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on Dynamic General Equilibrium |
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Issue of 2019‒08‒12
eighteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Mei Dong (University of Melbourne); Toshiaki Shoji (Seikei University); Yuki Teranishi (Keio University) |
| Abstract: | This paper develops a price model with a product cycle. Through a frictional product market with search and matching frictions, an endogenous product cycle is accompanied with a price cycle where a price for a new good and a price for an existing good are set in a different manner. This model nests a New Keynesian Phillips curve with the Calvo's price adjustment as a special case and generates several new phenomena. Our simple model captures observed facts in Japanese product level data such as the pro-cyclicality among product entry, demand, and price. In a general equilibrium model, an endogenous product entry increase variation of the inflation rate by 20 percent in Japan. This number increases to 72 percent with a price discounting after a first price. |
| Keywords: | Phillips curve; product and price cycles; search and matching |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utmpwp:009&r=all |
| By: | Tim Obermeier |
| Abstract: | This paper studies how the progressivity of the income tax affects intra-household inequality and the marriage market. Tax progressivity increases the after-tax earnings of the lowerearning spouse and improves their bargaining position in marriage. This mechanism reduces inequality in consumption and leisure within households. In addition, tax progressivity can change who is single and who marries whom. I study these effects in an equilibrium search and matching model with intra-household bargaining, labor supply and savings. The model is calibrated to data from the Netherlands and used to study a hypothetical reform which increases progressivity by 40% relative to the current system. The reduction of intra-household inequality accounts for 24.77% of the reduction in inequality in private consumption due to the reform, and 11.43% of the reduction in inequality in utility from private and public consumption, leisure and home production. Changes in the composition of couples and singles, due to endogenous marriage and divorce, have small implications for inequality. |
| Keywords: | Tax Progressivity, Intra-Household Bargaining, Equilibrium search, Assortative matching |
| JEL: | H20 E21 J12 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2019_109&r=all |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | This paper lists 19 points that follow from results I have obtained using a structural macroeconomic model (SEM). Such models are more closely tied to the aggregate data than are DSGE models, and I argue that DSGE models and similar models should have properties that are consistent with these points. The aim is to try to bring macro back to its empirical roots. |
| Keywords: | Macro models, Macro properties |
| JEL: | E1 E2 E3 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2165r&r=all |
| By: | Mario Meier; Tim Obermeier |
| Abstract: | This paper studies how firms’ screening behavior and multiple applications per job affect the optimal design of unemployment policies. We provide a model of job search and firms’ recruitment process that incorporates important features of the hiring process. In our model, firms have limited information about the productivity of each applicant and make selective interview decisions among applicants, which leads to employer screening. We estimate the model using German administrative employment records and information on job search behavior, vacancies and applications. The model matches important features of the hiring process, e.g. the observed decline in search effort, job finding rates and interview rates with increased unemployment duration. We find that allowing for employer screening is quantitatively important for the optimal design of unemployment insurance. Benefits should be paid for a longer period of time and be more generous in the beginning, but more restrictive afterwards, compared to the case where we treat the hiring and interview decisions of firms as exogenous. This is because more generous benefits lead to lower search externalities among job seekers and because benefits change the composition of the unemployment pool which alleviates screening for the long-term unemployed. |
| Keywords: | Unemployment, Optimal Unemployment Insurance, Employer Screening |
| JEL: | H20 J64 J65 J71 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2019_110&r=all |
| By: | Magali Marx; Benoit Mojon; François R. Velde |
| Abstract: | Risk-free rates have been falling since the 1980s while the return on capital has not. We analyse these trends in a calibrated overlapping-generations model with recursive preferences, designed to encompass many of the "usual suspects" cited in the debate on secular stagnation. Deleveraging cannot account for the joint decline in the risk free rate and increase in the risk premium, and declining labour force and productivity growth imply only a limited decline in real interest rates. If we allow for a change in the (perceived) risk to productivity growth to fit the data, we find that the decline in the risk-free rate requires an increase in the borrowing capacity of the indebted agents in the model, consistent with the increase in the sum of public and private debt since the crisis. |
| Keywords: | secular stagnation, interest rates, risk, return on capital |
| JEL: | E00 E40 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:794&r=all |
| By: | Stefan Gebauer; Falk Mazelis |
| Abstract: | Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999-2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating the macroprudential tightening with monetary easing can limit this leakage mechanism, while still bringing about the desired reduction in aggregate lending. We discuss how regulators that either do or do not consider credit leakage to shadow banks set policy in response to macroeconomic shocks. Lastly, in a counterfactual analysis, we then compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle. |
| Keywords: | Macroprudential Regulation, Monetary Policy, Shadow Banking, Non-Bank Financial Institutions, Financial Frictions |
| JEL: | E58 G23 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1814&r=all |
| By: | Ricardo Sabbadini |
| Abstract: | Despite the cost imposed by the interest rate spread between sovereign debt and international reserves, emerging countries’ governments maintain stocks of both. I investigate the optimality of this joint accumulation of assets and liabilities using a quantitative model of sovereign debt, in which: i) international reserves only function to smooth consumption, before or after a default; ii) the sovereign’s decision to repudiate debt determine the spread; iii) lenders are risk-averse; and iv) default is partial. Simulated statistics from the benchmark model match their observed counterparts for average debt and spread, consumption volatility, and the main correlations among the relevant variables. Due to the presence of partial default and risk-averse lenders, the model also produces a mean reserve level of 7.7% of GDP, indicating that the optimal policy is to hold positive amounts of reserves. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:496&r=all |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | This comment points out mismeasurement of three of the variables in the DSGE model in Smets and Wouters (2007) and in models that use the Smets-Wouters model as a benchmark. The mismeasurement appears serious enough to call into question the reliability of empirical results using these variables. |
| Keywords: | DSGE models, Macro data |
| JEL: | E12 E32 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2166r&r=all |
| By: | Christopher D. Carroll; Jiri Slacalek; Martin Sommer |
| Abstract: | We show that an estimated tractable ‘buffer stock saving’ model can match the 30-year decline in the U.S. saving rate leading up to 2007, the sharp increase during the Great Recession, and much of the intervening business cycle variation. In the model, saving depends on the gap between ‘target’ and actual wealth, with the target determined by measured credit availability and measured unemployment expectations. Following financial deregulation starting in the late 1970s, expanding credit supply explains the trend decline in saving, while fluctuations in wealth and consumer-survey-measured unemployment expectations capture much of the business-cycle variation, including the sharp rise during the Great Recession. |
| JEL: | D14 E2 E21 E24 E44 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26131&r=all |
| By: | Margherita Borella (University of Turin and CeRP-Collegio Carlo Alberto); Mariacristina De Nardi (Federal Reserve Bank of Minneapolis); Fang Yang (Louisiana State University) |
| Abstract: | White, non-college-educated Americans born in the 1960s face shorter life expectancies, higher medical expenses, and lower wages per unit of human capital compared with those born in the 1940s, and men’s wages declined more than women’s. After documenting these changes, we use a life-cycle model of couples and singles to evaluate their effects. The drop in wages depressed the labor supply of men and increased that of women, especially in married couples. Their shorter life expectancy reduced their retirement savings but the increase in out-of-pocket medical expenses increased them by more. Welfare losses, measured as a one-time asset compensation, are 12.5%, 8%, and 7.2% of the present discounted value of earnings for single men, couples, and single women, respectively. Lower wages explain 47-58% of these losses, shorter life expectancies 25-34%, and higher medical expenses account for the rest. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:188&r=all |
| By: | Mathias Klein; Christopher Krause |
| Abstract: | In this study, we set up a DSGE model with upward looking consumption comparison and show that consumption externalities are an important driver of consumer credit dynamics. Our model economy is populated by two different household types. Investors, who hold the economy’s capital stock, own the firms and supply credit, and workers, who supply labor and demand credit to finance consumption. Furthermore, workers condition their consumption choice on the investors’ level of consumption. We estimate the model and find a significant keeping up-mechanism by matching business cycle statistics. In reproducing credit moments, our proposed model significantly outperforms a model version in which we abstract from consumption externalities. |
| Keywords: | Income redistribution, consumer credit, relative consumption motive, business cycles |
| JEL: | E21 E32 E44 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1816&r=all |
| By: | Ken-Ichi Akao (School of Social Sciences, Waseda University, 1-6-1 Nishiwaseda Shinjuku Tokyo, 169-8050, Japan.); Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University, Japan.); Kazuo Nishimura (Institute of Economic Research, Kyoto University, Japan) |
| Abstract: | In a nonconcave economic dynamics model, an open question is the optimality of a steady state of the canonical system of Hamiltonian differential equations in the convex part of the production function. We demonstrate that it can be an optimal steady state. |
| Keywords: | Economic dynamic model, Convex-concave production function, Optimal steady state |
| JEL: | C61 D90 O41 |
| URL: | http://d.repec.org/n?u=RePEc:was:dpaper:1907&r=all |
| By: | Alexios Anagnostopoulos (Stony Brook University); Orhan Erem Atesagaoglu (Istanbul Bilgi University; University of Cambridge); Elisa Faraglia (University of Cambridge; CEPR); Chryssi Giannitsarou (University of Cambridge; CEPR) |
| Abstract: | We develop a theoretical framework in order to investigate the link between two recent trends: (i) the rise in cross-country stock market correlations over the past three decades, and (ii) the increase in global foreign direct investment (FDI) positions over the same period. Our objective is twofold: first, we investigate empirically the channel through which the rise in global stock market correlations is associated with the observed increase in global FDI. Second, we develop a two-country stochastic asset pricing model with multinational firms that allows us to quantify the extent to which the recent rise in global FDI can account for the observed increase in cross-country stock market comovement. Calibrating three versions of the model (financial autarky, incomplete markets and complete markets) to the US and the rest-of-the-world, we find that a permanent inrcease in FDI positions, as observed from mid 1990s to mid 2000s, leads to substantial increase in cross-country stock market comovements. Increases in FDI alone can account for approximately one third of the observed increase in stock market correlations. We also discuss the role of portfolio diversification and, more generally, asset market integration. |
| JEL: | G12 G15 F21 F23 F44 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1912&r=all |
| By: | Bingyan Han; Hoi Ying Wong |
| Abstract: | This paper investigates an equilibrium feedback control for time-inconsistent reward functionals when the state variable follows a Volterra process. As Volterra processes are non-Markovian and non-semimartingale in general, we develop an extended path-dependent Hamilton-Jacobi-Bellman (PHJB) equation system and offer a verification theorem to the solution of the PHJB equation. We apply the theory to three time-inconsistent problems when the risky asset price follows the Volterra Heston model, a typical rough volatility model. Analytical solutions are derived for the three problems: mean-variance portfolio problem (MVP) with constant risk aversion, MVP with a state-dependent risk aversion, and an investment/consumption problem with non-exponential discounting. Through these examples, we address the effects of roughness on equilibrium strategies. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1907.11378&r=all |
| By: | Larsson, Bo (erfConsulting AB); Wijkander, Hans (Dept. of Economics, Stockholm University) |
| Abstract: | Effects from risk, bankruptcies, and capital regulation of banks is explored in a dynamic stochastic equilibrium model where banks have two controls, dividends and level of risktaking. Unregulated value-maximizing banks, balance current profit against cost of risk. Banks with capitalization below desired level chose a lower level of risk than well-capitalized banks, but their capital adequacy ratios are yet lower. Binding regulation reduces risk-taking and instantaneous risk of bankruptcy but in the process also reduce endogenous growth of bank capital. This leads to an increased risk of bankruptcy that stems from the longer time banks spend poorly capitalized after large negative shocks due to the capital regulation. |
| Keywords: | Banking; Dynamic Banking; Banking regulation; Capital adequacy; Dividends; Incentive structure |
| JEL: | C61 G21 G22 |
| Date: | 2019–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2019_0004&r=all |
| By: | Nakata, Taisuke; Schmidt, Sebastian |
| Abstract: | We study optimal monetary and fiscal policy in a New Keynesian model where occasional declines in agents’ confidence can give rise to persistent liquidity trap episodes. Unlike in the case of fundamental-driven liquidity traps, there is no straightforward recipe for mitigating the welfare costs and the systematic inflation shortfall associated with expectations-driven liquidity traps. Raising the inflation target or appointing an inflation-conservative central banker improves inflation outcomes away from the lower bound but exacerbates the shortfall at the lower bound. Using government spending as an additional policy tool worsens stabilization outcomes both at and away from the lower bound. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society can eliminate expectations-driven liquidity traps altogether. JEL Classification: E52, E61, E62 |
| Keywords: | discretion, effective lower bound, fiscal policy, monetary policy, policy delegation, sunspot equilibria |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192304&r=all |
| By: | Hakan Yilmazkuday (Department of Economics, Florida International University) |
| Abstract: | The reduction in international trade has been more than the reduction in economic activity during the 2008 financial crisis, against the one-to-one relationship between them implied by standard trade models. This so-called the great trade collapse (GTC) has been investigated extensively in the literature resulting in alternative competing stories as potential explanations. By introducing and estimating a dynamic stochastic general equilibrium model using eighteen quarterly series from the U.S., including those that represent the competing stories, this paper evaluates the contribution of each story to GTC. The results show that retail inventories have contributed the most to the collapse and the corresponding recovery, followed by protectionist policies, intermediate-input trade, and trade finance. Productivity and demand shocks have played negligible roles. |
| Keywords: | Trade Collapse, Inventories, Intermediate Inputs, Trade Finance, Protectionist Policies |
| JEL: | E32 F12 F41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:1902&r=all |
| By: | Elena Carletti; Roberto Marquez; Silvio Petriconi |
| Abstract: | We build a general equilibrium model of banks’ optimal capital structure, where bankruptcy is costly and investors have heterogenous endowments and incur a cost for participating in equity markets. We show that banks raise both deposits and equity, and that investors are willing to hold equity only if adequately compensated. We then introduce (binding) capital requirements and show that: (i) it distorts investment away from productive projects toward storage; or (ii) it widens the spread between the returns to equity and to deposits. These results hold also when we extend the model to incorporate various rationales justifying capital regulation. |
| Keywords: | limited market participation, bank capital structure, capital regulation, investor returns |
| JEL: | G21 G28 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp18102&r=all |