nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒05‒06
27 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Nominal GDP growth indexed bonds: Business Cycle and Welfare Effects within the Framework of New Keynesian DSGE model By Yongo Kwon
  2. Heterogeneous effects of single monetary policy on unemployment rates in the largest EMU economies By Alexander Mihailov; Giovanni Razzu; Zhe Wang
  3. Fiscal and monetary policy rules in Malawi:a New Keynesian DSGE analysis By Joseph Upile Matola; Roberto Leon-Gonzalez
  4. Is Household Heterogeneity Important for Business Cycles? By Youngsoo Jang; Takeki Sunakawa; Minchul Yum
  5. Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model By Begenau, Juliane
  6. Evaluating Welfare and Economic Effects of Raised Fertility By Makarski, Krzysztof; Tyrowicz, Joanna; Malec, Magda
  7. Occupational Choice and the Dynamics of Human Capital, Inequality and Growth By Dvorkin, Maximiliano; Monge-Naranjo, Alexander
  8. Search and Multiple Jobholding By Lalé, Etienne
  9. Demographic Aging, Industrial Policy, and Chinese Economic Growth By Dotsey, Michael; Li, Wenli; Yang, Fang
  10. Household Heterogeneity and the Value of Government Spending Multiplier: an Analytical Characterization By Kopiec, Pawel
  11. Labor Market Power By Berger, David; Herkenhoff, Kyle; Mongey, Simon
  12. Monetary Policy and Financial Exclusion in an Estimated DSGE Model of Sub-Saharan African Economies By Paul Owusu Takyi; Roberto Leon-Gonzalez
  13. Long-Run Tax Incidence in a Human Capital-based Endogenous Growth Model with Labor-Market Frictions By Been-Lon Chen; Hung-Ju Chen; Ping Wang
  14. The Global Factor in Neutral Policy Rates : Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination By Richard H. Clarida
  15. Fragility in modeling consumption tax revenue By Kazuki Hiraga; Kengo Nutahara
  16. Optimal Social Insurance and Rising Labor Market Risk By Krebs, Tom; Scheffel, Martin
  17. Optimal Cooperative Taxation in the Global Economy By Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
  18. Firm and Worker Dynamics in an Aging Labor Market By Engbom, Niklas
  19. The Lost Ones: The Opportunities and Outcomes of Non-College-Educated Americans Born in the 1960s By Borella, Margherita; De Nardi, Mariacristina; Yang, Fang
  20. The direction and intensity of China’s monetary policy conduct : A dynamic factor modelling approach By Funke, Michael; Tsang, Andrew
  21. Optimal Corporate Taxation Under Financial Frictions By Davila, Eduardo; Hebert, Benjamin
  22. The risk-adjusted carbon price By Ton S. van den Bremer; Rick van der Ploeg
  23. Firms, Skills, and Wage Inequality By Pinheiro, Roberto; Tasci, Murat
  24. Upstream, Downstream & Common Firm Shocks By Grant, Everett; Yung, Julieta
  25. Population and the environment: the role of fertility, education and life expectancy By Fabio Mariani; Agustin Perez Barahona; Natacha Raffin
  26. Monetary policy implications of state-dependent prices and wages By Costain, James; Nakov, Anton; Petit, Borja
  27. A Search Model of Experience Goods By Chen, Yongmin; Li, zhuozheng; Zhang, Tianle

  1. By: Yongo Kwon
    Abstract: We examine the welfare effects of GDP-indexed bonds in a New Keynesian DSGE model. We add to a literature showing that the issuance of GDP-indexed bond may help stabilise public debt and so give more room for countercyclical fiscal policy, by conducting a careful general equilibrium welfare analysis. In a standard DSGE models, where Ricardian equivalence holds, household welfare is immune to the source of government financing. We examine how GDP-indexed bonds, rather than nominal bonds, affect welfare when Ricardian equivalence does not hold. Specifically, we add “hand-to-mouth” households (Galí et al., 2007), distortionary income taxes that fund debt, and Epstein and Zin (1989) type recursive preference to the most widely used medium scale model of Smets and Wouters (2007). The results show when the fiscal authority tries to stabilise debt, GDP-indexed bonds can significantly increase the welfare of the hand-to-mouse households by stabilising their consumption and labour supply responses to fiscal consolidations compared to a case involving nominal debt alone.
    Keywords: New-Keynesian model, GDP-indexed bonds, Counter-cyclical fiscal policy
    Date: 2019–05
  2. By: Alexander Mihailov (Department of Economics, University of Reading); Giovanni Razzu (Department of Economics, University of Reading); Zhe Wang (Department of Economics, University of Reading)
    Abstract: This paper studies the effects of monetary policy on the national rates of unemployment in Germany, France, Italy and Spain, the four largest economies of the European Monetary Union (EMU), since the introduction of the euro in 1999 and before and after the Global Financial Crisis (GFC) of 2007-09. Estimating and simulating a version of a canonical medium-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with indivisible labor that incorporates unemployment developed by Galí, Smets and Wouters (2012), the paper compares the relative importance of monetary policy shocks, risk premium shocks, wage markup shocks and labor supply shocks and studies their effects on other labor market variables, such as labor force participation and real wages. We find that the same monetary policy of the European Central Bank (ECB) has had heterogeneous effects on unemployment rates and other labor market variables in these four major EMU economies. Moreover, in all of them monetary policy shocks are the second largest source of unemployment rate variability in the short, medium and long run, only preceded by risk premium shocks. Our results also confirm that the post-GFC zero lower bound environment has rendered ECB's interest rate policy much less powerful in affecting EMU unemployment rates. In addition to the heterogeneity documented in the effects of monetary policy along various labor market dimensions across the countries in our sample, we also reveal that the EMU economies are, further, characterized by important differences along these dimensions with respect to the United States (US).
    Keywords: single monetary policy, European Monetary Union, unemployment rate fluctuations, labor market heterogeneity, New Keynesian DSGE models, Bayesian estimation
    JEL: D58 E24 E31 E32 E52
    Date: 2019–04–24
  3. By: Joseph Upile Matola (National Graduate Institute for Policy Studies, Tokyo, Japan / bMinistry of Finance, Economic Planning, and Development, Lilongwe, Malawi); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, Tokyo, Japan)
    Abstract: In this paper, Malawi fs fiscal and monetary policy rules are estimated and their effects and influence on key macroeconomic variables analyzed in a New Keynesian DSGE framework. Bayesian estimation is used to estimate the model using data on consumption, investment, inflation, nominal interest rate, government spending, consumption tax revenue, and income tax revenue. It is found that monetary policy in Malawi follows a Taylor type interest rate rule in which interest rates respond strongly to changes in inflation, in accordance with the gTaylor principle h, and only mildly to output fluctuations. Fiscal policy too reacts to output fluctuations in a modest fashion. With regards to the main drivers of output fluctuations, it is shown that although fiscal and monetary policy shocks play a significant role, it is actually productivity shocks and to a lesser extent cost-push and preference shocks that are the main contributors to business cycles.
    Date: 2019–04
  4. By: Youngsoo Jang; Takeki Sunakawa; Minchul Yum
    Abstract: This paper explores how the interaction between household heterogeneity and progressive government transfers shapes aggregate labor market ‡uctuations. Using a static model of the extensive margin labor supply, we analytically show that greater progressivity in the transfer system leads to greater volatility of low wage workers’ employment and less procyclical average labor productivity. We then build a dynamic general equilibrium model with both idiosyncratic and aggregate productivity shocks and show that household heterogeneity substantially shapes the dynamics of macroeconomic aggregates when interacted with progressive transfers. Specifically, a notable feature of the performance of our heterogeneous-agent model is its ability to reproduce moderately procyclical average labor productivity while retaining the success of the representative-agent indivisible labor model in generating a large cyclical volatility of aggregate hours relative to output. Finally, we document that among low-wage workers, (i) the individuallevel probability of adjusting labor supply along the extensive margin is signi…cantly higher, and (ii) the fall in employment rate is considerably steeper during the last six recessions, both of which support the key mechanism of our model.
    Keywords: Heterogeneity, progressivity, government transfers, extensive margin labor supply, business cycles
    JEL: E32 E24 E21
    Date: 2019–04
  5. By: Begenau, Juliane (Stanford GSB)
    Abstract: This paper develops a quantitative dynamic general equilibrium model in which households’ preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benefit of higher capital requirements related to this channel significantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.
    JEL: E44 G21 G28
    Date: 2019–01
  6. By: Makarski, Krzysztof (Warsaw School of Economics); Tyrowicz, Joanna (University of Warsaw); Malec, Magda (Warsaw School of Economics)
    Abstract: Many countries consider rising fertility through pro-family policies as a solution to the fiscal pressure stemming from longevity. However, an increased number of births implies immediate private costs and only delayed public benefits of younger and larger population. We propose using an overlapping generations model with a rich family structure to quantify the effects of simulated increases to the birth rates. We analyze the overall macroeconomic and welfare effects of these simulated paths relative to status quo. We also study the distribution of these effects across cohorts and study the sensitivity of the final effects to the assumed target value and path of increased fertility. Since our study tries to quantify the possible effects of pro-natalistic policies, we focus of public costs and benefits of having children. We find that fiscal effects are positive, but short of the natalistic expenditures in many countries. The sign and the size of both welfare and fiscal effects depend on the patterns of increased fertility.
    Keywords: fertility, welfare, natalistic policies, overlapping generations model
    JEL: H55 E17 C60 C68 E21 D63
    Date: 2019–04
  7. By: Dvorkin, Maximiliano (Federal Reserve Bank of St. Louis); Monge-Naranjo, Alexander (Federal Reserve Bank of St. Louis)
    Abstract: We develop a tractable dynamic Roy model in which workers choose occupations to maximize their lifetime utility. In our setting, a worker’s human capital is driven by his labor market choices, given idiosyncratic occupation-specific productivity shocks and the costs of switching occupations. We characterize the equilibrium assignment of workers to jobs and show that the resulting evolution of aggregate human capital across occupations ultimately determines the long-run rate of growth of the economy. We then use our model to quantitatively study the impact of labor-saving technical changes on workers’ occupational choices and on the economy’s income inequality, job polarization and long-run growth.
    Keywords: Occupational Choice; Human Capital; Dynamics; Inequality; Endogenous Growth; General Equilibrium
    JEL: E24 J24 J31 J62
    Date: 2019–04–23
  8. By: Lalé, Etienne (University of Québec at Montréal)
    Abstract: A search-theoretic model of the labor market with idiosyncratic fluctuations in hours worked, search both off- and on-the-job, and multiple jobholding is developed. Taking on a second job entails a commitment to hold onto the primary employer, enabling the worker to use the primary job as her outside option to bargain with the secondary employer. The model performs well at explaining multiple jobholding inflows and outflows, and it is informative for understanding the secular decline in multiple jobholding. While some worry that this decline heralds a less-flexible labor market, the model reveals that it has contributed to reducing search frictions.
    Keywords: multiple jobholding, employment, hours worked, job search
    JEL: E24 J21 J62
    Date: 2019–04
  9. By: Dotsey, Michael (Federal Reserve Bank of Philadelphia); Li, Wenli (Federal Reserve Bank of Philadelphia); Yang, Fang (Louisiana State University)
    Abstract: We examine the role of demographics and changing industrial policies in ac- counting for the rapid rise in household savings and in per capita output growth in China since the mid-1970s. The demographic changes come from reductions in the fertility rate and increases in the life expectancy, while the industrial policies take many forms. These policies cause important structural changes; first benefiting private labor-intensive firms by incentivizing them to increase their share of employment, and later on benefiting capital-intensive firms resulting in an increasing share of capital devoted to heavy industries. We conduct our analysis in a general equilibrium economy that also features endogenous human capital investment. We calibrate the model to match key economic variables of the Chinese economy and show that demographic changes and industrial policies both contributed to in- creases in savings and output growth but with differing intensities and at different horizons. We further demonstrate the importance of endogenous human capital investment in accounting for the economic growth in China.
    Keywords: Aging; Credit policy; Household saving; Output growth; China
    JEL: E21 J11 J13 L52
    Date: 2019–03–21
  10. By: Kopiec, Pawel
    Abstract: This paper provides an analytical formula for the government spending multiplier in economy populated with heterogeneous households that face uninsured idiosyncratic risk. To derive this expression I use the canonical Bewley-Huggett-Aiyagari model extended to capture frictional product market. In my analysis I relax several assumptions that were made in the literature to obtain closed-form solutions in heterogeneous agent models such as: partial equilibrium (e.g., Auclert (2017)), extreme illiquidity (e.g., Krusell et al. (2011)) and constant real interest rates (e.g., Auclert et al. (2018)). The resulting formula for the multiplier is decomposed into interpretable, model-based channels. Calibrated model is used to estimate their magnitude under alternative fiscal and monetary policy rules. Quantitative exploration indicates that household heterogeneity plays a crucial role in the propagation of government expenditures shocks.
    Keywords: Heterogeneous Agents, Fiscal Stimulus
    JEL: D30 E62 H23 H30 H31
    Date: 2019
  11. By: Berger, David (Northwestern University); Herkenhoff, Kyle (University of Minnesota); Mongey, Simon (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: E2 J2 J42
    Date: 2019–04
  12. By: Paul Owusu Takyi (National Graduate Institute for Policy Studies, Tokyo, Japan); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, Tokyo, Japan)
    Abstract: This paper examines the effectiveness of monetary policy and its implications for financially included and excluded households in Sub-Saharan African (SSA) economies, using an estimated New-Keynesian DSGE model. The model has financially included ( eoptimizing f) households coexisting with financially excluded ( ehand-to-mouth f) households. We exploit time series data on four SSA economies, spanning 1985-2016, to estimate the model fs parameters through Bayesian inference methods. Our estimation results show that the share of financially excluded households in these economies is relatively small, usually between 35% and 42%. This finding suggests that previous efforts to enhance financial inclusion in SSA have contributed to a general lowering of the cost of financial market participation. Our results also indicate that the monetary authorities in SSA countries have targeted inflation more aggressively than output growth. Further, the results of our Bayesian impulse response analysis suggests that a positive monetary policy shock does perform its intended role of significantly reducing inflation and output, despite a sizeable fraction of the population is financially excluded. Additionally, we find that a contractionary monetary policy tends to have differentiated impacts; it decreases consumption of financially excluded households more than that of financially included ones. The results reveal that financially included households are able to absorb shocks, and thus can smooth consumption more effectively than financially excluded households. Consequently, given that financially included households are better positioned to address shocks, it is recommended that monetary authorities in developing countries place greater emphasis on output growth relative to inflation. That shifting emphasis could support the stabilization of income, which would enable financially excluded households to smooth consumption. In addition, efforts to ensure full financial inclusion are recommended so that monetary policy can more fully achieve its objectives.
    Date: 2019–04
  13. By: Been-Lon Chen; Hung-Ju Chen; Ping Wang
    Abstract: In a second-best optimal growth setup with only factor taxes, it is in general optimal to fully replace capital by labor income taxation in the long run. We revisit this important issue by developing a human capital-based endogenous growth model with frictional labor search, allowing each firm to create multiple vacancies and each worker to determine market participation. We find that the conventional efficient bargaining condition is necessary but not sufficient for achieving constrained social optimality. We then conduct tax incidence exercises in balanced growth by calibrating to the U.S. economy with a pre-existing 20% flat tax on capital and labor income. Our quantitative results suggest that, due to a dominant channel via the interactions between vacancy creation and market participation, it is optimal to switch only partially from capital to labor taxation in a benchmark economy where human capital formation depends on both physical and human capital stocks. This main finding is robust even along the transition with time-varying factor tax rates. Moreover, our quantitative analysis under alternative setups suggest that while endogenous human capital and labor market frictions are essential for obtaining a positive optimal capital tax, endogenous leisure, nonlinear human capital accumulation and endogenous growth are not crucial.
    JEL: E62 H22 J24 O41
    Date: 2019–04
  14. By: Richard H. Clarida
    Abstract: This paper highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. Using a standard two country DSGE model, we derive a structural decomposition in which the nominal exchange rate is a function of the expected present value of future neutral real interest rate differentials plus a business cycle factor and a PPP factor. Country specific “r*” shocks in general require optimal monetary policy to pass these through to the policy rate, but such shocks will also have exchange rate implications, with an expected decline in the path of the real neutral policy rate reflected in a depreciation of the nominal exchange rate. We document a novel empirical regularity between the equilibrium error in the VECM representation of the empirical Holston Laubach Williams (2017) four country r* model and the value of the nominal trade weighted dollar. In fact, the correlation between the dollar and the 12 quarter lag of the HLW equilibrium error is estimated to be 0.7. Global shocks to r* under optimal policy require no exchange rate adjustment because passing though r* shocks to policy rates ‘does all the work’ of maintaining global equilibrium. We also study a richer model with international spill overs so that in theory there can be gains to international policy cooperation. In this richer model we obtain a similar decomposition for the nominal exchange rate, but with the added feature that r* in each country is a function global productivity and business cycle factors even if these factors are themselves independent across countries. We argue that in practice, there could well be significant costs to central bank communication and credibility under a regime of formal policy cooperation, but that gains to policy coordination could be substantial given that r*’s are unobserved but are correlated across countries.
    Keywords: Exchange rate ; Monetary policy ; Policy coordination
    JEL: E4 F31 F33
    Date: 2019–04–22
  15. By: Kazuki Hiraga; Kengo Nutahara
    Abstract: This study shows that the shape of the tax revenue curve for consumption tax and its boundedness are sensitive to (i) the functional form of utility and (ii) the use of tax revenue in a neoclassical general equilibrium model. The tax revenue curve for consumption tax cannot be hump-shaped if the utility function is King- Plosser-Rebelo utility with constant labor supply elasticity. Conversely, the curve can be hump-shaped if the utility function is additively separable in consumption and labor supply or if the utility function is Greenwood-Hercowitz-Huffman, both of which are popular in the literature. The use of tax revenue also has significant effects on the tax revenue curve for consumption tax. If the tax revenue is mainly used as a lump-sum transfer to households, Then the tax revenue is likely to be unbounded, whereas it is likely to be bounded and the tax revenue curve is likely to be hump-shaped if the tax revenue is mainly used as government consumption.
    Date: 2019–02
  16. By: Krebs, Tom (Federal Reserve Bank of Minneapolis); Scheffel, Martin (Karlsruhe Institute of Technology)
    Abstract: This paper analyzes the optimal response of the social insurance system to a rise in labor market risk. To this end, we develop a tractable macroeconomic model with risk-free physical capital, risky human capital (labor market risk) and unobservable effort choice affecting the distribution of human capital shocks (moral hazard). We show that constrained optimal allocations are simple in the sense that they can be found by solving a static social planner problem. We further show that constrained optimal allocations are the equilibrium allocations of a market economy in which the government uses taxes and transfers that are linear in household wealth/income. We use the tractability result to show that an increase in labor market (human capital) risk increases social welfare if the government adjusts the tax-and-transfer system optimally. Finally, we provide a quantitative analysis of the secular rise in job displacement risk in the US and find that the welfare cost of not adjusting the social insurance system optimally can be substantial.
    Keywords: Labor market risk; Social insurance; Moral hazard
    JEL: E21 H21 J24
    Date: 2019–02–01
  17. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal)
    Abstract: We use the Ramsey and Mirrlees approaches to study how fiscal and trade policy should be set cooperatively when governments must raise revenues with distorting taxes. Free trade and unrestricted capital mobility are optimal. Efficient outcomes can be implemented with taxes only on final consumption goods and labor income. We study alternative tax systems, showing that uniform taxation of household asset returns, and not taxing corporate income yields efficient outcomes. Border adjustments exempting exports from and including imports in the tax base are desirable. Destination and residence based tax systems are desirable compared to origin and source based systems.
    Keywords: Capital income tax; Free trade; Value-added taxes; Border adjustment; Origin- and destination-based taxation; Production efficiency
    JEL: E60 E61 E62
    Date: 2019–04–18
  18. By: Engbom, Niklas (Federal Reserve Bank of Minneapolis)
    Abstract: I develop an idea flows theory of firm and worker dynamics in order to assess the consequences of population aging. Older people are less likely to attempt entrepreneurship and switch employers because they have found better jobs. Consequently, aging reduces entry and worker mobility through a composition effect. In equilibrium, the lower entry rate implies fewer new, better job opportunities for workers, while the better matched labor market dissuades job creation and entry. Aging accounts for a large share of substantial declines in firm and worker dynamics since the 1980s, primarily due to equilibrium forces. Cross-state evidence supports these predictions.
    Keywords: Demographics; Employment; Economic growth; Labor turnover; Entrepreneurial choice
    JEL: E24 J11 O40
    Date: 2019–04–10
  19. By: Borella, Margherita (Università di Torino); De Nardi, Mariacristina (Federal Reserve Bank of Minneapolis); Yang, Fang (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.
    JEL: E21 H31
    Date: 2019–03–18
  20. By: Funke, Michael; Tsang, Andrew
    Abstract: The recent upgrade of the People’s Bank of China’s monetary policy framework establishes a corridor system of interest rates. As the revamped policy arrangement now features a multiple-instrument mix of liquidity tools and pricing signals, we employ a dynamic factor modelling approach to derive an indicator of China’s monetary policy stance. The approach is based on the notion that comovements in several monetary policy instruments have a common element that can be captured by a single underlying, unobserved component. To clarify and interpret the derived index, we employ a baseline DSGE model that can be solved analytically and allows tracing of the expansionary and contractionary on-and-off phases of Chinese monetary policy.
    JEL: C54 E52 E58 E61 E32
    Date: 2019–04–24
  21. By: Davila, Eduardo (Yale University/New York University and NBER); Hebert, Benjamin (Stanford University and NBER)
    Abstract: We study optimal corporate taxation when firms are financially constrained. We describe a corporate taxation principle: taxes should be levied on unconstrained firms, which value resources inside the firm less than constrained firms. Under complete information, this principle completely characterizes optimal corporate tax policy. With incomplete information, the government can use payout policy to elicit whether a firm is constrained, and tax accordingly. In our static model, optimal corporate taxation can be implemented by a corporate dividend tax, and in our dynamic model, the optimal sequence of mechanisms can also be implemented by a corporate dividend tax.
    JEL: G38 H21 H25
    Date: 2019–01
  22. By: Ton S. van den Bremer; Rick van der Ploeg
    Abstract: We use perturbation methods to derive a rule for the optimal risk-adjusted social cost of carbon (SCC) that incorporates the effects of uncertainties associated with climate and the economy from a calibrated DSGE model. We allow for different aversions to risk and intertemporal fluctuations, convex damages, uncertainties in economic growth, atmospheric carbon, climate sensitivity and damages, their correlations, and distributions that are skewed in the longer run to capture long-run climate feedbacks. Our non-certainty-equivalent rule for the SCC incorporates precaution, risk insurance, and climate sensitivity and damage rate hedging effects to deal with future economic and climatic and damage risks.
    Keywords: precaution, insurance, hedging, economic, climatic and damage uncertainties, skewness, mean reversion, correlated risks, risk aversion, intergenerational inequality aversion, convex damages
    JEL: H21 Q51 Q54
    Date: 2019
  23. By: Pinheiro, Roberto (Federal Reserve Bank of Cleveland); Tasci, Murat (Federal Reserve Bank of Cleveland)
    Abstract: We present a model with search frictions and heterogeneous agents that allows us to decompose the overall increase in US wage inequality in the last 30 years into its within- and between-firm and skill components. We calibrate the model to evaluate how much of the overall rise in wage inequality and its components is explained by different channels. Output distribution per firm-skill pair more than accounts for the observed increase over this period. Parametric identification implies that the worker-specific component is responsible for 85 percent of this, compared to 15 percent that is attributable to firm-level productivity shifts.
    Keywords: Multi-agent firms; skill distributions; wage inequality;
    JEL: D02 D21 J2 J3
    Date: 2019–04–19
  24. By: Grant, Everett (Federal Reserve Bank of Dallas); Yung, Julieta (Bates College)
    Abstract: We develop a multi-sector DSGE model to calculate upstream and downstream industry exposure networks from U.S. input-output tables and test the relative importance of shocks from each direction by comparing these with estimated networks of firms’ equity return responses to one another. The correlations between the upstream exposure and equity return networks are large and statistically significant, while the downstream exposure networks have lower — but still positive — correlations that are not statistically significant. These results suggest a low short-term elasticity of substitution across inputs transmitting shocks from suppliers, but more flexible ties with downstream firms. Additionally, both the DSGE model and simulations of our empirical approach highlight the importance of accounting for common factors in network estimation, which become more important over our 1989-2017 sample period, explaining 11.7% of equity return variation over the first ten years and 35.0% over the final ten.
    Keywords: upstream versus downstream; input-output linkages; firm networks; shock propagation; aggregate shocks
    JEL: C32 D85 E23 E44 G01
    Date: 2019–04–12
  25. By: Fabio Mariani (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Agustin Perez Barahona (University of Cergy-Pontoise and Ecole Polytechnique); Natacha Raffin (Normandie Univ, UNIROUEN, CREAM and EconomiX, University Paris Nanterre)
    Abstract: This paper explores the interplay between population and environmental quality. After reviewing the existing literature, we set up a theoretical framework suitable to analyze two major endogenous forces of demographic change - fertility and life expectancy - and their dynamic interaction with human capital and environmental conditions. We thus revisit and encompass in a unified model some key results of the literature, and gain new insight on the consequences of policy intervention on environmental dynamics and economic development. In particular, we highlight (i) the possible perverse effects of pollution control, (ii) a demographic explanation of the environmental Kuznets curve, (iii) the opportunity of relying on educational subsidies to alleviate the pressure on natural resources, and (iv) the existence of poverty traps related to human capital and environmental quality.
    Keywords: Environmental quality; Life expectancy; Education; Fertility
    JEL: J11 O44 Q56
    Date: 2019–04
  26. By: Costain, James; Nakov, Anton; Petit, Borja
    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. JEL Classification: E31, D81, C73
    Keywords: control costs, logit equilibrium, near rationality, nominal rigidity, state-dependent adjustment
    Date: 2019–04
  27. By: Chen, Yongmin; Li, zhuozheng; Zhang, Tianle
    Abstract: The economics literature on consumer search has focused on inspection goods, the quality of which is observed before purchase. This paper studies a model of experience goods where consumers search for desired varieties but can observe product quality only after consumption. The model yields price and welfare results that are contrary to those for inspection goods. Specifically, we find that equilibrium price may rise even when search intensity is higher and, under plausible conditions, both consumer and social welfare are initially increasing in search cost. Our analysis shows that quality observability is a key determinant of how search markets function.
    Keywords: consumer search, experience goods, inspection goods, product quality, search cost
    JEL: D8 L1
    Date: 2019–04–28

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