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on Dynamic General Equilibrium |
| By: | Guilherme Bandeira (Bank of Spain); Jordi Caballe (Universitat Autonoma de Barcelona and Barcelona GSE); Eugenia Vella (University of Sheffield and MOVE, Universitat Autonoma de Barcelona) |
| Abstract: | In this paper we propose a new channel through which fiscal austerity affects the macroeconomy. To this end, we introduce endogenous migration both for the unem- ployed and the employed members of the household in a small open economy New Keynesian model with labour market frictions. Our model-based simulations for the austerity mix implemented in Greece over the period 2010-2015 show that the model is able to match the total size of half a million emigrants and output drop of 25%, while the model without migration generates an output drop of 20%. Having established that the model delivers empirically plausible results, we then use it to investigate (i) the two-way relation between migration and austerity, and (ii) the role of migration as shock absorber. We find that tax hikes induce prolonged migration outflows, while the effect of spending cuts is hump-shaped. In turn, emigration implies an increase in both the tax hike and time required to achieve a given size of debt reduction. As a result of the labour-reducing effect of these higher tax hikes, the unemployment gains from migration are only temporary in the presence of austerity and are substantially reversed over time. |
| Keywords: | Fiscal consolidation, migration, matching frictions, on-the-job search |
| JEL: | E32 F41 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2019009&r=all |
| By: | Artur Rutkowski (Group for Research in Applied Economics (GRAPE)) |
| Abstract: | We provide ex ante welfare, fiscal and general macroeconomic evaluation of the voluntary old-age saving scheme recently introduced in Poland (Pracownicze Plany Kapitałowe, Employees’ Capital Plans). ECPs provide tax redemptions as well as lump-sum transfers with the objective to foster old-age savings. Reduction in capital income tax revenues and a rise in expenditure needs to be compensated through adjustment in other taxes. We employ an overlapping generations model (OLG) to gauge the plausible magnitude of the macroeconomic and welfare effects and provide insights in terms of microfoundations of these adjustments. Our OLG model features voluntary participation and innovates relative to the literature by introducing agents with hand-to-mouth preferences. We find relatively high crowding out of private savings. In our preferred specification roughly 0.08 to 0.09 PLN of each 1 PLN allocated to ECPs are actually new savings, the rest being displaced from unincentivized private voluntary savings. The plausible values of the effective capital growth range between 0.03 and 0.42 of 1 PLN in ECPs. ECPs reduce welfare of the fully rational agents, unless they offer a sufficiently large annuity. ECPs provide consumption smoothing and interest income to HTM agents. |
| Keywords: | overlapping generations, old-age savings, tax incentives, incomplete rationality |
| JEL: | C68 D63 E17 E21 H55 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:34&r=all |
| By: | Celso José Costa Junior (Ministerio de Economía, Universidad Estadual de Ponta Grossa (UEPG) & Fundação Getúlio Vargas (FGV), Brasil); Alejandro C. García Cintado (Universidad Pablo de Olavide (UPO) & UEPG); Manuel Alejandro Hidalgo Pérez (UPO & Secretaría General de Economía – Junta de Andalucía) |
| Abstract: | This paper uses a DSGE model with political-regime-dependent fiscal and monetary policies so as to examine political-business cycles in an emerging market such as Brazil under three different regimes – an "opportunistic regime" and "two partisan ones". The former regime seeks to identify whether within the period of seven quarters prior to the elections, the government manipulated the economy to increase the chances of getting reelected (or securing a successor). As for the latter two, they try to verify whether the macroeconomic strategies pursued by the "more leftist" governments differed from their "more right-wing" predecessors’ monetary and fiscal policies. Our results show that there exists an opportunistic behavior by all the governments studied as regards fiscal policy, and that from a macroeconomic viewpoint, President Rouseff’s administration fared differently than previous governments. However, monetary policy turns out to be independent of the regimes considered. |
| Keywords: | political cycles, monetary policy, fiscal policy, Oaxaca model, Dynamic Stochastic General Equilibrium (DSGE) model. |
| JEL: | E32 E52 E62 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:19.09&r=all |
| By: | M. Koray Kalafatcilar |
| Abstract: | This study firstly introduces demographic concepts and reveals the different dynamics displayed by emerging and advanced economies. Then, the links between demographic developments and economic activity are discussed. We aim to support our arguments with quantitative findings obtained through a New-Keynesian general equilibrium model. The general equilibrium model, which is calibrated for Turkey, is simulated for the period until 2050 in accordance with changes in demographic exogenous variables. Through this simulation, the path that main macroeconomic variables follow is analyzed. The simulation exercise, conducted through the model which is de-trended with the increases in productivity and population, reveals that, compared to the initial steady state, production factor prices significantly change; real interest rate declines and real wage increases. |
| Keywords: | Demography, Overlapping generations, Savings, General equilibrium |
| JEL: | J11 E21 C61 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1911&r=all |
| By: | Billi, Roberto (Research Department, Central Bank of Sweden); Galí, Jordi (CREI, UPF and Barcelona GSE) |
| Abstract: | We analyze the welfare impact of greater wage exibility while taking into account explicitly the existence of the zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally amplifies the adverse effects of greater wage exibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the presence of the ZLB implies that an increase in wage exibility reduces welfare even under the optimal monetary policy with commitment. |
| Keywords: | labor market exibility; nominal rigidities; optimal monetary policy with commitment; Taylor rule; ZLB |
| JEL: | E24 E32 E52 |
| Date: | 2019–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0367&r=all |
| By: | Ewen Gallic (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Gauthier Vermandel (Paris-Dauphine and PSL Research Universities & France Stratégie, Services du Premier Ministre) |
| Abstract: | How much do weather shocks matter? The literature addresses this question in two isolated ways: either by looking at long-term effects through the prism of theoretical models, or by focusing on short-term effects using empirical analysis. We propose a framework to bring together both the short and long-term effects through the lens of an estimated DSGE model with a weather-dependent agricultural sector. The model is estimated using Bayesian methods and quarterly data for New Zealand using the weather as an observable variable. In the short-run, our analysis underlines the key role of weather as a driver of business cycles over the sample period. An adverse weather shock generates a recession, boosts the non-agricultural sector and entails a domestic currency depreciation. Taking a long-term perspective, a welfare analysis reveals that weather shocks are not a free lunch: the welfare cost of weather is currently estimated at 0.19% of permanent consumption. Climate change critically increases the variability of key macroeconomic variables (such as GDP, agricultural output or the real exchange rate) resulting in a higher welfare cost peaking to 0.29% in the worst case scenario. |
| Keywords: | agriculture, business cycles, climate change, weather shocks |
| JEL: | C13 E32 Q54 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1915&r=all |
| By: | Naoki Yoshihara (Department of Economics, University of Massachusetts Amherst); Se Ho Kwak (Department of Economics, University of Massachusetts Amherst) |
| Abstract: | In contrast to Mandler’s (1999a; Theorem 6) impossibility result about the Sraffian indeterminacy of the steady-state equilibrium, we first show that any regular Sraffian steady-state equilibrium is indeterminate in terms of Sraffa (1960) under the simple overlapping generation economy. Moreover, we also check that this indeterminacy is generic. These results are obtained by explicitly defining a simple model of overlapping gener- ation economies with Leontief production techniques, in which we also explain the main source of the difference between our results and Mandler (1999a; section 6). |
| Keywords: | Sraffian indeterminacy |
| JEL: | B51 D33 D50 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2019-04&r=all |
| By: | Francesco Scervini (Department of Economics, University of Pavia); Serena Trucchi (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | This paper examines the interaction between altruism towards offspring and precautionary savings. It investigates whether increased uncertainty in children labor income fosters savings of parents. We first construct a two-periods and two-generations model, to underline which are the mechanisms behind the intergenerational precautionary motive for savings. Second, we exploit two micro datasets to test the main theoretical implications. Parents’ consumption turns out to respond to the offspring’s income risk. This result is robust to the presence of family fixed effects and to many alternative empirical specifications. |
| Keywords: | Precautionary savings, consumption, income risk, offspring |
| JEL: | D13 C23 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2019:13&r=all |
| By: | Francesco De Palma; Yann Thommen |
| Abstract: | Policy advisers repeatedly call on Western European countries to reform their employment protection legislation (EPL) by adopting layoff taxes to finance unemployment insurance (UI). This new design, partly based on the existing "experience-rating" (ER) system in the U.S., would induce firms to internalize layoff fiscal costs and hence reduce unemployment. Its success remains uncertain in economies with a collective wage-setting system, as in many Western European countries. Using a matching model with endogenous job destruction, we provide an ex-ante evaluation of this policy reform’s effects on labor market outcomes in a firm-level bargaining economy and a sector-level bargaining one. Using numerical exercises, we show that compared to a scenario of a simple increase in EPL stringency, the implementation of an ER system results in a decrease in unemployment under both bargaining regimes. Because of the possibility for firms to adjust most terms and conditions of employment (including wage) in decentralized negotiations, juxtaposing the ER system with the existing EPL yields the best labor market performance under a firm-level bargaining regime. The lack of internal flexibility in sector-level bargaining calls for accompanying the implementation of the ER with a relaxation of the existing EPL’s stringency. Lastly, we show that in industries with a turbulent economic environment, accompanying the introduction of ER while reducing the existing EPL’s strictness is recommended. |
| Keywords: | Search and matching models, Collective bargaining, Experience rating, Employment protection. |
| JEL: | E10 J48 J50 J60 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2019-16&r=all |
| By: | Xavier Fairise; François Langot; Ze Zhong Shang |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tep:teppwp:wp18-15&r=all |
| By: | Debortoli, Davide (UPF, CREI and Barcelona GSE); Kim, Jinill (Korea University); Lindé, Jesper (Research Department, Central Bank of Sweden); Nunes, Ricardo (University of Surrey and CIMS) |
| Abstract: | Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare-relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when imposing a moderate degree of interest rate volatility. |
| Keywords: | Central banksobjectives; simple loss function; monetary policy design; sticky prices and sticky wages; DSGE models |
| JEL: | C32 E58 E61 |
| Date: | 2018–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0366&r=all |
| By: | Davide Debortoli; Jordi Galí; Luca Gambetti |
| Abstract: | The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule. |
| JEL: | E44 E52 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25820&r=all |