|
on Dynamic General Equilibrium |
|
Issue of 2019‒04‒22
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Daniela Hauser; Martin Seneca |
| Abstract: | The optimal currency literature has stressed the importance of labor mobility as a precondition for the success of monetary unions. But only a few studies formally link labor mobility to macroeconomic adjustment and policy. In this paper, we study macroeconomic dynamics and optimal monetary policy in an economy with cyclical labor flows across two distinct regions that share trade links and a common monetary framework. In our New Keynesian dynamic, stochastic, general-equilibrium model calibrated to the United States, migration flows are driven by fluctuations in the relative labor market performance across the monetary union. While labor mobility can be an additional channel for cross-regional spillovers as well as a regional shock absorber, we find that a mobile labor force closes the efficiency gaps in the labor market and thus lessens the trade-off between inflation and labor market stabilization. As migration flows are generally inefficient, however, regionspecific disturbances introduce additional trade-offs with regional labor market conditions. Putting some weight on stabilizing fluctuations in the labor market enhances welfare when monetary policy follows a simple rule. |
| Keywords: | Business fluctuations and cycles; Economic models; Labour markets; Monetary policy framework; Regional economic developments |
| JEL: | E32 E52 F4 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-15&r=all |
| By: | Jamie Hentall MacCuish |
| Abstract: | I present evidence incorporating costly thought solves three puzzles in the retirement literature. The first puzzle is, given incentives, the extent of bunching of labour market exits at legislated state pension ages (SPA) seems incompatible with rational expectations. Adding to the evidence for this puzzle, I include an empirical analysis focusing on whether liquidity constraints can explain this bunching and find they cannot. The nature of this puzzle is clarified by exploring a life-cycle model with rational agents that matches aggregate profiles. This model succeeds in matching aggregates by overestimating the impact of the SPA on poorer individuals whilst underestimating its impact on wealthier people. The second puzzle is people are often mistaken about their own pension provisions. Concerning the second puzzle, I incorporate rational inattention to the SPA into the aforementioned life-cycle model, allowing for mistaken beliefs. To the best of my knowledge, this paper is the first not only to incorporate rational inattention into a life-cycle model but also to assess a rationally inattentive model against non-experimental individual choice data. This facilitates another important contribution: discipling the cost of attention with subjective belief data. Preliminary results indicate rational inattention improves the aggregate fit and better matches the response of participation to the SPA across the wealth distribution, hence offering a resolution to the first puzzle. The third puzzle is despite actuarially advantageous options to defer receipt of pension benefits, take up is extremely low. An extension of the model generates an explanation of this last puzzle: the actuarial calculations implying deferral is preferable ignore the utility cost of tracking your pension which can be avoided by claiming. These puzzles are researched in the context of the reform to the UK female SPA. |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1904.06520&r=all |
| By: | Manuel Muñoz |
| Abstract: | The paper investigates the effectiveness of dividend-based macroprudential rules in complementing capital requirements to promote bank soundness and sustained lending over the cycle. First, some evidence on bank dividends and earnings in the euro area is presented. When shocks hit their profits, banks adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then, a DSGE model with key financial frictions and a banking sector is developedto assess the virtues of what shall be called dividend prudential targets. Welfare-maximizing dividend-based macroprudential rules are shown to have importantproperties: (i) they are effective in smoothing the financial cycle by means of lessvolatile bank retained earnings, (ii) they induce welfare gains associated to a BaselIII-type of capital regulation, (iii) they mainly operate through their cyclical component,ensuring that long-run dividend payouts remain unaffected, (iv) they are flexible enough so as to allow bank managers to optimally deviate from the target, and (v) they act as an insurance scheme for the real economy. Keywords : macroprudential regulation, capital requirements, dividend prudential target, financial stability, bank dividends |
| JEL: | E44 E61 G21 G28 G35 |
| URL: | http://d.repec.org/n?u=RePEc:cnv:wpaper:dt_68en&r=all |
| By: | Colin Davis; Ken-ichi Hashimoto |
| Abstract: | This paper constructs a two-country model of international trade to study how labor market frictions affect industry location patterns, unemployment rates, and fully endogenous productivity growth. We show that when the larger country offers subsidies to labor search costs or reduces unemployment benefits, the domestic unemployment rate falls, causing greater industry concentration and faster productivity growth, but higher unemployment for the smaller country. When similar labor market policies are implemented in the smaller country, however, the resulting fall in domestic unemployment leads to lower industry concentration and slower productivity growth, while lowering unemployment in the larger country. |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1052&r=all |
| By: | Hui He (International Monetary Fund); Kevin x.d. Huang (Vanderbilt University); Lei Ning (Shanghai University of Finance and Economics) |
| Abstract: | Empirical evidence shows that both leisure and medical care are important for maintaining health. And taxation may affect the allocation of these two inputs. We build a life-cycle overlapping-generations model in which taxation and relative health care price are key determinants of the composition of the two inputs in the endogenous accumulation of health capital. In the model, a lower tax wedge leads to using relatively more medical care and less leisure in maintaining health, while a higher relative health care price implies an opposite substitution in quantity (away from medical care towards leisure) that weakens the direct bearing of the higher price on overall health spending. We show that differences in taxation and in relative health care price between the US and Europe can jointly account for a bulk of their differences in health expenditure- GDP ratio and in leisure time allocated for health production, with the taxation channel playing a quantitatively more significant role. |
| Keywords: | Macro-health, Taxation, Relative health care price, Health care expenditure, Time allocation, Life cycle, Overlapping generations |
| JEL: | E6 H2 |
| Date: | 2019–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-19-00010&r=all |
| By: | Asriyan, Vladimir; Laeven, Luc; Martin, Alberto |
| Abstract: | We develop a new theory of information production during credit booms. In our model, entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources towards private consumption. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralization-screening mix depends on the value of aggregate collateral. High collateral values raise investment and economic activity, but they also raise collateralization at the expense of screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g. real estate booms), the economy accumulates physical capital but depletes information about investment projects. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing investment projects, which takes time to rebuild. We provide new empirical evidence using US firm-level data in support of the model's main mechanism. JEL Classification: E32, E44, G01, D80 |
| Keywords: | collateral, credit booms, crises, information production, misallocation |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192266&r=all |
| By: | Lieberknecht, Philipp; Wieland, Volker |
| Abstract: | There is substantial disagreement about the consequences of the Tax Cuts and Jobs Act (TCJA) of 2017, which constitutes the most extensive tax reform in the United States in more than 30 years. Using a large-scale two-country dynamic general equilibrium model with nominal rigidities, we find that the TCJA increases GDP by about 2% in the medium-run and by about 2.5% in the long-run. The short-run impact depends crucially on the degree and costs of variable capital utilization, with GDP effects ranging from 1 to 3%. At the same time, the TCJA does not pay for itself. In our analysis, the reform decreases tax revenues and raises the debt-to-GDP ratio by about 15 percentage points in the medium-run until 2025. We show that combining the TCJA with spending cuts can dampen the increase in government indebtedness without reducing its expansionary effect. |
| Keywords: | tax reform,corporate taxes,capital taxes,labor income taxes,spending cuts,fiscal stimulus |
| JEL: | E62 E63 E65 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:svrwwp:102018&r=all |
| By: | Croce, Mariano (Finance Department, Bocconi University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of North Carolina Kenan-Flagler Business School); Nguyen, Thien (Ohio State University (OSU) - Department of Finance); Raymond, Steve (University of North Carolina (UNC) at Chapel Hill - Department of Economics) |
| Abstract: | Does it matter whether a government is prompt or slow in consolidating outstanding debt? We address this question by studying the connection between the time variation of the persistence of government-debt-to-output ratio, macroeconomic activity, and asset prices. In the US, when government debt is sluggish, consumption exhibits lower expected growth, more long-run uncertainty, and more long-run downside risk. Simultaneously, the risk premium on the consumption claim (Koijen et al. (2010), Lustig et al. (2013)) increases and features more positive (adverse) skewness. We rationalize these findings in an endogenous growth model in which (i) fiscal policy is distortionary, (ii) the value of innovation depends on fiscal risk, and (iii) the representative agent is sensitive to the resulting distribution of consumption risk. Our model suggests that committing to a rapid reduction of the debt-to-output ratio can enhance the value of innovation, aggregate wealth, and hence welfare. |
| JEL: | E62 G1 H2 H3 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2019-02&r=all |
| By: | José M. Ordóñez-de-Haro (Department of Economics, University of Málaga); José L. Torres (Department of Economics, University of Málaga) |
| Abstract: | This paper studies the implications of the sharing or collaborative economy on the rest of the economy. During the last decade, the so-called collaborative economy has experienced an intensive process of expansion, mainly in certain tourism and transport services, by renting household durables stock excess capacity. Technological progress and the development of Information and Communication Technologies (ICTs) have removed barriers to market access and information constraints, which provides households with a marketplace to rent goods and services produced by using household capital. In this paper we propose a general equilibrium theoretical framework within which to study the collaborative economy sector, together with both the market production and household production sectors. Our model considers that production within the collaborative economy falls between market production and domestic production, and combines some features of both environments, but di¤ers in others. We found that a positive neutral technological shock to market production has a positive impact on the accumulation of durable goods, consistent with the data. By contrast, a positive productivity shock to the sharing economy sector reduces durables investment and increases business capital investment. Finally, an investment-speci?c technological shock to durables has a positive e¤ect on household capital but a negative one on business capital. |
| Keywords: | Collaborative consumption; Sharing economy; Household production; Durable goods |
| JEL: | D13 E22 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:mal:wpaper:2019-1&r=all |
| By: | Bohn, H; Lopez-Velasco, AR |
| Keywords: | Immigration, Political economy model, Overlapping generations, Intergenerational mobility, Guest workers |
| Date: | 2018–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsbrw:qt70z7h8xq&r=all |
| By: | Myunghyun Kim (Economic Research Institute, Bank of Korea) |
| Abstract: | Until the 1990s, standard models with two large open economies (i.e. the U.S. and Europe) provided plausible representations of the world economy. However, with the emergence of many countries such as China since then, this approach no longer seems reasonable. In line with this change to the global economic environment, there also have been changes in cross-country correlations: the output correlation between the U.S. and Europe has risen, and their consumption correlation has slightly fallen. Accordingly, this paper adds many countries to a standard model to show that doing so can capture the transition in the cross-country correlations. By analytical investigation, I first show that as the number of countries in a simple model increases, the output correlation rises and the consumption correlation falls. A quantitative analysis with a more general model also shows that when the model has more countries, it yields a higher output correlation and a smaller consumption correlation. |
| Keywords: | International business cycles, Number of countries, n-country model, Output correlation, Consumption correlation |
| JEL: | F40 F41 F44 |
| Date: | 2019–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1916&r=all |
| By: | George Economides; Anastasio Xepapadeas |
| Abstract: | We investigate the impact of climate change on the macroeconomic performance of a small open economy. The setup is a new Keynesian dynamic stochastic general equilibrium model of a small open economy without monetary policy independence in which a climate module that interacts with the economy has been incorporated. The model is solved numerically using common parameter values, fiscal data and projections about temperature growth from the Greek economy. Our results, suggest that climate change implies a significant output loss and a dramatic deterioration of competitiveness. |
| Keywords: | climate change, monetary policy, new Keynesian models |
| JEL: | E50 E10 Q50 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7582&r=all |
| By: | Makoto Watanabe (VU Amsterdam); Vyacheslav Arbuzov (University of Rochester); Yu Awaya (University of Rochester); Hiroki Fukai (Kyushu University) |
| Abstract: | This paper presents a simple and tractable equilibrium model of repos, where collateralized credit emerges under limited commitment. We show that even if there is no time variation in fundamentals, repo markets can fluctuate endogenously over time. In our theory, repo market fragilities are associated with endogenous fluctuations in trade probabilities, collateral values, and debt limits. We show that the collateral premium of a durable asset will become the lowest right before a recession and the highest right after the recession and that secured credit is acyclical. |
| Keywords: | collateral, search, endogenous credit market fluctuations |
| JEL: | E30 E50 C73 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20190019&r=all |
| By: | Jia, Chengcheng (Federal Reserve Bank of Cleveland) |
| Abstract: | I explore how asymmetric information between the central bank and the private sector changes the optimal conduct of monetary policy. I build a New Keynesian model in which private agents have imperfect information about underlying shocks, while the central bank has perfect information. In this environment, private agents extract information about the underlying shocks from the central bank’s interest-rate decisions. This informational effect weakens the direct effect of monetary policy: When the central bank adjusts the interest rate to offset the effects of underlying shocks, the interest rate also reveals information about the realization of underlying shocks. Because private agents have more precise information about the shocks and consequently react more aggressively to it, the economy becomes harder to stabilize with monetary policy. I show that committing to the optimal state-contingent policy rule alleviates this problem by controlling the information revealed through the interest rate. |
| Keywords: | Monetary Policy; Policy Rule; |
| JEL: | D83 E43 E52 E58 |
| Date: | 2019–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:190700&r=all |
| By: | Frédéric Gavrel (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This short paper provides a directed search model of the labor market in which the persistency of vacant jobs results from a mismatch problem, not from a pure coordination problem. Since firms cannot commit to an output cutoff lower than the posted wage, laissez-faire is inefficient. But, under a binding condition, public policy can restore market efficiency by associating a minimum wage with a layoff tax. |
| Keywords: | Efficiency,Mismatch,Directed search,Layoff tax |
| Date: | 2019–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02083453&r=all |
| By: | Grossman, Valerie (Federal Reserve Bank of Dallas); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas); Wynne, Mark A. (Federal Reserve Bank of Dallas); Zhang, Ren (Bowling Green State University) |
| Abstract: | This paper estimates the natural interest rate for six small open economies (Australia, Canada, South Korea, Sweden, Switzerland and the U.K.) with a structural New Keynesian model using Bayesian techniques. Our empirical analysis establishes the following four novel findings: First, we show that the open-economy framework provides a better fit of the data than its closed-economy counterpart for the six countries we investigate. Second, we also show that, in all six countries, a monetary policy rule in which the domestic real policy rate tracks the Wicksellian domestic short-term natural rate fits the data better than an otherwise standard Taylor (1993) rule. Third, we show that over the past 35 years, the natural interest rates in all six countries have shifted downwards and strongly comoved with each other. Fourth, our findings illustrate that foreign output shocks (spillovers from the rest of the world) are a major contributor to the dynamics of the natural rate in these six small open economies, and that natural rates comove strongly with estimated U.S. natural rates. |
| Keywords: | Small Open-Economy Model; Monetary Policy; Natural Rate; Bayesian Estimation |
| JEL: | C11 C13 E43 E58 F41 |
| Date: | 2019–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:359&r=all |
| By: | James Costain (ECB and Banco de EspaÑa); Anton Nakov (ECB and CEPR); Borja Petit (CEMFI) |
| Abstract: | We study the effects of monetary shocks in a model of state-dependent price and wage adjustment based on “control costs”. Suppliers of retail goods and of labor are both monopolistic competitors that face idiosyncratic productivity shocks and nominal rigidities. Stickiness arises because precise decisions are costly, so agents choose to tolerate small errors in the timing of adjustments. Our simulations are calibrated to microdata on the size and frequency of price and wage changes. Money shocks have less persistent real effects in our state-dependent model than they would a time-dependent framework, but nonetheless we obtain sufficient monetary nonneutrality for consistency with macroeconomic evidence. Nonneutrality is primarily driven by wage rigidity, rather than price rigidity. State-dependent nominal rigidity implies a flatter Phillips curve as trend inflation declines, because nominal adjustments become less frequent, making short-run inflation less reactive to shocks. |
| Keywords: | nominal rigidity, state-dependent adjustment, logit equilibrium, near rationality, control costs |
| JEL: | E31 D81 C73 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1910&r=all |
| By: | Oleksandr Shcherbakov |
| Abstract: | This paper develops and estimates a model of firm-level fixed capital investment when firms face borrowing constraints. Dynamically optimal investment functions are derived for the firms with and without financial constraints. These policy functions are then used to construct the likelihood of observing each of the investment regimes in the data. Structural parameters are estimated using data from the Ukrainian manufacturing sector in 1993–1998. I provide empirical evidence of the role of market and ownership structure for firm-level investment behavior. I also discuss the effects of international trade exposure and involvement in non-monetary transactions on the probability of facing financial constraints and the resulting fixed capital accumulation path. Estimation results are used to illustrate the welfare implications of financial constraints in the Ukrainian manufacturing sector. |
| Keywords: | Econometric and statistical methods; Economic models; Firm dynamics |
| JEL: | C61 C63 D24 G31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-14&r=all |
| By: | Battistini, Niccolò; Callegari, Giovanni; Zavalloni, Luca |
| Abstract: | This paper analyzes the impact of monetary policy on public debt sustainability through the lens of a general equilibrium model with fiscal limits. We find that the mere possibility of a binding ZLB may have detrimental effects on debt sustainability, as a kink in the Laffer curve induces a dead-weight loss in the present discounted value of future primary surpluses. Moreover, debt sustainability improves with monetary policy activeness, that is, with the elasticity of the interest rate to changes in inflation and the output gap. On this basis, we assess the trade-off between economic stabilization and debt sustainability depending on the monetary policy environment. In normal times, large public spending shocks may engender perverse debt dynamics and cause economic contractions. At the ZLB, a muted trade-off between stabilization and sustainability instead expands the fiscal margin, especially if coupled with a commitment to a more active monetary policy during normal times. JEL Classification: E52, E61, E63 |
| Keywords: | fiscal sustainability, monetary policy, ZLB |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192268&r=all |
| By: | Pablo Cuba-Borda; Luca Guerrieri; Matteo Iacoviello; Molin Zhong |
| Abstract: | Applied researchers interested in estimating key parameters of DSGE models face an array of choices regarding numerical solution and estimation methods. We focus on the likelihood evaluation of models with occasionally binding constraints. We document how solution approximation errors and likelihood misspecification, related to the treatment of measurement errors, can interact and compound each other. |
| Keywords: | Measurement error ; Solution error ; Occasionally binding constraints ; Particle filter |
| JEL: | C32 C53 C63 |
| Date: | 2019–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-28&r=all |
| By: | Nguyen, Thien T. (Ohio State University (OSU) - Department of Finance) |
| Abstract: | The maturity-weighted public debt-to-GDP ratio predicts negatively one- to five-year cumulative nominal consumption growth. Moreover, a higher debt-to-GDP ratio is associated with higher yield spreads, controlling for output gap and inflation. I examine these facts in a New Keynesian DSGE model in which growth and inflation are endogenous. In this model, high government debt forecasts low growth and deflation, making bonds attractive assets in high debt states. Furthermore, due to mean-reversions of fundamental processes that drive the economy, longer-term bonds are better hedges than shorter-term ones, resulting in increases in the slope of the term structure at times of high public debt and hence the empirical regularities seen in the data. My model can also explain several other puzzling phenomena, including the bond premium puzzle, the bond yield volatility puzzle, the failure of the expectations hypothesis, and the ability of a linear combination of the forward rates and the forward spread to forecast excess bond returns. |
| JEL: | E43 E44 E62 G12 G18 H32 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2018-23&r=all |