|
on Dynamic General Equilibrium |
| By: | Millard, Stephen (Bank of England); Varadi, Alexandra (Wadram College, Oxford); Yashiv, Eran (Tel Aviv University) |
| Abstract: | We model the interactions of financial frictions and real frictions, using a DSGE model calibrated for the US economy, with households, banks, firms and wage bargaining. The model features labour and investment frictions, in the form of convex costs, and financial frictions, in the form of credit constraints and the risk of banks diverting their funds. In addition, there are price frictions and habits in consumption. We examine technology, monetary policy, and credit shocks. We look at the response to these shocks of real aggregate variables, financial market variables, and labour market variables. We find that the interactions of real frictions and financial frictions have important implications for the effects of financial shocks on the macroeconomy. |
| Keywords: | Real frictions; financial frictions; business cycles |
| JEL: | E32 E44 |
| Date: | 2018–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0769&r=dge |
| By: | Naohisa Hirakata (Bank of Japan); Yasutaka Koike (Bank of Japan) |
| Abstract: | In this paper, we analyze the dynamics of the labor share in the United States and Japan using a dynamic stochastic general equilibrium (DSGE) model. For this purpose, we develop a model employing a constant elasticity of substitution (CES) production function with capital- and labor- augmenting technologies and investment specific technology. Our findings are as follows. First, comparing two different specifications of our model - one with a CES production function and one with a Cobb-Douglas production function - using marginal data densities indicates that the former provides a better fit for both the U.S. and Japanese data. Second, our estimates suggest that the elasticity of substitution is larger than one in the United States but less than one in Japan. Third, while capital-augmenting technology shocks have contributed to the decline of the labor share in the United States, they have exerted upward pressure on the labor share in Japan. The difference in the effects of capital-augmenting technology shocks on the labor share is due to the difference in the elasticity of substitution in the United States and Japan. Finally, the estimated models for the United States and Japan successfully replicate the observed relationship between the labor share and inflation. |
| Keywords: | Labor Share; Elasticity of Capital-Labor Substitution; Inflation |
| JEL: | E31 E32 |
| Date: | 2018–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp18e20&r=dge |
| By: | Thomas Brand; Marlène Isoré; Fabien Tripier |
| Abstract: | We develop a business cycle model where endogenous firm creation stems from two credit market frictions. First, entrepreneurs search for a lending relationship with a bank. Second, an optimal debt contract with monitoring is implemented. We analyze the interplay between both frictions, and embed it into an otherwise standard business cycle model, which we estimate with Bayesian techniques. We find that uncertainty shocks are a prime contributor to business cycle fluctuations in the US, not only for macro-financial aggregates but also for firm creation. Moreover, we point out that the credit search friction dampens the financial accelerator mechanism because default may imply the end of the lending relationship. |
| Keywords: | Uncertainty;Financial frictions;Search and matching;Business cycle;Firm creation;Firm dynamics |
| JEL: | D8 E3 E4 E5 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2018-19&r=dge |
| By: | Mitra, Shalini |
| Abstract: | In a standard real business cycle model extended to include intangible capital (IC) I show that a rise in the income share of IC in the production function, in line with data can account for a significant share of the increase in real wage volatility (both absolute and relative to income) and labor input volatility (relative to income) observed in the U.S. since the mid 1980's even as volatility of output declined. Intangible capital accumulates stochastically and similar to final goods requires physical capital, intangible capital and labor to produce. Under these conditions an increase in the share of IC in production increases the propagation of the IC-specific shock which raises (absolute and relative) wage and labor input volatility. The higher propagation of the IC shock also accounts for the large decline in the pro-cyclicality of labor productivity (relative to both output and labor) observed during this period. |
| Keywords: | Intangible capital, business cycles, labor market dynamics, wage volatility, measured labor productivity, Great Moderation. |
| JEL: | E22 E32 |
| Date: | 2018–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:89697&r=dge |
| By: | Pierre Emmanuel Weil |
| Abstract: | This paper studies the macroeconomic and cross-sectional consequences of redistributive fiscal policy, with a focus on pensions. Evidence suggests that transfers crowd out private savings heterogeneously across household income, wealth, and age groups. These changes cumulate to dynamic effects on the wealth distribution, which must be taken into account for policymakers with distributional goals. To quantify these channels, I build an overlapping generations heterogeneous agent model based on continuous time methods, joining canonical mechanisms of lifecycle behavior and precautionary savings. Despite its parsimony, the model yields empirically realistic distributions of savings and of the cross-sectional impact of pension reform. I use it to make two main contributions. First, I quantify the cross-sectional impact on savings of pension reform. Adjustment is concentrated among workers in lower-middle wealth groups. Richer households are indifferent about transfers, while the poorest are constrained. Thus, the equilibrium real rate stays largely unchanged, supporting previous efforts which studied these effects in partial equilibrium. Second, in a transition experiment I show that raising social security benefits leads wealth inequality to fall in the short run, but to grow past its original level after fifteen years -- even if the accompanying tax increase is progressive. This follows from lower-middle workers reducing savings most strongly. Means-testing amplifies this effect. Progressive transfers to young workers have similar impact, but through different channels. Transfers encourage riskier portfolios, however crowding out is weaker since it is easier to save than to borrow. |
| JEL: | E21 E62 D31 H23 |
| Date: | 2018–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2018:pwe433&r=dge |
| By: | Oliver Pardo |
| Abstract: | This paper assess the macroeconomic and welfare effects of the 2017 tax reform in the US. This assessment is carried out by simulating the enacted business tax cuts in a dynamic general equilibrium model calibrated to replicate the household income distribution in the US. The simulation suggests that the cuts will lead to increases in investment, wages and output, although the welfare gains are quite unevenly distributed across households. Long-run investment increases by one percentage point of the baseline GDP, leading to a 1.3% increase in the steady-state wages and a 1.7% increase in the steady-state output. However, there is a sudden and permanent drop in tax revenue equivalent to 0.5% of the baseline GDP. The necessary cuts in government spending imply that households in the poorest quintile may face a welfare loss equivalent to 1.6% of the GDP. Mean-while, households in the richest quintile can expect a gain of 4.4% of the GDP. Overall, the welfare gains of all households add up 4.7% of the GDP. Hence, the aggregated welfare gains from all but the richest quintile is barely positive. |
| Keywords: | tax reform, welfare, dynamic general equilibrium, heterogeneousagents, distribution. |
| JEL: | C6 E6 H2 |
| Date: | 2018–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:col:000416:017011&r=dge |
| By: | Joao Ayres; Gajendran Raveendranathan |
| Abstract: | We use firm dynamics statistics on employment by age, entry, exit, and job flows to identify sources of business cycle fluctuations in the U.S. economy since 1980. We extend the Hopenhayn (1992) firm dynamics model by incorporating capital and debt accumulation to the firm’s problem and savings to the consumer’s problem. Analyzing the implications of unexpected productivity, credit, labor wedge, and investment wedge shocks for firm dynamics statistics, we show that (a) productivity shock accounts for the 1990-91 and 2001 recessions, and (b) productivity and credit shocks jointly account for the 1980-82 and 2007-09 recessions. |
| Keywords: | firm dynamics, business cycles. |
| JEL: | D21 D22 E24 E32 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2018-16&r=dge |
| By: | Minchul Yum |
| Abstract: | A higher labor tax rate increases the equilibrium real interest rate and reduces the equilibrium wage in a heterogeneous-agent model with endogenous savings and indivisible labor supply decisions. I show that these general equilibrium adjustments, in particular of the real interest rate, reinforce the negative employment impact of higher labor taxes. However, the representative-agent version of the model, which generates similar aggregate employment responses to labor tax changes, implies that general equilibrium feedback is neutral. The cross-country panel data reveal that the negative association between labor tax rates and the extensive margin labor supply is significantly and robustly weaker in small open economies where the interest rate is less tightly linked to domestic circumstances. This empirical evidence supports the transmission mechanism of labor tax changes for employment in the heterogeneous-agent model. |
| Keywords: | labor income tax; labor supply elasticity; general equilibrium; cross-country panel |
| JEL: | E21 E24 J21 J22 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_059_2018&r=dge |
| By: | G. Cardullo; M. Conti; G. Sulis |
| Abstract: | In this paper we present a search and matching model in which firms invest in sunk capital equipment. By comparing two wage setting scenarios, we show that a two-tier bargaining scheme, where a fraction of the salary is negotiated at firm level, raises the amount of investment per worker in the economy compared to a one-tier bargaining scheme, in which earnings are entirely negotiated at sectoral level. The model's main result is consistent with the positive correlation between investment per worker and the presence of a two-tier bargaining agreement that we find in a representative sample of Italian firms. |
| Keywords: | unions;investment;hold-up;Two-Tier Bargaining;Control Function |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201812&r=dge |
| By: | Bianchi, Javier (Federal Reserve Bank of Minneapolis); Mondragon, Jorge (Federal Reserve Bank of Minneapolis) |
| Abstract: | This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence. |
| Keywords: | Sovereign debt crises; Rollover risk; Monetary unions |
| JEL: | E4 E5 F34 G15 |
| Date: | 2018–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:755&r=dge |
| By: | Boyan Jovanovic; Julien Prat |
| Abstract: | Cyclical patterns in earnings can arise when contracts between firms and their workers are incomplete, and when workers cannot borrow or lend so as to smooth their consumption. Earnings cycles generate occasional large changes in earnings, consistent with some recent empirical findings. At the calibrated parameter values, financial constraints promote investment in reputation – an intangible capital form – in contrast to their documented inhibiting effect on investment in tangible capital. |
| JEL: | D31 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25252&r=dge |
| By: | Elena Sochirca (Universidade do Minho and NIPE); Pedro Cunha Neves (Universidade da Beira Interior and CEFAGE-UBI) |
| Abstract: | We build a dynamic model with endogenous middle class development, human capital accumulation and policy choices, in order to analyse the interactions between the optimal policies implemented by the rulling elite and the key drivers of economic growth in the presence of elite rivalry. We consider that: (i) the specic policy choices depend on economic and political incentives of the elite; (ii) the individuals' decisions regarding their childrens' education are endogenously determined by specic economic and political factors. Our results suggest that, contrarily to the economically motivated policies, the politically motivated policy choices imply innecient economic outcomes and limit the development of the middle class and human capital accumulation. The results also show that higher middle class and human capital accumulation growth rates can lower the degree of elite rivalry by reducing the level of the optimal tax rate, increase public investments in education and yield positive changes in all economic outcomes. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:cfe:wpcefa:2018_04&r=dge |
| By: | Gavin Goy; Cars Homme; Kostas Mavromatis |
| Abstract: | This paper studies the macroeconomic effects of central bank forward guidance when central bank credibility is endogenous. In particular, we take a stylized New Keynesian model with an occasionally binding zero lower bound constraint on nominal interest rates and heterogeneous and boundedly rational households. The central bank uses a bivariate VAR to forecast, not taking into account the time-variation in the distribution of aggregate expectations. In this framework, we extend the central bank's toolkit to allow for the publication of its own forecasts (Delphic guidance) and the commitment to a future path of the nominal interest rate (Odyssean guidance). We find that both Delphic and Odyssean forward guidance increase the likelihood of recovery from a liquidity trap. Even though Odyssean guidance alone appears more powerful, we find it to increase ex post macroeconomic volatility and thus reduce welfare. |
| Keywords: | Forward Guidance; Heterogeneous Beliefs; Bounded Rationality; Central Bank Learning |
| JEL: | E12 E58 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:614&r=dge |
| By: | Giovannini, Massimo (European Commission – JRC); Hohberger, Stefan (European Commission – JRC); Ratto, Marco (European Commission – JRC); Vogel, Lukas (European Commission) |
| Abstract: | The paper reviews adjustment dynamics in the EMU on the basis of estimated DSGE models for four large EA Member States (DE, FR, IT, ES). We compare the response of the four countries to identical shocks and find a particularly strong response of employment and wages in ES, a high sensitivity of IT to investment-related shocks, and a comparatively strong impact of global shocks on the DE economy. We also perform counterfactual exercises that apply the estimated shocks and parameters for ES to DE, FR, and IT. The counterfactual simulations suggest that differences in shocks have been important for GDP growth differentials, and together with structural differences also contributed to differences in employment fluctuations across the four countries considered. |
| Keywords: | Estimated DSGE; adjustment dynamics; business cycles; EMU; counterfactuals |
| JEL: | E32 F41 F44 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:201808&r=dge |
| By: | Ying Feng; David Lagakos; James E. Rauch |
| Abstract: | This paper draws on household survey data from countries of all income levels to measure how average unemployment rates vary with income per capita. We document that unemployment is increasing with GDP per capita. Furthermore, we show that this fact is accounted for almost entirely by low-educated workers, whose unemployment rates are strongly increasing in GDP per capita, rather than by high-educated workers, whose unemployment rates are not correlated with income. To interpret these facts, we build a model with workers of heterogeneous ability and two sectors: a traditional sector, in which self-employed workers produce output without reward for ability; and a modern sector, in which firms hire in frictional labor markets, and output increases with ability. Countries differ exogenously in the productivity level of the modern sector. The model predicts that as productivity rises, the traditional sector shrinks, as progressively less-able workers enter the modern sector, leading to a rise in overall unemployment and in the ratio of low-educated to high-educated unemployment rates. Quantitatively, the model accounts for around one third of the cross-country patterns we document. |
| Keywords: | unemployment, development |
| JEL: | E24 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7311&r=dge |
| By: | Vives Coscojuela, Cecilia |
| Abstract: | This paper studies the effect of home-owners' migration costs on unemployment in an economy where workers move both for work- and non-work-related reasons. To this end, a search model with heterogeneous locations is developed and calibrated to the US economy. Both the employment and unemployment exit rates are endogenous. Migration costs imply that home-owners quit their jobs less often than renters and find jobs at a higher rate. Consistent with the empirical evidence, the model predicts that home-owners have a lower unemployment rate than renters. |
| Keywords: | unemployment, labour, mobility, home, ownership |
| JEL: | J61 J64 R23 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:ikerla:30207&r=dge |
| By: | Joaquín Naval (Universitat de Girona); José I. Silva (Universitat de Girona); Javier Vázquez-Grenno (Universitat de Barcelona & IEB) |
| Abstract: | This paper quantifies the joint effect of on-the-job training and workers' on-the-job learning decisions on aggregate employment. We present an Index of On-the-job Human Capital Acquisition (OJHCA), based on data from the OECD Program for the International Assessment of Adult Competencies. The objective of the index is to capture both formal and informal learning in the workplace. We document a strong positive association between the two components of our index, i.e., on-the-job training and on-the-job learning. We also show that the index is positively correlated with employment across OECD economies. To explain these stylized facts, we build a search and matching model with on-the-job human capital acquisition that depends on both on-the-job training provided by firms and on the workers' level of on-the-job learning. We calibrate the model to the Canadian economy and adjust the learning and training marginal costs to match cross-country levels in the human capital index. We compare the model's predictions with the data and we conclude that differences in marginal costs are necessary to match the differences observed in employment rates across countries. We also extend the model including payroll taxes and education. The model is able to reproduce the observed differences in employment rates between countries with the highest and the lowest level of OJHCA. |
| Keywords: | Employment, labor productivity, human capital, search and matching |
| JEL: | E24 J24 J64 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ieb:wpaper:doc2018-05&r=dge |
| By: | Ricardo Lagos; Shengxing Zhang |
| Abstract: | We develop a model of monetary exchange in bilateral over-the-counter markets to study the effects of monetary policy on asset prices and financial liquidity. The theory predicts asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy and the market microstructure where it is traded. These liquidity considerations imply a positive correlation between the real yield on stocks and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous. |
| JEL: | D83 E31 E52 G12 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25239&r=dge |
| By: | Andreas Kettemann; Andreas I. Mueller; Josef Zweimüller |
| Abstract: | This paper explores the relationship between the duration of a vacancy and the starting wage of a new job, using unusually informative data comprising detailed information on vacancies, the establishments posting the vacancies and the workers eventually filling the vacancies. We find that vacancy durations are negatively correlated with the starting wage and that this negative association is particularly strong with the establishment component of the starting wage. We also confirm previous findings that growing establishments fill their vacancies faster. To understand the relationship between establishment growth, vacancy filling and entry wages, we calibrate a model with directed search and ex-ante heterogeneous workers and firms. We find a strong tension between matching the sharp increase in vacancy filling for growing firms and the response of vacancy filling to firm-level wages. We discuss the implications of this finding as well as potential resolutions. |
| Keywords: | vacancy posting, vacancy duration, recruiting, search wages |
| JEL: | E24 J31 J63 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7351&r=dge |
| By: | Clemens C. Struck |
| Abstract: | The standard neoclassical model predicts that countries with higher productivity growth rates experience sharp increases in investment that are followed by rapid declines. This investment response contrasts with the empirical evidence that suggests a rather hump-shaped investment behavior. In this paper, I present a two-country general equilibrium model that generates hump-shaped investment responses from labor market frictions. In the model, I decompose investment into tradable and non-tradable components and show that an increase in the growth rate of a country results in scarcities of the non-tradable components which raise the relative price of investment goods. These scarcities occur because labor is unable to reallocate quickly between sectors within economies. |
| Keywords: | Investment prices; Capital flows; Current account; Global imbalances; Capital returns; Labor market frictions; Trade frictions |
| JEL: | F21 F32 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201729&r=dge |
| By: | Eleni Iliopulos; François Langot; Thepthida Sopraseuth |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tep:teppwp:wp18-13&r=dge |
| By: | Daniel Jaar |
| Abstract: | This paper proves equilibrium existence in an incomplete market sequential economy with finitely-lived debt contracts. Introducing credit constraints limiting agents' access to liquidity, we show that a competitive equilibrium always exists. Our results are consistent with broad forms of endogenous credit segmentation. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp474&r=dge |
| By: | Asriyan, Vladimir; Laeven, Luc; Martín, Alberto |
| 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 firm-level data in support of the model's main mechanism. |
| Keywords: | Collateral; Credit Booms; Crises; Information Production; Missallocation |
| JEL: | D80 E32 E44 G01 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13340&r=dge |
| By: | Zhang, Shengxing |
| Abstract: | To understand the illiquidity of the over-the-counter market when dealers and traders are in long-term relationships, I develop a framework to study the endogenous liquidity distortions resulting from the profit-maximizing, screening behavior of dealers. The dealer offers the trading mechanism contingent on the aggregate history of his customers summarized by the asset allocation. The equilibrium distortion is type dependent: trade with small surplus breaks down; trade with intermediate surplus may be delayed; trade with large surplus is carried out with a large bid/ask spread but without delay. Because of dealers' limited commitment, the distortions become more severe when the valuation shock is frequent, the valuation dispersion is large or the matching friction to form new relationships is large. Calibrating the model and running a horse race between matching efficiency, trading speed and relationship stability, I found that the liquidity disruption in the market during the recent financial crisis is more consistent with declining matching efficiency of forming trading relationsh |
| Keywords: | screening; liquidity; long-term relationship; over-the-counter markets |
| JEL: | D82 D83 G1 |
| Date: | 2018–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:86800&r=dge |
| By: | Jean-Olivier Hairault; François Langot; Thepthida Sopraseuth |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tep:teppwp:wp18-11&r=dge |