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on Dynamic General Equilibrium |
| By: | Alessandra Fogli; Veronica Guerrieri |
| Abstract: | Since the '80s the US has experienced not only a steady increase in income inequality, but also a contemporaneous increase in residential segregation by income. Using US Census data, we first document a positive correlation between inequality and segregation at the MSA level between 1980 and 2010. We then develop a general equilibrium overlapping generations model where parents choose the neighborhood where to raise their children and invest in their children's education. In the model, segregation and inequality amplify each other because of a local spillover that affects the returns to education. We calibrate the model using 1980 US data and the micro estimates of the effect of neighborhood exposure in Chetty and Hendren (2018). We then assume that in 1980 an unexpected permanent skill premium shock hits the economy and show that segregation contributes to 28% of the subsequent increase in inequality. |
| JEL: | D5 D63 E0 E24 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26143&r=all |
| By: | de Groot, Oliver; Haas, Alexander |
| Abstract: | Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction new-Keynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly "interest margin" channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplified model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing. |
| Keywords: | Monetary policy, Taylor rule, Forward guidance, Liquidity trap |
| JEL: | E5 E6 |
| Date: | 2019–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95479&r=all |
| By: | Beverly Lapham; Ayman Mnasri (Qatar University) |
| Abstract: | We develop an open economy monetary model with heterogeneous households which is characterized by incomplete pass-through of exchange rate movements to import prices. Partial pass-through arises in our environment due to the presence of competitive search in international goods' markets. Under competitive search, agents choose a sub-market in which to exchange goods, where different sub-markets are characterized by different price and trading probability combinations. Preference and policy shocks which induce exchange rate movements cause households to choose a different sub-market for their purchases of traded goods--an extensive margin response. These responses mitigate the direct effect of nominal exchange rate changes on equilibrium traded goods' prices, thereby generating incomplete exchange rate pass-through to goods' prices. In the calibrated model, exchange rate pass-through due to foreign shocks ranges between 19% and 62%, which is in the range of import price pass-through estimates for developed economies. Due to risk aversion by households, the magnitude of pass-through depends on the size and direction of the initial shock, making the model consistent with the observed phenomenon of asymmetric pass-through. Importantly, by incorporating household heterogeneity, we are able to examine the role of precautionary savings in affecting pass-through, characterize how pass-through varies across different types of households, and examine the distributional effects of exchange rate movements. |
| Keywords: | Exchange Rate Pass-Through, Competitive Search, Monetary Policy |
| JEL: | F31 O24 E58 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1418&r=all |
| By: | Adrien Auclert; Bence Bardóczy; Matthew Rognlie; Ludwig Straub |
| Abstract: | We propose a general and highly efficient method for solving and estimating general equilibrium heterogeneous-agent models with aggregate shocks in discrete time. Our approach relies on the rapid computation and composition of sequence-space Jacobians—the derivatives of perfect-foresight equilibrium mappings between aggregate sequences around the steady state. We provide a fast algorithm for computing Jacobians for heterogeneous agents, a technique to substantially reduce dimensionality, a rapid procedure for likelihood-based estimation, a determinacy condition for the sequence space, and a method to solve nonlinear perfect-foresight transitions. We apply our methods to three canonical heterogeneous-agent models: a neoclassical model, a New Keynesian model with one asset, and a New Keynesian model with two assets. |
| JEL: | C63 E21 E32 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26123&r=all |
| By: | Erik Hernæs; Steinar Strøm; Tao Zhang |
| Abstract: | We investigate the impact on pension take-up and labour supply of a broad Norwegian pension reform. Focussing on the long term impact, we use a structural discrete choice model estimated on data for first groups to become eligible for the new pension, accounting for the opportunity cost of retiring early. A majority of the individuals combine take-up of pension with working. This is particular the case for individuals with lower education. The estimated model explains observed behaviour rather precisely, in particular for those who retire entirely and for all choices made by individuals with higher education. The estimated model is applied in an out of sample prediction for the cohort born in 1950. Again, the model predicts rather accurately the fraction that retires entirely and the choices made by the higher educated. Two policy simulations, an increase in longevity and tax on pension income equal to tax on labour income, implies lower take up of pensions and more people working. The response to the longevity adjustment compensates less than half of the reduction of the annual pension level in the adjustment, which is designed to mimic the increase in the longevity over the next 20 years. |
| Keywords: | pension reform, labor supply |
| JEL: | D10 H55 J26 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7723&r=all |
| By: | Jonathan Benchimol (Bank of Israel); Lahcen Bounader (International Monetary Fund, Washington, D.C., United States) |
| Abstract: | Abstract We build a behavioral New Keynesian model that emphasizes different forms of myopia for households and firms. By examining the optimal monetary policy within this model, we find four main results. First, in a framework where myopia distorts agents' inflation expectations, the optimal monetary policy entails implementing inflation targeting. Second, price level targeting emerges as the optimal policy under output gap, revenue, or interest rate myopia. Given that bygones are not bygones under price level targeting, rational inflation expectations are a minimal condition for optimality in a behavioral world. Third, we show that there are no feasible instrument rules for implementing the optimal monetary policy, casting doubt on the ability of simple Taylor rules to assist in the setting of monetary policy. Fourth, bounded rationality may be associated with welfare gains. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2019.07&r=all |
| By: | Sanjay R. Singh; Vaishali Garga (Department of Economics, University of California Davis) |
| Abstract: | We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon termed as output hysteresis. In the model, incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing TFP growth and generating a permanent loss in output. Using a purely quadratic approximation to welfare under endogenous growth, we derive normative implications for monetary policy. Away from the zero lower bound (ZLB), optimal commitment policy sets interest rates to eliminate output hysteresis. A strict inflation targeting rule implements the optimal policy. However, when the nominal interest rate is constrained at the ZLB, strict inflation targeting is sub-optimal and admits output hysteresis. A new policy rule that targets output hysteresis returns the output to the pre-shock trend and approximates the welfare gains under optimal com- mitment policy. A central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output. |
| Keywords: | zero lower bound, optimal monetary policy, endogenous potential output, hysteresis bias |
| JEL: | E52 E32 O42 |
| Date: | 2019–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:331&r=all |
| By: | Georgiadis, Georgios; Schumann, Ben |
| Abstract: | Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy co-ordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the US dollar multilaterally decline with an economy’s export-import US dollar pricing share differential, i.e. the difference between the share of an economy’s exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy’s net exports in response to multilateral changes in the US dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border transmission channels, we document that consistent with the prediction from DCP the output spillovers from US dollar appreciation correlate negatively with recipient economies’ export-import US dollar invoicing share differentials. We document that these findings are robust to considering US demand, US monetary policy and exogenous exchange rate shocks as a trigger of US dollar appreciation, as well as to accounting for the role of commodity trade in US dollar invoicing. JEL Classification: F42, E52, C50 |
| Keywords: | dominant-currency pricing, spillovers, US shocks |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192308&r=all |
| By: | Margherita Borella; Mariacristina De Nardi; Fang Yang |
| Abstract: | In the U.S., both taxes and old age Social Security benefits depend on one's marital status and tend to discourage the labor supply of the secondary earner. To what extent are these provisions holding back female labor supply? We estimate a rich life-cycle model of labor supply and savings for couples and singles using the Method of Simulated Moments (MSM) on the 1945 and 1955 birth-year cohorts and we use it to evaluate what would happen without these provisions. Our model matches well the life cycle profiles of labor market participation, hours, and savings for married and single people and generates plausible elasticities of labor supply. Eliminating marriage-related provisions drastically increases the participation of married women over their entire life cycle, reduces the participation of married men after age 55, and increases the savings of couples in both cohorts, including the later one, which has similar participation to that of more recent generations. If the resulting government surplus were used to lower income taxation, there would be large welfare gains for the vast majority of the population. |
| JEL: | E21 H2 J22 J31 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26097&r=all |
| By: | Hans Fehr; Maurice Hofmann |
| Abstract: | We study the interplay between tenure decisions, stock market investment and the public social security system. Housing equity not only serves a dual purpose as a consumption good and as an asset, but also provides insurance to buffer various risks in retirement. Our life cycle model captures these links in order to explain why homeownership in Germany is so low. Our simulation results indicate that the public long-term care as well as the pension system reduce the homeownership rate in Germany by 10-15 percentage points. |
| Keywords: | homeownership, stock market participation, life-cycle models, long-term care |
| JEL: | C61 G11 H55 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7783&r=all |
| By: | Korfhage, Thorben |
| Abstract: | In this paper, I estimate a dynamic structural model of labor supply, retirement, and informal care supply, incorporating labor market frictions and the German tax and benefit system. I find that informal elderly care has adverse and persistent effects on labor market outcomes and therefore negatively affects lifetime earnings, future pension benefits, and individuals' well-being. These consequences of caregiving are heterogeneous and depend on age, previous earnings, and institutional regulations. Policy simulations suggest that, even though fiscally costly, public long-term care insurance can offset the personal costs of caregiving to a large extent - in particular for low-income individuals. |
| Keywords: | long-term care,informal care,long-term care insurance,labor supply,retirement,pension benefits,structural model |
| JEL: | I18 I38 J14 J22 J26 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:813&r=all |
| By: | Engbom, Niklas; Moser, Christian |
| Abstract: | We show that a minimum wage can have large effects throughout the earnings distribution, using a combination of theory and empirical evidence. To this end, we develop an equilibrium search model featuring empirically relevant worker and firm heterogeneity. We use the estimated model to evaluate a 119 percent increase in the real minimum wage in Brazil from 1996 to 2012. Direct and indirect effects of the policy account for a substantial decline in earnings inequality, with modest negative employment consequences. Using administrative linked employer-employee data and two household surveys, we find reduced-form evidence supporting the model predictions. |
| Keywords: | Worker and Firm Heterogeneity; Equilibrium Search Model; Monopsony; Spillover Effects; Minimum Wage |
| JEL: | E2 E20 E24 E25 E26 E6 E60 E61 E64 J3 J30 J31 J38 J42 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95384&r=all |
| By: | Sant'Anna, Ana Claudia; Miranda, Mario J.; Katchova, Ani |
| Keywords: | Agricultural Finance |
| Date: | 2019–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea19:290724&r=all |
| By: | Harmenberg, Karl (Department of Economics, Copenhagen Business School); Ôberg, Erik (Uppsala University) |
| Abstract: | Private consumption demand falls in response to increased unemployment risk during a recession, as households increase their precautionary savings and postpone irreversible durable investments. The postponement effect is seven times as large as the precautionary-savings effect in a calibrated buffer-stock savings model. In consequence, anticipation of future unemployment risk is more important than realized unemployment shocks in accounting for durable expenditure dynamics during recessions, while the opposite is true for nondurables. The importance of anticipation of future unemployment risk also means that having many ’hand-to-mouth’ households, who do not respond to changes in income risk, significantly dampens the demand response for durables to an adverse labor market shock. We find that the model elasticities of durable and nondurable expenditures with respect to unemployment risk are close to what we estimate in micro survey data. |
| Keywords: | household consumption; income risk; unemployment; business cycles |
| JEL: | E21 E24 E32 J64 |
| Date: | 2019–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cbsnow:2019_008&r=all |
| By: | Groll, Dominik |
| Abstract: | Laut Entwurf des Gesetzes zur Beitragsentlastung der Versicherten in der gesetzlichen Krankenversicherung (GKV), der vom Bundeskabinett kürzlich beschlossen wurde, sollen ab 1. Januar 2019 die Krankenkassenbeiträge wieder paritätisch (d.h. je zur Hälfte) durch Arbeitnehmer und Arbeitgeber finanziert werden. Da die Beiträge zu den Sozialversicherungen einen großen Bestandteil des Abgabenkeils zwischen den Nettolöhnen der Arbeitnehmer und den Lohnkosten der Arbeitgeber darstellen, ist mit Effekten auf Beschäftigung, Produktion, aber auch auf die Lohnentwicklung zu rechnen. Um die gesamtwirtschaftlichen Folgen abzuschätzen, verwenden wir im Folgenden das in der Deutschen Bundesbank entwickelte, makroökonomische Simulationsmodell GEAR, ein für Deutschland geschätztes großes DSGE-Modell. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwbox:20189&r=all |
| By: | Pietro Dindo; Andrea Modena; Loriana Pelizzon |
| Abstract: | This paper investigates the interdependence between the risk-pooling activity of the financial sector and: output, consumption, risk-free rate, and Sharpe ratio in a dynamic general equilibrium model of a productive economy. Due to their exposure to idiosyncratic shocks and market segmentation, heterogeneous households/entrepreneurs (h/entrepreneurs) are willing to mitigate their risk through a financial sector. The financial sector pools risky claims issued by different firms within its assets, faces an associated intermediation cost and, via leverage, provides a risk-free asset to h/entrepreneurs. Exogenous systematic shocks change the relative size of the financial sector, and thus the equilibrium amount of pooled risk, making financial leverage state-dependent and counter-cyclical. We study how this mechanism endogenously channels amplification of consumption and mitigation of output fluctuations. In equilibrium, financial sector leverage also determines counter-cyclical Sharpe ratios and pro-cyclical risk-free interest rates. Last, we investigate the relationship between the size of the financial sector, leverage, and welfare. We show that limiting financial sector leverage determines a sub-optimal pooling of idiosyncratic risk but fosters the growth rate of the h/entrepreneurs’ consumption. On the other side, when the financial sector is too large, it destroys too many resources after intermediation costs. Therefore, the h/entrepreneurs benefit the most when the financial sector is neither too small nor too big. |
| Keywords: | amplification, business cycle, financial frictions, leverage, risk pooling |
| JEL: | E13 E32 E69 G12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7772&r=all |