nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒06‒17
thirty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Multi-period loans, occasionally binding constraints and monetary policy: a quantitative evaluation By Kristina Bluwstein; Michał Brzoza-Brzezina; Paolo Gelain; Marcin Kolasa
  2. News, noise and Indian business cycle By Ashima Goyal; Abhishek Kumar
  4. On the Instability of Banking and Other Financial Intermediation By Chao Gu; Cyril Monnet; Ed Nosal; Randall Wright
  5. The Global Business Cycle: Measurement and Transmission By Zhen Huo; Andrei A. Levchenko; Nitya Pandalai-Nayar
  6. Market Regulation, Cycles and Growth in a Monetary Union By Mirko Abbritti; Sebastian Weber
  7. Do Unemployment Benefit Extensions Explain the Emergence of Jobless Recoveries? By Mitman, Kurt; Rabinovich, Stanislav
  8. Monetary Policy and Household Deleveraging By Martin Harding; Mathias Klein
  9. Educational funds and economic growth:private versus public funds By Kohei Okada
  10. Bank lending, financial frictions, and inside money creation By Lukas Altermatt
  11. Females, the Elderly, and Also Males: Demographic Aging and Macroeconomy in Japan By KITAO Sagiri; MIKOSHIBA Minamo; TAKEUCHI Hikaru
  12. Earning Risks, Parental Schooling Investment, and Old-Age Income Support From Children By Alok Kumar
  13. Bounded Rationality, Monetary Policy, and Macroeconomic Stability By Francisco Ilabaca; Greta Meggiorini; Fabio Milani
  14. The Gold Standard and the Great Depression: a Dynamic General Equilibrium Model. By Luca Pensieroso; Romain Restout
  15. The Role of Nonemployers in Business Dynamism and Aggregate Productivity By Pedro Bento; Diego Restuccia
  16. “Still" an Agnostic Procedure to Identify Monetary Policy Shocks with Sign Restrictions By Bruno Perdigão
  17. Redistributive Consequences of Abolishing Uniform Contribution Policies in Pension Funds By Damiaan Chen; Sweder van Wijnbergen
  18. Sovereign Default and Imperfect Tax Enforcement By Francesco Pappadà; Yanos Zylberberg
  19. Optimal Taxation with Risky Human Capital and Retirement Savings By Radoslaw Paluszynski; Pei Cheng Yu
  20. The long-run effects of uncertainty shocks By Bonciani, Dario; Oh, Joonseok Jason
  21. Demonetization as a Payments System Shock under Goods and Financial Market Segmentation: A Short Run Analysis By Waknis, Parag
  22. Wheels and cycles: (sub)optimality and volatility of corrupted economies. By Stefano BOSI; David DESMARCHELIER; Thai HA-HUY
  23. Explaining the labor share: automation vs labor market institutions By Luís Guimarães; Pedro Mazeda Gil
  24. International spillovers of quantitative easing By Marcin Kolasa; Grzegorz Wesołowski
  25. Designing Robust Monetary Policy Using Prediction Pools By Szabolcs Deák; Paul Levine; Afrasiab Mirza; Joseph Pearlman
  26. Trainspotting: `Good Jobs', Training and Skilled Immigration By Andrew Mountford; Jonathan Wadsworth
  27. Fiscal Consolidation and Public Wages By Juin-Jen Chang; Hsieh-Yu Lin; Nora Traum; Shu-Chun Susan Yang
  28. Dominant currency debt By Egemen Eren; Semyon Malamud
  29. Generational Conflict and Education Politics: Implications for Growth and Welfare By Yuki Uchida; Tetsuo Ono
  30. The Indeterminacy Agenda in Macroeconomics By Roger E A Farmer
  31. On the Equivalence of Private and Public Money By Markus K. Brunnermeier, Dirk Niepelt

  1. By: Kristina Bluwstein (Bank of England); Michał Brzoza-Brzezina (Narodowy Bank Polski); Paolo Gelain (Federal Reserve Bank of Cleveland); Marcin Kolasa (Narodowy Bank Polski)
    Abstract: We study the implications of multi-period 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
  2. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Abhishek Kumar (Indira Gandhi Institute of Development Research)
    Abstract: New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models with various specifications oftechnology, markup and interest rate shocks are estimated with Indian data using Kalman filter basedpure and Bayesian likelihood estimation. Preference and interest rate shocks are found to be importantfor output determination whereas markup and interest rate shocks are important for inflation. News,such as contained in stock market variables and arising from anticipated interest rates, affects growth ofgross domestic product. Interest rate shock is anticipated at horizon of one quarter and out of totalvariance explained by interest rate shock, one third is due to the anticipated shock. Anticipated interestrate shock diminishes the role of preference shock in output determination. Markup shock has a largeshare, very low persistence but is correlated. There is evidence that permanent component of technologyis not well anticipated, and once we incorporate that technology shocks become more important fordetermination of output although it still remains much below US levels. Implications for policy aredrawn out.
    Keywords: DSGE; India; News; Noise; Technology Shock; Learning; Anticipated Shocks;Kalman Filter; Maximum Likelihood; Inflation; Monetary Policy
    JEL: E31 E32 E52
    Date: 2019–04
  3. By: Bohn, Henning; Lopez-Velasco, Armando R
    Abstract: First generation immigrants to the United States have higher fertility rates than natives. This paper analyzes to what extent this factor provides political support for immigration, using an overlapping generation model with production and capital accumulation. In this setting, immigration represents a dynamic trade-off for native workers as more immigrants decrease current wages but increase the future return on their savings. We find that immigrant fertility has surprisingly strong effects on voter incentives, especially when there is persistence in the political process. If fertility rates are sufficiently high, native workers support immigration. Persistence, either due to inertia induced by frictions in the legal system or through expectational linkages, significantly magnifies the effects. Entry of immigrants with high fertility has redistributive impacts across generations similar to pay-as-you-go social security: initial generations are net winners, whereas later generations are net losers.
    Keywords: Immigration, Political Economy Model, Overlapping Generations, Immigrant Fertility Rates, Intergenerational Redistribution, Economic Theory, Economics
    Date: 2019–07–01
  4. By: Chao Gu (University of Missouri); Cyril Monnet (University of Bern, Study Center Gerzensee, Swiss National Bank); Ed Nosal (FRB Atlanta); Randall Wright (University of Wisconsin, FRB Minneapolis)
    Abstract: Are financial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with financial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Four formalizations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with delegated investment as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos- Wright; and one with Rubinstein-Wolinsky intermediaries in a decentralized asset market as in Duffie et al. In each case we find, for different reasons, financial intermediation engenders instability in a precise sense.
    Date: 2019–05
  5. By: Zhen Huo (Yale University); Andrei A. Levchenko (University of Michigan, NBER, & CEPR); Nitya Pandalai-Nayar (University of Texas at Austin & NBER)
    Abstract: This paper uses sector-level data for 30 countries and up to 28 years to provide a quantitative account of the sources of international GDP comovement. We propose an accounting framework to decompose comovement into the components due to correlated shocks, and to the transmission of shocks across countries. We apply this decomposition in a multi-country multi-sector DSGE model. We provide an analytical solution to the global influence matrix that characterizes every countryÕs general equilibrium GDP elasticities with respect to various shocks anywhere in the world. We then provide novel estimates of country-sector-level technology and non-technology shocks to assess their correlation and quantify their contribution to comovement. We find that TFP shocks are virtually uncorrelated across countries, whereas non-technology shocks are positively correlated. These positively correlated shocks account for two thirds of the observed GDP comovement, with international transmission through trade accounting for the remaining one third. However, trade opening does not necessarily increase GDP correlations relative to autarky, because the contribution of trade openness to comovement depends on whether sectors with more or less correlated shocks grow in influence as countries increase input linkages. Finally, while the dynamic model features rich intertemporal propagation of shocks, quantitatively these components contribute little to the overall GDP comovement as impact effects dominate.
    Keywords: TFP shocks, non-technology shocks, international comovement, input linkages
    JEL: F41 F44
  6. By: Mirko Abbritti; Sebastian Weber
    Abstract: We build a two-country currency union DSGE model with endogenous growth to assess the role of cross-country differences in product and labor market regulations for long-term growth and for the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks, through endogenous TFP movements, can lead to permanent changes of output and real exchange rates. Differences are exacerbated when member countries have different product and labor market regulations. Less regulated economies are likely to have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment and disappointing TFP growth rates experienced in the less reform-friendly euro area members.
    Date: 2019–06–03
  7. By: Mitman, Kurt; Rabinovich, Stanislav
    Abstract: Countercyclical unemployment benefit extensions in the United States act as a propagation mechanism, contributing to both the high persistence of unemployment and its weak correlation with productivity. We show this by modifying an otherwise standard frictional model of the labor market to incorporate a stochastic and state-dependent process for unemployment insurance estimated on US data. Accounting for movements in both productivity and unemployment insurance, our calibrated model is consistent with unemployment dynamics of the past 50 years. In particular, it explains the emergence of jobless recoveries in the 1990's as well as their absence in previous recessions, the low correlation between unemployment and labor productivity, and the apparent shifts in the Beveridge curve following recessions. Next, we embed this mechanism into a medium-scale DSGE model, which we estimate using standard Bayesian methods. Both shocks to unemployment benefits and their systematic component are shown to be important for the sluggish recovery of employment following recessions, in particular the Great Recession, despite the fact that shocks to unemployment benefits account for little of the overall variance decomposition. If we also incorporate other social safety nets, such as food stamps (SNAP), the estimated model assigns an even bigger role to policy in explaining sluggish labor market recovery. We also find that unemployment benefit extensions prevented deflation in the last three recessions, thus acting similarly to a wage markup shock.
    Keywords: business cycles; jobless recoveries; Unemployment insurance
    JEL: E24 E32 J65
    Date: 2019–05
  8. By: Martin Harding; Mathias Klein
    Abstract: This study investigates the interrelation between the household leverage cycle, collateral constraints, and monetary policy. Using data on the U.S. economy, we find that a contractionary monetary policy shock leads to a large and significant fall in economic activity during periods of household deleveraging. In contrast, monetary policy shocks only have insignificant effects during a household leveraging state. These results are robust to alternative definitions of leveraging and deleveraging periods, different ways of identifying monetary policy shocks, controlling for the state of the business cycle, the level of households debt, and financial stress. To provide a structural interpretation for these empirical findings, we estimate a monetary DSGE model with financial frictions and occasionally binding collateral constraints. The model estimates reveal that household deleveraging periods in the data on average coincide with periods of binding collateral constraints whereas constraints tend to turn slack during leveraging episodes. Moreover, the model produces an amplification of monetary policy shocks that is quantitatively comparable to our empirical estimates. These findings indicate that the state-dependent tightness of collateral constraints accounts for the asymmetric effects of monetary policy across the household leverage cycle as found in the data.
    Keywords: Monetary policy, household leverage, occasionally binding constraints
    JEL: E32 E52
    Date: 2019
  9. By: Kohei Okada (Graduate School of Economics, Osaka University)
    Abstract: This study constructs an overlapping generations model in order to examine the relationshipbetween education and R&D activities. Using this model, we analyze the effect of individuals'borrowing of educational funds on economic growth. We rst consider the benchmark case inwhich individuals borrow educational funds at a market interest rate. We next consider thatindividuals borrow educational funds from a government at a constant rate of interest. If thepolicy interest rate is too low, the number of skilled workers increases, but economic growth isnot achieved in the long run, because an increase in the demand for educational funds owing tothe low policy interest rate crowds out funds for R&D investment and hinders economic growth.In addition, this study examines welfare and intergenerational inequality. When the governmentlowers the policy interest rate, the current generation's welfare level increases. However, futuregenerations' welfare levels will decrease. This study shows that the government faces a trade-offbetween the current generation's welfare and future generations' welfare.
    Keywords: Education policy, Occupational choice, Intergenerational inequality, R&D
    JEL: I22 I24 H52 O10
    Date: 2019–05
  10. By: Lukas Altermatt
    Abstract: I build a general equilibrium model of the transmission of monetary policy on bank lending. Bank lending is done by individual banks that face random investment opportunities by creating inside money. Banks are subject to a reserve requirement and have access to the interbank money market. The model shows that lowering the money market rate relative to the inflation rate reduces investment and welfare. This is because the money market is an outside option for banks that face bad investment opportunities. Reducing the money market rate lowers the value of this outside option, which in turn reduces banks’ willingness to acquire reserves ex-ante. This leads to less aggregate reserves, which reduces the banking system’s ability to grant credit.
    Keywords: Monetary policy transmission, open market operations, channel system, interest rate pass-through
    JEL: E4 E5
    Date: 2019–05
  11. By: KITAO Sagiri; MIKOSHIBA Minamo; TAKEUCHI Hikaru
    Abstract: The speed and magnitude of the 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 in addition to 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 extensive margin and in productivity can significantly mitigate the effects of demographic aging on the macroeconomy and reduce fiscal pressures, despite a decline in wages 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 the labor supply and that create a more efficient allocation of male and female workers of all age groups will be critical to keeping government deficits under control and raising incomes across the nation.
    Date: 2019–05
  12. By: Alok Kumar (Department of Economics, University of Victoria)
    Abstract: Old-age income support is an important motive for parents to invest in schooling of their children in developing countries. At the time parents choose schooling investment for their children, both parental future income and return from schooling are uncertain. This paper analyzes effects of parental income risk and human capital investment risk on parental schooling investment using alternative models (altruism and educational loan model) of determination of old-age income support in a model with intergenerational transfers. It finds that effects of these risks on schooling investment depend on whether old-age income support is state-contingent. When income support is state-contingent, increasing parental income risk (human capital investment risk) has a positive (negative) effect on schooling investment. However, when income support is not state-contingent, effects of these two types of risks may get reversed. Numerical analysis using Indonesian data suggests that risks have significant negative effect on schooling investment.
    Keywords: Schooling, Parental Income Risk, Human Capital Investment Risk, Old-Age Income Support, Risk-Sharing
    Date: 2019–04–01
  13. By: Francisco Ilabaca (Department of Economics, University of California-Irvine); Greta Meggiorini (Department of Economics, University of California-Irvine); Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper estimates a Behavioral New Keynesian model to revisit the evidence that passive US monetary policy in the pre-1979 sample led to indeterminate equilibria and sunspot-driven fluctuations, while active policy after 1982, by satisfying the Taylor principle, was instrumental in restoring macroeconomic stability. The model assumes "cognitive discounting", i.e., consumers and firms pay less attention to variables further into the future. We estimate the model allowing for both determinacy and indeterminacy. The empirical results show that determinacy is preferred both before and after 1979. Even if monetary policy is found to react only mildly to inflation pre-Volcker, the substantial degrees of bounded rationality that we estimate prevent the economy from falling into indeterminacy.
    Keywords: Behavioral New Keynesian model; Cognitive discounting; Myopia; Estimation under determinacy and indeterminacy; Taylor principle; Active vs passive monetary policy
    JEL: E31 E32 E52 E58
    Date: 2019–06
  14. By: Luca Pensieroso; Romain Restout
    Abstract: Was the Gold Standard a major determinant of the onset and the protracted character of the Great Depression of the 1930s in the United States and Worldwide? In this paper, we model the ‘Gold-Standard hypothesis’ in a dynamic general equilibrium framework. We show that encompassing the international and monetary dimensions of the Great Depression is important to understand what happened in the 1930s, especially outside the United States. Contrary to what is often maintained in the literature, our results suggest that the vague of successive nominal exchange rate devaluations coupled with the monetary policy implemented in the United States did not act as a relief. On the contrary, they made the Depression worse.
    Keywords: Gold Standard, Great Depression, Dynamic General Equilibrium.
    JEL: N10 E13 N01
    Date: 2019
  15. By: Pedro Bento; Diego Restuccia
    Abstract: A well-documented observation of the U.S. economy in the last few decades has been the steady decline in the net entry rate of employer firms, a decline in business dynamism, suggesting a possible connection with the recent slowdown in aggregate productivity growth. We consider the role of nonemployers, businesses without paid employees, in business dynamism and aggregate productivity. Notwithstanding the decline in the growth of employer firms, we show that the total number of firms, which includes nonemployer businesses, has increased in the U.S. economy since the early 1980s. We interpret this trend, along with the evolution of the employment distribution across firms, through the lens of a standard theory of firm dynamics. The model implies that firm dynamics have contributed to an average annual growth rate of aggregate productivity of at least 0.26% since the early 1980s, over one quarter of the productivity growth of 1% in the data. Further, our implied measure of productivity growth moves closely over time with measured productivity growth in the data.
    Keywords: Nonemployers, employer firms, business dynamism, productivity, TFP.
    JEL: O1 O4 O5 E02 E1
    Date: 2019–06–17
  16. By: Bruno Perdigão
    Abstract: In this paper I use prominent models as a laboratory to analyze the performance of different identification strategies and propose the introduction of new model consistent restrictions to identify monetary policy shocks in SVARs. In particular, besides standard sign restrictions on interest rates and inflation, the inability of monetary policy to have real effects ten years after the shock is proposed as an additional identification restriction. Evidence is presented of the model consistency of this neutrality restriction both for the canonical three-equation new Keynesian model and the Smets and Wouters (2007) model. In a simple empirical application, I show that this restriction may be important to recover real effects of monetary policy.
    Date: 2019–06
  17. By: Damiaan Chen; Sweder van Wijnbergen
    Abstract: In a pension system with uniform policies for contribution and accrual, each participant has the same contribution rate and accrual rate independent of the age at the time of payment. Although a common practice for public sector pension plans in many countries, this is not actuarially fair because the investment horizon of young participants is longer than the investment horizon of the elderly. We show the unintended redistributive intergenerational effects of a uniform contribution system and the consequences of switching from uniform policies to an actuarially fair system, first analytically in a stylized model with three overlapping generations. We then quantify these effects in a detailed model with multiple overlapping generations, realistic parameters and detailed information on the income distribution, calibrated on the Dutch funded pension system. The system implies a substantial transfer of income from poor to wealthy participants of about 10 billion euros. The gross aggregate transition effect of abolishing the uniform policy pension for an actuarially fair system is about 37 billion euros (5% of the Dutch GDP). For each cohort, the redistributive effects are less than 5% of their total pension.
    Keywords: uniform policies; pension funds; transition; income inequality
    JEL: G23 J32
    Date: 2019–06
  18. By: Francesco Pappadà; Yanos Zylberberg
    Abstract: We show that 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. This mechanism captures a 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 fiscal policy. During default crises, high tax distortions force the government towards extreme fiscal policies, notably including costly austerity spells.
    Keywords: Sovereign Default, Imperfect Tax Enforcement, Fiscal Policy.
    JEL: E02 E32 E62 F41 H20
    Date: 2019
  19. By: Radoslaw Paluszynski (University of Houston); Pei Cheng Yu (UNSW Business School)
    Abstract: We study optimal tax policies with human capital investment and retirement savings for present-biased agents. Agents are heterogeneous in their innate ability and make risky education investments which determines their labor productivity and affects their consumption path. We characterize the optimal wedges and show that they are different across education groups. More specifically, we demonstrate how the optimal policy encourages human capital investment with savings incentives. We show that the optimum can be implemented with income-contingent student loans, and existing retirement policies augmented by a new tax instrument that subsidizes retirement savings for college graduates. The proposed instrument takes the form of employer’s 401(k) matching contribution proportional to the repayment of student loans, and mimics the latest policy proposals that aim to incentivize college education. We show that the optimal tax system yields significant welfare gains relative to the optimal policies designed for time-consistent agents.
    Keywords: Present bias, Human capital, Retirement, Sequential screening
  20. By: Bonciani, Dario (Bank of England); Oh, Joonseok Jason (European University Institute)
    Abstract: This paper argues that shocks increasing macroeconomic uncertainty negatively affect economic activity not only in the short but also in the long run. In a sticky-price DSGE model with endogenous growth through investment in R&D, uncertainty shocks lead to a short-term fall in demand because of precautionary savings and rising markups. The decline in the utilised aggregate stock of R&D determines a fall in productivity, which causes a long-term decline in the main macroeconomic aggregates. When households feature Epstein-Zin preferences, they become averse to these long-term risks affecting their consumption process (long-run risk channel), which strongly exacerbates the precautionary savings motive and the overall negative effects of uncertainty shocks.
    Keywords: Uncertainty shocks; R&D; endogenous growth
    JEL: E32 O40
    Date: 2019–06–07
  21. By: Waknis, Parag
    Abstract: A surprise demonetization, where certain or all denominations of currency notes cease to be legal tender on a short notice, can be understood as a severe payment system shock requiring agents to immediately shift to alternative payment mechanisms. I use a short-term macroeconomic model based on Willamson (2009) featuring goods and financial market segmentation to analyze the effect of such a shock in an economy with substantial informality and cash dependence. The quantitative characterization of the equilibrium dynamics using a deterministic example shows significant level as well as redistributive effects in the very short run. The households with access to formal financial markets experience an increase in consumption and those without such access experience a decline. Most of these effects come from differential access to formal financial markets as a consumption smoothing mechanism.
    Keywords: demonetization, segmented markets, payments systems
    JEL: E26 E42 E52
    Date: 2019–05–28
  22. By: Stefano BOSI; David DESMARCHELIER; Thai HA-HUY
    Abstract: We consider a simple economy where production depends on labor supply and social capital. Networking increases the social capital ("greases the wheel") but also the corruption level ("sands the wheel"). Corruption is a negative productive externality. We compare the market economy, where the negative externality is not taken in account by individuals, with a centralized economy, where the planner internalizes the negative effect. We highlight the possible existence of cycles in the market economy and optimal cycles in the planned one. We compare the centralized and the decentralized solutions in the short and in the long run.
    Keywords: Corruption, optimal cycles, Ramsey model.
    JEL: C61 E32
    Date: 2019
  23. By: Luís Guimarães (Queen’s University Belfast and cef.up); Pedro Mazeda Gil (cef.up, FEP, Universidade do Porto)
    Abstract: We propose a simple model to assess the evolution of the US labor share and how automation affects employment. In our model, heterogeneous firms may choose a manual technology and hire a worker subject to matching frictions. Alternatively, they may choose an automated technology and produce using only machines (robots). Our model offers three main insights. First, automation-augmenting shocks reduce the labor share but increase employment and wages. Second, labor market institutions play an almost insignificant role in explaining the labor share. Third, the US labor share only (clearly) fell after 1987 because of a contemporaneous acceleration of automation's productivity.
    Keywords: Automation; Labor Share; Technology Choice; Employment; Matching Frictions.
    JEL: E24 J64 L11 O33
    Date: 2019–05
  24. By: Marcin Kolasa (Narodowy Bank Polski); Grzegorz Wesołowski (Narodowy Bank Polski)
    Abstract: This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets, an increase in international comovement of term premia, and change in the responsiveness of the exchange rate to interest rate differentials. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds.
    Keywords: quantitative easing, international spillovers, bond market segmentation, term premia
    JEL: E44 E52 F41
    Date: 2019
  25. By: Szabolcs Deák (University of Surrey); Paul Levine (University of Surrey); Afrasiab Mirza (University of Birmingham); Joseph Pearlman (City University)
    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 maker first 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 problem 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 as in 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 of financial frictions.
    JEL: D52 D53 E44 G18 G23
    Date: 2019–06
  26. By: Andrew Mountford (Royal Holloway, University of London and CReAM); Jonathan Wadsworth (Royal Holloway, University of London, Centre for Economic Performance, CReAM)
    Abstract: While skilled immigration ceteris paribus provides an immediate boost to GDP per capita by adding to the human capital stock of the receiving economy, might it also reduce the number of 'good jobs', i.e. those with training, available to indigenous workers? This paper analyzes this issue theoretically and empirically. The theoretical model shows how skilled immigration may affect the sectoral allocation of labor and how it may have a positive or negative effect on the training and social mobility of native born workers. The empirical analysis uses UK data from 2001 to 2018 to show that training rates of UK born workers have declined in a period where immigration has been rising strongly, and have declined significantly more in high wage non-traded sectors. At the sectoral level however this link is much less strong but there is evidence of different effects of skilled immigration across traded and non-traded sectors and evidence that the hiring of UK born workers in high wage non-traded sectors has been negatively affected by skilled immigration, although this effect is not large. Taken together the theoretical and empirical analyses suggest that skilled immigration may have some role in allocating native born workers away from 'good jobs' sectors but it is unlikely to be a major driver of social mobility.
    Keywords: Immigration, Training, Income Distribution
    Date: 2019–06
  27. By: Juin-Jen Chang; Hsieh-Yu Lin; Nora Traum; Shu-Chun Susan Yang
    Abstract: A New Keynesian model with government production, public compensation, and unemployment is fit to U.S. data to study the macroeconomic and fiscal effects of public wage reductions. We find that accounting for the type of government spending is crucial for its macroeconomic implications. Although reductions in public wages and government purchases of goods have similar effects on total output and the fiscal balance, the former can raise private output slightly, in contrast to the substantial contractionary effects of the latter. In addition, the baseline estimation finds that exogenous public wage reductions decrease private wages. Model counterfactuals show that sufficiently rigid nominal private wages can reverse the response of private wages, as the rigidity dampens the labor reallocation effect from the public to private sector that exerts downward pressure on private wages.
    Date: 2019–06–10
  28. By: Egemen Eren; Semyon Malamud
    Abstract: We propose a "debt view" to explain the dominant international role of the dollar. We develop an international general equilibrium model in which firms optimally choose the currency composition of their nominal debt. Expansionary monetary policy in downturns prevents Fisherian debt deflation through its effects on inflation and exchange rates, and alleviates financial distress. Theoretically, the dominant currency is the one that depreciates in global downturns over horizons of corporate debt maturity. Empirically, the dollar fits this description, despite being a short-run safe-haven currency. We provide broad empirical support for the debt view. We also study the globally optimal monetary policy.
    Keywords: dollar debt, dominant currency, exchange rates, inflation, debt deflation
    JEL: E44 E52 F33 F34 F41 F42 F44 G01 G15 G32
    Date: 2019–05
  29. By: Yuki Uchida (Faculty of Economics, Seikei University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study considers the politics of public education and its impact on economicgrowth and welfare across generations. We employ probabilistic voting to demon-strate the generational con ict regarding taxes and spending and show that agingresults in a tax burden shift from the retired to the working generation, reductionin public education spending, and ultimately in slowing down economic growth.We subsequently consider a legal constraint that aims to boost education spend-ing: a spending oor for education. This constraint stimulates economic growthbut creates a trade-off between current and future generations' welfare. Finally, thequantitative implications of our results are explored by calibrating the model to theJapanese economy.
    Keywords: Public education, Economic growth, Capital income tax, Proba- bilistic voting
    JEL: D70 E24 H52
    Date: 2018–02
  30. 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 selffulfilling 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.
    Keywords: macroeconomics, multiple equilibria, psychology, business cycles, labour and capital
    JEL: D5 E40
    Date: 2019–06
  31. By: Markus K. Brunnermeier, Dirk Niepelt
    Abstract: We develop a generic model of money and liquidity that identi es sources of liquidity bubbles and seignorage rents. We provide sucient conditions under which a swap of monies leaves the equilibrium allocation and price system unchanged. We apply the equivalence result to the \Chicago Plan," cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). In particular, we show why CBDC need not undermine nancial stability.
    Keywords: Money creation, monetary system, inside money, outside money, equivalence, CBDC, Chicago Plan, sovereign money
    Date: 2019–05

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