|
on Dynamic General Equilibrium |
| By: | Nobuhiro Abe (Bank of Japan); Takuji Fueki (Bank of Japan); Sohei Kaihatsu (Strategy, Policy, and Review Department, International Monetary Fund) |
| Abstract: | This paper estimates a Markov switching dynamic stochastic general equilibrium model (MS-DSGE) allowing for changes in monetary/fiscal policy interaction. The key feature of the model is that it seeks to quantitatively examine the impact of changes in monetary/fiscal policy interaction on economic outcomes even during a period when the ZLB is binding and unconventional monetary policy is implemented. To this end, we estimate our model using the shadow interest rate, which can be interpreted as an aggregate that captures the overall effect of unconventional monetary policies as well as conventional monetary policy. Applying our model to Japan, we identify changes in monetary/fiscal policy interaction even during the period when unconventional monetary policy has been implemented. We find that the introduction of Qualitative and Quantitative Easing (QQE) enables the Bank of Japan to actively respond to the inflation rate, which has helped to push up inflation. |
| Keywords: | Monetary policy; Inflation; Markov-switching DSGE |
| JEL: | E52 E62 C32 |
| Date: | 2019–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp19e03&r=all |
| By: | Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante |
| Abstract: | This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically. |
| JEL: | E20 H2 H21 H31 H41 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25617&r=all |
| By: | Carlo Pizzinelli (University of Oxford); Konstantinos Theodoridis (Cardiff Business School); Francesco Zanetti (University of Oxford (E-mail: Francesco.Zanetti@ economics.ox.ac.uk)) |
| Abstract: | This paper documents state dependence in labor market fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specific idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low- productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity. |
| Keywords: | Search and Matching Models, State Dependence in Business Cycles, Threshold Vector Autoregression |
| JEL: | E24 E32 J64 C11 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:19-e-03&r=all |
| By: | Karin Mayr-Dorn |
| Abstract: | This paper analyses the effect of firm learning on labor market efficiency in a frictional labor market with asymmetric information. I consider a model with random matching and wage bargaining a la Pissarides (1985, 2000) where worker ability is unknown to firms at the hiring stage. Firm learning increases relative expected earnings in high-ability jobs and, thereby, enhances imitation incentives of low-ability workers. The net effect on aggregate expected match surplus and unemployment is indeterminate a priori. Numerical results show that firm learning does not increase labor market efficiency. |
| Keywords: | job search; on-the-job effort; asymmetric information; learning. |
| JEL: | D82 D83 J64 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2019_06&r=all |
| By: | Heejeong Kim (Concordia University) |
| Abstract: | This paper studies the implications of observed and unobserved heterogeneity in wages across households with different education levels on wealth inequality and life-cycle savings. Using the PSID, I estimate skill-specific wage processes that allow both observed between-group wage dispersion and unobserved within-group wage dispersion. The implications of these estimated skill-specific wage processes are quantitatively studied in an incomplete-markets overlapping-generations general equilibrium model wherein households choose their education. I show that, in contrast to a model with a common wage process, the model with skill-specific wage processes explains far more wealth inequality and life-cycle wealth accumulation of skilled and unskilled households seen in data. |
| Keywords: | Incomplete markets, wealth inequality, life-cycle savings |
| JEL: | E21 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:19003&r=all |
| By: | William Gbohoui |
| Abstract: | This paper develops a dynamic general equilibrium model to assess the effects of temporary business tax cuts. First, the analysis extends the Ricardian equivalence result to an environment with production and establishes that a temporary tax cut financed by a future tax-increase has no real effect if the tax is lump-sum and capital markets are perfect. Second, it shows that in the presence of financing frictions which raise the cost of investment, the policy temporarily relaxes the financing constraint thereby reducing the marginal cost of investment. This direct effect implies positive marginal propensities to invest out of tax cuts. Third, when the tax is distortionary, the expectation of high future tax rates reduces the expected marginal return on investment mitigating the direct stimulative effects. |
| Date: | 2019–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/29&r=all |
| By: | Matthes, Christian (Federal Reserve Bank of Richmond); Lubik, Thomas A. (Federal Reserve Bank of Richmond); Verona, Fabio (Bank of Finland) |
| Abstract: | We study the behavior of key macroeconomic variables in the time and frequency domain. For this purpose, we decompose U.S. time series into various frequency components. This allows us to identify a set of stylized facts: GDP growth is largely a high-frequency phenomenon whereby inflation and nominal interest rates are characterized largely by low-frequency components. In contrast, unemployment is a medium-term phenomenon. We use these decompositions jointly in a structural VAR where we identify monetary policy shocks using a sign restriction approach. We find that monetary policy shocks affect these key variables in a broadly similar manner across all frequency bands. Finally, we assess the ability of standard DSGE models to replicate these findings. While the models generally capture low-frequency movements via stochastic trends and business-cycle fluctuations through various frictions, they fail at capturing the medium-term cycle. |
| Keywords: | Wavelets; bandpass filter; SVAR; sign restrictions; DSGE model |
| JEL: | C32 C51 E32 |
| Date: | 2019–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:19-06&r=all |
| By: | Troug, Haytem |
| Abstract: | To show how fiscal policy affects the transmission mechanism of monetary policy, we extend a standard new Keynesian model for a small open economy to allow for the presence of non-separable government consumption in the utility function. We show how monetary policy should optimally respond to demand and supply shocks when the government sector is incorporated into the model. The introduction of government consumption affects the transmission of monetary policy. When government consumption has a crowding in effect on private consumption, it will dampen the transmission mechanism of monetary policy, and vice versa. Nevertheless, the degree of openness will minimise the effect of the introduction of government consumption in a non-separable form. Data for 35 OECD countries empirically support these findings, and the empirical results are robust to the zero lower bound period. The theoretical model also shows that, once we model the rest of the world economy, domestic government consumption and foreign government consumption will have opposing effects on private consumption, which contradicts with the existing literature. |
| Keywords: | New Keynesian models, Business Cycle, Monetary Policy, Open Economy Macroeconomics, Joint Analysis of Fiscal and Monetary Policy. |
| JEL: | E12 E32 E52 E63 F41 |
| Date: | 2019–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92511&r=all |
| By: | Heejeong Kim (Concordia University) |
| Abstract: | What drives sharp declines in aggregate quantities over the Great Recession? I study this question by building a dynamic stochastic overlapping generations economy where households hold both low-return liquid and high-return illiquid assets. In this environment, I consider shocks to aggregate TFP that occur alongside a rise in risk of a further economic downturn. Importantly, a higher probability of an economic disaster is consistent with the recent evidence finding a decline in households’ expected income growth over the Great Recession. I also show that a rise in disaster risk explains the rise in savings rates, seen in the micro data over the Great Recession. When calibrated to reproduce the distribution of wealth as well as the frequency and severity of disasters reported in Barro (2006), a rise in disaster risk, and an empirically consistent fall in TFP, explains around 70 percent of the decline in aggregate consumption and more than 50 percent of the decline in investment over the Great Recession. Comparing my model to an economy without illiquid assets, I find that household variation in the liquidity of wealth plays a key role in amplifying the effect of a rise in disaster risk. |
| Keywords: | Business cycles, incomplete markets, disaster risk, portfolio choice |
| JEL: | E21 E32 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:19002&r=all |
| By: | Miroslav Gabrovski (University of Hawaii at Manoa); Jang-Ting Guo (University of California, Riverside) |
| Abstract: | In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical fluctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is sufficiently low. |
| Keywords: | Progressive Taxation, Nominal Wage Rigidity, Automatic Stabilizer, Business Cycles |
| JEL: | E12 E32 E62 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201902&r=all |
| By: | Philippon, Thomas |
| Abstract: | We propose a model to identify the causes of rising profits and concentration, and declining entry and investment in the US economy. Our approach combines a rich structural DSGE model with cross sectional identification from firm and industry date. Using asset prices, our model estimates the realized and anticipated shocks that drive the endogeneity of entry and concentration and recovers shocks to entry costs. We validate our approach by showing that the model implied entry shocks correlate with independently constructed measures of entry regulation and M&A activities. We conclude that entry costs have risen and that the ensuing decline in competition has depressed consumption by five to ten percent. |
| Keywords: | Competition; corporate investment; Tobin's q; zero lower bound |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13548&r=all |
| By: | Boerma, Job; Karabarbounis, Loukas |
| Abstract: | We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and home production. Accounting for home production amplifies welfare-based differences across households meaning that inequality is larger than we thought. Home production does not offset differences that originate in the market sector because productivity differences in the home sector are significant and the time input in home production does not covary with consumption expenditures and wages in the cross section of households. The optimal tax system should feature more progressivity taking into account home production. |
| Keywords: | Consumption; Home Production; inequality; Labor Supply |
| JEL: | D10 D60 E21 J22 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13554&r=all |
| By: | Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College) |
| Abstract: | A New Keynesian model, estimated using Bayesian methods over a sample period that includes the recent episode of zero nominal interest rates, illustrates the effects of replacing the Federal Reserve's historical policy of interest rate management with one targeting money growth instead. Counterfactual simulations show that a rule for adjusting the money growth rate, modestly and gradually, in response to changes in the output gap delivers performance comparable to the estimated interest rate rule in stabilizing output and inflation. The simulations also reveal that, under the same money growth rule, the US economy would have recovered more quickly from the 2007-09 recession, with a much shorter period of exceptionally low interest rates. These results suggest that money growth rules can serve as a simple and effective alternative guide for monetary policy in the current low interest rate environment. |
| Keywords: | Divisia monetary aggregates, Monetary policy rules, New Keynesian models, Zero lower bound |
| JEL: | E31 E32 E41 E47 E51 E52 |
| Date: | 2019–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:976&r=all |
| By: | Germán Gutiérrez; Callum Jones; Thomas Philippon |
| Abstract: | We propose a model to identify the causes of rising profits and concentration, and declining entry and investment in the US economy. Our approach combines a rich structural DSGE model with cross-sectional identification from firm and industry data. Using asset prices, our model estimates the realized and anticipated shocks that drive the endogeneity of entry and concentration and recovers shocks to entry costs. We validate our approach by showing that the model-implied entry shocks correlate with independently constructed measures of entry regulation and M&A activities. We conclude that entry costs have risen and that the ensuing decline in competition has depressed consumption by five to ten percent. |
| JEL: | D4 E0 E22 E3 L1 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25609&r=all |
| By: | CHAFIK, Omar |
| Abstract: | Nominal interest rate is generally assumed to follow an UIP condition when the exchange rate is fixed, and the capital account is opened. Consequently, domestic interest rate is determined by foreign rates and the risk premium. This paper shows that for an oil exporting country like UAE, adjusting nominal interest rate only to foreign rate could be economically inconsistent. In fact, what really matters with exchange rate is expectations, and for an oil exporter country like UAE these expectations are significantly impacted by oil prices. By incorporating a market-expected exchange rate mechanism in a semi-structural New Keynesian Model, this paper highlights the importance of this mechanism and provides a consistent analytical framework. |
| Keywords: | Monetary policy, exchange rate, New Keynesian Model, UIP condition, Bayesian estimation |
| JEL: | C11 E3 E5 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92558&r=all |
| By: | Zhou, Haiwen |
| Abstract: | The interaction among a firm’s choices of output, technology, and monitoring intensity is studied in a general equilibrium model. Firms engage in oligopolistic competition and unemployment is a result of the existence of efficiency wages. The following results are derived analytically. First, an increase in the cost of exerting effort leads a firm to choose a more advanced technology and a lower level of monitoring intensity. Second, an increase in the discount rate does not change a firm’s choices of technology and monitoring intensity. Third, an increase in the elasticity of substitution among goods leads a firm to choose higher levels of monitoring intensity and technology. In a model in which the level of monitoring is exogenously given, there is a negative relationship between the wage rate and the monitoring intensity. In this model with endogenously chosen monitoring intensity, the wage rate and the monitoring intensity can move either in the same direction or in opposite directions. |
| Keywords: | Unemployment, efficiency wages, monitoring intensity, the choice of technology, oligopoly |
| JEL: | E24 J64 L13 |
| Date: | 2019–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92494&r=all |
| By: | Miguel Casares Polo (Departamento de Economía-UPNA); Alba Del Villar (Departamento de Economía-UPNA) |
| Abstract: | We calibrate a two-country New Keynesian model with endogenous portfolio choice and valuation effects to discuss the determinants of the increase in Canadian Net Foreign Assets with the US observed after 2012. Furthermore, we discuss the shocks that may explain the “reversed two-way” capital flows pattern recently characterizing the Canada-US asset trading: Canada has a negative position on bond holdings owned by US investors while a positive balance emerges on its equity holdings from US firms. The combination of a global technology shock, the US fiscal contraction, an adverse wage-push shock in the US and the greater monetary stimulus in the US than in Canada (QE) provide insights to describe the recent capital flows between Canada and the US. Both the QE and the negative wage-push shock in the US play a crucial role as explanatory factors through substantial valuation effects. |
| Keywords: | US-Canada capital flows, portfolio choice model, business cycles |
| JEL: | E44 F41 F44 E12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:nav:ecupna:1901&r=all |
| By: | Josef Schroth |
| Abstract: | This paper studies optimal bank capital requirements in a model of endogenous bank funding conditions. I find that requirements should be higher during good times such that a macroprudential "buffer" is provided. However, whether banks can use buffers to maintain lending during a financial crisis depends on the capital requirement during the subsequent recovery. The reason is that a high requirement during the recovery lowers bank shareholder value during the crisis and thus creates funding-market pressure to use buffers for deleveraging rather than for maintaining lending. Therefore, buffers are useful if banks are not required to rebuild them quickly. |
| Keywords: | financial frictions, financial intermediation, regulation, counter-cyclical capital requirements, market discipline, access to funding |
| JEL: | E13 E32 E44 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:771&r=all |
| By: | Valentin Jouvanceau (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France) |
| Abstract: | What are the impacts of a flush of interest-bearing excess reserves to the real economy? Surprisingly, the theoretical literature remains silent about this question. We address this issue in a new Keynesian model with various financial frictions and reserve requirements in the balance sheet of bankers. Modeling QE by the supply of excess reserves, allow for endogenous changes in the relative supply of financial assets. We find that this mechanism is crucial to identify and disentangle between the portfolio balance, the credit and the asset prices channels of QE. Further, we demonstrate that the macroeconomic effects of QE are rather weak and mainly transmitted through the asset prices channel. |
| Keywords: | Quantitative Easing, Excess Reserves, Transmission Channels, Securitization Crisis |
| JEL: | E32 E44 E52 E58 G01 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1910&r=all |
| By: | Calin Arcalean |
| Abstract: | I develop a political economy theory of dynamic fiscal competition via public spending and debt. With internationally mobile capital, strategic policies generate two cross-border externalities that voters in each country fail to internalize: (1) an increase in public spending that bolsters capital accumulation but also (2) a race to the top in public debt which crowds out capital. The relative size of these two externalities varies with the number of financially integrated countries and interacts with the domestic political conflict between young and old voters. Despite residence based taxation, capital tax rates are lower under strategic policies than under coordination. Furthermore, they may decline with financial integration. Strategic policies lead to lower long run output and welfare relative to coordination but are preferred by subse-quent generations of voters if the number of financially integrated countries is low or the political weight of the young is high. |
| Keywords: | political economy, public spending, public debt, economic integration |
| JEL: | H20 H40 H60 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7530&r=all |
| By: | Cantore, Cristiano; Ferroni, Filippo; León-Ledesma, Miguel |
| Abstract: | The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but with a wide variety of NK models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken. |
| Keywords: | Labor Share; monetary policy shocks |
| JEL: | C52 E23 E32 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13551&r=all |
| By: | Miyamoto, Wataru; Nguyen, Thuy Lan |
| Abstract: | We quantify the effects of changes in international input-output linkages on the nature of business cycles. We build a multi-sector multi-country international business cycle model that matches the input-output structure within and across countries. We find that, in our 23 countries sample with manufacturing and non-manufacturing sectors, changes in the international input-output linkages between 1970 and 2007 causes a 15% drop in output volatility in a median country, but the effects are heterogeneous across countries. Changing international linkages tend to stabilize output in most countries, while leading to a higher risk of a global recession. |
| Keywords: | International business cycles, trade linkages, volatilities, input-output |
| JEL: | E32 F31 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2018-16&r=all |
| By: | Cars Hommes; Joep Lustenhouwer |
| Abstract: | Policy implications are derived for an inflation-targeting central bank, whose credibility is endogenous and depends on its past ability to achieve its targets. This is done in a New Keynesian framework with heterogeneous and boundedly rational expectations. We find that the region of allowed policy parameters is strictly larger than under rational expectations. However, when the zero lower bound on the nominal interest rate is accounted for, self-fulfilling deflationary spirals can occur, depending on the credibility of the central bank. Deflationary spirals can be prevented with a high inflation target and aggressive monetary easing. |
| Keywords: | Business fluctuations and cycles; Credibility; Monetary policy |
| JEL: | E52 E32 C62 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-9&r=all |