nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒07‒15
twenty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. "Cyclical Part-Time Employment in an Estimated New Keynesian Model with Search Frictions" By Toshihiko Mukoyama; Mototsugu Shintani; Kazuhiro Teramoto
  2. Implications of Increasing College Attainment for Aging in General Equilibrium By Juan Carlos Conesa; Timothy J. Kehoe; Vegard M. Nygaard; Gajendran Raveendranathan
  3. The Global Business Cycle: Measurement and Transmission By Zhen Huo; Andrei A. Levchenko; Nitya Pandalai-Nayar
  4. Labor Market Search, Informality, and On-The-Job Human Capital Accumulation By Matteo Bobba; Luca Flabbi; Santiago Levy; Mauricio Tejada
  5. Pension, Retirement, and Growth in the Presence Heterogeneous Elderly By Makoto Hirono; Kazuo Mino
  6. A model for international spillovers to emerging markets By Romain Houssa; Jolan Mohimont; Chris Otrok
  7. Declining Worker Turnover: the Role of Short Duration Employment Spells By Michael J. Pries; Richard Rogerson
  8. The Macroeconomics of the Greek Depression By Chodorow-Reich, Gabriel; Karabarbounis, Loukas; Kekre, Rohan
  9. Impact Of NFPS Capital Expenditure On Economic Growth In Bolivia In Years 2006-2016 By Joab Valdivia Coria
  10. Waiting for Affordable Housing in New York City By Holger Sieg; Chamna Yoon
  11. Quest for robust optimal macroprudential policy By Pablo Aguilar; Samuel Hurtado; Stephan Fahr; Eddie Gerba
  12. The Macroeconomics of the Greek Depression By Chodorow-Reich, Gabriel; Karabarbounis, Loukas; Kekre, Rohan
  13. Capital Controls and Firm Performance By Eugenia Andreasen; Sofía Bauducco; Evangelina Dardati
  14. Leaning Against Housing Prices As Robustly Optimal Monetary Policy By Klaus Adam; Michael Woodford
  15. A framework for debt-maturity management By Saki Bigio; Galo Nuño; Juan Passadore
  16. Charge-offs, Defaults and U.S. Business Cycles By Christopher M. Gunn; Alok Johri; Marc-André Letendre
  17. Ramsey Tax Competition with Real Exchange Rate Determination By Paul Gomme
  18. American Dream Delayed: Shifting Determinants of Homeownership By Khorunzhina, Natalia; Miller, Robert A.
  19. A Unified Approach to Measuring u* By Richard K. Crump; Stefano Eusepi; Marc Giannoni; Ayşegül Şahin
  20. A Macro-Model to Monetary Transmission Analysis in Tunisia By Aymen Makni
  21. Production Network and International Fiscal Spillovers By Michael B. Devereux; Karine Gente; Changhua Yu

  1. By: Toshihiko Mukoyama (Department of Economics, Georgetown University); Mototsugu Shintani (Faculty of Economics, The University of Tokyo); Kazuhiro Teramoto (Department of Economics, New York University)
    Abstract: This paper analyzes the dynamics of full-time employment and part-time employment over the business cycle. We first document basic macroeconomic facts on these employment stocks using the U.S. data and decompose their cyclical dynamics into the contributions of different flows into and out of these stocks. Second, we develop and estimate a New Keynesian search-and-matching model with two labor markets to uncover the fundamental driving forces of the cyclical dynamics of employment stocks. We find that the procyclicality of the net flow from part-time to full-time employment is essential in accounting for countercyclical patterns of part-time employment. Key Words: Part-time employment; Bayesian estimation; DSGE model; Search, matching and bargaining. JEL Classi cation: E24; E32.
    Date: 2018–08
  2. By: Juan Carlos Conesa; Timothy J. Kehoe; Vegard M. Nygaard; Gajendran Raveendranathan
    Abstract: We develop and calibrate an overlapping generations general equilibrium model of the U.S. economy with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of exogenous trends in increasing college attainment, decreasing fertility, and increasing longevity between 2005 and 2100. While all three trends contribute to a higher old age dependency ratio, increasing college attainment has different macroeconomic implications because it increases labor productivity. Decreasing fertility and increasing longevity require the government to increase the average labor tax rate from 32.0 to 44.4 percent. Increasing college attainment lowers the required tax increase by 10.1 percentage points. The required tax increase is higher under general equilibrium than in a small open economy with a constant interest rate because the reduction in the interest rate lowers capital income tax revenues.
    JEL: H20 H51 H55 I13 J11
    Date: 2019–06
  3. By: Zhen Huo; Andrei A. Levchenko; Nitya Pandalai-Nayar
    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 cross-country transmission of shocks. 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 country's general equilibrium GDP elasticities with respect to 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. 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, quantitatively these components contribute little to GDP comovement as impact effects dominate.
    JEL: F41 F44
    Date: 2019–06
  4. By: Matteo Bobba (Toulouse School of Economics, University of Toulouse Capitole); Luca Flabbi (Department of Economics, University of North Carolina); Santiago Levy (Vice-Presidency for Sectors and Knowledge, Inter-American Development Bank); Mauricio Tejada (Department of Economics (ILADES), Universidad Alberto Hurtado)
    Abstract: We develop a search and matching model where firms and workers produce output that depends both on match-specific productivity and on worker-specific human capital. The human capital is accumulated while working but depreciates while searching for a job. Jobs can be formal or informal and firms post the formality status. The equilibrium is characterized by an endogenous steady state distribution of human capital and by an endogenous formality rate. The model is estimated on longitudinal labor market data for Mexico. Human capital accumulation on-the-job is responsible for more than half of the overall value of production and upgrades more quickly while working formally than informally. Policy experiments reveal that the dynamics of human capital accumulation magnifies the negative impact on productivity of the labor market institutions that give raise to informality
    Keywords: Labor market frictions, Search and matching, Nash bargaining, Informality, On-the-Job human capital accumulation
    Date: 2019–01
  5. By: Makoto Hirono (Graduate School of Economics, Doshisha University); Kazuo Mino (Graduate School of Economics, Doshisha University and Institute of Economics, Kyoto University)
    Abstract: This study explores the linkage between the labor force participation of the elderly and the long-run performance of the economy in the context of a two-period-lived overlapping generations model. We assume that the old agents are heterogeneous in their labor efficiency and they continue working if their income exceeds the pension that can be received in the case of full retirement. We inspect the long-run effects of changes in key factors that determine the labor force participation of the elderly. While the main part of the study treats a neoclassical growth model, we also discuss a model with endogenous growth.
    Keywords: retirement decision, labor force participation, population aging, pension system, capital accumulation
    JEL: E10 E62
    Date: 2019–07
  6. By: Romain Houssa (DeFiPP (CRED & CeReFiM) - University of Namur; CES (University of Leuven) and CESifo); Jolan Mohimont (University of Namur and National Bank of Belgium); Chris Otrok (University of Missouri and Federal Reserve Bank of St Louis)
    Abstract: This paper develops a small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model that helps to explain business cycle synchronization between an emerging market and advanced economies. The model captures the specificities of both economies (e.g. primary commodity, manufacturing, intermediate inputs, and credit) that are most relevant for understanding the importance as well as the transmission mechanisms of a wide range of domestic and foreign (supply, demand, monetary policy, credit, primary commodity) shocks facing an emerging economy. We estimate the model with Bayesian methods using quarterly data from South Africa, the US and G7 countries. In contrast to the predictions of standard SOE models, we are able to replicate two stylized facts. First, our model predicts a high degree of business cycle synchronization between South Africa and advanced economies. Second, the model is able to account for the influence of foreign shocks in South Africa. We are also able to demonstrate the specific roles these shocks played during key historical episodes such as the global financial crisis in 2008 and the commodity price slump in 2015. The ability of our framework to capture endogenous responses of commodity and financial sectors to structural shocks is crucial to identify the importance of these shocks in South Africa.
    Keywords: Macroeconomic Policies, Emerging Markets, SOE, DSGE, Bayesian, Foreign shocks, Monetary Policy
    JEL: E3 E43 E52 C51 C33
    Date: 2019–04
  7. By: Michael J. Pries; Richard Rogerson
    Abstract: Using the Quarterly Workforce Indicators, we document that a significant amount of the decline in labor market turnover during the last two decades is accounted for by the decline in employment spells that last less than a quarter. Using a search and matching model that incorporates noisy signals about the quality of a worker-firm match, we show that improved candidate screening by firms can account for the decline in short-lived employment spells. Quantitative exercises show that this explanation can account for the observed changes in various labor market outcomes, whereas alternative potential explanations, such as increased hiring costs, cannot.
    JEL: E24 J23
    Date: 2019–06
  8. By: Chodorow-Reich, Gabriel; Karabarbounis, Loukas; Kekre, Rohan
    Abstract: The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, we develop and estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust. Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression. Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects. By contrast, shifting the burden of adjustment from taxes toward spending or from capital taxes toward other taxes would generate significant longer-term production and consumption gains.
    Keywords: Fiscal policy; Greek Depression; Nominal Rigidity; productivity; taxes
    JEL: E20 E32 E44 E62 F41
    Date: 2019–05
  9. By: Joab Valdivia Coria (Ministerio de Econom�a y Finanzas P�blicas)
    Abstract: In recent years, public investment has become considerably more dynamic with the application of the Economic Social Communitarian Productive Model (MESCP) since 2006, which helped reactivate and boost the domestic demand, unlike what happened in previous periods. The scenario simulations based on a Dynamic Stochastic General Equilibrium (DSGE) model proposed by the study reveal the importance of capital expenditure in economic growth. The results show that changes in capital spending in the short term persistently boost economic growth and have positive effects on consumption and private investment, dismissing the existence of a possible crowding-out effect in the private sector.
    Keywords: Bayesian Estimation, Tax Expenditure, Public Investment, Dynamic Stochastic General Equilibrium (DSGE) model, Fiscal Policy
    JEL: C11 C31 G21
    Date: 2017–12
  10. By: Holger Sieg; Chamna Yoon
    Abstract: We develop a new dynamic equilibrium model with heterogeneous households that captures the most important frictions that arise in housing rental markets and explains the political popularity of affordable housing policies. We estimate the model using data collected by the New York Housing Vacancy Survey in 2011. We find that there are significant adjustment costs in all markets as well as serious search frictions in the market for affordable housing. Moreover, there are large queuing frictions in the market for public housing. Having access to rent-stabilized housing increases household welfare by up to $65,000. Increasing the supply of affordable housing by ten percent significantly improves the welfare of all renters in the city. Progressive taxation of higher-income households that live in public housing can also be welfare improving.
    JEL: D45 D58 H7 R31
    Date: 2019–06
  11. By: Pablo Aguilar (Banco de España); Samuel Hurtado (Banco de España); Stephan Fahr (European Central Bank); Eddie Gerba (Danmarks Nationalbank)
    Abstract: This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al. (2015). We find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher tan the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit and GDP 5% and 0.8% higher had optimal capital level been in place during the 2011-2013 crisis. Further, using a model-consistent loss function, we find that the optimal Countercyclical Capital Buffer (CCyB) rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from optimal combination of instruments is higher than the sum of their individual effects due to synergies and positive mutual spillovers.
    Keywords: optimal policy, global welfare analysis, financial stability, financial DSGE model, macroprudential policy
    JEL: G21 G28 G17 E58 E61
    Date: 2019–07
  12. By: Chodorow-Reich, Gabriel (Harvard University); Karabarbounis, Loukas (Federal Reserve Bank of Minneapolis); Kekre, Rohan (University of Chicago)
    Abstract: The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, we estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust. Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression. Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects. By contrast, shifting the burden of adjustment away from taxes toward spending or away from capital taxes toward other taxes would generate longer-term production and consumption gains. Eliminating the rise in transfers to households during the boom would significantly reduce the burden of tax adjustment in the bust and the magnitude of the depression.
    Keywords: Greek Depression; Productivity; Nominal rigidity; Fiscal policy; Taxes
    JEL: E20 E32 E44 E62 F41
    Date: 2019–06–28
  13. By: Eugenia Andreasen (Economics Department, Universidad de Santiago de Chile); Sofía Bauducco (Central Bank of Chile); Evangelina Dardati (Economics Department, Universidad Alberto Hurtado)
    Abstract: This paper studies the effects of capital controls on firms’ production, investment and exporting decisions. We empirically characterize the firm’s responses to the introduction of a capital control, using the Chilean encaje implemented between 1991 and 1998 as a laboratory. Motivated by our findings, we build a general equilibrium model with heterogeneous firms, financial constraints and international trade and calibrate it to the Chilean economy. We find that capital controls reduce aggregate production and investment while increasing exports, the share of exporters and TFP. The e↵ects of capital controls are exacerbated for firms in more capital-intensive sectors and for exporters.
    Keywords: Capital controls, firm dynamics, financial frictions, international trade.
    Date: 2019–06
  14. By: Klaus Adam; Michael Woodford
    Abstract: We analytically characterize optimal monetary policy for an augmented New Key- nesian model with a housing sector. In a setting where the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a 'target criterion' that refers to inflation and the output gap only is optimal, as in the standard model without a housing sector. When the policymaker is concerned with po- tential departures of private sector expectations from rational ones and seeks to choose a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to 'lean against' housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and simi- larly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between 'fundamental' and 'non-fundamental' movements in housing prices.
    JEL: D81 D84 E52
    Date: 2018–05
  15. By: Saki Bigio (UCLA); Galo Nuño (Banco de España); Juan Passadore (EIEF)
    Abstract: We characterize the optimal debt-maturity management problem of a government in a small open economy. The government issues a continuum of finite-maturity bonds in the presence of liquidity frictions. We find that the solution can be decentralized: the optimal issuance of a bond of a given maturity is proportional to the difference between its market price and its domestic valuation, the latter defined as the price computed using the government’s discount factor. We show how the steady-state debt distribution decreases with maturity. These results hold when extending the model to incorporate aggregate risk or strategic default.
    Keywords: debt maturity, debt management, liquidity costs
    JEL: F34 F41 G11
    Date: 2019–06
  16. By: Christopher M. Gunn (Department of Economics, Carleton University); Alok Johri (Department of Economics, McMaster University); Marc-André Letendre (Department of Economics, McMaster University)
    Abstract: We use aggregate banking data to uncover a new fact: U.S. banks counter-cyclically vary the proportion of defaulted loans that they charge-off. The variance of this “charge-offs to defaults” ratio is roughly 15 times larger than that of GDP. Canonical financial accelerator models cannot explain this variance. We show that introducing stochastic default costs into the model helps to resolve the discrepancywith the data. Estimating the augmented model on typical macroeconomic data using Bayesian techniques reveals that the estimated default cost shocks not only help account for the variance of the banking data but also help account for a significant fraction of the U.S. business cycle between 1984 and 2015.
    Keywords: Charge-offs and defaults, default cost shocks, financial acceleratormodels, business cycles
    JEL: E3 E44
    Date: 2019–07–05
  17. By: Paul Gomme (Concordia University, CIREQ and CIRANO)
    Abstract: How should governments choose tax rates when they face competition from other jurisdictions? This questions is answered by solving for the Nash equilibrium of the game played between Ramsey planners in a two good, two country open economy macroeconomic model. It is shown, analytically, that the planers do not tax capital income in the long run. Short term results, obtained computationally, reveal that the government of the larger country manages the path of the real exchange rate in order to manipulates its smaller rival's choice of tax rates. Tax competition does not lead to a "race to the bottom."
    Keywords: Optimal fiscal policy; open economy macroeconomics; Ramsey taxation
    JEL: E32 E52 F41
    Date: 2019–07–02
  18. By: Khorunzhina, Natalia (Department of Economics, Copenhagen Business School); Miller, Robert A. (Tepper School of Business)
    Abstract: This paper develops and estimates a dynamic model of discrete choice for labor supply, fertility and transition from tenant to home-owner,to investigate the secular decline in home ownership over the past several decades,wholly attributable to households postponing the purchase of their first home. House prices only partly explain the decline; higher base level wages led to lower fertility also contributing to the decline,because households with children are more likely to own a home than those without.Somewhat surprisingly we find higher levels of female education ameliorated this trend,highly educated women placing greater value on homeownership.
    Keywords: Housing Demand; Fertility; Labor Supply
    JEL: D14 D91 J13 J22 R21
    Date: 2019–07–03
  19. By: Richard K. Crump; Stefano Eusepi; Marc Giannoni; Ayşegül Şahin
    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 comprises 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 linking inflation to current and expected deviations of unemployment from its unobserved natural rate. We estimate that the natural rate of unemployment is around 4.0% toward the end of 2018 and that the unemployment gap is 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.
    JEL: D84 E24 E31 E32 J11
    Date: 2019–06
  20. By: Aymen Makni (Central Bank of Tunisia)
    Abstract: In this paper, we develop a gap model based on a reduced form of the New Keynesian Model. The model offers various scenario structure tools which analyze the dynamics of key macroeconomic variables under diverse shocks and depicts their properties and historical decompositions. This framework rationalizes the monetary transmission mechanism as well as the effects of major shocks influencing the macroeconomic variables and can assess the role of monetary policy in reacting to observed and anticipated changes in inflation and other economic variables. This model provides a useful framework detailing monetary policy and helping policymakers mainly to react strongly to inflation.
    Keywords: Monetary Policy, Central Banks and Their Policies, Macroeconomic Model, Monetary Transmission Mechanism
    JEL: E52 E58 E10 E50
    Date: 2019–06
  21. By: Michael B. Devereux (Vancouver school of economics, University of British Columbia, NBER and CEPR); Karine Gente (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE, Marseille, France); Changhua Yu (China Center for Economic Research, National School of Development, Peking University, Beijing, China,)
    Abstract: This paper analyzes the impact of fiscal spending shocks in a multi-country model with international production networks. In contrast to standard results suggesting that production network linkages are unimportant for the aggregate response to macro shocks in a closed economy, we show that network structures may place a central role in the international propagation of fiscal shocks, particularly when wages are slow to adjust. The paper first develops a simple general equilibrium multi-country model and derives some analytical results on the response to fiscal spending shocks. We then apply the model to an analysis of fiscal spillovers in the Eurozone, using the calibrated sectoral network structure from the World Input Output Database (WIOD). In a version of the model with sticky wages, we find that fiscal spillovers from Germany and other some other large Eurozone countries may be large, and within the range of empirical estimates. More importantly, we find that the Eurozone production network very important for the international spillovers. In the absence of international production network linkages, spillovers would be only a third as large as predicted by the baseline model. Finally, we explore the diffusion of identified German government spending at the sectoral level, both within and across countries. We find that government expenditures have both significant upstream and downstream effects when these links are measured by the direction of sectoral production linkages.
    Keywords: production network, fiscal policy, spillovers, Eurozone, terms of trade, nominal rigidities
    JEL: E23 E62 F20 F42 H50
    Date: 2019–07

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