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

  1. Asset Liquidity and Fiscal Consolidation Programs By Bernardino, Tiago
  2. Multinational Expansion in Time and Space By Stefania Garetto; Lindsay Oldenski; Natalia Ramondo
  3. Making Carbon Taxation A Generational Win Win By Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Jeffrey D. Sachs; Simon Scheidegger
  4. Macroeconomic effects of capital tax rate changes By Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
  5. Child Care Policy and Capital Mobility By Shintani, Masaya; Yasuoka, Masaya
  6. Weather Shocks By Ewen Gallic; Gauthier Vermandel
  7. Growth and bubbles: Investing in human capital versus having children By Xavier Raurich; Thomas Seegmuller
  8. Convergence, Financial Development, and Policy Analysis By Justin Yifu Lin; Jianjun Miao; Pengfei Wang
  9. Equilibrium Trade in Automobile Markets By Kenneth Gillingham; Fedor Iskhakov; Anders Munk-Nielsen; John P. Rust; Bertel Schjerning
  10. (Macro) Prudential Taxation of Good News By Jean Flemming; Jean-Paul L'Huillier; Facundo Piguillem
  11. Aggregate Implications of Changing Sectoral Trends By Foerster, Andrew; Hornstein, Andreas; Sarte, Pierre-Daniel G.; Watson, Mark W.
  12. Immigration, Social Networks, and Occupational Mismatch By Sevak Alaverdyan; Anna Zaharieva
  13. Sovereign Debt Restructurings: Delays in Renegotiations and Risk Averse Creditors By Tamon Asonuma; Hyungseok Joo
  14. Unemployment Dynamics and Endogenous Unemployment Insurance Extensions By W. Similan Rujiwattanapong
  15. Financial Frictions and Stimulative Effects of Temporary Corporate Tax Cuts By William Gbohoui; Rui Castro
  16. Skill-Biased Technological Change and Inequality in the U.S. By Ferrreira, Ana Melissa
  17. Reassessing Trade Barriers with Global Value Chains By Yuko Imura
  18. Inefficient Fire-Sales in Decentralized Asset Markets By Ehsan Ebrahimy
  19. Discounting the Future: on Climate Change, Ambiguity Aversion and Epstein-Zin Preferences By Stan Olijslagers; Sweder van Wijnbergen

  1. By: Bernardino, Tiago
    Abstract: We argue that the relationship between wealth inequality and fiscal multipliers depends crucially on the type of fiscal experiment used as well as on the measure of the wealth distribution. We calibrate an incomplete-markets, overlapping generations model to different European economies and use Household Finance and Consumption Survey (HFCS) data to compare fiscal multipliers when models are calibrated to match the distribution of liquid vs. net wealth. We find a negative relationship between fiscal multipliers and wealth inequality when considering fiscal consolidation programs, in contrast to fiscal expansions experiments which are standard in the literature. The underlying mechanism relies on the relationship between the distribution of wealth and the share of credit constrained agents. We examine the role of households’ balance sheet compositions regarding asset liquidity and find that when calibrating the model to match liquid wealth, the relationship between wealth inequality and fiscal multipliers is much stronger.
    Keywords: Fiscal Consolidation, Wealth Inequality, Fiscal Multipliers, Consumption Smoothing Hypothesis
    JEL: E21 E62 H31 H63
    Date: 2019–01
  2. By: Stefania Garetto (BU, CEPR, and NBER); Lindsay Oldenski (Georgetown University); Natalia Ramondo (UCSD and NBER)
    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.
    Keywords: Economic Growth, Innovation, Credit Constraints, Convergence, Policy Analysis, Money, Inflation
    JEL: O11 O23 O31 O33 O38 O42
    Date: 2019–04
  3. By: Laurence J. Kotlikoff (Boston University and NBER); Felix Kubler (University of Zurich and Swiss Financial Institute); Andrey Polbin (The Russian Presidential Academy of National Economy and Public Administration and The Gaidar Institute for Economic Policy); Jeffrey D. Sachs (Columbia University and NBER); Simon Scheidegger (University of Lausanne)
    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 largescale, 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
  4. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
    Abstract: We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a dynamic equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in the skill premium. Moreover, the expansionary long-run aggregate effects are smaller when distortionary labor or consumption tax rates have to increase to finance the capital tax rate cut. An extension to a model with heterogeneous households shows that consumption inequality increases in the long-run. We study transition dynamics and show that short-run effects depend critically on the monetary policy response: whether the central bank allows inflation to directly facilitate government debt stabilization and how inertially it raises interest rates. Finally, we contrast the long-term aggregate welfare gains with short-term losses, as well as in the model with heterogeneous households, show that welfare gains for the skilled go together with welfare losses for the unskilled.
    Keywords: capital tax rate, permanent change in the tax rate, capital-skill complementarity, skill premium, inequality, transition dynamics, monetary policy response
    JEL: E62 E63 E52 E58 E31
    Date: 2019
  5. By: Shintani, Masaya; Yasuoka, Masaya
    Abstract: Earlier reports have described effects of child care policy on fertility and education investment in an endogenous fertility model. Nevertheless, these studies examine closed economies in which capital accumulation is achieved by saving or small open economies in which capital accumulation is not considered. We can regard a capital mobility model as another model for which capital accumulation in one country affects capital accumulation in another country. Our paper presents consideration of capital mobility and examines how child care policy in one country affects another country. Results show that child allowances and education subsidies positively or negatively affect human capital accumulation in the foreign country even if fertility and human capital accumulation can be raised in the country in which child care policies are provided.
    Keywords: Capital Mobility, Child Allowance, Education Subsidy, Endogenous Fertility, Human Capital
    JEL: J13
    Date: 2019–05–20
  6. By: Ewen Gallic (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (Université Paris-Dauphine, PSL Research University, 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
    Date: 2019–05
  7. By: Xavier Raurich; Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: As it is documented, households' investment in their own education (human capital) is negatively related to the number of children individuals will have and requires some loans to be financed. We show that this contributes to explain episodes of bubbles associated to higher growth rates. This conclusion is obtained in an overlapping generations model where agents choose to invest in their own education and decide their number of children. A bubble is a liquid asset that can be used to finance either education or the cost of rearing children. The time cost of rearing children plays a key role in the analysis. If the time cost per child is sufficiently high, households have only a small number of children. Then, the bubble has a crowding-in effect because it is used to provide loans to finance investments in education. On the contrary, if the time cost per child is low enough, households have a large number of children. Then, the bubble is mainly used to finance the total cost of rearing children and has a crowding-out effect on investment. Therefore, the new mechanism we highlight shows that a bubble enhances growth if the economy is characterized by a high rearing time cost per child.
    Keywords: Bubble,Sustained growth,Fertility,Human capital
    Date: 2019–05
  8. By: Justin Yifu Lin (Institute of New Structural Economics, Peking University); Jianjun Miao (Department of Economics, Boston University); Pengfei Wang (Department of Economics, Hong Kong University of Science and Technology)
    Abstract: We study the relationship among inflation, economic growth, and financial development in a Schumpeterian overlapping-generations model with credit constraints. In the baseline case money is super-neutral. When the financial development exceeds some critical level, the economy catches up and then converges to the growth rate of the world technology frontier. Otherwise, the economy converges to a poverty trap with a growth rate lower than the frontier and with inflation decreasing with the level of financial development. We then study efficient allocation and identify the sources of inefficiency in a market equilibrium. We show that a particular combination of monetary and fiscal policies can make a market equilibrium attain the efficient allocation.
    Keywords: Economic Growth, Innovation, Credit Constraints, Convergence, Policy Analysis, Money, Inflation
    JEL: O11 O23 O31 O33 O38 O42
    Date: 2019–01
  9. By: Kenneth Gillingham; Fedor Iskhakov; Anders Munk-Nielsen; John P. Rust; Bertel Schjerning
    Abstract: We introduce a computationally tractable dynamic equilibrium model of the automobile market where new and used cars of multiple types (e.g. makes/models) are traded by heterogeneous consumers. Prices and quantities are determined endogenously to equate supply and demand for all car types and vintages, along with the ages at which cars are scrapped. The model allows for transactions costs, taxes, flexible specifications of car characteristics, consumer preferences, and heterogeneity. We apply the model to two examples: a revenue-neutral replacement of the new vehicle registration tax with a higher fuel tax and a hypothetical “merger to monopoly” in an oligopolistic new car market. We show substantial gains in consumer welfare from the tax policy change, as well as important effects on government revenues, automobile prices, driving, fuel consumption and CO 2 emissions, while the merger leads to substantial welfare losses.
    JEL: L9 L98 Q4 Q5 R4
    Date: 2019–05
  10. By: Jean Flemming (University of Oxford); Jean-Paul L'Huillier (Brandeis University); Facundo Piguillem (EIEF)
    Abstract: We analyze the optimal macroprudential policy under the presence of news shocks. News are shocks to the growth rate that convey information about future growth. In this context, crises are characterized by long periods with positive shocks (and good news) that eventually revert, rendering the collateral constraint binding and triggering deleveraging. In this environment it is optimal to tax borrowing during good times, and let agents act freely leaving the allocations undistorted, including borrowing and lending, when the economy reverts to a bad state. We contrast our findings to the case of standard shocks to the level of income, where it is optimal to tax debt in bad times, when agents need to borrow the most for precautionary savings motives. Also, taxes are used much less often and are around one-tenth of those under level shocks.
    Date: 2019
  11. By: Foerster, Andrew (Federal Reserve Bank of San Francisco); Hornstein, Andreas (Federal Reserve Bank of Richmond); Sarte, Pierre-Daniel G. (Federal Reserve Bank of Richmond); Watson, Mark W. (Princeton University)
    Abstract: We fi nd disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specif c trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and labor growth lead to changes in GDP growth that may be as large as three times these sectors' share in the economy. We find that trend GDP growth has declined by more than 2 percentage points since 1950, and that this decline has been primarily shaped by sector-specifi c rather than aggregate factors. Sustained contractions in growth specifi c to Construction, Nondurable Goods, and Professional and Business and Services make up close to sixty percent of the estimated trend decrease in GDP growth. In addition, the slow process of capital accumulation means that structural changes have endogenously persistent effects. We estimate that trend GDP growth will continue to decline for the next 10 years absent persistent increases in TFP and labor growth.
    Date: 2019–05–14
  12. By: Sevak Alaverdyan; Anna Zaharieva
    Abstract: In this study we investigate the link between the job search channels that workers use to find employment and the probability of occupational mismatch in the new job. Our specific focus is on differences between native and immigrant workers. We use data from the German Socio-Economic Panel (SOEP) over the period 2000-2014. First, we document that referral hiring via social networks is the most frequent single channel of generating jobs in Germany; in relative terms referrals are used more frequently by immigrant workers compared to natives. Second, our data reveals that referral hiring is associated with the highest rate of occupational mismatch among all channels in Germany. We combine these findings and use them to develop a theoretical search and matching model with two ethnic groups of workers (natives and immigrants), two search channels (formal and referral hiring) and two occupations. When modeling social networks we take into account ethnic and professional homophily in the link formation. Our model predicts that immigrant workers face stronger risk of unemployment and often rely on recommendations from their friends and relatives as a channel of last resort. Furthermore, higher rates of referral hiring produce more frequent occupational mismatch of the immigrant population compared to natives. We test this prediction empirically and confirm that more intensive network hiring contributes significantly to higher rates of occupational mismatch among immigrants. Finally, we document that the gaps in the incidence of referrals and mismatch rates are reduced among second generation immigrants indicating some degree of integration in the German labour market.
    Keywords: job search, referrals, social networks, occupational mismatch, immigration
    JEL: J23 J31 J38 J64
    Date: 2019
  13. By: Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey)
    Abstract: Foreign creditors' business cycles influence both the process and the outcome of sovereign debt restructurings. We compile two datasets on creditor committees and chairs and on creditor business and financial cycles at the restructurings, and find that when creditors experience high GDP growth, restructurings are delayed and settled with smaller haircuts. To rationalize these stylized facts, we develop a theoretical model of sovereign debt with multi-round renegotiations between a risk averse sovereign debtor and a risk averse creditor. The quantitative analysis of the model shows that high creditor income results in both longer delays in renegotiations and smaller haircuts. Our theoretical predictions are supported by data.
    JEL: F34 F41 H63
    Date: 2019–05
  14. By: W. Similan Rujiwattanapong (Aarhus Universitet; Centre for Macroeconomics (CFM))
    Abstract: This paper investigates the impact of endogenous unemployment insurance (UI) extensions on the dynamics of unemployment and its duration structure in the US. Using a search and matching model with worker heterogeneity, I allow for the maximum UI duration to depend on unemployment and for UI benefits to depend on worker characteristics. UI extensions have a large effect on long-term unemployment during the Great Recession via job search responses and a moderate effect on total unemployment via job separations. Disregarding rational expectations about the timing of UI extensions implies an overestimation of the unemployment rate by over 2 percentage points.
    Keywords: Business cycles, Long-term unemployment, unemployment insurance, Unemployment duration, Rational expectations
    JEL: E24 E32 J24 J64 J65
    Date: 2019–05
  15. By: William Gbohoui; Rui Castro
    Abstract: This paper uses an industry equilibrium model where some firms are financially constrained to quantify the effects of a transitory corporate tax cut funded by a future tax increase on the U.S. economy. It finds that by increasing current cash-flows tax cuts alleviate financing frictions, hereby stimulating current investment. Per dollar of tax stimulus, aggregate investment increases by 26 cents on impact, and aggregate output by 3.5 cents. The average effect masks heterogeneity: multipliers are close to 1 for constrained firms, especially new entrants, and negative for larger and unconstrained firms. The output effects extend well past the period the policy is reversed, leading to a cumulative multiplier of 7.2 cents. Multipliers are significantly larger when controlling for the investment crowding-out effect among unconstrained firms.
    Date: 2019–05–07
  16. By: Ferrreira, Ana Melissa
    Abstract: Since the 1980’s, income inequality has increased markedly and is at the highest level ever since it has been recorded in the U.S. This paper uses an overlapping-generations model with incomplete markets that allows for household heterogeneity and that is calibrated to match the U.S. economy with the purpose to study how skill-biased technological change (SBTC) and changes in taxation quantitatively account for the increase in inequality from 1980 to 2010. We find that SBTC and taxation decrease account for 48% of the total increase in the income Gini coefficient. In particular, we conclude that SBTC alone accounted for 42% of the overall increase in income inequality, while changes in the progressivity of the income tax schedule alone accounted for 5,7%.
    Keywords: Technical change, Income Inequality, Wealth Inequality, Heterogeneity, Taxation
    JEL: E21 J0
    Date: 2019–01
  17. By: Yuko Imura
    Abstract: This paper provides a systematic, quantitative analysis of the short-run and long-run effects of various trade-restricting policies in the presence of global value chains and multinational production. Using a two-country dynamic stochastic general equilibrium model with endogenous firm entry and exit in both exporting and multinational production, I compare the effects of (i) tariffs on final-good imports, (ii) tariffs on intermediate-input imports, and (iii) barriers to accessing foreign markets. I show that, in the long run, all three policies lead to a recession in both countries, but the relative effects on the GDP of the two countries vary across policies. At the firm level, less productive exporters exit from the destination market while the most productive few find it profitable to locate production in the foreign country as multinationals, thereby partially recovering the loss from exporting. In the short run, the dynamics differ across policies and from their long-run outcomes. Final-good tariffs and market-access barriers lead to a temporary production boom in the policy-imposing country, while intermediate-input tariffs result in an immediate recession in both countries. The latter also discourages multinational operation over the short run when the input tariffs dominate the declining costs of labor and capital.
    Keywords: Business fluctuations and cycles; Firm dynamics; International topics; Trade Integration
    JEL: F12 F13 F41
    Date: 2019–05
  18. By: Ehsan Ebrahimy
    Abstract: Classic models of fire-sales that emphasize liquidity-constrained natural buyers can-not fully account for the asset fire-sales during the Financial Crisis of 2008. I present a model to demonstrate that fire-sales may happen even when there is a sizable pool of natural buyers and in the absence of asymmetric information, due to a coordina-tion failure among buyers. In particular, I show that when trade is decentralized and participation is endogenous, constrained asset demand and liquidity needs that are ex-pected to increase over time create complementarity among buyers’ decisions to wait. This complementarity makes competitive markets prone to coordination failures and fire-sales which may be inefficient. I also discuss various policy options to eliminate the risk of fire-sales in such a setup.
    Date: 2019–05–06
  19. By: Stan Olijslagers (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: We focus on the effect of preference specifications on the current day valuation of future outcomes. Specifically, we analyze the effect of risk aversion, ambiguity aversion and the elasticity of intertemporal substitution on the willingness to pay to avoid climate change risk. The first part of the paper analyzes a general disaster (jump) risk model with a constant arrival rate of disasters. This provides useful intuition in how preferences influence valuation of long-term risk. The second part of the paper extends this model with a climate model and a temperature dependent arrival rate. Since the model yields closed form solutions up to solving an integral, our model does not suffer from the curse of dimensionality of numerical IAMs with several state variables. Introducing Epstein-Zin preferences with an elasticity of substitution higher than one and ambiguity aversion leads to much larger estimates of the social cost of carbon than obtained under power utility. The dominant parameters are the risk aversion coefficient and the elasticity of intertemporal substitution. Ambiguity aversion is of second order importance.
    Keywords: Social Cost of Carbon, Ambiguity Aversion, Epstein-Zin preferences, Stochastic Differential Utility, Climate Change
    JEL: Q51 Q54 G12 G13
    Date: 2019–04–24

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