nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒06‒10
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. XMAS: An extended model for analysis and simulations By Benjamín García; Sebastián Guarda; Markus Kirchner; Rodrigo Tranamil
  2. Unemployment and the demand for money By Samuel Huber; Jaehong Kim; Alessandro Marchesiani
  3. The Nonlinear Effects of Fiscal Policy By Brinca, Pedro; Faria-e-Castro, Miguel; Ferreira, Miguel H.; Holter, Hans
  4. Endogenous Migration in a Two-Country Model with Labor Market Frictions By Bright Isaac Ikhenaode; Carmelo Pierpaolo Parello
  5. Turning It Up To Eleven: Re-Evaluating the Role of Financial Frictions in the 2007–2008 Economic Crisis By Aligishiev, Z.; Ben-Gad, M.; Mountford, A.; Pearlman, J.
  6. State-dependent Monetary Policy Regimes By Zakipour-Saber, Shayan
  7. The effect of observables, functional specifications, model features and shocks on identification in linearized DSGE models By Sergey Ivashchenko; Willi Mutschler
  8. Property rights and long-Run capital By Julio Dávila
  9. Females, the elderly, and also males: Demographic aging and macroeconomy in Japan By Sagiri Kitao; Minamo Mikoshiba; Hikaru Takeuchi
  10. Resolving New Keynesian Anomalies with Wealth in the Utility Function By Pascal Michaillat; Emmanuel Saez
  11. Un modelo DSGE bayesiano para la heterogeneidad en shocks de impuestos como política fiscal en la reactivación económica del Perú By Juan Tenorio; Maritza Huanchi
  12. Monetary Equilibrium and the Cost of Banking Activity By Paola Boel; Gabriele Camera
  13. Central Bank Digital Currency and Banking By Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu
  14. The Beveridge curve in the housing market By Gaetano Lisi
  15. Demographic change and climate change By Rauscher, Michael
  16. Sovereign default and imperfect tax enforcement By Francesco Pappada; Yanos Zylberberg
  17. Necessary and Sufficient Conditions for Determinacy of Asymptotically Stationary Equilibria in Olg Models By Alexander Gorokhovsky; Anna Rubinchik
  18. Should Central Banks Issue Digital Currency? By Keister, Todd; Sanches, Daniel R.
  19. The Gold Standard and the Great Depression: a Dynamic General Equilibrium Model By Luca Pensieroso; Romain Restout
  20. A unified approach to measuring u* By Crump, Richard K.; Eusepi, Stefano; Giannoni, Marc; Sahin, Aysegul
  21. Bank capital in the short and in the long run By Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik
  22. Aggregate Implications of Changing Sectoral Trends By Andrew Foerster; Andreas Hornstein; Pierre-Daniel Sarte; Mark W. Watson
  23. Designing Robust Monetary Policy Using Prediction Pools By Deak, S.; Levine, P.; Mirza, A.; Pearlman, J.
  24. Explaining Bond Return Predictability in an Estimated New Keynesian Model By Martin M. Andreasen
  25. The Indeterminacy Agenda in Macroeconomics By Roger E.A. Farmer
  26. Adverse Selection, Lemons Shocks and Business Cycles By Ikeda, Daisuke

  1. By: Benjamín García; Sebastián Guarda; Markus Kirchner; Rodrigo Tranamil
    Abstract: The Extended Model for Analysis and Simulations (XMAS) is the Central Bank of Chile's newest dynamic stochastic general equilibrium (DSGE) model for macroeconomic projections and monetary policy analysis. Building on Medina and Soto (2007), the model includes several new features, in line with recent developments in the modeling of small open economies, particularly commodityexporting emerging economies such as Chile. The extensions over the base model include the modeling of non-core inflation dynamics, a commodity sector with endogenous production and investment, a labor market with search and matching frictions that allows for labor variation on both the intensive and extensive margins, an augmented fiscal block, as well as additional shocks and other real and nominal frictions. These features allow for a more granular analysis and more comprehensive forecasts of the Chilean economy, improving the fit of the model to macroeconomic data in several dimensions.
    Date: 2019–05
  2. By: Samuel Huber; Jaehong Kim; Alessandro Marchesiani
    Abstract: We develop a dynamic general equilibrium model to analyze the relationship between monetary policy, money demand, and unemployment. Our model succeeds in replicating the empirical fact of a downward sloping Phillips curve for low infl ation rates and an upward sloping curve for high inflation rates. The reason is that low in flation rates make saving, as opposed to consumption, more attractive. Less consumption is associated with less output and therefore higher unemployment. To the contrary, when inflation exceeds a certain threshold, money is too costly to hold, which results in a decrease in output and an increase in unemployment.
    Keywords: Money, infl ation, overlapping generations, unemployment
    JEL: D90 E31 E41 E50
    Date: 2019–05
  3. By: Brinca, Pedro (Nova School of Business and Economics, Center for Economics and Finance at UP); Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis); Ferreira, Miguel H. (Nova School of Business and Economics); Holter, Hans (University of Oslo)
    Abstract: We argue that the fiscal multiplier of government purchases is increasing in the spending shock, in contrast to what is assumed in most of the literature. The fiscal multiplier is largest for large positive government spending shocks and smallest for large contractions in government spending. We empirically document this fact using aggregate U.S. data. We find that a neoclassical, life-cycle, incomplete markets model calibrated to match key features of the US economy can explain this empirical finding. The mechanism hinges on the relationship between fiscal shocks, their form of financing, and the response of labor supply across the wealth distribution. The model predicts that the aggregate labor supply elasticity is increasing in the size of the fiscal shock, and this holds regardless of whether shocks are deficit- or balanced-budget financed (albeit through different mechanisms). We find evidence of our mechanism in micro data for the US.
    Keywords: Fiscal Multipliers; Nonlinearity; Asymmetry; Heterogeneous Agents
    JEL: E21 E62
    Date: 2019–05–22
  4. By: Bright Isaac Ikhenaode; Carmelo Pierpaolo Parello
    Abstract: We present a dynamic North-South model with search frictions and endogenous labor migration to study the long-run implications of labor factor mobility on labor market conditions and welfare. In the model, the high-TFP country (North) acts as the destination country for migration, while the low-TFP country (South) acts as the origin country. We prove that there always exists a unique steady-state equilibrium for the world economy, and find that a permanent increase in migration effort causes per capita income to rise in North and to fall in the South. However, our simulations also show the existence of a job displacement effect in the host country that makes domestic employment fall in the long-run. In an extension of the baseline model, we test the long-run effects of a pro-employment protectionist policy of the destination country consisting in imposing a distortionary tax on the domestic firms hiring migrant workers. Our analysis shows that a positive tax rate on foreign employment can increase natives welfare, but only at the expense of losses in national production and employment. These results are robust across different degrees of substitutability between migrant and native workers.
    Keywords: North-South migration; Ramsey-Like Growth; International Labor Mobility; Frictional Unemployment
    JEL: F24 F41 J61 O15
    Date: 2018–10
  5. By: Aligishiev, Z.; Ben-Gad, M.; Mountford, A.; Pearlman, J.
    Abstract: We analyze the role of public and private financial frictions in the 2007–2008 economic crisis in the United States by extending the model of Drautzburg and Uhlig (2015) to eleven observable variables using data on all three interest rates in the model (policy, private and public). We also include a preference shock in the model, and present an alternative method for describing shock decompositions during and preceding the crisis designed to isolate the impact of the pre-crisis shocks. The estimated model produces an intuitive description of the evolution of the postwar U.S. economy overall and of the economic crisis at the end of the sample period. We find, in contrast to Drautzburg and Uhlig, that monetary and fiscal policy shocks played a significant role in mitigating the effects of the financial crisis.
    Keywords: DSGE model; Shock decomposition; Financial Frictions; Fiscal Policy
    Date: 2019
  6. By: Zakipour-Saber, Shayan (Central Bank of Ireland)
    Abstract: Are monetary policy regimes state-dependent? To answer the question this paper estimates New Keynesian general equilibrium models that allow the state of the economy to influence the monetary authority’s stance on inflation. I take advantage of recent developments in solving rational expectations models with state-dependent parameter drift to estimate three models on U.S. data between 1965-2009. In these models, the probability of remaining in a monetary policy regime that is relatively accommodative towards inflation, varies over time and depends on endogenous model variables; in particular, either deviations of inflation or output from their respective targets or a monetary policy shock. The main contribution of this paper is that it finds evidence of state-dependent monetary policy regimes. The model that allows inflation to influence the monetary policy regime in place, fits the data better than an alternative model with regime changes that are not state-dependent. This finding points towards reconsidering how changes in monetary policy are modeled.
    Keywords: Markov-Switching DSGE, State-dependence, Bayesian Estimation
    JEL: C13 C32 E42 E43
    Date: 2019–04
  7. By: Sergey Ivashchenko; Willi Mutschler
    Abstract: Both the investment adjustment costs parameters in Kim (2003) and the monetary policy rule parameters in An & Schorfheide (2007) are locally not identifiable. We show means to dissolve this theoretical lack of identification by looking at (1) the set of observed variables, (2) functional specifications (level vs. growth costs, output-gap definition), (3) model features (capital utilization, partial inflation indexation), and (4) additional shocks (investment-specific technology, preference). Moreover, we discuss the effect of these changes on the strength of parameter identification from a Bayesian point of view. Our results indicate that researchers should treat parameter identification as a model property, i.e. from a model building perspective.
    Keywords: identification, weak identification, investment adjustment costs, Taylor rule, model features, shocks
    JEL: C18 C51 C68 E22 E52
    Date: 2019–06
  8. By: Julio Dávila (Centre d'Economie de la Sorbonne and CORE - Université Catholique de Louvain)
    Abstract: The fact that some proprietary capital gradually falls into the public domain (e.g. patents) or is taxed to fund productive public spending (e.g. public infrastructures and the institutional framework) inefficiently decreases capital accumulation, impacting households' consumption. Specifically, for a neoclassical infinitely-lived agents economy with constant returns to scale the planner's steady state consumption is 4.6%-9.1% higher than the market one —for standard empirically supported parameters. For a similarly parametrised overlapping generations economy it is around 10.5%. A tax and subsidy balanced policy able to decentralise the planner's steady consists of (i) subsidising the rental rate of private capital by an amount equal to its depreciation by (ii) taxing households' net position between, on the one hand, firm and depreciated capital ownership and, on the other, borrowing against future dividends and its resale value. From standard functions and parameterisations of the OG setup it follows that the savings rate decentralising the planner's steady state is close to 61.5% —of which ? in loans to firms and ? in real monetary balances and assets ownership net of borrowing against the latter— and that the tax rate on household net debt is smaller the bigger are monetary real balances and debt
    Keywords: Property rights; capital accumulation
    JEL: H21 H23 O4
    Date: 2019–05
  9. By: Sagiri Kitao; Minamo Mikoshiba; Hikaru Takeuchi
    Abstract: The speed and magnitude of ongoing demographic aging in Japan are unprecedented. A rapid decline in the labor force and a rising fiscal burden to finance social security expenditures could hamper growth over a prolonged period. We build a dynamic general equilibrium model populated by overlapping generations of males and females who differ in employment type and labor productivity as well as life expectancy. We study how changes in the labor market over the coming decades will affect the transition path of the economy and fiscal situation of Japan. We find that a rise in the labor supply of females and the elderly of both genders in an extensive margin and in labor productivity can significantly mitigate effects of demographic aging on the macroeconomy and reduce fiscal pressures, despite a decline in wage during the transition. We also quantify effects of alternative demographic scenarios and fiscal policies. The study suggests that a combination of policies that remove obstacles hindering labor supply and that enhance a more efficient allocation of male and female workers of all age groups will be critical to keeping government deficit under control and raising income across the nation.
    Keywords: Japanese Economy, Demographic Trends, Female and Elderly Labor Force Participation, Overlapping Generation Model.
    JEL: E62 J11 J21 H55
    Date: 2019–06
  10. By: Pascal Michaillat; Emmanuel Saez
    Abstract: The New Keynesian model makes several anomalous predictions at the zero lower bound: collapse of output and inflation, and implausibly large effects of forward guidance and government spending. To resolve these anomalies, we introduce wealth into the utility function. The justification is that wealth is a marker of social status, and people value social status. Since people save not only for future consumption but also to accrue social status, the Euler equation is modified. As a result, when the marginal utility of wealth is sufficiently large, the dynamical system representing the equilibrium at the zero lower bound becomes a source instead of a saddle---which resolves all the anomalies.
    Date: 2019–05
  11. By: Juan Tenorio (Georgetown University); Maritza Huanchi (Universidad Nacional del Callao)
    Abstract: Durante los últimos años, el Perú atravesó recesiones debido a la dependencia externa estableciendo políticas fiscales para la reactivación económica. Sin embargo, la diversidad de impuestos y su escaso estudio no permitieron definir una política adecuada debido a la no consideración de heterogeneidad de sus efectos. Esta investigación estima el impacto de shocks del IGV y el IR considerando las limitaciones anteriores. Asimismo, a través del modelo de Equilibrio General Dinámico Estocástico (DSGE) Bayesiano se evidenció que un shock por IGV incrementa la economía en 2.2%, disminuye el empleo, aumenta el consumo en el periodo inicial y retrae la inversión. Por otra parte, un shock de IR impulsa la economía en 4.8%, retrae el consumo pero eleva el empleo casi proporcionalmente, e incrementa la inversión. Finalmente, se concluyó que una reforma tributaria de IR tiene efectos más satisfactorios, logrando una recaudación de 12.3% del PBI, en comparación del IGV (8.9%).
    Keywords: Reactivación económica, política fiscal, impuestos, DSGE Bayesiano
    JEL: E62 H22
    Date: 2019–05
  12. By: Paola Boel (Sveriges Riksbank); Gabriele Camera (Economic Science Institute, Chapman University & University of Bologna)
    Abstract: We investigate the effects of banks’ operating costs on allocations and welfare in a low interest rate environment. We introduce an explicit production function for banks in a microfounded model where banks employ labor resources, hired on a competitive market, to run their operations. In equilibrium, this generates a spread between interest rates on loans and deposits, which naturally reflects the underlying monetary policy and the efficiency of financial intermediation. In a deflation or low inflation environment, equilibrium deposits yield zero returns. Hence, banks end up soaking up labor resources to offer deposits that do not outperform idle balances, thus reducing aggregate efficiency.
    Keywords: banks; frictions; matching
    JEL: C70 D40 E30 J30
    Date: 2019
  13. By: Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu
    Abstract: Many central banks are considering whether to issue a new form of electronic money that would be accessible to the public. This new form is usually called a central bank digital currency (CBDC). Issuing a CBDC would have implications on the financial system and more broadly on the wider economy. The effects of a CBDC on the banking sector, output and welfare depend crucially on the level of competition in the market for bank deposits. We show that when banks have no market power, issuing a deposit-like CBDC (that people can use like a debit card in transactions) would crowd out private banking. It would shift deposits away from the banking system, reducing bank lending. However, in a more realistic scenario, when banks have market power in the deposit market, issuing a deposit-like CBDC with a proper interest rate would encourage banks to pay higher interest or offer better services to keep their customers. They can do so because they earn a positive profit. As a result, banks would attract more deposits and extend more loans. In this case, issuing a CBDC would not necessarily crowd out private banking. In fact, the CBDC would serve as an outside option for households, thus limiting banks’ market power, and improve the efficiency of bank intermediation. We show quantitatively that the effects of a CBDC on lending, deposits, output and welfare can be sizable. We also analyze how different designs of a CBDC affect our results, including whether the CBDC is deposit-like or cash-like and whether the CBDC can be used to satisfy banks’ reserve requirements.
    Keywords: Digital Currencies and Fintech; Market structure and pricing; Monetary Policy; Monetary policy framework
    JEL: E50 E58
    Date: 2019–05
  14. By: Gaetano Lisi (University of Cassino and Lazio Meridionale)
    Abstract: As opposed to a recent criticism (according to which a model à la Pissarides inherently generates a downward sloping Beveridge curve), this preliminary theoretical paper shows that a baseline search-and-matching model is able to take into account the main distinctive features of the housing market, thus generating an upward sloping Beveridge curve.
    JEL: J63 J64 R21 R31 R32
    Date: 2019–05
  15. By: Rauscher, Michael
    Abstract: The paper uses a continuous-time overlapping-generations model with endogenous growth and pollution accumulation over time to study the link between longevity and global warming. It is seen that increasing longevity accelerates climate change in a business-as-usual scenario without climate policy. If a binding emission target is set exogenously and implemented via a cap-and-trade system, the price of emission permits is increasing in longevity. Longevity has no effect on the optimal solution of the climate problem if perfect intergenerational transfers are feasible. If these transfers are absent, the impact of longevity is ambiguous.
    Date: 2019
  16. By: Francesco Pappada; Yanos Zylberberg
    Abstract: We show that, in many countries, tax compliance is volatile and markedly responds to fiscal policy. To explore the consequence of this novel stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impact future fiscal revenues and thus default risk. Thismechanism captures one key empirical regularity of economies with imperfect tax enforcement: the low sensitivity of debt price to fiscal consolidations. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal scal policy. During default crises, high tax distortions force the government towards extreme scal policies, notably including costly austerity spells.
    Keywords: China, productivity.
    Date: 2019–05–29
  17. By: Alexander Gorokhovsky (Dept. of Mathematics University of Colorado at Boulder); Anna Rubinchik (Dept. of Economics; University of Haifa)
    Abstract: We propose a criterion for determining whether a local policy analysis can be made in a given equilibrium in an overlapping generations model. The criterion can be applied to models with in?nite past and future as well as those with a truncated past. The equilibrium is not necessarily a steady state; for example, demographic and type composition of the population or individuals’ endowments can change over time. However, asymptotically, the equilibrium should be stationary. The two limiting stationary paths at either end of the timeline do not have to be the same. If they are, conditions for local uniqueness are far more stringent for an economy with a truncated past as compared to its counterpart with an infinite past. In addition, we illustrate our main result using a textbook model with a single physical good, a two-period life-cycle and a single type of consumer. In this model we show how to calculate a response to a policy change using the implicit function theorem.
    Keywords: Overlapping generations, Implicit function theorem, Determinacy, Time-invariance, Comparative statics
    JEL: C02 C62 D50
    Date: 2019–05
  18. By: Keister, Todd (Rutgers University); Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: We study how the introduction of a central bank-issued digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. Banks in our model are financially constrained, and the liquidity premium on bank deposits affects the level of aggregate investment. We study the optimal design of a digital currency in this setting, including whether it should pay interest and how widely it should circulate. We highlight an important policy tradeoff: while a digital currency tends to promote efficiency in exchange, it can also crowd out bank deposits, raise banksfunding costs, and decrease investment. Despite these effects, introducing a central bank digital currency often raises welfare.
    Keywords: Monetary policy; liquidity premium; collateral constraint; aggregate investment; cryptocurrency
    JEL: E32 E42 E52 G28
    Date: 2019–06–03
  19. By: Luca Pensieroso (IRES, Universite catholique de Louvain); Romain Restout (Universite de Lorraine, Université de Strasbourg, CNRS, BETA, 54000, Nancy and IRES, Universite catholique de Louvain.)
    Date: 2019
  20. By: Crump, Richard K. (Federal Reserve Bank of New York); Eusepi, Stefano (University of Texas at Austin); Giannoni, Marc (Federal Reserve Bank of Dallas); Sahin, Aysegul (University of Texas at Austin)
    Abstract: This paper bridges the gap between two popular approaches to estimating the natural rate of unemployment, u*. The first approach uses detailed labor market indicators, such as labor market flows, cross-sectional data on unemployment and vacancies, or various measures of demographic changes. The second approach, which employs reduced-form models and DSGE models, relies on aggregate price and wage Phillips curve relationships. We combine the key features of these two approaches to estimate the natural rate of unemployment in the United States using both data on labor market flows and a forward-looking Phillips curve that links inflation to current and expected deviations of unemployment from its unobserved natural rate. We estimate that the natural rate of unemployment was around 4.0 percent toward the end of 2018 and that the unemployment gap was roughly closed. Identification of a secular downward trend in the unemployment rate, driven solely by the inflow rate, facilitates the estimation of u*. We identify the increase in labor force attachment of women, decline in job destruction and reallocation intensity, and dual aging of workers and firms as the main drivers of the secular downward trend in the inflow rate.
    Keywords: firm dynamics; demographics; business dynamism; macroeconomics
    JEL: D22 E24 J11
    Date: 2019–05–01
  21. By: Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik
    Abstract: How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but also entail transition costs because their imposition reduces credit supply and aggregate demand on impact. In the baseline scenario of a quantitative macro-banking model, 25% of the long-run welfare gains are lost due to transitional costs. The strength of monetary policy accommodation and the degree of bank riskiness are key determinants of the trade-off between the short-run costs and long-run benefits from changes in capital requirements. JEL Classification: E3, E44, G01, G21
    Keywords: default risk, effective lower bound, macroprudential policy, transitional dynamics
    Date: 2019–05
  22. By: Andrew Foerster; Andreas Hornstein; Pierre-Daniel Sarte; Mark W. Watson
    Abstract: We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specific 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-specific rather than aggregate factors. Sustained contractions in growth specific 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.
    JEL: E23
    Date: 2019–05
  23. By: Deak, S.; Levine, P.; Mirza, A.; Pearlman, J.
    Abstract: How should a forward-looking policy maker conduct monetary policy when she has a finite set of models at her disposal, none of which are believed to be the true data generating process? In our approach, the policy makerfirst assigns weights to models based on relative forecasting performance rather than in-sample fit, consistent with her forward-looking objective. These weights are then used to solve a policy design prob-lem that selects the optimized Taylor-type interest-rate rule that is robust to model uncertainty across a set of well-established DSGE models with and without financial frictions. We find that the choice of weights has a significant impact on the robust optimized rule which is more inertial and aggressive than either the non-robust single model counterparts or the optimal robust rule based on backward-looking weights asin the common alternative Bayesian Model Averaging. Importantly, we show that a price-level rule has excellent welfare and robustness properties, and therefore should be viewed as a key instrument for policy makers facing uncertainty over the nature offinancial frictions.
    JEL: H
    Date: 2019
  24. By: Martin M. Andreasen (University of Aarhus and CREATES)
    Abstract: This paper estimates a New Keynesian model that explains key macro series, the ten-year nominal yield curve, and the ability of the spread between long- and short-term bond yields to predict future excess bond returns. The model also generates an upward sloping nominal and real yield curve, produces a positive inflation risk premium, and recovers the prediction by the expectations hypothesis of no return predictability when historical bond yields are risk-adjusted using term premia from the proposed model. Key to obtaining these results is a new specification of stochastic volatility that allows high current inflation to generate high future uncertainty.
    Keywords: Bond return predictability, Term premia, Robust structural estimation, Stochastic volatility
    JEL: E44 G12
    Date: 2019–05–22
  25. By: Roger E.A. Farmer
    Abstract: This article surveys a subset of literature in macroeconomics which embraces the existence of multiple equilibria. This indeterminacy agenda in macroeconomics uses multiple-equilibrium models to integrate economics with psychology. Economists have long argued that business cycles are driven by shocks to the productivity of labour and capital. According to the indeterminacy agenda, the self-fulfilling beliefs of financial market participants are additional fundamental factors that drive periods of prosperity and depression. The indeterminacy agenda provides a microeconomic foundation to Keynes’ General Theory that does not rely on the assumption that prices and wages are costly to change.
    JEL: D5 E40
    Date: 2019–05
  26. By: Ikeda, Daisuke (Bank of Japan)
    Abstract: Asymmetric information is crucial for understanding the disruption of the supply of credit. This paper studies a dynamic economy featuring asymmetric information and resulting adverse selection in credit markets. Entrepreneurs seek loans from banks for projects, but asymmetric information about entrepreneurs' riskiness causes a lemons problem: relatively safe entrepreneurs do not get funded. An increase in the riskiness of some entrepreneurs raises interest rate spreads, aggravates adverse selection, and shrinks the supply of bank credit. The model calibrated to the U.S. economy generates significant business fluctuations including severe recessions comparable to the Great Recession of 2007-09.
    Keywords: Adverse selection; Mechanism design approach; separating contract
    JEL: D82 E32 E44
    Date: 2019–04–01

This nep-dge issue is ©2019 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.