nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒01‒28
29 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Fiscal Theory of the Price Level in Overlapping Generations Models By Roger E.A. Farmer; Pawel Zabczyk
  2. Are labor unions important for business cycle fluctuations: lessons from Bulgaria (1999-2016) By Vasilev, Aleksandar
  3. Macroeconomic Effects of Credit Deepening in Latin America By Carlos Carvalho; Nilda Pasca; Laura Souza; Eduardo Zilberman
  4. Demographics, Pension Systems and the Saving-Investment Balance By Hua Chai; Jun Il Kim
  5. Monetary policy, trade, and endogenous growth under different international financial market structures By Michael Donadelli; Patrick Grüning; Aurelija Proskute
  6. General Equilibrium Feedback Regarding the Employment Effects of Labor Taxes By Minchul Yum
  7. Confidence and the Financial Accelerator By Christian Myohl, Yannic Stucki
  8. Quality of Schooling: Child Quantity-Quality Tradeoff, Technological Progress and Economic Growth By Swati Saini; Meeta Keswani Mehra
  9. Investment-Specific Technological Change, Taxation and Inequality in the U.S. By Brinca, Pedro; Oliveira, João; Duarte, João
  10. Shifting Inflation Expectations and Monetary Policy By Agustín Arias; Markus Kirchner
  11. What Hides behind the German Labor Market Miracle? Unemployment Insurance Reforms and Labor Market Dynamics By Hartung, Benjamin; Jung, Philip; Kuhn, Moritz
  12. Demographics, Old-Age Transfers and the Current Account By Mai Chi Dao; Callum Jones
  13. The effects of firing costs on employment and hours per employee By Yannic Stucki, Jacqueline Thomet
  14. Vacancy durations and entry wages: evidence from linked vacancy-employer-employee data By Andreas Kettemann; Andreas I. Mueller; Josef Zweimüller
  15. Unions, Two-Tier Bargaining and Physical Capital Investment: Theory and Firm-Level Evidence from Italy By Cardullo, Gabriele; Conti, Maurizio; Sulis, Giovanni
  16. Bank Capital Regulation in a Zero Interest Environment By Döttling, Robin
  17. Parental Time Investment and Intergenerational Mobility By Minchul Yum
  18. Argentina’s “Missing Capital” Puzzle and Limited Commitment Constraints By Kapicka, Marek; Kydland, Finn E.; Zarazaga, Carlos E.
  19. Steady States in Search-and-Matching Models By Stephan Lauermann; Georg Noeldeke; Thomas Troeger
  20. A neoclassical perspective on Switzerland’s 1990s stagnation By Yannic Stucki, Jacqueline Thomet
  21. Financial Cycles, Credit Bubbles and Stabilization Policies By Luisa Corrado; Tobias Schuler
  22. Global Banking, Financial Spillovers, and Macroprudential Policy Coordination By Pierre-Richard Agénor; Luiz Awazu Pereira da Silva
  23. A Closed Form Multivariate Linear Filter By Francis Vitek
  24. Are banking and capital markets union complements? Evidence from channels of risk sharing in the eurozone By Mathias Hoffmann; Egor Maslov; Bent E. Sørensen; Iryna Stewen
  25. Sticky-Wage Models and Knowledge Capital By Kevin X. D. Huang; Munechika Katayama; Mototsugu Shintani; Takayuki Tsuruga
  26. The Redistributive Effects of a Money-Financed Fiscal Stimulus. By Chiara Punzo; Lorenza Rossi
  27. Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT By Maebayashi, Noritaka
  28. The Economic Effects of a Tax Shift from Direct to Indirect Taxation in France By Francisco de Castro Fernández; Marion Perelle; Romanos Priftis
  29. Gains from Policy Cooperation in Capital Controls and Financial Market Incompleteness By Shigeto Kitano; Kenya Takaku

  1. By: Roger E.A. Farmer; Pawel Zabczyk
    Abstract: We demonstrate that the Fiscal Theory of the Price Level (FTPL) cannot be used to determine the price level uniquely in the overlapping generations (OLG) model. We provide two examples of OLG models, one with three 3-period lives and one with 62-period lives. Both examples are calibrated to an income profile chosen to match the life-cycle earnings process in U.S. data estimated by Guvenen et al. (2015). In both examples, there exist multiple steady-state equilibria. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies. As long as the primary deficit or the primary surplus is not too large, the fiscal authority can conduct policies that are unresponsive to endogenous changes in the level of its outstanding debt. Monetary and fiscal policy can both be active at the same time.
    JEL: E31 E58 H62
    Date: 2019–01
  2. By: Vasilev, Aleksandar
    Abstract: In this paper we investigate the quantitative importance of collective agreements in explaining uctuations in Bulgarian labor markets. Following Maffezzoli (2001), we introduce a monopoly union in a real-business-cycle model with government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016), and compare and contrast it to a model with indivisible labor and no unions as in Rogerson and Wright (1988). We find that the sequential bargaining between unions and firms produces an important internal propagation mechanism, which fits data much better that the alternative framework with indivisible labor.
    Keywords: business cycles,general equilibrium,labor unions,indivisible labor,involuntary unemployment
    JEL: E32 E24 J23 J51
    Date: 2019
  3. By: Carlos Carvalho; Nilda Pasca; Laura Souza; Eduardo Zilberman
    Abstract: We augment a standard dynamic general equilibrium model with financial frictions, in order to quantify the macroeconomic effects of the credit deepening process observed in Latin America in the last decade - most notably in Brazil. In the model, a stylized banking sector intermediates credit from patient households to impatient households and entrepreneurs. Motivated by the Brazilian experience, we allow the credit constraint faced by households to depend on labor income. Our model is designed to isolate the effects of credit deepening through demand-side channels, and abstracts from potential effects of credit supply on total factor productivity. In the calibrated model, credit deepening generates only modest above-trend growth in consumption, investment, and GDP. Since Brazil has experienced one of the most intense credit deepening processes in Latin America, we argue that the quantitative effects that hinge on the channels captured by the model are unlikely to be sizable elsewhere in Latin America.
    Date: 2019–01
  4. By: Hua Chai; Jun Il Kim
    Abstract: This paper studies the effect of demographic change on national saving, global interest rates, and international capital flows, focusing on the role of the public pension system. We develop a small open economy overlapping generations model to illustrate the channels through which demographic variables and pension system generosity interact to affect both private and public saving behavior. We then extend this framework to a two-country setting and simulate scenarios of demographic change and pension reform. We find that the generosity of the pension system plays an important role in determining the movement of the global interest rate and patterns of international capital flows.
    Keywords: Capital flows;Foreign exchange;Current account;Aging;Investment;Pensions;Private savings;Public sector savings;Demographic indicators;demographics, pension, saving
    Date: 2018–12–07
  5. By: Michael Donadelli (Ca'Foscari University of Venice); Patrick Grüning (CEFER, Bank of Lithuania and Vilnius University); Aurelija Proskute (Bank of Lithuania)
    Abstract: This study develops a symmetric two-country New-Keynesian general equilibrium model with endogenous growth, Calvo-style price and wage rigidities, and international trade of final consumption goods and intermediate goods. The equilibrium implications of two financial market structures are compared: financial autarky and complete markets. In the case of financial autarky, no international bond is traded. In the case of complete markets, the households have access to a full set of international nominal state-contingent bonds. We find that assuming complete markets instead of financial autarky leads to higher co-movement of most macroeconomic growth rates across countries, higher co-movement of inflation rates across countries, lower uncovered interest rate parity regression coefficients, and a lower correlation between exchange rate growth and consumption growth differentials. These results are mostly in line with US and UK data from 1950-2015, which are split into two samples, 1950-1970 and 1971-2015, in order to be compared to the model with financial autarky and the model with complete markets, respectively.
    Keywords: International financial markets, Monetary policy, Nominal rigidities, Endogenous growth
    JEL: E30 E44 F44 G12 O30
    Date: 2019–01–11
  6. 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
  7. By: Christian Myohl, Yannic Stucki
    Abstract: We introduce financial frictions in the spirit of Bernanke, Gertler, and Gilchrist (1999) into a standard RBC model and use the heterogeneous-prior framework of Angeletos, Collard, and Dellas (2018) to accommodate confidence-driven business cycle fluctuations. We show that financial frictions strongly amplify the response to confidence shocks—more strongly than the response to fundamental shocks. Furthermore, we show that in the presence of financial frictions, prolonged episodes of unfounded optimism cause boom-bust cycles in investment and to a lesser extent in output. In particular, the financial state of the economy deteriorates severely after the initial boom, which leaves the economy more vulnerable to adverse shocks.
    Keywords: Confidence, sentiments, financial accelerator, financial frictions, higher-order beliefs, higher-order uncertainty, business cycle.
    JEL: E32 E44
    Date: 2018–07
  8. By: Swati Saini (Jawaharlal Nehru University); Meeta Keswani Mehra (Jawaharlal Nehru University)
    Abstract: An overlapping generations version of an R&D-based growth model ‘a la Diamond (1965) and Jones (1995) is built to examine how improvement in quality of schooling impact technical progress and long- run economic growth of an economy by influencing fertility and education decisions at household level. The results indicate that improvement in schooling quality triggers a child quantity-quality trade-off at household level when quality of schooling exceeds an endogenously determined threshold. At the household level, parents invest more in education of children and have lesser number of children in response to improvement in quality of schooling. This micro-level tradeoff has two opposing effects on aggregate human capital accumulation at macro level. Higher investment in education of a child stimulates the accumulation of human capital which fosters technical progress but the simultaneous decline in fertility rate reduces the total factor productivity growth and economic growth by contracting the pool of available researchers. The first effect prevails over latter only when quality of schooling is higher than the threshold.Length:53 pages
  9. By: Brinca, Pedro; Oliveira, João; Duarte, João
    Abstract: Since 1980 the U.S. economy has experienced a large increase in income inequality. To explain this phenomenon we develop a life-cycle, overlapping generations model with uninsurable labor market risk, a detailed tax system and investment-specific technological change (ISTC). We calibrate our model to match key characteristics of the U.S. economy and study how ISTC, shifts in taxation, government debt and employment have contributed to the rise in income inequality. We find that these structural changes can account for close to one third of the observed increase in the post-tax income Gini. The main mechanisms in play are the rise in the wage premium of non-routine workers, resulting from capital-non-routine complementarity, as well as a reduction of the progressivity of the labor income tax schedule, which increases post-tax inequality. We show that ISTC alone accounts for roughly 15% of the change observed in post-tax income Gini, while the reduction in progressivity accounts for 16%.
    Keywords: Income Inequality, Taxation, Automation
    JEL: E21 H21 J31
    Date: 2019
  10. By: Agustín Arias; Markus Kirchner
    Abstract: The idea of “anchored” inflation expectations is often understood as a situation in which long-run expected inflation does not significantly respond to new information. Furthermore, expectations are thought to become “unanchored” only after a long enough sequence of inflation surprises. In this paper we conceptualize this idea in a monetary DSGE model with a time-varying learning mechanism, in which the sensitivity of agents to incoming data depends on accumulated inflation forecast errors. The latter affect the learning gain that agents use to update their beliefs on future inflation. We show how this mechanism improves the fit of the model to macroeconomic data, including expected inflation, for the Chilean inflation targeting period. In particular, we show that observed episodes with anchored and unanchored expectations are well captured by the estimated time-varying learning gain. We then use the estimated model to assess the role of monetary policy to anchor inflation expectations over time.
    Date: 2019–01
  11. By: Hartung, Benjamin (University of Bonn); Jung, Philip (TU Dortmund); Kuhn, Moritz (University of Bonn)
    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: unemployment insurance, labor market flows, endogenous separations
    JEL: E24 J63 J64
    Date: 2018–11
  12. By: Mai Chi Dao; Callum Jones
    Abstract: Building on the evolving literature on the topic, this paper reviews the relationship between demographics and long-run capital flows in both theory and in the data. For this purpose, we develop a two region overlapping generations model where countries differ in their population growth and mortality risk. Besides exploring the implications of demographics for saving and the current account over the long-run, we also study how these might be affected by differences in the coverage and sustainability of old-age transfer schemes. The model predicts that population structure and life expectancy (which affects the need to save to meet old age consumption) affect current account levels, and that while countries with more generous unfunded transfer schemes tend to have lower saving and more capital inflows over the long-run, this effect may be dampened by natural limits (on taxation) of these schemes. The key predictions of the model are generally supported by a rich panel dataset.
    Keywords: Pensions;Demographic indicators;Current account balances;Current account surpluses;Capital flows;Aging;Demographics, Current Account Flows, External Imbalances, General
    Date: 2018–12–07
  13. By: Yannic Stucki, Jacqueline Thomet
    Abstract: We explore the role of firing costs on labor market outcomes in a search and matching framework with distinct decisions on the intensive (hours per employee) and extensive (employment) margins of labor supply. We show that allowing for two distinct labor supply margins matters for assessing firing costs. When the intensive margin is kept fixed (as is typically done in empirical work on firing costs), the dampening effect of firing costs on employment fluctuations is strongly understated. Further, in a quantitative exercise, we calibrate firing costs to represent the different employment protection regulations across OECD countries. We find that with firing costs of a similar size as in France, the drop in US employment during the Great Recession would have been a third its size.
    Keywords: Search and matching, firing costs, employment protection legislation, labor supply margins.
    JEL: E32 F44 J22
    Date: 2018–07
  14. 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: 2018–12
  15. By: Cardullo, Gabriele (University of Genova); Conti, Maurizio (University of Genova); Sulis, Giovanni (University of Cagliari)
    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
    JEL: J51 J64 E22
    Date: 2018–11
  16. By: Döttling, Robin
    Abstract: How do near-zero deposit rates affect (optimal) bank capital regulation and risk taking? I study these questions in a tractable, dynamic equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, subject to a (zero) lower bound constraint on deposit rates (ZLB). At the ZLB, capital requirements become less effective in curbing excessive risk-taking incentives, as they disproportionately hurt franchise values. As a consequence, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Subsidizing bank funding costs at the ZLB dampens risk-taking, but may reduce overall welfare.
    Keywords: Zero lower bound,Search for yield,Capital regulation,Bank competition,Franchise value
    JEL: G21 G28 E43
    Date: 2019
  17. 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
  18. By: Kapicka, Marek (Center for Economic Research and Graduate Education and Economics Institute (CERGE-EI)); Kydland, Finn E. (University of California, Santa Barbara); Zarazaga, Carlos E. (Federal Reserve Bank of Dallas)
    Abstract: Capital accumulation in Argentina was slow in the 1990s, despite high total factor productivity (TFP) growth and low international interest rates. A possible explanation for the “missing capital” is that foreign investors were reluctant to take advantage of the high returns to investment seemingly offered by that small open economy under such favorable conditions, on the grounds that previous historical developments had led them to perceive Argentina as a country prone to external debt “opportunistic defaults.” The paper examines this conjecture from the perspective of an optimal contract between foreign lenders and a small open economy subject to limited commitment constraints. Numerical experiments for a deterministic version of that analytical framework show that limited commitment constraints introduce an asymmetry to the capital accumulation process of small open economies: the responses of investment to positive TFP shocks are muted and shortlived, while those to negative TFP shocks are large and persistent. Furthermore, under some circumstances, a lower international interest rate environment can magnify the asymmetry. A quantitative implementation of the model economy to data from Argentina accounts, in line with asymmetry just described, for the rapid decline that that country’s capital stock experienced, along with a falling TFP during the 1980s, as well as for the lack of any visible recovery of that stock during the significant surges of TFP observed between 1992-1998 and 2002-2008. In the absence of the limited commitment constraint, Argentina’s capital stock in 2008 would have been 50% higher than it actually was.
    Keywords: external debt opportunistic defaults; missing capital; optimal contract; limited commitment constraints; capital accumulation; Argentina
    JEL: F34 F41 F42 F43 O19 O54
    Date: 2018–12–01
  19. By: Stephan Lauermann; Georg Noeldeke; Thomas Troeger
    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
  20. By: Yannic Stucki, Jacqueline Thomet
    Abstract: We study Switzerland’s 1990s growth weakness through the lens of the business cycle accounting framework by Chari, Kehoe, and McGrattan (2007). Our main result is that weak productivity growth cannot account for the experienced stagnation. Rather, the stagnation is explained by factors that made labor and investment expensive. We show that an increase in labor income taxes and financial frictions are plausible causes. Holding these factors constant, counterfactual real annualized output growth over the 1992Q1–1996Q4 period is 1.93%, compared to a realized growth of 0.35%.
    Keywords: Business cycle accounting, housing crises, stagnation, Switzerland
    JEL: E13 E20 E32 E65
    Date: 2018–06
  21. By: Luisa Corrado; Tobias Schuler
    Abstract: This paper analyzes the effects of several policy instruments to mitigate financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios and allow for interbank trading. We then show how a financial bubble can develop from a financial innovation. By incorporating a loan management technology and a bank equity channel we can evaluate the efficacy of several policy instruments in counteracting financial bubbles. We find that an endogenous capital requirement reduces the impact of a financial bubble significantly while central bank intervention (“leaning against the wind”) proves to be less effective. A welfare analysis ranks the policy reaction through an endogenous capital requirement as best.
    Keywords: financial bubbles, credit-to-GDP gap, endogenous capital requirement, stabilization policies
    JEL: E44 E52
    Date: 2018
  22. By: Pierre-Richard Agénor; Luiz Awazu Pereira da Silva
    Abstract: The gains from international macroprudential policy coordination are studied in a two-region, core-periphery macroeconomic model with imperfect financial integration and cross-border banking. Financial frictions occur at two levels: between firms and banks in each region, and between periphery banks and a global bank in the core region. Macroprudential regulation takes the form of a countercyclical tax on bank loans to domestic capital goods producers, which responds to real credit growth and is subject to a cost in terms of welfare. Numerical experiments, based on a parameterized version of the model, show that the welfare gains from macroprudential policy coordination are positive, albeit not large, for the world economy. In addition, these gains tend to increase with the degree of international financial integration. However, depending on the origin of financial shocks, they can also be highly asymmetric across regions.
    Keywords: global banking, financial spillovers, macroprudential policy coordination
    JEL: E58 F42
    Date: 2019–01
  23. By: Francis Vitek
    Abstract: This paper considers the problem of jointly decomposing a set of time series variables into cyclical and trend components, subject to sets of stochastic linear restrictions among these cyclical and trend components. We derive a closed form solution to an ordinary problem featuring homogeneous penalty term difference orders and static restrictions, as well as to a generalized problem featuring heterogeneous penalty term difference orders and dynamic restrictions. We use our Generalized Multivariate Linear Filter to jointly estimate potential output, the natural rate of unemployment and the natural rate of interest, conditional on selected equilibrium conditions from a calibrated New Keynesian model.
    Date: 2018–12–10
  24. By: Mathias Hoffmann; Egor Maslov; Bent E. Sørensen; Iryna Stewen
    Abstract: EMU was a major step towards deeper financial integration among member states. However, diversification of equity portfolios remained limited while banking integration surged. We argue that the nature of banking integration is of first-order importance for understanding the patterns and channels of risk sharing. While EMU was associated with the creation of an integrated interbank market, as witnessed by an explosion in cross-border interbank flows, “real” banking integration (in terms of cross-border bank-to-real sector flows or banking-consolidation) remained limited. But we find that real banking integration is associated with more risk sharing, while indirect integration via interbank flows is not. Further, indirect banking integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model that allows us to explain these patterns in the data, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.
    Date: 2018–12
  25. By: Kevin X. D. Huang; Munechika Katayama; Mototsugu Shintani; Takayuki Tsuruga
    Abstract: We present a sticky-wage model with two types of labors: while worker's labor contributes to current production, researcher's work helps develop new ideas to add to firm's knowledge capital that enhances its productivity for many periods. The long-lived effect of knowledge capital on productivity is analogous to the long-lasting effect of consumer durables on utility in the sticky-price model of Barsky, House and Kimball (2007). Our sticky-wage model generates the near monetary neutrality result similar to the result in their sticky-price model, if returns to researchers' labor are low in developing knowledge capital. We show, however, that the relative role of the pricing of the two production inputs analogous to consumption durables and nondurables in their sticky-price model is completely reversed in our sticky-wage model.
    Date: 2019–01
  26. By: Chiara Punzo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Lorenza Rossi
    Abstract: This paper analyzes the redistributive channel of a money financed fiscal stimulus (MFFS). It shows that the way in which this regime is implemented is crucial to determine its redistributive effects and consequently its effectiveness. In normal times, the most effective regime is a MFFS with no additional intervention by the Central Bank to stabilize the real public debt using infiation, whereas a MFFS accompanied by real debt stabilization - through the adjustment of seigniorage - is the most effective one in a ZLB scenario. In a TANK model this regime is so effec- tive to avoid the recessionary effects implied by the ZLB. This result does not hold in a RANK model, where the redistributive channel is absent. Remarkably, contrary to the common wisdom a MFFS is followed by a moderate increase of infiation, which is only temporarily higher than the target.
    Keywords: Money-Financed scal stimulus, seignorage, govern- ment spending, redistribution, borrower-saver, scal multipliers, welfare, RANK versus TANK.
    JEL: E32 E52 E62
    Date: 2019–01
  27. By: Maebayashi, Noritaka
    Abstract: This study investigates (i) how unfunded public pensions financed by VAT, as discussed in Japan, affect economic growth, and (ii) whether payroll tax or VAT is the more growth-friendly tax structure for the finance of public pensions. We examine these issues in overlapping generations (OLG) models with parental altruism and find the following results. A public pension system financed by VAT itself may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT have turned out to be more growth-friendly than those financed by payroll tax when bequests are operative.
    Keywords: Public pensions financed by VAT, Altruism, Education, Bequests, Growth
    JEL: D64 H20 H55 I20 O40
    Date: 2018–12–26
  28. By: Francisco de Castro Fernández; Marion Perelle; Romanos Priftis
    Abstract: This paper uses the European Commission's DSGE model QUEST to investigate the impact of alternative tax reforms shifting the tax burden away from labour or corporates, making the French tax system more growth friendly. These experiments consist in raising VAT and, simultaneously reducing either social security contributions borne by employers or corporate income taxes. These tax reforms overall entail positive and permanent effects on GDP and price competitiveness. Scenarios that imply cuts in social contributions borne by employers bring about more positive effects on employment, the trade balance and the general government deficit. By contrast, while lowering corporate taxes also gives rise to a positive GDP response, external price competitiveness and private investment, they negatively affect employment, the trade balance and the general government deficit.
    JEL: H30 E62 H20 H22
    Date: 2018–03
  29. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We examine how the degree of financial market incompleteness affects welfare gains from policy cooperation in capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We find that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from policy cooperation in capital controls then become larger.
    Keywords: Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game
    JEL: D52 E61 F32 F42 G15
    Date: 2019–01

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