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on Dynamic General Equilibrium |
| By: | Bluwstein, Kristina (Bank of England); Brzoza-Brzezina, Michal (Narodowy Bank Polski and SGH Warsaw School of Economics); Gelain, Paolo (Federal Reserve Bank of Cleveland); Kolasa, Marcin (Narodowy Bank Polski and SGH Warsaw School of Economics) |
| Abstract: | We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications—fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack—to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks. |
| Keywords: | mortgages; fixed-rate contracts; monetary policy; |
| JEL: | E44 E51 E52 |
| Date: | 2019–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:191000&r=all |
| By: | Jean-Olivier Hairault (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); François Langot (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique); Thepthida Sopraseuth (CEPREMAP - Centre pour la recherche économique et ses applications) |
| Abstract: | In this paper, we show that (i) the volatility of worker flows increases with age in US CPS data, and (ii) a search and matching model with life-cycle features, endogenous separation and search effort, is well suited to explain this fact. With a shorter horizon on the labor market, older workers' outside options become less responsive to new employment opportunities, thereby making their wages less sensitive to the business cycle. Their job finding and separation rates are then more volatile along the business cycle. The horizon effect cannot explain the significant differences between prime-age and young workers as both age groups are far away from retirement. A lower bargaining power on the youth labor market brings the model closer to the data. JEL Classification: E32, J11, J23 |
| Keywords: | life cycle,business cycle,matching,search |
| Date: | 2019–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:hal-01984987&r=all |
| By: | Sara Eugeni (Durham University Business School) |
| Abstract: | In this paper, we contribute to the debate on whether exchange rate volatility is detrimental or not for welfare by characterizing optimal monetary policies in a two-country OLG model where markets are incomplete. The equilibrium nominal exchange rate is volatile as a result of shocks against which agents are not able to insure. In a non-cooperative environment, central banks have an incentive to devaluate the domestic currency by giving monetary transfers to domestic agents. However, such policies result in higher exchange rate volatility. We show that cooperation reduces exchange rate volatility as: (1) the negative spillover effects due to the expansionary monetary policies are internalized; (2) cooperative policies smooth the effects of shocks to fundamentals on the exchange rate. For standard parameter values, the gains from cooperation are not negligible. However, for cooperation to be Pareto improving countries should be weighted differently in the social welfare function. This could explain the lack of cooperation across countries, instead of the negligible gains as previously argued. |
| Keywords: | exchange rate volatility, incomplete markets, international spillovers, gains from cooperation, OLG models |
| JEL: | D52 F31 F41 F42 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:dur:durham:2019_02&r=all |
| By: | Stefania Garetto; Lindsay Oldenski; Natalia Ramondo |
| Abstract: | This paper studies the expansion patterns of the multinational enterprise (MNE) in time and space. Using a long panel of US MNEs, we document that: MNE affiliates grow by exporting to new markets; the activities of MNE affiliates persist during the affiliate's life, usually starting with sales to their host market and eventually expanding to export markets; and MNE affiliates' entry into new locations does not depend on the location of preexisting affiliates. Informed by these facts, we develop a multi-country quantitative dynamic model of the MNE that features heterogeneity in firm-level productivity, persistent aggregate shocks, and a rich structure of costs that affect MNE expansion. Importantly, MNE affiliates can decouple their locations of production and sales, and endogenously choose to enter or exit the host and the export markets. We introduce a compound option formulation that allows us to capture in a tractable way the rich heterogeneity that is observed in the data and that is necessary for quantitative analysis. Using the calibrated model, our quantitative application to Brexit reveals that export platforms are important for understanding the reallocation of MNE activity in time and space, and that the nature of the frictions to MNE activities matters for aggregate firm dynamics. |
| JEL: | F1 F23 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25804&r=all |
| By: | Jensen, Henrik (University of Copenhagen); Petrella, Ivan (University of Warwick); Ravn, Soren (University of Copenhagen); Santoro, Emiliano (University of Copenhagen) |
| Abstract: | We document that the U.S. and other G7 economies have been characterized by an increasingly negative business cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become non-binding in the face of expansionary shocks, allowing agents to freely substitute intertemporally. Contractionary shocks, on the other hand, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions. |
| Keywords: | Credit constraints; business cycles; skewness; deleveraging; JEL Classification Numbers: E32 ; E44 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wrkemf:21&r=all |
| By: | Ricardo Lagos; Shengxing Zhang |
| Abstract: | We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that—in contrast to current conventional wisdom in policy-oriented research in monetary economics—the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable—even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations—even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances. |
| JEL: | E31 E4 E41 E42 E43 E44 E5 E51 E52 E58 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25803&r=all |
| By: | Ally Zhang (University of Zurich and Swiss Finance Institute) |
| Abstract: | We develop an infinite horizon model that links the intermediation in both the financial and real sectors. Intermediaries provide market liquidity and exploit the arbitrage profits in segmented financial markets. To do so, they use their productive capital as collateral. We show that the weakened intermediation and arbitrage losses are mutually reinforcing during an economic downturn. This forces intermediaries to de-lever and leads to liquidity spirals in both financial and real sectors. Also, the distress might further open up the possibility of sudden run-like market freezes, where intermediaries are denied access to renewed funding through arbitrage. We evaluate the effect of three intervention policies: direct purchase of distressed assets, interest rate cuts, and capital injection. We find that capital injection is most effective as it loosens the margin requirement. The interest cut is least effective because it exacerbates the capital misallocation. |
| Keywords: | limit of arbitrage, financial intermediary, haircut, segmented markets, financial crises, market liquidity, collateral constraints |
| JEL: | D52 D58 E44 G01 G12 G33 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1762&r=all |
| By: | Fernandez-Villaverde, Jesus (University of Pennsylvania); Mandelman, Federico S. (Federal Reserve Bank of Atlanta); Yu, Yang (Shanghai University of Finance and Economics); Zanetti, Francesco (University of Oxford) |
| Abstract: | We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active equilibrium with strong joint venture formation, large output, and low unemployment coexists with a passive equilibrium with low joint venture formation, low output, and high unemployment. {{p}} Changes in fundamentals move the system between the two equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive equilibrium, while it plays a limited role in the active equilibrium. |
| Keywords: | aggregate fluctuations; strategic complementarities; macroeconomic volatility; government spending |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2019–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2019-09&r=all |
| By: | Murota, Ryu-ichiro |
| Abstract: | Using a dynamic general equilibrium model, this paper theoretically analyzes a negative interest rate policy in a permanent liquidity trap. If the natural nominal interest rate is above the lower bound set by the presence of vault cash held by commercial banks, a reduction in the nominal rate of interest on excess bank reserves can get an economy out of the permanent liquidity trap. In contrast, if the natural nominal interest rate is below the lower bound, then it cannot do so, but instead a rise in the rate of tax on vault cash is useful for doing so. |
| Keywords: | aggregate demand, liquidity trap, negative nominal interest rate, unemployment |
| JEL: | E12 E31 E58 |
| Date: | 2019–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93498&r=all |
| By: | Saki Bigio; Galo Nuño; Juan Passadore |
| 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. |
| JEL: | F34 F41 G11 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25808&r=all |
| By: | Amaral, Pedro S. (Federal Reserve Bank of Cleveland); Corbae, Dean (Wisconsin School of Business); Quintin, Erwan (Wisconsin School of Business) |
| Abstract: | The vast literature on financial development focuses mostly on the causal impact of the quantity of financial intermediation on economic development and productivity. This paper, instead, focuses on the role of the financial sector in creating securities that cater to the needs of heterogeneous investors. We describe a dynamic extension of Allen and Gale (1989)’s optimal security design model in which producers can tranche the stochastic cash flows they generate at a cost. Lowering security creation costs in that environment leads to more financial investment, but it has ambiguous effects on capital formation, output, and aggregate productivity. Much of the investment boom caused by increased securitization activities can, in fact, be spent on securitization costs and intermediation rents, with little or even negative effects on development and productivity. |
| Keywords: | Endogenous security markets; financial development; economic development; |
| JEL: | E30 E44 |
| Date: | 2017–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:162901&r=all |
| By: | Aikman, David; Giese, Julia; Kapadia, Sujit; McLeay, Michael |
| Abstract: | This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results. JEL Classification: E52, E58, G01, G28 |
| Keywords: | countercyclical capital buffer, credit boom, financial crises, financial stability, macroprudential policy, monetary policy |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192278&r=all |
| By: | Konstantinos Angelopoulos; Spyridon Lazarakis; Jim Malley |
| Abstract: | Incomplete markets models imply heterogeneous household savings behaviour which in turn generates pecuniary externalities via the interest rate. Conditional on differences in the processes determining household earnings for distinct groups in the population, these savings externalities may contribute to inequality. Working with an open economy heterogenous agent model, where the interest rate only partially responds to domestic asset supply, we find that differences in the earnings processes of British households with university and non-university educated heads entail savings externalities that increase wealth inequality between the groups and within the group of the non-university educated households. We further find that while the inefficiency effects of these externalities are quantitatively small, the distributional effects are sizeable. |
| Keywords: | incomplete markets, productivity differences, savings externalities |
| JEL: | E21 E25 H23 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7619&r=all |
| By: | Landais, Camille; Michaillat, Pascal; Saez, Emmanuel |
| Abstract: | This paper develops a theory of optimal unemployment insurance (UI) in matching models. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the tradeoff between insurance and job-search incentives, plus a correction term, which is positive when an increase in UI pushes the labor market tightness toward its efficient level. In matching models, most wage mechanisms do not ensure efficiency, so tightness is generally inefficient. The effect of UI on tightness depends on the model: increasing UI may raise tightness by alleviating the rat race for jobs or lower tightness by increasing wages through bargaining. |
| JEL: | J1 |
| Date: | 2018–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:88304&r=all |
| By: | Kaz Miyagiwa; Yoshiyasu Ono |
| Abstract: | We examine the effect of immigration on the host-country economy in the dynamic model that can deal with secular unemployment. Immigration has contrasting effects, depending on the economic state of the host country. If it suffers from unemployment, an influx of immigrants worsens unemployment and decreases consumption by natives. If instead the host country has full employment, immigration boosts native consumption while maintaining full employment, provided that immigrants are not too numerous. An influx of too many immigrants however can trigger stagnation. We also find that immigrants’ remittances are harmful to natives under full employment but beneficial under secular stagnation. |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1054&r=all |