nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒03‒25
sixteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Has the Canadian Public Debt Been Too High? A Quantitative Assessment By Marco Cozzi
  2. Market Structure and Indeterminacy of Stationary Equilibria in a Decentralized Monetary Economy By Kubota, So
  3. Nominal GDP Targeting with Heterogenous Labor Supply By Bullard, James; Singh, Aarti
  4. Shadow Banking and the Great Recession: Evidence from an Estimated DSGE Model By Fève, Patrick; Moura, Alban; Pierrard, Olivier
  5. International Business Cycle and Financial Intermediation By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  6. Understanding Persistent Stagnation By Pablo Cuba-Borda; Sanjay R. Singh
  7. On the Real Determinacy and Indeterminacy of Stationary Equilibria in Monetary Models By Kazuya Kamiya
  8. Lending frictions and nominal rigidities: Implications for credit reallocation and TFP By Florian, David; Francis, Johanna
  9. Environmental Policy Instrument Choice and International Trade By J. Scott Holladay; Mohammed Mohsin; Shreekar Pradhan
  10. The Neo-Fisherianism to Escape Zero Lower Bound By Chattopadhyay, Siddhartha
  11. The Lost Ones: the Opportunities and Outcomes of Non-College Educated Americans Born in the 1960s By Margherita Borella; Mariacristina De Nardi; Fang Yang
  12. A Theory of Housing Demand Shocks By Zheng Liu; Pengfei Wang; Tao Zha
  13. Optimal Time-Consistent Monetary, Fiscal and Debt Maturity Policy By Eric M. Leeper; Campbell B. Leith; Ding Liu
  14. A Non-Parametric Approach to Testing the Axioms of the Shapely Value with Limited Data By Simona E. Cociuba; James C. MacGee
  15. Is the study of business-cycle fluctuations 'scientific?' By Edouard Challe
  16. The Effectiveness of Hiring Credits By Pierre Cahuc; Stéphane Carcillo; Thomas Le Barbanchon

  1. By: Marco Cozzi (Department of Economics, University of Victoria)
    Abstract: This paper provides a quantitative analysis on whether the historically sizable public debt that the Canadian governments have accumulated might be close to its welfare maximizing level. As the public provision of liquidity to borrowing constrained individuals coupled with an increased supply of safe assets can be welfare improving, I consider a two-region model with an integrated asset market and incomplete insurancemarkets. The home country features a rich life-cycle setup, where the income dynamics rely on state of the art estimates obtained from previous studies using income tax returns. The main features are ex-ante labor earnings heterogeneity, both in levels and in growth rates, together with persistent and permanent shocks. When the public expenditure is assumed to be wasteful, I find that the optimal quantity of public debt for Canada is negative, meaning that the government should be a net saver. When the government, with a portion of its expenditure and consistent with the Canadian experience, finances valuable public goods the long-run public debt is still found to be inefficiently large, but closer to the welfare maximizing level.
    Keywords: Public debt, Incomplete markets, Welfare
    Date: 2019–03–15
  2. By: Kubota, So
    Abstract: This study investigates which market structure gives rise to indeterminacy of stationary equilibria in a decentralized economy with non-degenerate distributions of money holdings. I develop a price-posting model with divisible money and then, examine two alternative markets: a pairwise random matching market and a many-to-many exchange. Importantly, the former market balances the number of matched buyers and sellers by definition. As a result, indeterminacy arises under the pairwise matching while a unique equilibrium exists in the many-to-many market. This balancing assumption also leads to the indeterminacy in a Walrasian market.
    Keywords: search theory, money, indeterminacy
    JEL: D31 D51 D83 E41
    Date: 2019–03
  3. By: Bullard, James; Singh, Aarti
    Abstract: We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2018), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supplying their desired amount of labor, a type of “divine coincidence” result. We also analyze the incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an extension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.
    Keywords: Monetary policy transmission; input-output; VAR; intermediate goods.
    Date: 2018–11
  4. By: Fève, Patrick; Moura, Alban; Pierrard, Olivier
    Abstract: We argue that shocks to credit supply by shadow and retail banks were key to understanding 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
  5. By: Tamas Csabafi (Department of Economics, University of Missouri-St. Louis); Max Gillman (Department of Economics, University of Missouri-St. Louis); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more Önancially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated.
    Keywords: international real business cycles, financial intermediation, credit spread, bank productivity, 2008 crisis.
    JEL: E13 E32 E44 F41
    Date: 2018–09
  6. By: Pablo Cuba-Borda; Sanjay R. Singh
    Abstract: We theoretically explore long-run stagnation at the zero lower bound in a representative agent framework. We analytically compare expectations-driven stagnation to a secular stagnation episode and find contrasting policy implications for changes in government spending, supply shocks and neo-Fisherian policies. On the other hand, a minimum wage policy is expansionary and robust to the source of stagnation. Using Bayesian methods, we estimate a DSGE model that can accommodate two competing hypotheses of long-run stagnation in Japan. We document that equilibrium selection under indeterminacy matters in accounting for model fit.
    Keywords: Expectations-driven trap ; Secular stagnation ; Inflation expectations ; Zero lower bound
    JEL: E31 E32 E52
    Date: 2019–03–07
  7. By: Kazuya Kamiya (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: It is known that stationary equilibria are indeterminate in some monetary models, especially in money search models with divisible money. However, most of the indeterminacy results are limited to the case that money holdings distributions have fi nite supports. In the case of infi nite supports, both determinacy and indeterminacy results are known. In this paper, using the Borsuk-Ulam theorem in Banach Space, I investigate what determines the differences.
    Keywords: Real Determinacy, Real Indeterminacy, Monetary Search Model, All-Pay Auction, Divisible Money, Infi nite Dimensional Space, Borsuk-Ulam Theorem
    JEL: C78 D51 D83 E40
    Date: 2019–03
  8. By: Florian, David (Banco Central de Reserva del Perú); Francis, Johanna (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: 2019–02
  9. By: J. Scott Holladay (Department of Economics, University of Tennessee); Mohammed Mohsin (Department of Economics, University of Tennessee); Shreekar Pradhan (King Abdullah Petroleum Studies And Research Center)
    Abstract: We develop a dynamic stochastic general equilibrium model to understand how environmental policy instrument choice affects trade. We extend the existing literature by employing an open economy model to evaluate three environmental policy instruments: cap-and-trade, pollution taxes, and an emissions intensity standard in the face of two types of exogenous shocks. We calibrate the model to Canadian data and simulate productivity and import price shocks. We evaluate the evolution of key macroeconomic variables, including the trade balance in response to the shocks under each policy instrument. Our findings for the evolution of output and emissions under a productivity shock are consistent with previous closed economy models. Our open economy framework allows us to find that a cap-and-trade policy dampens the international trade effects of the business cycle relative to an emissions tax or intensity standard. Under an import shock, pollution taxes and intensity targets are as effective as cap-and-trade policies in reducing variance in consumption and employment. The cap-and-trade policy limits the intensity of the import competition shock suggesting that particular policy instrument might serve as a barrier to trade.
    Keywords: Environmental policy, Import competition, Business cycles, Macroeconomic dynamics, Open economy
    JEL: Q54 E32
    Date: 2019–03
  10. By: Chattopadhyay, Siddhartha
    Abstract: Sufficiently persistent rise in nominal interest increases inflation rate in short-run. This short-run comovement of nominal interest rate and inflation rate is known as Neo-Fisherianism. This paper proposes a policy based on Neo-Fisherianism to escape Zero Lower Bound (ZLB) using a textbook forward looking New Keynesian model. I have shown that proposed policy with properly chosen inflation target and persistence can stimulate economy and escape ZLB by raising nominal interest rate. I have also shown that the proposed policy is robust to varying degrees of price stickiness.
    Keywords: New Keynesian Model, Neo-Fisherianism, Zero Lower Bound
    JEL: E31 E4 E43 E5 E52 E6 E63
    Date: 2019–02–20
  11. By: Margherita Borella; Mariacristina De Nardi; Fang Yang
    Abstract: White, non-college-educated Americans born in the 1960s face shorter life expectancies, higher medical expenses, and lower wages per unit of human capital compared with those born in the 1940s, and men's wages declined more than women's. After documenting these changes, we use a life-cycle model of couples and singles to evaluate their effects. The drop in wages depressed the labor supply of men and increased that of women, especially in married couples. Their shorter life expectancy reduced their retirement savings but the increase in out-of-pocket medical expenses increased them by more. Welfare losses, measured a one-time asset compensation are 12.5%, 8%, and 7.2% of the present discounted value of earnings for single men, couples, and single women, respectively. Lower wages explain 47-58% of these losses, shorter life expectancies 25-34%, and higher medical expenses account for the rest.
    JEL: E21 H31
    Date: 2019–03
  12. By: Zheng Liu; Pengfei Wang; Tao Zha
    Abstract: Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.
    JEL: E21 E44 G21
    Date: 2019–03
  13. By: Eric M. Leeper; Campbell B. Leith; Ding Liu
    Abstract: The textbook optimal policy response to an increase in government debt is simple—monetary policy should actively target inflation, and fiscal policy should smooth taxes while ensuring debt sustainability. Such policy prescriptions presuppose an ability to commit. Without that ability, the temptation to use inflation surprises to offset monopoly and tax distortions, as well as to reduce the real value of government debt, creates a state-dependent inflationary bias problem. High debt levels and short-term debt exacerbate the inflation bias. But this produces a debt stabilization bias because the policy maker wishes to deviate from the tax smoothing policies typically pursued under commitment, by returning government debt to steady-state. As a result, the response to shocks in New Keynesian models can be radically different, particularly when government debt levels are high.
    JEL: E62 E63
    Date: 2019–03
  14. By: Simona E. Cociuba (University of Western Ontario); James C. MacGee (University of Western Ontario)
    Abstract: We show that a decline in the young share of the population exacerbates sectoral reallocation costs. We develop a three sector, perpetual youth search model with sector-specific human capital and two interconnected frictions: sectoral preferences, which imply that only some workers are mobile across sectors, and a wage bargaining distortion, whereby mobile workers’ outside option of searching in the growing sector dampens the fall in shrinking sector wages, leading to rest unemployment. In our parameterized model, output losses after a sectoral reallocation are significant. As population growth declines from 3 to −1 percent, output losses increase sevenfold, and there are extended periods of high unemployment and low vacancies.
    Date: 2018
  15. By: Edouard Challe (Sciences Po)
    Abstract: The study of macroeconomic fluctuations assumes that the behavior of the whole (aggregates) cannot be reduced to the sum of the parts (agents, markets). This is because interdependencies between markets can substantially amplify, or on the contrary dampen, shocks that at any time disturb the equilibrium. The understanding of general-equilibrium effects, on which direct evidence is limited, which are empirically blurred by multiple potential confounding factors, and for which controlled experiments are almost impossible to design, is necessarily more conjectural than the study of individual behavior or of a specific market. However, ignoring these effects because they do not have the same degree of empirical certainty as a directly observed microeconomic effect can lead to serious policy mistakes.
    Keywords: Theory of fluctuations; General equilibrium; Fiscal multipliers
    Date: 2018–09
  16. By: Pierre Cahuc (Département d'économie); Stéphane Carcillo (Département d'économie); Thomas Le Barbanchon (Centre de Recherche en Économie et Statistique (GENES))
    Abstract: This paper analyzes the effectiveness of hiring credits. Using comprehensive administrative data, we show that the French hiring credit, implemented during the Great Recession, had significant positive employment effects and no effects on wages. Relying on the quasi-experimental variation in labor cost triggered by the hiring credit, we estimate a structural search and matching model. Simulations of counterfactual policies show that the effectiveness of the hiring credit relied to a large extent on three features: it was nonanticipated, temporary and targeted at jobs with rigid wages. We estimate that the cost per job created by permanent hiring credits, either countercyclical or time-invariant, in an environment with flexible wages would have been much higher.
    Keywords: Hiring credit; Labor demand; Search and matching model
    JEL: C93 J6 C31
    Date: 2019–03

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