nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒03‒18
nineteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. An Operationalizing Theoretical Framework for the Analysis of Universal Health Coverage Reforms: First Test on an Archetype Developing Economy By Sameera Awawda; Mohammad Abu-Zaineh
  2. Fiscal Austerity and Migration: A Missing Link By Guillherme Bandeira; Jordi Caballé; Eugenia Vella
  3. Alchemy of Financial Innovation: Securitization, Liquidity and Optimal Monetary Policy By Jungu Yang
  4. Behavioural economics is useful also in macroeconomics : the role of animal spirits By de Grauwe, Paul; Ji, Yuemei
  5. Sovereign Spread Volatility and Banking Sector By Vivek Sharma; Edgar Silgado-Gómez
  6. Shadow banking and the Great Recession: Evidence from an estimated DSGE model By Patrick Fève; Alban Moura; Olivier Pierrard
  7. International Business Cycles: Information Matters By Eleni Iliopulos; Erica Perego; Thepthida Sopraseuth
  8. Long-term business relationships, bargaining and monetary policy By Mirko Abbritti; Asier Aguilera-Bravo; TommasoTrani
  9. Lending frictions and nominal rigidities: Implications for credit reallocation and TFP By David Florian Hoyle; Johanna L. Francis
  10. The Disability Option: Labor Market Dynamics with Macroeconomic and Health Risks By Amanda Michaud; David Wiczer
  11. Monetary financing with interest-bearing money By Harrison, Richard; Thomas, Ryland
  12. On Liquidity Shocks and Asset Prices By Pablo A. Guerron-Quintana; Ryo Jinnai
  13. Frictional Unemployment on Labor Flow Networks By Robert L. Axtell; Omar A. Guerrero; Eduardo L\'opez
  14. Changing Business Cycles: The Role of Women's Employment By Albanesi, Stefania
  15. A macroeconomic model with heterogeneous and financially-constrained intermediaries By Thomas Lejeune; Raf Wouters
  16. Capital misallocation and secular stagnation By Andrea Caggese; Ander Pérez-Orive
  17. Quantitative Easing and Excess Reserves By Valentin Jouvanceau
  18. Estimating the Price Markup in the New Keynesian Model By Martin M. Andreasen; Mads Dang
  19. Do Plants Freeze upon Uncertainty Shocks? By Ariel Mecikovsky; Matthias Meier

  1. By: Sameera Awawda (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Mohammad Abu-Zaineh (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: This paper presents an operationalizing theoretical framework to analyze the potential effects of universal health coverage (UHC) using dynamic stochastic general equilibrium (DSGE) model. The DSGE encapsulates a set of heterogeneous households that optimize their intertemporal utility of consumption, health capital, and leisure. The model is calibrated to capture the salient features of an archetype developing economy. The model is, then, used to simulate alternative UHC-financing policies. The theoretical framework we propose can be easily adapted to assess the implementation of UHC in a particular developing country setting. When applied to a hypothetical country, results show that the implementation of UHC can indeed improve access to healthcare for the population while offering households financial protection against future uncertainty. However, the degree of financial risk protection appears to vary across heterogeneous households and UHC-financing policies, depending on the associated benefits and the additional burden borne by each group.
    Keywords: universal health coverage, financial risk protection, dynamic stochastic general equilibrium model, developing countries
    Date: 2019–02
  2. By: Guillherme Bandeira; Jordi Caballé; Eugenia Vella
    Abstract: In this paper we propose a new channel through which fiscal austerity affects the macroeconomy. To this end, we introduce endogenous migration both for the unemployed and the employed members of the household in a small open economy New Keynesian model with labour market frictions. Our model-based simulations for the austerity mix implemented in Greece over the period 2010-2015 show that the model is able to match the total size of half a million emigrants and output drop of 25%, while the model without migration generates an output drop of 20%. Having established that the model delivers empirically plausible results, we then use it to investigate (i) the two-way relation between migration and austerity, and (ii) the role of migration as shock absorber. We find that tax hikes induce prolonged migration outflows, while the effect of spending cuts is hump-shaped. In turn, emigration implies an increase in both the tax hike and time required to achieve a given size of debt reduction. As a result of the labour-reducing effect of these higher tax hikes, the unemployment gains from migration are only temporary in the presence of austerity and are substantially reversed over time.
    Keywords: fiscal consolidation, Migration, matching frictions, on-the-job search
    JEL: E32 F41
    Date: 2019–03
  3. By: Jungu Yang (Economic Research Institute, Bank of Korea)
    Abstract: This paper provides a theoretical model to explain how securitization affects the overall liquidity and welfare of an economy, an under-discussed area in the literature. By applying an overlapping generations model with random-relocation shocks, the effects of securitization are analyzed in three different hypothetical situations: 1. only one region of the economy issues securities, 2. all regions issue securities with the same capital productivity, and 3. all regions issue securities, but capital productivity is disparate across regions. Asset securitization plays a role in supplying alternative liquid assets (fiat money). As the economy can invest its resources more efficiently in high-yielding illiquid assets (capital) due to securitization, both consumption and welfare increase overall. Optimal monetary policy follows the Friedman rule in cases 1. and 2. However, the rule does not apply in case 3.
    Keywords: Securitization, Liquidity, Friedman Rule, Monetary Policy
    JEL: E52 G11 G12
    Date: 2019–02–20
  4. By: de Grauwe, Paul; Ji, Yuemei
    Abstract: Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations driven by animal spirits. Our discussion includes two applications. One is on the optimal level of inflation targeting under a zero lower bound constraint. The other is on the role of animal spirits in explaining the synchronization of business cycles across countries.
    Keywords: Animal spirits Behavioural macroeconomics Monetary policy Inflation target Zero lower bound Business cycles
    JEL: E32 E58 F42
    Date: 2018–03–14
  5. By: Vivek Sharma (LUISS Guido Carli, Department of Economics and Finance); Edgar Silgado-Gómez (University of Rome "Tor Vergata" & European Central Bank)
    Abstract: Using structural vector autoregression augmented with stochastic volatility (SVAR-SV), we document that in late 2000s there were large spikes in volatility of spreads on peripheral eurozone government bonds. This increased volatility entailed a significant decline in bank credit to nonfinancial sector and real economic activity. We rationalize these results in a New Keynesian dynamic stochastic general equilibrium (DSGE) model with financial intermediation. In our framework, a rise in spread volatility erodes banks’ net worth and constrains their balance sheets. The banks respond by slashing their lending to real sector, dampening the economy as a whole. Results from the model match our empirical findings.
    Keywords: Sovereign Spread Volatility, Banks, SVAR-SV, NK-DSGE
    JEL: E32 E44 F30
    Date: 2019–03–08
  6. By: Patrick Fève; Alban Moura; Olivier Pierrard
    Abstract: We argue that shocks to credit supply by shadow and retail banks were key to understand the behavior of the US economy during the Great Recession and the Slow Recovery. We base this result on an estimated DSGE model featuring a rich representation of credit flows. Our model selects the two banking shocks as the most important drivers of the crisis because they account simultaneously for the fall in real activity, the decline in credit intermediation and the rise in lending-borrowing spreads. On the other hand, in contrast with the existing literature, our results assign only a moderate role to productivity and investment efficiency shocks.
    Keywords: Shadow banking, Great Recession, slow recovery, estimated DSGE models.
    JEL: C32 E32
    Date: 2019–03
  7. By: Eleni Iliopulos; Erica Perego; Thepthida Sopraseuth
    Abstract: We study the international transmission of shocks when agents form expectations under adaptive learning and imperfect information. To this aim we consider a two-country model featuring financial frictions, nominal rigidities, learning and Home information bias (as a source of information imperfection). We show that the more pronounced the Home information bias, the less agents track the international transmission of shocks, as it would otherwise be the case under rational expectations. The model succeeds in matching the low business cycle synchronization of consumption, while generating a positive output co-movement. In doing so, the model takes the theory closer to the data with respect to the output-consumption co-movement anomaly. The model also exhibits departure from the Uncovered Interest rate Parity.
    Keywords: Financial Frictions;International Business Cycles;Learning;Uncovered Interest Rate Parity
    JEL: D84 E44 E51 F41 F42
    Date: 2019–02
  8. By: Mirko Abbritti (University of Navarra); Asier Aguilera-Bravo (Public University of Navarra and INARBE); TommasoTrani (University of Navarra)
    Abstract: A growing empirical literature documents the importance of long-term relationships and bargaining for price rigidity and firms' dynamics. This paper introduces long-term business-to-business (B2B) relationships and price bargaining into a standard monetary DSGE model. The model is based on two assumptions: first, both wholesale and retail producers need to spend resources to form new business relationships. Second, once a B2B relationship is formed, the price is set in a bilateral bargaining between firms. The model provides a rigorous framework to study the effect of long-term business relationships and bargaining on monetary policy and business cycle dynamics. It shows that, for a standard calibration of the product market, these relationships reduce both the allocative role of intermediate prices and the real effects of monetary policy shocks. We also find that the model does a good job in replicating the second moments and cross-correlations of the data, and that it improves over the benchmark New Keynesian model in explaining some of them.
    Keywords: Monetary Policy, PriceBargaining, ProductMarketSearch, B2B
    JEL: E52 E3 D4 L11
    Date: 2019–03–06
  9. By: David Florian Hoyle (Central Reserve Bank of Peru); Johanna L. Francis (Fordham University)
    Abstract: In most modern recessions there is a sharp increase in job destruction and a mild to moderate decline in job creation, resulting in unemployment. The Great Recession was marked by a significant decline in job creation particularly for young firms in addition to the typical increase in destruction. As a result job reallocation fell. In this paper, we explicitly propose a mechanism for financial shocks to disproportionately affect young (typically) smaller firms via credit contracts. We investigate the particular roles of credit frictions versus nominal rigidities in a New Keynesian model augmented by a banking sector characterized by search and matching frictions with endogenous credit destruction. In response to a financial shock, the model economy produces large and persistent increases in credit destruction, declines in credit creation, and an overall decline in reallocation of credit among banks and firms; total factor productivity declines, even though average firm productivity increases, inducing unemployment to increase and remain high for many quarters. Credit frictions not only amplify the effects of a financial shock by creating variation in the number of firms able to produce they also increase the persistence of the shock for output, employment, and credit spreads. When pricing frictions are removed, however, credit frictions lose some of their ability to amplify shocks, though they continue to induce persistence. These findings suggest that credit frictions combined with nominal rigidities are a plausible transmission mechanism for financial shocks to have strong and persistent effects on the labor market particularly for loan dependent firms. Moreover, they may play an important role in job reallocation across firms.
    Keywords: Unemployment, financial crises, gross credit flows, productivity
    JEL: J64 E32 E44 E52
    Date: 2019–03
  10. By: Amanda Michaud (University of Western Ontario); David Wiczer (Stony Brook University)
    Abstract: We evaluate the contribution of changing macroeconomic conditions and demographics to the increase in Social Security Disability Insurance (SSDI) over recent decades. Within our quantitative framework, multiple sectors differentially expose workers to health and economic risks, both of which affect individuals’ decisions to apply for SSDI. Over the transition, falling wages at the bottom of the distribution increased awards by 27% in the 1980s and 90s and aging demographics rose in importance thereafter. The model also implies two-thirds of the decline in working-age male employment from 1985 to 2013, three-fourths of which eventually goes on SSDI.
    Date: 2018
  11. By: Harrison, Richard (Bank of England); Thomas, Ryland (Bank of England)
    Abstract: Recent results suggesting that monetary financing is more expansionary than bond financing in standard New Keynesian models rely on a duality between policy rules for the rate of money growth and the short-term bond rate, rather than a special role for money. We incorporate two features into a simple sticky-price model to generalize these results. First, that money may earn a strictly positive rate of return, motivated by recent debates on the introduction of central bank digital currencies and the introduction of interest-bearing reserves. This allows money-financed transfers to be used as a policy instrument at the effective lower bound, without giving up the ability to use the short-term bond rate to stabilize the economy in normal times. Second, a simple financial friction generates a wealth effect on household spending from government liabilities. Though temporary money-financed transfers to households can stimulate spending and inflation when the short-term bond rate is constrained by a lower bound, similar effects could be achieved by bond-financed tax cuts. So our results do not provide compelling reasons to choose monetary financing rather than bond financing.
    Keywords: Monetary financing; zero lower bound; interest-bearing money; digital currency
    JEL: E43 E52 E62
    Date: 2019–03–08
  12. By: Pablo A. Guerron-Quintana (Boston College and Espol); Ryo Jinnai (Hitotsubashi University)
    Abstract: In models of financial frictions, stock market booms tend to follow adverse liquidity shocks. This finding is clearly at odds with the data. We demonstrate that this counterfactual result is specific to real business cycle models with exogenous growth. Once we allow for both endogenous productivity and growth, this puzzling price dynamics easily disappear. Intuitively, the gloomy economic-growth outlook following the adverse liquidity shocks generates a predictable and negative long-run component in dividend growth, leading to the collapse of equity prices.
    Date: 2019–03–13
  13. By: Robert L. Axtell; Omar A. Guerrero; Eduardo L\'opez
    Abstract: We develop an alternative theory to the aggregate matching function in which workers search for jobs through a network of firms: the labor flow network. The lack of an edge between two companies indicates the impossibility of labor flows between them due to high frictions. In equilibrium, firms' hiring behavior correlates through the network, generating highly disaggregated local unemployment. Hence, aggregation depends on the topology of the network in non-trivial ways. This theory provides new micro-foundations for the Beveridge curve, wage dispersion, and the employer-size premium. We apply our model to employer-employee matched records and find that network topologies with Pareto-distributed connections cause disproportionately large changes on aggregate unemployment under high labor supply elasticity.
    Date: 2019–03
  14. By: Albanesi, Stefania
    Abstract: This paper builds a real DSGE model with gender differences in labor supply and productivity. The model is used to assess the impact of changing trends in female labor supply on productivity and TFP growth and aggregate business cycles. We find that the growth in women's labor supply and relative productivity contributed substantially to TFP growth starting from the early 1980s, even if it depressed average labor productivity growth, contributing to the 1970s productivity slowdown. We also show that the lower cyclicality of female hours and their growing share in aggregate hours is able to account for a large fraction of the decline in the cyclicality of aggregate hours during the great moderation, as well as the decline in the correlation between average labor productivity and hours. Finally, we show that the discontinued growth in female labor supply after the 1990s played a substantial role in the jobless recoveries following the 2001 and 2007-2009 recession. Moreover, it also depressed aggregate hours and output growth during the late 1990s and mid 2000s expansions and it reduced male wages. These results suggest that continued growth in female hours since the early 1990s would have significantly improved economic performance in the United States.
    Keywords: business cycles; female employment; Great Moderation; jobless recoveries; productivity slowdown
    JEL: E27 E32 E37 J11
    Date: 2019–03
  15. By: Thomas Lejeune (Economics and Research Department, National Bank of Belgium); Raf Wouters (Economics and Research Department, National Bank of Belgium)
    Abstract: This paper analyses the risk amplification inherent in a macroeconomic model with a heterogeneous financial sector. It extends a model with an equity-constrained intermediary by adding a shadow banking intermediary with pro-cyclical leverage. It is shown that the inclusion of this intermediary significantly amplifies financial frictions and adds to financial instability. Quantitative effects on asset prices are magnified, and the amplification propagates to the real side of the macroeconomy. Reducing the size of the shadow banking sector involves a trade-off between stabilizing the economy and the expected growth of economic activity. Ignoring the heterogeneity of the financial sector may lead to an underestimation of the excess risk-taking due to the anticipation of expansionary policies and of financial and macroeconomic responses to shocks.
    Keywords: Financial frictions, Financial constraints, Endogenous risk, Shadow banking
    JEL: G2 G12 E44
    Date: 2019–02
  16. By: Andrea Caggese; Ander Pérez-Orive
    Abstract: The widespread emergence of intangible technologies in recent decades may have significantly hurt output growth–even when these technologies replaced considerably less productive tangible technologies–because of low interest rates. After a shift toward intangible capital in production, the corporate sector becomes a net saver because intangible capital has a low collateral value. Firms’ ability to purchase intangible capital is impaired by low interest rates because low rates slow down the accumulation of savings and increase the price of capital, worsening capital misallocation. Our model simulations reproduce key trends in the U.S. in the period from 1980 to 2015.
    Keywords: Intangible capital, borrowing constraints, capital reallocation, secular stagnation
    JEL: E22 E43 E44
    Date: 2018–07
  17. By: Valentin Jouvanceau (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    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
    Date: 2019
  18. By: Martin M. Andreasen (Aarhus University and CREATES and The Danish Finance Institute); Mads Dang (Aarhus University and CREATES)
    Abstract: This paper shows that the price demand elasticity can be estimated reliably in a standard log-linearized version of the New Keynesian model when including firm profit as an observable in the estimation. Using this identification strategy for the post-war US economy, we find an estimated price demand elasticity of 2.58 with a tight standard error of 0.31. This corresponds to an average price markup of 63% with a 95% confidence interval of [39%, 88%]. We also show that a calibrated markup of 20%, as commonly used in the literature, is rejected by the data, because it generates too much variability in firm profit.
    Keywords: Aggregate supply curve, Identification, Likelihood inference, New Keynesian model, Price markup
    JEL: C10 E12
    Date: 2019–03–01
  19. By: Ariel Mecikovsky; Matthias Meier
    Abstract: What explains the impact of uncertainty shocks on the economy? This paper uses highly disaggregated data on industry-level job flows to investigate the empirical relevance of various transmission channels of uncertainty shocks. The channels we consider are labor adjustment frictions, capital adjustment frictions, nominal ridigities, and financial frictions. For each channel, we derive testable implications regarding the response of job flows to uncertainty shocks. Empirically, uncertainty shocks lead to more job destruction and less job creation in more than 80% of all industries. The effect is significantly stronger in industries that face tighter financial constraints, which supports the financial frictions channel. In contrast, our evidence does not support the other three channels.
    Keywords: Uncertainty shocks; Job Flows; Financial Frictions
    JEL: E02
    Date: 2019–03

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