nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒04‒01
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Intergenerational Incidence of Green Tax Reform By Sebastian Rausch; Hidemichi Yonezawa
  2. A Quantitative Analysis of Countercyclical Capital Buffers By Faria-e-Castro, Miguel
  3. Optimal Monetary Policy for the Masses By Bullard, James B.; DiCecio, Riccardo
  4. Foreign Reserve Accumulation, Foreign Direct Investment, and Economic Growth By Hidehiko Matsumoto
  5. Preface to the Chinese Edition of A History of Macroeconomics from Keynes to Lucas and Beyond By Michel De Vroey
  6. State-dependent Monetary Policy Regimes By Shayan Zakipour-Saber
  7. “Life-cycle Wealth Accumulation and Consumption Insurance" By Claudio Campanale; Marcello Sartarelli
  8. Self-Fulfilling Debt Crises, Fiscal Policy and Investment By Carlo Galli
  9. Intermediation in Markets for Goods and Markets for Assets By Nosal, Ed; Wong, Yuet-Yee; Wright, Randall
  10. Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession By Adrien Auclert; Will S. Dobbie; Paul Goldsmith-Pinkham
  11. Do Greasy Wheels Curb Inequality? By Cynthia L. Doniger
  12. Unequal vulnerability to climate change and the transmission of adverse effects through international trade By Karine Constant; Marion Davin
  13. A Theory of Housing Demand Shocks By Liu, Zheng; Wang, Pengfei; Zha, Tao
  14. Information, Secondary Market Trade, and Asset Liquidity By Athanasios Geromichalos; Kuk Mo Jung; Seungduck Lee; Dillon Carlos
  15. Independent Monetary Policy Versus a Common Currency: A Macroeconomic Analysis for the Czech Republic Through the Lens of an Applied DSGE Model By Jan Bruha; Jaromir Tonner
  16. The lost ones: the opportunities and outcomes of non-college-educated Americans born in the 1960s By Margherita Borella; Mariacristina De Nardi; Fang Yang
  17. On the Heterogeneous Welfare Gains and Losses from Trade By Carroll, Daniel R.; Hur, Sewon
  18. The Rationality Bias By Hagenhoff, Tim; Lustenhouwer, Joep
  19. Macroeconomic Effects of Taxes on Banking By José Emilio Boscá; Rafael Doménech; Javier Ferri; Juan F. Rubio-Ramírez
  20. Changes in the inflation target and the comovement between inflation and the nominal interest rate By Yunjong Eo; Denny Lie
  21. Dynamic intertemporal utility optimization by means of Riccati transformation of Hamilton-Jacobi Bellman equation By Sona Kilianova; Daniel Sevcovic
  22. Macroprudential Policy in the New Keynesian World By Hans Gersbach; Volker Hahn; Yulin Liu
  23. Regime-Dependent Effects of Uncertainty Shocks: A Structural Interpretation By Stéphane Lhuissier; Fabien Tripier
  24. Market Power and Innovation in the Intangible Economy By De Ridder, M.
  25. Idiosyncratic shocks: a new procedure for identifying shocks in a VAR with application to the New Keynesian model By Wickens, Michael R.
  26. Exchange Rate Undershooting: Evidence and Theory By Hettig, Thomas; Müller, Gernot; Wolf, Martin

  1. By: Sebastian Rausch (ETH Zurich, Switzerland); Hidemichi Yonezawa (ETH Zurich, Switzerland)
    Abstract: We examine the lifetime incidence and intergenerational distributional effects of an economywide carbon tax swap using a numerical dynamic general equilibrium model with overlapping generations of the U.S. economy. We highlight various fundamental choices in policy design including (1) the level of the initial carbon tax, (2) the growth rate of the carbon tax trajectory of over time, and (3) alternative ways for revenue recycling. Without revenue recycling, we find that generations born before the tax is introduced experience smaller welfare losses, or even gain, relative to future generations. For suffciently low growth rates of the tax trajectory, the impacts for distant future generations decrease over time. For future generations born after the introduction of the tax, the negative welfare impacts are the smallest (largest) when revenues are recycled through lowering pre-existing capital income taxes (through per-capita lump-sum rebates). For generations born before the tax is introduced, we find that lump-sum rebates favor very old generations and labor (capital) income tax recycling favors very young generations (generations of intermediate age).
    Keywords: Carbon tax, Green Tax Reform, Intergenerational Incidence, Distributional Impacts, Overlapping Generations, Climate Policy
    JEL: H23 Q52 D91 Q43 C68
    Date: 2018–03
  2. By: Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis)
    Abstract: This paper analyzes the effects of countercyclical capital buffers (CCyB) in a nonlinear DSGE model with a financial sector that is subject to occasional panics. The model is combined with data to estimate sequences of structural shocks and study policy counterfactuals. First, I show that lowering capital buffers during a crisis can moderate the intensity of the crisis. Second, I show that raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2008 financial crisis shows that CCyB in the ±2% range (as in the Federal Reserve’s current framework) could have greatly mitigated the financial panic in 2007Q4-2008Q4. These findings suggest that CCyB are a useful policy tool both ex-ante and ex-post.
    Keywords: countercyclical capital buffers; financial crises; macroprudential policy
    JEL: E4 E6 G2
    Date: 2019–03–19
  3. By: Bullard, James B. (Federal Reserve Bank of St. Louis); DiCecio, Riccardo (Federal Reserve Bank of St. Louis)
    Abstract: We study nominal GDP targeting as optimal monetary policy in a simple and stylized model with a credit market friction. The macroeconomy we study has considerable income inequality, which gives rise to a large private sector credit market. There is an important credit market friction because households participating in the credit market use non-state contingent nominal contracts (NSCNC). We extend previous results in this model by allowing for substantial intra-cohort heterogeneity. The heterogeneity is substantial enough that we can approach measured Gini coefficients for income, financial wealth, and consumption in the U.S. data. 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 further characterize monetary policy in terms of nominal interest rate adjustment.
    Keywords: Optimal monetary policy; life cycle economies; heterogeneous households; credit market participation; nominal GDP targeting; non-state contingent nominal contracting; inequality; Gini coefficients
    JEL: E4 E5
    Date: 2019–03–22
  4. By: Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper develops a quantitative small-open-economy model to assess the optimal pace of foreign reserve accumulation by emerging and developing countries. In the model, reserve accumulation depreciates the real exchange rate and attracts foreign direct investment (FDI) inflows, which promotes productivity growth through endogenous firm dynamics. The economy is also subject to sudden stops in the form of an occasionally binding constraint on foreign borrowing, and accumulated reserves are used to prevent severe economic downturns. The model shows that two factors are the key determinants of the optimal pace of reserve accumulation: the elasticity of the foreign borrowing spread with respect to foreign debt, and the entry cost for FDI entry. The model suggests that these two factors can explain a substantial amount of the cross-country variation in the observed pace of reserve accumulation.
    Keywords: Foreign Reserve Accumulation, Foreign Direct Investment, Sudden Stops, Endogenous Growth, Real Exchange Rate, Gross Capital Flows
    JEL: F23 F31 F32 F41 F43
    Date: 2019–03
  5. By: Michel De Vroey (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: In this preface, I reflect on the evolution of macroeconomics in the wake of the 2018 recession. I give a sketch of the developments that have taken place and assess the validity of some of the main criticisms that have been addressed to DSGE macroeconomics
    Keywords: History of macroeconomics, 2008 recession, DSGE macroeconomics, RBC model, New Keynesian model
    JEL: B22 E12 E E30
    Date: 2019–01
  6. By: Shayan Zakipour-Saber (Queen Mary University of London)
    Abstract: Are monetary policy regimes state-dependent? To answer the question this paper estimates New Keynesian general equilibrium models that allow the state of the economy to influence the monetary authority's stance on inflation. I take advantage of recent developments in solving rational expectations models with state-dependent parameter drift to estimate three models on U.S. data between 1965-2009. In these models, the probability of remaining in a monetary policy regime that is relatively accommodative towards inflation, varies over time and depends on endogenous model variables; in particular, either deviations of inflation or output from their respective targets or a monetary policy shock. The main contribution of this paper is that it finds evidence of state-dependent monetary policy regimes. The model that allows inflation to influence the monetary policy regime in place, fits the data better than an alternative model with regime changes that are not state-dependent. This finding points towards reconsidering how changes in monetary policy are modelled.
    Keywords: Markov-Switching DSGE, State-dependence, Bayesian Estimation
    JEL: C13 C32 E42 E43
    Date: 2019–02–14
  7. By: Claudio Campanale (University of Turin and CeRP); Marcello Sartarelli (Universidad de Alicante)
    Abstract: Households appear to smooth consumption in the face of income shocks much more than implied by life-cycle versions of the standard incomplete market model under reference calibrations. In the current paper we explore in detail the role played by the life-cycle profile of wealth accumulation. We show that a standard model parameterized to match the latter can rationalize between 83 and more than 97 percent of the consumption insurance against permanent earnings shocks empirically estimated by Blundell, Pistaferri and Preston (2008), depending on the tightness of the borrowing limit.
    Date: 2018–11
  8. By: Carlo Galli (Centre for Macroeconomics (CFM); University College London (UCL))
    Abstract: This paper studies the circular relationship between sovereign credit risk, government fiscal and debt policy, and output. I consider a sovereign default model with fiscal policy and private capital accumulation. I show that, when fiscal policy responds to borrowing conditions in the sovereign debt market, multiple equilibria exist where the expectations of lenders are self-fulfilling. In the bad equilibrium, pessimistic beliefs make sovereign debt costly. The government substitutes borrowing with taxation, which depresses private investment and future output, increases default probabilities and verifies lenders’ beliefs. This result is reminiscent of the European debt crisis of 2010-12: while recessionary, fiscal austerity may be the government best response to excessive borrowing costs during a confidence crisis.
    Keywords: Self-fulfilling debt crises, Soverign default, Multiple equilibria, Fiscal austerity
    JEL: E44 E62 F34
    Date: 2019–02
  9. By: Nosal, Ed (Federal Reserve Bank of Atlanta); Wong, Yuet-Yee (Binghamton University); Wright, Randall (University of Wisconsin-Madison)
    Abstract: We analyze agents' decisions to act as producers or intermediaries using equilibrium search theory. Extending previous analyses in various ways, we ask when intermediation emerges and study its efficiency. In one version of the framework, meant to resemble retail, middlemen hold goods, which entails (storage) costs; that model always displays uniqueness and simple transition dynamics. In another version, middlemen hold assets, which entails negative costs, that is, positive returns; that model can have multiple equilibria and complicated belief-based dynamics. These results are consistent with the venerable view that intermediation in financial markets is more prone to instability than in goods markets.
    Keywords: middlemen; intermediation; search; bargaining; multiplicity
    JEL: D83 G24
    Date: 2019–03–01
  10. By: Adrien Auclert; Will S. Dobbie; Paul Goldsmith-Pinkham
    Abstract: This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession. We document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states, and develop a general equilibrium model to recover the aggregate employment effect. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers across states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent.
    JEL: D14 E32 K35
    Date: 2019–03
  11. By: Cynthia L. Doniger
    Abstract: I document a disparity in the cyclicality of the allocative wage-the labor costs considered when deciding to form or dissolve an employment relationship-across levels of educational attainment. Specifically, workers with a bachelors degree or more exhibit an allocative wage that is highly pro-cyclical while high school dropouts exhibit no statistically discernible cyclical pattern. I also assess the response to monetary policy shocks of both employment and allocative wages across education groups. The less educated respond to monetary policy shocks on the employment margin while the more educated respond on the wage margin. An important takeaway is that conventional monetary policy easing reduces employment inequality but increases wage inequality. I embed these findings in a New Keynesian framework that includes price and heterogeneous wage rigidity and show that heterogeneity results in welfare losses due to fluctuations that exceed those of the output-gap and p rice-level equivalent representative agent economy. The excess welfare loss is borne by the least educated.
    Keywords: Inequality ; Monetary policy ; Wage rigidity
    JEL: E24 E52 J41
    Date: 2019–03–27
  12. By: Karine Constant (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12); Marion Davin (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier)
    Abstract: In this paper, we consider the unequal distribution of climate change damages in the world and we examine how the underlying costs can spread from a vulnerable to a non-vulnerable country through international trade. To focus on such indirect effects, we treat this topic in a North-South trade overlapping generations model in which the South is vulnerable to the damages entailed by global pollution while the North is not. We show that the impact of climate change in the South can be a source of welfare loss for northern consumers, in both the short and the long run. In the long run, an increase in the South's vulnerability can reduce the welfare in the North economy even in the case in which it improves its terms of trade. In the short run, the South's vulnerability can also represent a source of intergenerational inequity in the North. Therefore, we emphasize the strong economic incentives for non-vulnerable - and a fortiori less-vulnerable - economies to reduce the climate change damages on - more - vulnerable countries.
    Keywords: overlapping generations,international trade,heterogeneous damages,climate change
    Date: 2018–12–07
  13. By: Liu, Zheng (Federal Reserve Bank of San Francisco); Wang, Pengfei (Hong Kong University of Science and Technology); Zha, Tao (Federal Reserve Bank of Atlanta)
    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.
    Keywords: price-rent puzzle; heterogeneity; marginal agent; cutoff point; liquidity premium; price-to-rent ratio; collateral constraint
    JEL: E21 E44 G21
    Date: 2019–03–01
  14. By: Athanasios Geromichalos; Kuk Mo Jung; Seungduck Lee; Dillon Carlos (Department of Economics, University of California Davis)
    Abstract: Economists often say that certain types of assets, e.g., Treasury bonds, are very `liquid'. Do they mean that these assets are likely to serve as media of exchange or collateral (a definition of liquidity often employed in monetary theory), or that they can be easily sold in a secondary market, if needed (a definition of liquidity closer to the one adopted in finance)? We develop a model where these two notions of asset liquidity coexist, and their relative importance is determined endogenously in general equilibrium: how likely agents are to visit a secondary market in order to sell assets for money depends on whether sellers of goods/services accept these assets as means of payment. But, also, the incentive of sellers to invest in a technology that allows them to recognize and accept assets as means of payment depends on the existence (and efficiency) of a secondary market where buyers could liquidate assets for cash. The interaction between these two channels offers new insights regarding the determination of asset prices and the ability of assets to facilitate transactions and improve welfare.
    Keywords: Information, Over-the-Counter Markets, Search and Matching, Liquidity, Asset prices, Monetary policy
    JEL: E40 E50 G11 G12 G14
    Date: 2019–03–21
  15. By: Jan Bruha; Jaromir Tonner
    Abstract: The goal of this paper is to contribute to the understanding of the macroeconomic costs and benefits of euro adoption by the Czech economy through the lens of the CNB's official structural macroeconomic model - called g3. To do so, we perform simulations using the g3 model and a modification thereof with a fixed nominal exchange rate and with the policy rate given by the ECB. First, we compare the unconditional volatilities of selected macro variables implied by the two models. Second, we use the g3 model to filter the historical data to identify the structural shocks that affected the Czech economy in the past ten years, and we then use the modified model to simulate the counterfactual outcome of what would have happened to the Czech economy if the euro had been adopted in the past. Our results indicate that euro adoption would have had positive effects on the levels of macroeconomic variables at the cost of an increase in nominal volatility.
    Keywords: DSGE model, euro, monetary policy
    JEL: E47 E52 F47
    Date: 2018–12
  16. By: Margherita Borella (University of Torino); Mariacristina De Nardi (University College London / Federal Reserve Bank of Chicago / IFS / NBER); Fang Yang (Louisiana State University)
    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 as 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.
    Keywords: education, Health, wage gap, welfare losses, life expectancy
    JEL: E21 H31
    Date: 2019
  17. By: Carroll, Daniel R. (Federal Reserve Bank of Cleveland); Hur, Sewon (Federal Reserve Bank of Cleveland)
    Abstract: How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with nonhomothetic preferences—to generate the documented relationship between tradable expenditure shares, income, and wealth—and uninsurable earnings risk—to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we permanently reduce trade costs so as to generate a rise in import share of GDP commensurate with that seen in the data from 2001 to 2014. We find that households in the lowest wealth decile experience welfare gains over the transition, measured by permanent consumption equivalents, that are 67 percent larger than those in the highest wealth decile.
    Keywords: trade gains; inequality; consumption;
    JEL: E21 F10 F13
    Date: 2019–03–22
  18. By: Hagenhoff, Tim; Lustenhouwer, Joep
    Abstract: We analyze differences in consumption and wealth that arise because of different degrees of rationality of households. In particular, we use a standard New Keynesian model and let a certain fraction of households be fully rational while the other fraction possesses less cognitive ability. We identify the rationality bias of boundedly rational agents, defined as a deviation from the fully rational benchmark, as the driver of consumption and wealth heterogeneity. It turns out that the rationality bias can be decomposed into three individual components: the consumption expectation bias, the real interest rate bias and the preference shock expectation bias. We show that for certain specifications of monetary policy the rationality bias can be eliminated because its individual components exactly offset each other although they are individually non-zero. However, it might not be desirable from a welfare perspective to eliminate the rationality bias as this comes along with high inflation volatility.
    Keywords: heterogeneous expectations,bounded rationality,consumption and wealth heterogeneity,monetary policy
    JEL: E32 E52 D84
    Date: 2019
  19. By: José Emilio Boscá; Rafael Doménech; Javier Ferri; Juan F. Rubio-Ramírez
    Abstract: This paper evaluates the macroeconomic effects of taxes on banking in a small open economy in a currency union for three tax alternatives: an additional tax on profits, on deposits, and on loans. We propose a DSGE model with a rich detail of taxes and a banking sector and show that these three taxes are equivalent in their effects on macroeconomic variables.
    Keywords: Working Paper , Global Economy , Banks , Global
    Date: 2019–03
  20. By: Yunjong Eo; Denny Lie
    Abstract: Does raising an inflation target require increasing the nominal interest rate in the short run? We answer this question using a standard New Keynesian model with rich backward-looking elements. We first analytically show that the short-run comovement between inflation and the nominal interest rate is less likely to be positive, all else equal, as the monetary authority reacts more aggressively to the deviation of inflation from its target or as more backward-looking elements are incorporated into the model. Meanwhile, features of the model that enhance forward-looking behavior, such as partial price indexation to the inflation target or a lower degree of price rigidity, are shown to help increase the likelihood of positive comovement. However, we find that this so called Neo-Fisherism is most likely to hold even with a significant degree of backward-lookingness in the model, unless the monetary authority reacts to inflation in an extremely aggressive manner, close to strict inflation targeting. In addition, we estimate New Keynesian models of the U.S. economy and confirm our results that the U.S. economy exhibits Neo-Fisherism: raising the inflation target necessitates a short-run increase in the nominal interest rate. This finding is robust to empirically-plausible parameterizations of the model and to the specification of price indexation to the inflation target in firms’ price-setting process.
    Keywords: Neo-Fisherism, inflation expectations, a Taylor-type rule, strict inflation targeting, hybrid NKPC
    JEL: E12 E32 E58 E61
    Date: 2019–03
  21. By: Sona Kilianova; Daniel Sevcovic
    Abstract: In this paper we investigate a dynamic stochastic portfolio optimization problem involving both the expected terminal utility and intertemporal utility maximization. We solve the problem by means of a solution to a fully nonlinear evolutionary Hamilton-Jacobi-Bellman (HJB) equation. We propose the so-called Riccati method for transformation of the fully nonlinear HJB equation into a quasi-linear parabolic equation with non-local terms involving the intertemporal utility function. As a numerical method we propose a semi-implicit scheme in time based on a finite volume approximation in the spatial variable. By analyzing an explicit traveling wave solution we show that the numerical method is of the second experimental order of convergence. As a practical application we compute optimal strategies for a portfolio investment problem motivated by market financial data of German DAX 30 Index and show the effect of considering intertemporal utility on optimal portfolio selection.
    Date: 2019–03
  22. By: Hans Gersbach (ETH Zurich, Switzerland); Volker Hahn (University of Konstanz, Germany); Yulin Liu (ETH Zurich, Switzerland)
    Abstract: We integrate banks and the coexistence of bank and bond financing into an otherwise standard New Keynesian framework. There are two policy-makers: a central banker, who can decide on short-term nominal interest rates, and a macroprudential policy-maker, who can vary aggregate capital requirements. The two policy instruments can be used to stabilize shocks, to moderate bank credit cycles, and to induce a more efficient allocation of resources across sectors. Moreover, we investigate the optimal combination of simple policy rules for interest rates and capital requirements. The optimal policy rules imply that the central bank should focus exclusively on price stability and the macroprudential policy-maker should react exclusively to changes in loan rate premia.
    Keywords: central banks, banking regulation, capital requirements, optimal monetary policy
    JEL: E52 E58 G28
    Date: 2018–08
  23. By: Stéphane Lhuissier; Fabien Tripier
    Abstract: Using a Markov-switching VAR, we show that the effects of uncertainty shocks on output are four times higher in a regime of economic distress than in a tranquil regime. We then provide a structural interpretation of these facts. To do so, we develop a business cycle model, in which agents are aware of the possibility of regime changes when forming expectations. The model is estimated using a Bayesian minimum distance estimator that minimizes, over the set of structural parameters, the distance between the regime-switching VAR-based impulse response functions and those implied by the model. Our results point to changes in the degree of financial frictions. We discuss the implications of this structural interpretation and show that the expectation effect of regime switching in financial conditions is an important component of the financial accelerator mechanism. If agents hold pessimistic expectations about future financial conditions, then shocks are amplified and transmitted more rapidly to the economy.
    Keywords: Uncertainty shocks, Regime switching, Financial frictions, Expectation effects.
    JEL: C32 E32 E44
    Date: 2019
  24. By: De Ridder, M.
    Abstract: Productivity growth has stagnated over the past decade. This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles create a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs and endogenously raise fixed costs, which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits.
    Keywords: Business Dynamism, Growth, Intangibles, Productivity, Market Power
    Date: 2019–03–25
  25. By: Wickens, Michael R.
    Abstract: A key issue in VAR analysis is how best to identify economic shocks. The paper discusses the problems that the standard methods pose and proposes a new type of shock. Named an idiosyncratic shock, it is designed to identify the component in each VAR residual associated with the corresponding VAR variable. The procedure is applied to a calibrated New Keynesian model and to a VAR based on the same variables and using US data. The resulting impulse response functions are compared with those from standard procedures.
    Keywords: Macroeconomic Shocks; New Keynesian Model; VAR analysis
    JEL: C32 E32
    Date: 2019–03
  26. By: Hettig, Thomas; Müller, Gernot; Wolf, Martin
    Abstract: We run local projections to estimate the effect of US monetary policy shocks on the dollar. We find that monetary contractions appreciate the dollar and establish two results. First, the spot exchange rate undershoots: the appreciation is smaller on impact than in the longer run. Second, forward exchange rates also appreciate on impact, but their response is flat across tenors. Next, we develop and estimate a New Keynesian model with information frictions. In the model, investors do not observe the natural rate of interest directly. As a result, they learn only over time whether an interest rate surprise represents a monetary contraction. The model accurately predicts the joint dynamics of spot and forward exchange rates following a monetary contraction.
    Keywords: Forward Exchange Rate; Forward premium puzzle; information effect; Information Frictions; monetary policy; Spot Exchange Rate; UIP puzzle
    JEL: E43 F31
    Date: 2019–03

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