor crosses some threshold level. Endogeneity stems from the sustained impacts of transition innovations on the latent factor, absent from which our model reduces to one with exogenous Markov switching. Due to the flexible form of state space representation, this class of models is vastly broad, including classical regression models and the popular dynamic stochastic general equilibrium (DSGE) models as special cases. We develop a computationally efficient filtering algorithm to estimate the non-linear model. Calculations are greatly simplified by appropriate augmentation of the transition equation and exploiting the conditionally linear and Gaussian structure. The algorithm is shown to be accurate in approximating both the likelihood function and filtered state variables. We also apply the filter to estimate a small-scale DSGE model with threshold-type switching in monetary policy rule, and find apparent empirical evidence of endogeneity in the U.S. monetary policy shifts. Overall, our approach provides a greater scope for understanding the complex interaction between regime switching and measured economic behavior. |
| Keywords: | state space model; regime switching; endogenous feedback; filtering; DSGE model |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2018011&r=dge |
| By: | Hartung, Benjamin; Jung, Philip; Kuhn, Moritz |
| Abstract: | A key question in labor market research is how the unemployment insurance system affects unemployment rates and labor market dynamics. We revisit this old question studying the German Hartz reforms. On average, lower separation rates explain 76% of declining unemployment after the reform, a fact unexplained by existing research focusing on job finding rates. The reduction in separation rates is heterogeneous, with long-term employed, high-wage workers being most affected. We causally link our empirical findings to the reduction in long-term unemployment benefits using a heterogeneous-agent labor market search model. Absent the reform, unemployment rates would be 50% higher today. |
| Keywords: | endogenous separations; labor market flows; Unemployment insurance |
| JEL: | E24 J63 J64 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13328&r=dge |
| By: | Bilbiie, Florin Ovidiu |
| Abstract: | Liquidity traps can be either fundamental, or confidence-driven. In a simple unified New-Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("news") shocks, making income effects dominate substitution effects. The same condition governs Neo-Fisherian effects (expansionary-inflationary interest-rate increases) which are thus inherent in confidence traps. Several monetary-fiscal policies (forward guidance, interest rate increases, public spending, labor-tax cuts) have diametrically opposed effects according to the trap variety. This duality provides testable implications to disentangle between trap types; that is essential, for optimal policies are likewise diametrically opposite. |
| Keywords: | confidence and fundamental liquidity traps; Fiscal multipliers; forward guidance; monetary policy; neo-Fisherian; optimal policy |
| JEL: | E3 E4 E5 E6 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13334&r=dge |
| By: | Carnicelli, Lauro |
| Abstract: | This article studies the effects of financial shocks on the labor market when participation in the labor force is endogenous. Previous research concerning endogenous participation produced models that generated a counterfactually procyclical unemployment rate and a positively sloped Beveridge curve. This paper shows that collateral constraints alone are not able to produce correlations in line with the data. However, financial shocks, that change the collateral requirements, are responsible for most of the movements on the labor market and generate a countercyclical unemployment and a negatively slopped Beveridge curve. |
| Keywords: | Endogenous participation; Financial shocks |
| JEL: | E32 E44 J63 J64 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90254&r=dge |
| By: | Pham, Binh T.; Sala, Hector; Silva, José I. |
| Abstract: | We examine Vietnam’s economy together with its closest trade partners. We show that capital accumulation has been the primary growth engine since the start of its transition to the pro-market economy in 1986–the Doi Moi. We also show that the cyclical behavior of its macro-aggregates is similar to the one of its ASEAN-5 peers and other developing countries. We extend the standard small-open-economy RBC model by considering habit persistence and government consumption which allows a close match of the moments of the growth variables. At the business cycle frequency, transitory productivity shocks account for approximately one-half of Vietnam’s output variance, while country-risk and non-transitory productivity shocks account to close to one-fifth each. Regarding Solow residual's volatility, we find that the trend component merely accounts for 12% of this variance in Vietnam, while in Thailand it is only 6%. These findings refute “the cycle is the trend” hypothesis in Aguiar and Gopinath (2007), and align to those in García-Cicco, Pancrazi, and Uribe (2010) and Rhee (2017), in which the stationary component is overwhelmingly dominant. We claim that technological progress and productivity-enhancing measures are fundamental for Vietnam's economy to sustain a high growth. |
| Keywords: | Vietnam, ASEAN, DSGE, RBC, trend shock, growth |
| JEL: | E0 E13 E3 E32 E60 |
| Date: | 2018–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90297&r=dge |
| By: | Swapnil Singh (Center for Excellence in Finance and Economic Research (CEFER), Bank of Lithuania) |
| Abstract: | Using the March Current Population Survey, I show that over the last two decades, married households in the United States received increasingly more public insurance against labor income risk, whereas the opposite was true for single households. To evaluate the welfare consequences of this trend, I perform a quantitative analysis. As a novel contribution, I expand the standard incomplete markets model à la Aiyagari (1994) to include two groups of households: married and single. The model allows for changes in the marital status of households and accounts for transition dynamics between steady states. I show that the divergent trends in public insurance have a significant detrimental effect on the welfare of both married and single households. |
| Keywords: | Incomplete markets, welfare, consumption inequality, progressive taxation, insurance |
| JEL: | D52 D60 E21 E62 H31 |
| Date: | 2018–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:54&r=dge |
| By: | Stephan Imhof, Cyril Monnet, Shengxing Zhang |
| Abstract: | We study the implications of liquidity regulations and monetary policy on depositmaking and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1815&r=dge |
| By: | Lukmanova, Elizaveta; Rabitsch, Katrin |
| Abstract: | We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle. |
| Keywords: | Monetary policy, Neo-Fisher effect, Time-varying inflation target, DSGE, VAR |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:6681&r=dge |
| By: | Hamann, Franz (Banco de La Republica); Mendoza, Enrique G. (University of Pennsylvania); Restrepo-Echavarria, Paulina (Federal Reserve Bank of St. Louis) |
| Abstract: | In this paper we document the stylized facts about the relationship between international oil price swings, sovereign risk and macroeconomic performance of oil-exporting economies. We show that even though being a bigger oil producer decreases sovereign risk–because it increases a country’s ability to repay–having more oil reserves increases sovereign risk by making autarky more attractive. We develop a small open economy model of sovereign risk with incomplete international financial markets, in which optimal oil extraction and sovereign default interact. We use the model to understand the mechanisms behind the empirical facts, and show that it supports them. |
| Keywords: | Sovereign Risk; Oil Production; Oil Reserves; Oil Price Swings |
| JEL: | F34 Q32 |
| Date: | 2018–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-032&r=dge |
| By: | Gete, Pedro |
| Abstract: | This paper proposes a tractable way to incorporate lending standards ("credit qualification thresholds") into macro models of financial frictions. Banks can reject borrowers whose risk is above an endogenous threshold at which no lending rate sufficiently compensates banks for the borrowers’ default risk. Firms denied credit cut employment and labor reallocates mostly towards safer producers. Lending standards propagate bank capital shortfalls through labor misallocation causing deeper and more persistent real effects. The paper also shows that lending spreads are insufficient indicators of credit supply disruptions. That is, for the same increase in credit spreads, output falls faster when denial rates are increasing. Finally, with endogenous lending standards, first-moment bank capital shocks look like second-moment shocks. JEL Classification: E32, E44, E47, G2 |
| Keywords: | bank capital, bank losses, extensive margin, labor reallocation, lending standards, misallocation |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182207&r=dge |
| By: | Vasilev, Aleksandar |
| Abstract: | We introduce "fair" wages in a general-equilibrium model where worker's effort is unobservable and investigate whether such a mechanism can quantitatively account for the degree of real wage rigidity in the Bulgarian labor markets, as documented in Lozev, Vladova, and Paskaleva (2011) and Paskaleva (2016). In contrast to Danthine and Kurmann (2004), here we internalize the effect that past wages have on current effort level. We calibrate the model to Bulgarian data (1999-2016), and quantify the effect of technological shocks on hours and wages in the theoretical setup. Overall, the calibrated model with "fair" wages performs poorly when it comes to the relative volatilities of labor market variables. This is because aggregate labor market conditions, as proxied by the employment rate and past aggregate wages, turn out not to be quantitatively important for business cycles in Bulgaria. |
| Keywords: | Business cycles,unobservable effort,fair wages,unemployment |
| JEL: | E24 E32 J41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:184665&r=dge |
| By: | B. Ravikumar (Federal Reserve Bank of St. Louis); Ana Maria Santacreu (Federal Reserve Bank of St. Louis); Michael Sposi (Southern Methodist University & Federal Reserve Bank of Dallas) |
| Abstract: | We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation and trade imbalances. We develop a gradient-free method to compute the exact transition path following a trade liberalization. We find that (i) larger countries accumulate a current account surplus, and financial resources flow from larger countries to smaller countries, boosting consumption in the latter, (ii) countries with larger short-run trade deficits accumulate capital faster, (iii) the gains are nonlinear in the reduction in trade costs, and (iv) capital accumulation accounts for substantial gains. The net foreign asset position before the liberalization is positively correlated with the gains. The tradables intensity in consumption goods production determines the static gains, and the tradables intensity in investment goods production determines the dynamic gains that include capital accumulation. |
| Keywords: | Welfare gains, Dynamics, Capital accumulation, Trade imbalances |
| JEL: | E22 F11 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:smu:ecowpa:1810&r=dge |
| By: | Alex Xi He (Department of Economics, MIT); John Kennes (Department of Economics and Business Economics, Aarhus University, Denmark); Daniel le Maire (University of Copenhagen) |
| Abstract: | We use a directed search model to develop estimation procedures for the identification of worker and rm rankings from labor market data. These methods allow for a general specication of production complementarities and the possibility that higher ranked workers are not more productive in all firms. We also offer conditions for a positive/negative assortative matching that incorporate the possibility of a stochastic job ladder with on-the-job search. Numerical simulations relate the implications of the model to the implications of fixed effect regressions and give further insights into the performance of our estimation procedures. Finally, we evaluate evidence for Denmark using our methods and we show that workers are highly sorted and that higher type workers are less productive than lower type workers while employed in lower type jobs. |
| Keywords: | Directed search, sorting, wage dynamics, auctions |
| JEL: | J64 J63 E32 |
| Date: | 2018–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2018-10&r=dge |
| By: | Dvorkin, Maximiliano (Federal Reserve Bank of St. Louis); Sanchez, Juan M. (Federal Reserve Bank of St. Louis); Sapriza, Horacio (Federal Reserve Board); Yurdagul, Emircan (Universidad Carlos III) |
| Abstract: | We show evidence that news about future productivity play an important role in the dynamics of country risk leading to a sovereign debt crisis. We show that a news shock has a significantly larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. We develop a quantitative model of news and sovereign debt default with endogenous maturity that can generate impulse responses very similar to the empirical estimates. The model also highlights that the effect of a news shock is stronger for an economy with shorter debt maturity. Finally, our analytic framework also suggests that as the precision of news increases, the economy may not increase its total indebtedness, but will be able to borrow at shorter maturities and pay lower spreads, especially during periods of high financial stress. |
| Keywords: | Crises; News; Default; Spreads; Maturity; Country Risk; Sovereign Debt |
| JEL: | F34 F41 G15 |
| Date: | 2018–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-033&r=dge |
| By: | Vladimir Asriyan; Luc Laeven; Alberto Martín |
| Abstract: | We develop a new theory of information production during credit booms. In our model, entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources towards private consumption. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralization-screening mix depends on the value of aggregate collateral. High collateral values raise investment and economic activity, but they also raise collateralization at the expense of screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g. real estate booms), the economy accumulates physical capital but depletes information about investment projects. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing investment projects, which takes time to rebuild. We provide new empirical evidence using US rm-level data in support of the model's main mechanism. |
| Keywords: | credit booms, collateral, information production, crises, misallocation |
| JEL: | E32 E44 G01 D80 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1064&r=dge |
| By: | Brinca, Pedro; Iskrev, Nikolay; Loria, Francesca |
| Abstract: | Since its introduction by Chari et al. (2018), Business Cycle Accounting (BCA) exercises have become widespread. Much attention has been devoted to the results of such exercises and to methodological departures from the baseline methodology. Little attention has been paid to identification issues within these classes of models, despite the methodology typically involving estimating relatively large scale dynamic stochastic general equilibrium models. In this paper we investigate whether such issues are of concern in the original methodology and in an extension proposed by Sustek (2011) called Monetary BCA. We resort to two types of identification tests in population. One concerns strict identification as theorized by Komuner and Ng (2011), while the other deals both with strict and weak identification as in Iskrev (2015). As to the former, when restricting the estimation to the parameters governing the latent variable's laws of motion, we find that both in the BCA and MBCA framework, all parameters fulfill the requirements for strict identification. If instead we estimate all structural parameters of the model jointly, both frameworks show strict identification failures in several parameters. These results hold for both tests. We show that restricting estimation of some deep parameters can obviate such failures. When we explore weak identification issues, we find that they affect both models. They arise from the fact that many of the estimated parameters do not have a distinct effect on the likelihood. Most importantly, we explore the extent to which these weak identification problems affect the main economic takeaways and find that the identification deficiencies are not relevant for the standard BCA model. Finally, we compute some statistics of interest to practitioners of the BCA methodology. |
| Keywords: | Business Cycle Accounting, Identification, Maximum Likelihood Estimation |
| JEL: | C32 C51 C52 E27 E32 E37 |
| Date: | 2018–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90250&r=dge |
| By: | Jean-Olivier Hairault (PSE - Paris School of Economics); François Langot (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique); Thepthida Sopraseuth (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique) |
| Date: | 2018–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01922680&r=dge |