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on Dynamic General Equilibrium |
| By: | Chao Gu (University of Missouri); Cyril Monnet (University of Berne); Ed Nosal (FRB Atlanta); Randall Wright (University of Wisconsin) |
| Abstract: | Are financial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with financial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Four formalizations are considered: a dynamic version of Diamond-Dybvig incorporating reputational considerations; a model with delegated monitoring as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with Rubinstein-Wolinsky intermediaries in a decentralized asset market as in Duffie et al. In each case we find, for different reasons, that financial intermediation engenders instability in a precise sense. |
| Keywords: | Banking, Financial Intermediation, Instability, Volatility |
| JEL: | D02 E02 E44 G21 |
| Date: | 2019–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1901&r=all |
| By: | Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Jeffrey D. Sachs; Simon Scheidegger |
| Abstract: | Carbon taxation has been studied primarily in social planner or infinitely lived agent models, which trade off the welfare of future and current generations. Such frameworks obscure the potential for carbon taxation to produce a generational win-win. This paper develops a large-scale, dynamic 55-period, OLG model to calculate the carbon tax policy delivering the highest uniform welfare gain to all generations. The OLG framework, with its selfish generations, seems far more natural for studying climate damage. Our model features coal, oil, and gas, each extracted subject to increasing costs, a clean energy sector, technical and demographic change, and Nordhaus (2017)’s temperature/damage functions. Our model’s optimal uniform welfare increasing (UWI) carbon tax starts at $30 tax, rises annually at 1.5 percent and raises the welfare of all current and future generations by 0.73 percent on a consumption-equivalent basis. Sharing efficiency gains evenly requires, however, taxing future generations by as much as 8.1 percent and subsidizing early generations by as much as 1.2 percent of lifetime consumption. Without such redistribution (the Nordhaus “optimum”), the carbon tax constitutes a win-lose policy with current generations experiencing an up to 0.84 percent welfare loss and future generations experiencing an up to 7.54 percent welfare gain. With a six-times larger damage function, the optimal UWI initial carbon tax is $70, again rising annually at 1.5 percent. This policy raises all generations’ welfare by almost 5 percent. However, doing so requires levying taxes on and giving transfers to future and current generations ranging up to 50.1 percent and 10.3 percent of their lifetime consumption. Delaying carbon policy, for 20 years, reduces efficiency gains roughly in half. |
| JEL: | F0 F20 H0 H2 H3 J20 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25760&r=all |
| By: | David Berger (Northwestern University); Kyle Herkenhoff (University of Minnesota); Simon Mongey (University of Chicago) |
| Abstract: | What are the welfare implications of labor market power? We provide an answer to this question in two steps: (1) we develop a tractable quantitative, general equilibrium, oligopsony model of the labor market, (2) we estimate key parameters using within-firm-state, across-market differences in wage and employment responses to state corporate tax changes in U.S. Census data. We validate the model against recent evidence on productivity-wage pass-through, and new measurements of the distribution of local market concentration. The model implies welfare losses from labor market power that range from 2.9 to 8.0 percent of lifetime consumption. However, despite large contemporaneous losses, labor market power has not contributed to the declining labor share. Finally, we show that minimum wages can deliver moderate, and limited, welfare gains by reallocating workers from smaller to larger, more productive firms. |
| Keywords: | wage setting, market structure, labor markets |
| JEL: | E20 J20 J42 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2019-027&r=all |
| By: | Hochmuth, Brigitte; Moyen, Stephane; Stähler, Nikolai |
| Abstract: | How do labor market reforms affect international competitiveness and net foreign assets? To answer this question, we build a two-region RBC model with labor market frictions, idiosyncratic consumption risk, and limited cross-sectional heterogeneity to establish a direct link between labor market reforms and changes in net foreign assets via a precautionary savings channel. We apply the model to simulate far-reaching labor market reforms in Germany during the mid-2000s. We find that reducing the generosity of unemployment benefits decreases wages, fosters employment and augments competitiveness as well as trade. In addition, we can explain a significant share of the observed increase in German net foreign assets. A standard representative agent framework is not able to generate any notable effects on net foreign assets and the current account. |
| Keywords: | unemployment benefits reform,current account imbalances,precautionary savings,Hartz reform |
| JEL: | E21 E24 F16 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:132019&r=all |
| By: | Jonas E Arias (FRB Philadelphia); Guido Ascari (University of Oxford, University of Pavia, Bank of Finland); Nicola Branzoli (Bank of Italy); Efrem Castelnuovo (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne) |
| Abstract: | This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates. |
| Keywords: | trend inflation, determinacy, monetary policy |
| JEL: | E52 E3 C22 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2018n09&r=all |
| By: | Andri Chassamboulli; Pedro Gomes |
| Abstract: | We set up a search and matching model with a private and a public sector to understand the effects of employment and wage policies in the public sector on unemployment and education decisions. The effects of wages and employment of skilled and unskilled public-sector workers on the educational composition of the labor force depend crucially on the structure of the labor market. An increase of skilled public-sector wages has a small positive impact on educational composition and larger negative impact on the private employment of skilled workers, if the two sectors are segmented. If search across the two sectors is random, it has a large positive impact on education and a large positive impact on skilled private employment. We highlight the usefulness of the model for policymakers by calculating the value of public-sector job security for skilled and unskilled workers. |
| Keywords: | Public-sector employment; public-sector wages; unemployment; skilled workers; human capital accumulation, education decision, public-sector job security premium |
| JEL: | E24 J31 J45 J64 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:07-2019&r=all |
| By: | Paul R. Bergin; Giancarlo Corsetti |
| Abstract: | Motivated by the long-standing debate on the pros and cons of competitive devaluation, we propose a new perspective on how monetary and exchange rate policies can contribute to a country’s international competitiveness. We refocus the analysis on the implications of monetary stabilization for a country’s comparative advantage. We develop a two-country New-Keynesian model allowing for sectoral differences in the production of tradables in each economy: while in one sector firms are perfectly competitive, in another sector firms produce differentiated goods under monopolistic competition and subject to nominal rigidities, hence their performance is more sensitive to macroeconomic uncertainty. We show that, by stabilizing inflation and the output gap, monetary policy can foster the competitiveness of these firms, encouraging investment and entry in the differentiated goods sector, and ultimately affecting the composition of domestic output and exports. Welfare implications of alternative monetary policy rules that shift comparative advantage are found to be substantial in a calibrated version of the model. |
| JEL: | F41 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25765&r=all |
| By: | Kohei Hasui (Faculty of Economics, Matsuyama University); Teruyoshi Kobayashi (Faculty of Economics, Kobe University); Tomohiro Sugo (Bank of Japan) |
| Abstract: | Real-world central banks have a strong aversion to policy reversals. Nevertheless, theoretical models of monetary policy within the dynamic general equilibrium framework normally ignore the irreversibility of interest rate control. In this paper, we develop a formal model that incorporates a central bank's discretionary optimization problem with an aversion to policy reversals. We show that, even under a discretionary regime, the optimal timing of liftoff from the zero lower bound is characterized by its history dependence, which arises from the option value to waiting, and there exists an optimal degree of reversal aversion at which the social loss is minimized. |
| Keywords: | Monetary policy, policy irreversibility, reversal aversion, liquidity trap |
| JEL: | E31 E52 E58 E61 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1906&r=all |
| By: | Saki Bigio (UCLA); Galo Nuño (Banco de España); Juan Passadore (EIEF) |
| Abstract: | We characterize the optimal debt-maturity management problem of a government in a small open economy. The government issues a continuum of finite-maturity bonds in the presence of liquidity frictions. We find that the solution can be decentralized: the optimal issuance of a bond of a given maturity is proportional to the difference between its market price and its domestic valuation, the latter defined as the price computed using the government’s discount factor. We show how the steady-state debt distribution decreases with maturity. These results hold when extending the model to incorporate aggregate risk or strategic default. |
| Keywords: | Debt maturity; Debt management; Liquidity costs |
| JEL: | F34 F41 G11 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:143&r=all |
| By: | Dave, Chetan (University of Alberta, Department of Economics); Ghate, Chetan (Indian Statistical Institute); Gopalakrishnan, Pawan (Reserve Bank of India); Tarafdar, Suchismita (Shiv Nadar University) |
| Abstract: | We build a small open economy RBC model with financial frictions to analyze the incidence of expansionary fiscal consolidations in emerging market economies (EMEs). We calibrate the model to India, a proto-typical EME. We show that a spending based fiscal consolidation has an expansionary effect on output. In contrast, tax based consolidations are always contractionary. Either measure of consolidation, however, tends to increase the fiscal deficit and therefore the sovereign risk premia in our framework. Our findings support the results in the IMF WEO (2010), that tax based consolidation measures are more costly (in terms of GDP losses) than spending based consolidations in the short run. We identify new mechanisms that underlie the dynamics of fiscal reforms and their implications for successful fiscal consolidations. |
| Keywords: | Expansionary Fiscal Consolidations; Fiscal Policy in Small Open Economies; Emerging Market Business Cycles; Financial Frictions |
| JEL: | E32 E62 |
| Date: | 2019–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2019_005&r=all |
| By: | Andri Chassamboulli; Pedro Gomes |
| Abstract: | We set up a model with search and matching frictions to understand the effects of employment and wage policies, as well as nepotism in hiring in the public sector, on unemployment and rent seeking. Conditional on inefficiently high public-sector wages, more nepotism in public sector hiring lowers the unemployment rate because it limits the size of queues for public-sector jobs. Public-sector wage and employment policies impose an endogenous constraint on the number of workers the government can hire through connections. |
| Keywords: | Public-sector employment; nepotism; public-sector wages; unemployment. |
| JEL: | E24 J31 J45 J64 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:08-2019&r=all |
| By: | Matthew Clance (University of Pretoria, Department of Economics, Pretoria, 0002, South Africa); Wei Ma (Xi'an Jiaotong-Liverpool University, International Business School Suzhou, Suzhou, People's Republic of China); Ruthira Naraidoo (University of Pretoria, Department of Economics, Pretoria, 0002, South Africa) |
| Abstract: | This paper investigates the implications of international consumption risk sharing for a panel 69 developed and developing countries over the period 1986-2006. We theoretically derive the international consumption insurance proposition within an international real business cycle setup that involves consumption correlation with the real exchange rate to incorporate salient features that impede consumption risk sharing, namely trade costs and capital market imperfections, making use of the gravity structural model to obtain the trade costs estimates and output volatility to proxy capital market imperfections. We analyze the implications of the theory based on panel data estimation. We find that trade costs significantly impede risk sharing for the aggregate sample of countries and a 10% increase in trade costs can decrease consumption by almost 0:7% and 0:6% for trade between developed and developing countries and for intra-developing country trade respectively while intra-developed country trade seems to be affected by temporary changes in trade costs. Developed countries seem to be in line with insuring against output volatility while low income group face asset market constraints as output uncertainty increases. Policy implication hence involves lowering international trade costs in an attempt to alleviate issues of consumption allocations. |
| Keywords: | Trade costs, international consumption insurance, developed, developing, low income countries, capital market imperfection |
| JEL: | E21 E44 F14 F41 G15 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201932&r=all |
| By: | Yuta Toyama (School of Political Science and Economics, Waseda University, Tokyo, Japan and Research Institute for Environmental Economics and Management, Waseda University, Tokyo, Japan) |
| Abstract: | While the cap-and-trade program was originally proposed as a static regulation, its implementation introduces dynamic incentives such as saving (banking) of emissions per- mits. I examine the performance of the program by accounting for dynamic regulatory design and firms' incentives in the context of the US Acid Rain Program. I develop and estimate a dynamic equilibrium model of abatement investment and permit trading and banking, subject to transaction costs. Simulations reveal that although permit banking improves the cost-e fficiency, the aggregate level of banking is excess due to transaction costs. Distribution of emissions would be more dispersed in the first best. |
| Keywords: | Cap-and-trade regulation, dynamic equilibrium model, gains from trade, permit banking, transaction costs, electricity industry |
| JEL: | D22 L94 Q52 Q58 |
| URL: | http://d.repec.org/n?u=RePEc:was:dpaper:1902&r=all |
| By: | Michael Sposi (Southern Methodist University) |
| Abstract: | The age distribution evolves asymmetrically across countries, influencing relative saving rates and labor supply. Emerging economies experienced faster increases in working age shares than advanced economies did. Using a dynamic, multi-country model I quantify the effect of demographic changes on trade imbalances across 28 countries since 1970. Counterfactually holding demographics constant reduces net exports in emerging economies and boosts them in advanced economies. On average, a one percentage point increase in a country's working age share, relative to the world, increases its ratio of net exports to GDP by one-third of a percentage point. These findings alleviate the allocation puzzle. |
| Keywords: | Demographics, Trade imbalances, Dynamics, Labor supply. |
| JEL: | F11 F21 J11 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:smu:ecowpa:1902&r=all |
| By: | EL OTHMANI, Jawad (Bank Al-Maghrib, Département de la Recherche) |
| Abstract: | Ce travail porte sur l'estimation d'un modèle hybride néo-keynesien (HNKM) formé de trois équations structurelles caractérisant l'économie marocaine. Il s'agit de la courbe de demande, de la courbe d'o¤re et d'une règle Taylor augmentée des réserves de change. Le modèle est estimé par une approche bayésienne à partir des données trimestrielles couvrant la période 1998Q1-2016Q4. Parallèlement et s'inspirant des travaux de Del Negro et Schorfheide (2004), un modèle BVAR-DSGE a été estimé en exploitant les priors issus du modèle HNKM. Les fonctions de réponse impulsionnelles ont été comparées et les performances prédictives de ces deux modèles structurels ont été confrontées à des modèles statistiques alternatifs: le VAR classique et le BVAR. Il ressort des résultats des modèles HNKM et BVAR-DSGE que les réactions des variables aux di¤érents chocs sont globalement similaires et conformes aux prédictions de la théorie économique. L'étude de la qualité prévisionnelle des di¤érents modèles indique que le BVAR-DSGE et le HNKM présentent des avantages comparatifs mais sans dominer, en tous points, les modèles statistiques tels que le VAR classique et le VAR bayésien. |
| Keywords: | HNKM; BVAR-DSGE; BVAR; estimation bayésienne |
| JEL: | C10 C11 C13 E10 E12 E17 |
| Date: | 2018–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:ris:bkamdt:2018_005&r=all |