nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒02‒04
eighteen 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 Farmer; Pawel Zabczyk
  2. Keynesian Models, Detrending, and the Method of Moments By MAO TAKONGMO, Charles Olivier
  3. Learning Efficiency Shocks, Knowledge Capital and the Business Cycle: A Bayesian Evaluation By Alok Johri; Muhebullah Karimzada
  4. Are Labor Unions Important for Business Cycle Fluctuations: Lessons from Bulgaria (1999-2016) By Aleksandar Vasilev
  5. Firm Wages in a Frictional Labor Market By Rudanko, Leena
  6. Labor Market Search, Informality, and On-The-Job Human Capital Accumulation By Bobba, Matteo; Flabbi, Luca; Levy Algazi, Santiago; Tejada, Mauricio
  7. The Dynamics of Balanced Expansion in Monetary Economies with Sovereign Debt By Böhm, Volker
  8. Financial Frictions, Durable Goods and Monetary Policy By Leo Michelis; Ugochi T. Emenogu
  9. Innovation and trade policy in a globalized world By Akcigit, Ufuk; Ates, Sina T.; Impullitti, Giammario
  10. Fluctuaciones Cíclicas y Cambios de Régimen en la Economía Boliviana: Un Análisis Estructural a partir de un Modelo DSGE By David Zeballos Coria; Juan Carlos Heredia Gómez; Paola Yujra Tonconi
  11. Unemployment Volatility and Networks By Steven Kivinen
  12. Technological Unemployment Revisited: Automation in a Search and Matching Framework By Cords, Dario; Prettner, Klaus
  13. Expectation Formation and Learning in the Labour Market with On-the-Job Search and Nash Bargaining By Damdinsuren, Erdenebulgan; Zaharieva, Anna
  15. Credit Subsidies By Fiorella de Fiore; Oreste Tristani; Isabel Horta Correia; Pedro Teles
  16. Social Networks, Promotions, and the Glass-Ceiling Effect By Neugart, Michael; Zaharieva, Anna
  17. Bad Jobs By Yu Chen; Matthew Doyle; Francisco Gonzalez
  18. Interest Rate Uncertainty and Sovereign Default Risk By Alok Johri; Shahed K. Khan; Cesar Sosa-Padilla

  1. By: Roger 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.
    Date: 2019–01
  2. By: MAO TAKONGMO, Charles Olivier
    Abstract: One important question in the Keynesian literature is whether we should detrend data when estimating the parameters of a Keynesian model using the moment method. It has been common in the literature to detrend data in the same way the model is detrended. Doing so works relatively well with linear models, in part because in such a case the information that disappears from the data after the detrending process is usually related to the parameters that also disappear from the detrended model. Unfortunately, in heavy non-linear Keynesian models, parameters rarely disappear from detrended models, but information does disappear from the detrended data. Using a simple real business cycle model, we show that both the moment method estimators of parameters and the estimated responses of endogenous variables to a technological shock can be seriously inaccurate when the data used in the estimation process are detrended. Using a dynamic stochastic general equilibrium model and U.S. data, we show that detrending the data before estimating the parameters may result in a seriously misleading response of endogeneous variables to monetary shocks. We suggest building the moment conditions using raw data, irrespective of the trend observed in the data.
    Keywords: RBC models, DSGE models, Trend.
    JEL: C12 C13 C15 E17 E51
    Date: 2019
  3. By: Alok Johri; Muhebullah Karimzada
    Abstract: We incorporate shocks to the efficiency with which firms learn from production activity and accumulate knowledge into an otherwise standard real DSGE model with imperfect competition. Using real aggregate data and Bayesian inference techniques, we find that learning efficiency shocks are an important source of observed variation in the growth rate of aggregate output, investment, consumption and especially hours worked in post-war US data. The estimated shock processes suggest much less exogenous variation in preferences and total factor productivity are needed by our model to account for the joint dynamics of consumption and hours. This occurs because learning efficiency shocks induce shifts in labour demand uncorrelated with current TFP, a role usually played by preference shocks. At the same time, knowledge capital acts like an endogenous source of productivity variation in the model. Measures of model fit prefer the specification with learning efficiency shocks. Independent evidence on learning efficiency shocks are provided using sign-restriction based structural vector auto-regressions.
    Keywords: Business Cycles, Learning-by-Doing, Learning Efficiency Shocks, Knowledge Capital
    JEL: E32
    Date: 2018–12
  4. By: Aleksandar Vasilev (Lincoln International Business School, UK)
    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: 2019–01
  5. By: Rudanko, Leena (Federal Reserve Bank of Philadelphia)
    Abstract: This paper studies a labor market with directed search, where multi-worker firms follow a firm wage policy: They pay equally productive workers the same. The policy reduces wages, due to the influence of firms’ existing workers on their wage setting problem, increasing the profitability of hiring. It also introduces a time-inconsistency into the dynamic firm problem, because firms face a less elastic labor supply in the short run. To consider outcomes when firms reoptimize each period, I study Markov perfect equilibria, proposing a tractable solution approach based on standard Euler equations. In two applications, I first show that firm wages dampen wage variation over the business cycle, amplifying that in unemployment, with quantitatively significant effects. Second, I show that firm wage firms may find it profitable to fix wages for a period of time, and that an equilibrium with fixed wages can be good for worker welfare, despite added volatility in the labor market.
    Keywords: Labor Market Search; Business Cycles; Wage Rigidity; Competitive Search; Limited Commitment
    JEL: E24 E32 J41 J64
    Date: 2019–01–22
  6. By: Bobba, Matteo (Toulouse School of Economics); Flabbi, Luca (University of North Carolina, Chapel Hill); Levy Algazi, Santiago (Inter-American Development Bank); Tejada, Mauricio (Universidad Alberto Hurtado)
    Abstract: We develop a search and matching model where firms and workers produce output that depends both on match-specific productivity and on worker-specific human capital. The human capital is accumulated while working but depreciates while searching for a job. Jobs can be formal or informal and firms post the formality status. The equilibrium is characterized by an endogenous steady state distribution of human capital and by an endogenous formality rate. The model is estimated on longitudinal labor market data for Mexico. Human capital accumulation on-the-job is responsible for more than half of the overall value of production and upgrades more quickly while working formally than informally. Policy experiments reveal that the dynamics of human capital accumulation magnifies the negative impact on productivity of the labor market institutions that give raise to informality.
    Keywords: labor market frictions, search and matching, Nash bargaining, informality, on-the-job human capital accumulation
    JEL: J24 J3 J64 O17
    Date: 2019–01
  7. By: Böhm, Volker (Center for Mathematical Economics, Bielefeld University)
    Abstract: The paper examines the role of fiscal and monetary policy on the dynamics of monetary expansion in a macroeconomy. Its microeconomic structure defined by producers with neoclassical production functions, heterogeneous OLG consumers, and a stationary fiscal and monetary policy induces a consistent dynamic closed macroeconomic model of the AS-AD type. Existence and uniqueness of a temporary competitive monetary equilibrium are shown in a two-market economy (determining prices, wages, output, and employment) under a standard set of neoclassical conditions on production, consumer preferences, fiscal and monetary parameters. Comparative statics on prices, wages, and allocations for all levels of the state variables: money balances, debt, and expectations are shown. The dynamic development of temporary equilibria is defined by orbits of a dynamical system generated by three mappings of the one-step (recursive) time change, one for each state variable. The paper defines and describes explicitly the forecasting rules for prices as functions (so-called perfect predictors) which induce perfect foresight along orbits of the economy. It establishes sufficient conditions for their existence and uniqueness and provides a constructive characterization of perfect predictors for the AS-AD economy. Given existence of a globally perfect predictor, perfect foresight holds along all orbits of the economy. The results show that constant intertemporal allocations are uniquely gener- ated by orbits of balanced expansion of both money balances and public debt. Generically, depending on parameters, there exist two or no balanced paths while stationary equilibria with zero inflation exist only on a small (non-open) set of parameters. For a benchmark case (defined by isoelastic utility and production functions) perfect foresight dynamics exist globally and are monotonic (no cycles). There exist at most two balanced paths one of which is always unstable. Their existence and stability are influenced in a decisive way by fiscal and monetary parameters determining steady state inflation rates, allocations, as well as bounds for sustainable debt-to-GDP ratios.
    Keywords: monetary/fiscal policy, deficit, monetary growth, stability, perfect foresight
    Date: 2018–09–28
  8. By: Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada); Ugochi T. Emenogu (Bank of Canada, Ottawa, Canada)
    Abstract: This paper examines the effect of financial frictions on the consumption of durables and non-durables in a two-sector DSGE model with sticky prices and heterogeneous agents. The financial frictions are a combination of loan-to-value (LTV) and payment-to-income (PTI) constraints faced by borrowers. In this setting a monetary contraction reduces drastically the maximum amount that consumers can borrow in order to purchase durable goods. As a result, the model predicts that the consumption of durables falls, along with non-durables even when durable prices are fully flexible. Also output falls and the nominal interest rate increases following a monetary tightening. Thus, the model matches better the predictions of the model with the data, relative to the existing literature.
    Keywords: Durable goods, Sticky prices, Financial frictions, Monetary policy
    JEL: E44 E52
    Date: 2019–01
  9. By: Akcigit, Ufuk; Ates, Sina T.; Impullitti, Giammario
    Abstract: How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions, we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, market leadership, and trade flows, in a world with two large open economies at different stages of development. Firms’ R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) has ambiguous effects on welfare, while, dynamically, intensified globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, and only when introduced unilaterally. Tariffs generate large welfare losses in the medium and long run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally, our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.
    Keywords: economic growth; short- and long run gains from globalization; foreign technological catching-up; innovation policy; trade policy; competition
    JEL: F13 F43 O40
    Date: 2018–12
  10. By: David Zeballos Coria (Universidad La Salle); Juan Carlos Heredia Gómez (Universidad Andina Simón Bolívar); Paola Yujra Tonconi (Investigadora Junior)
    Abstract: El objetivo de la investigación es evaluar el comportamiento de la economía boliviana con base en un modelo de Equilibrio General Dinámico Estocástico, con cambio de Régimen (Markov-Switching DSGE). Empleando un modelo para una pequeña economía abierta, con instrumentación de la política monetaria basada en agregados y un mecanismo de intervención cambiaria, mediante técnicas de estimación bayesiana, se encuentra evidencia que parámetros estructurales del modelo, como los coeficientes de la función de reacción del Banco Central, experimentaron un cambio de régimen en 2000-2017; un comportamiento similar se verificaría también en las volatilidades de los choques estructurales experimentados por la economía boliviana en dicho período.
    Keywords: DFluctuaciones económicas, Modelo DSGE, Markov Switching, Estimación Bayesiana.
    JEL: E3 E6
    Date: 2018–10
  11. By: Steven Kivinen (Department of Economics, Dalhousie University)
    Abstract: I incorporate social networks into a search and matching model, allowing for congestion effects. The model predicts that the presence of network externalities increases the volatility of unemployment and other variables. I demonstrate analytically that aggregate matching functions exhibit decreasing returns to scale under certain conditions, that unemployment and matching rates have a larger response to productivity shocks, and that labour market tightness adjusts more slowly to its steady-state. Numerical simulations demonstrate that network effects can generate increases in the volatility of unemployment and matching rates, as well as increases in the autocorrelation of vacancies.
    Keywords: Social Networks; Unemployment; Search and Matching
    Date: 2017–03–15
  12. By: Cords, Dario; Prettner, Klaus
    Abstract: Will low-skilled workers be replaced by automation? To answer this question, we set up a search and matching model that features two skill types of workers and includes automation capital as an additional production factor. Automation capital is a perfect substitute for low-skilled workers and an imperfect substitute for high-skilled workers. Using this type of model, we show that the accumulation of automation capital decreases the labor market tightness in the low-skilled labor market and increases the labor market tightness in the high-skilled labor market. This leads to a rising unemployment rate and falling wages of low-skilled workers and a falling unemployment rate and rising wages of high-skilled workers. In a cali- bration to German data, we show that one additional industrial robot causes a loss of 1.66 low-skilled manufacturing jobs, whereas the additional robot creates 3.42 high-skilled manufacturing jobs. Thus, overall employment even rises with automation.
    Keywords: unemployment,automation,job search,technological progress,inequality,skill premium
    JEL: C78 J63 J64 O33
    Date: 2019
  13. By: Damdinsuren, Erdenebulgan (Center for Mathematical Economics, Bielefeld University); Zaharieva, Anna (Center for Mathematical Economics, Bielefeld University)
    Abstract: This paper develops a search and matching model with heterogeneous firms, on-the-job search by workers, Nash bargaining over wages and adaptive learning. We assume that workers are boundedly rational in the sense that they do not have perfect foresight about the outcome of wage bargaining. Instead workers use a recursive OLS learning mechanism and base their forecasts on the linear wage regression with the firm's productivity and worker's current wage as regressors. For a restricted set of parameters we show analytically that the Nash bargaining solution in this setting is unique. We embed this solution into the agentbased simulation and provide a numerical characterization of the Restricted Perceptions Equilibrium. The simulation allows us to collect data on productivities and wages which is used for updating workers' expectations. The estimated regression coefficient on productivity is always higher than the bargaining power of workers, but the difference between the two is decreasing as the bargaining power becomes larger and vanishes when workers are paid their full productivity. In the equilibrium a higher bargaining power is associated with higher wages and larger wage dispersion, in addition, the earnings distribution becomes more skewed. Moreover, our results indicate that a higher bargaining power is associated with a lower overall frequency of job-to-job transitions and a lower fraction of inefficient transitions among them. Our results are robust to the shifts of the productivity distribution
    Keywords: On-the-job search, Nash bargaining, OLS learning, inefficient transitions
    Date: 2018–12–18
  14. By: Roman N. Bozhya-Volya (National Research University Higher School of Economics); Alina S. Rybak (National Research University Higher School of Economics)
    Abstract: We investigate new instrument of monetary policy which is able to stimulate economy in the age of electronic money. Demurrage (negative interest on money holdings) is a non inflationary monetary instrument that is able to boost the rate of economic transactions. We show with the search-theoretic model that the search effort of buyers is increasing in demurrage fees and higher search effort is associated with the lower price level and higher aggregate output. We find that aggregate welfare is higher when demurrage is imposed compared to quantitative easing policy. While demurrage is complicated to impose on banknotes it is easily set on electronic money which makes this unconventional policy measure more technologically feasible
    Keywords: demurrage, negative interest on money, monetary policy, government policy in recession
    JEL: E50
    Date: 2019
  15. By: Fiorella de Fiore; Oreste Tristani; Isabel Horta Correia; Pedro Teles
    Abstract: Credit subsidies are an alternative to interest rate and credit policies when dealing with high and volatile credit spreads. In a model where credit spreads move in response to shocks to the net worth of financial intermediaries, credit subsidies are able to stabilize those spreads avoiding the transmission to the real economy. Interest rate policy can be a substitute for credit subsidies but is limited by the zero bound constraint. Credit subsidies overcome this constraint. They are superior to a policy of credit easing as long as the government is less efficient than financial intermediaries in providing credit.
    JEL: E31 E40 E44 E52 E58 E62 E63
    Date: 2018
  16. By: Neugart, Michael (Center for Mathematical Economics, Bielefeld University); Zaharieva, Anna (Center for Mathematical Economics, Bielefeld University)
    Abstract: Empirical studies show that female workers are under-represented in highest hierarchical positions of companies, which is known as the glass-ceiling effect. In this study we investigate the relationship between social networks and the glass-ceiling effect. Specifically, we develop an equilibrium search and matching model where job ladders consist of three hierarchical levels and social networks are generated endogenously. Male and female workers move up in the hierarchical ladder via job-to-job transitions between firms and internal promotions within firms. They also accumulate experience which is a necessary requirement for applying to jobs in the highest hierarchical level. Open vacancies can be filled by formal matching of applicants to jobs or by referrals, which implies that senior workers recommend their social contacts for the job. Social networks exhibit gender homophily, which reflects the fact that social ties are more likely to be formed between workers of the same gender. In a setting when female workers are the minority, there are too few female contacts in the social networks of their male colleagues. This disadvantage implies that female workers are refereed less often for the jobs and under-represented in senior hierarchical positions of firms. We show that referrals via homophilous social networks can explain part of the total wage gap stemming from the glass-ceiling effect in Germany (6:4%). This mechanism is amplified by more hierarchical firm structures, stronger clustering of social networks, and earlier promotion times.
    Keywords: glass-ceiling effect, networks, discrimination, theory of the firm, promotions, search-and-matching labor market
    Date: 2018–09–04
  17. By: Yu Chen (University of Calgary); Matthew Doyle (Department of Economics, University of Waterloo); Francisco Gonzalez (Department of Economics, University of Waterloo)
    Abstract: We propose a definition of bad jobs and a competitive search model that addresses why workers seek such jobs, why employers create them and why market forces allow bad jobs to persist. The model features competitive search equilibria in which unemployed workers search for jobs that are unambiguously bad in a well defined sense. Concretely, these are jobs with suboptimal career prospects and jobs characterized by employers' underinvestment in labor. Our theory builds on the insight that when current employers can counter outside offers, potential employers who do not observe workers' productivity in their current jobs use wages as a signal of workers' willingness to switch jobs. In turn, this implies that the wage contracts that employers post in the market for unemployed workers not only direct job search but also signal career prospects. Bad jobs are a symptom of coordination failure stemming from a conflict between the signaling and allocative roles of wage contracts. Our analysis brings out potential difficulties inherent to the economics of bad jobs.
    JEL: D82 E24 J31
    Date: 2019–01
  18. By: Alok Johri; Shahed K. Khan; Cesar Sosa-Padilla
    Abstract: Fluctuations in sovereign bond yields display a large global component which is associated with a rise in uncertainty. We build a model of sovereign default in which shocks to the level and to the volatility of the world interest rate help to account for this phenomenon. We calibrate the model parameters to Argentine data and estimate a process for the world interest rate using US treasuries data. Time variation in the world interest rate interacts with default incentives and its effect on borrowing and sovereign spreads is state contingent. We find that shocks to the level and volatility of the world interest rate (i.e. uncertainty shocks) cause the model to predict an average sovereign spread that is 280 basis points larger and 200 basis points more volatile than a model with a constant world interest rate. The model also predicts that countries will prefer a longer maturity for their debt when facing a time-varying world interest rate. The welfare gains from eliminating uncertainty about the world interest rate amount up to a permanent increase in consumption of 1 percent.
    Keywords: Sovereign default, Interest rate spread, Political turnover, Left-wing, Right-wing, Cyclicality of fiscal policy.
    JEL: E32 E43 F34 F41
    Date: 2018–12

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