nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒09‒02
seventeen papers chosen by



  1. Financial Frictions, Durable Goods and Monetary Policy By Ugochi Emenogu; Leo Michelis
  2. The Global Business Cycle: Measurement and Transmission By Huo, Zhen; Levchenko, Andrei A.; Pandalai-Nayar, Nitya
  3. Bank Assets, Liquidity and Credit Cycles By Lubello, Federico; Petrella, Ivan; Santoro, Emiliano
  4. Credit, Default, and Optimal Health Insurance By Jang, Youngsoo
  5. Dynamic Programming with State-Dependent Discounting By John Stachurski; Junnan Zhang
  6. Foreign Direct Investment as a Determinant of Cross-Country Stock Market Comovement By Anagnostopoulos, A.; Atesagaoglu, O.; Faraglia, E.; Giannitsarou, C.
  7. Who Bears the Burden of Universal Health Coverage? An Assessment of Alternative Financing Policies Using an Overlapping generations General Equilibrium Model By Sameera Awawda; Mohammad Abu-Zaineh; Bruno Ventelou
  8. Long-Run Consequences of Informal Elderly Care and Implications of Public Long-Term Care Insurance By Thorben Korfhage
  9. Explaining Differences in Income Levels of Africa’s Largest Economies – A Development Accounting Perspective By Ibhagui, Oyakhilome
  10. A Generalized Endogenous Grid Method for Models with the Option to Default By Jang, Youngsoo; Lee, Soyoung
  11. Multiple Applications, Competing Mechanisms, and Market Power By Albrecht, James; Cai, Xiaoming; Gautier, Pieter A.; Vroman, Susan
  12. Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective. By Kjetil Storesletten; Bo Zhao; Fabrizio Zilibotti
  13. Publish and Perish: Creative Destruction and Macroeconomic Theory By Jean-Bernard Chatelain; Kirsten Ralf
  14. Power generation and structural change: Quantifying economic effects of the coal phase-out in Germany By Heinisch, Katja; Holtemöller, Oliver; Schult, Christoph
  15. Partial Default By Cristina Arellano; Xavier Mateos-Planas; José-Víctor Ríos-Rull
  16. Economic consequences of high public debt and challenges ahead for the euro area By Maria Manuel Campos; Cristina Checherita-Westphal; Pascal Jacquinot; Pablo Burriel; Francesco Caprioli
  17. The Negative Mean Output Gap By Shekhar Aiyar; Simon Voigts

  1. By: Ugochi Emenogu; Leo Michelis
    Abstract: Financial frictions affect how much consumers spend on durable and non-durable goods. Borrowers can face both loan-to-value (LTV) constraints and payment-to-income (PTI) constraints. In this setting, a monetary contraction drastically reduces the amount consumers can borrow to purchase durable goods. We examine these effects in a dynamic stochastic general equilibrium (DSGE) model. DSGE models with durables predict that when monetary policy tightens, non-durable consumption will fall and durable consumption will rise. But this prediction contradicts empirical evidence, which shows that both types of consumption fall, and durables fall more than non-durables. Studies have tried to resolve this puzzle by integrating LTV constraints into the model, but without much success. In our model, we use a broader set of financial frictions that includes PTI limits on borrowing. We show that using both LTV and PTI constraints in the model solves the counterfactual increase in durables following a contractionary monetary shock and delivers the correct correlation. Including the PTI limit in the model leads to a decrease in labour supply. This reduces output, which, in turn, makes it more likely that total durable expenditures will fall.
    Keywords: Financial system regulation and policies; Monetary Policy
    JEL: E44 E52
    Date: 2019–08
    URL: http://d.repec.org/n?u=RePEc:bca:bocawp:19-31&r=all
  2. By: Huo, Zhen; Levchenko, Andrei A.; Pandalai-Nayar, Nitya
    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 country's 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: input linkages; international comovement; non-technology shocks; TFP shocks
    JEL: F41 F44
    Date: 2019–06
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:13796&r=all
  3. By: Lubello, Federico; Petrella, Ivan; Santoro, Emiliano
    Abstract: We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers' assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers' financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
    Keywords: Bank Collateral; Banking; capital misallocation; liquidity; macroprudential policy
    JEL: E32 E44 G21 G28
    Date: 2019–06
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:13831&r=all
  4. By: Jang, Youngsoo
    Abstract: How do defaults and bankruptcies affect optimal health insurance policy? I answer this question using a life-cycle model of health investment with the option to default on emergency room (ER) bills and financial debts. I calibrate the model for the U.S. economy and compare the optimal health insurance in the baseline economy with that in an economy with no option to default. With no option to default, the optimal health insurance is similar to the health insurance system in the baseline economy. In contrast, with the option to default, the optimal health insurance system (i) expands the eligibility of Medicaid to 22 percent of the working-age population, (ii) replaces 72 percent of employer-based health insurance with a private individual health insurance plus a progressive subsidy, and (iii) reforms the private individual health insurance market by improving coverage rates and preventing price discrimination against people with pre-existing conditions. This result implies that with the option to default, households rely on bankruptcies and defaults on ER bills as implicit health insurance. More redistributive healthcare reforms can improve welfare by reducing the dependence on this implicit health insurance and changing households’ medical spending behavior to be more preventative.
    Keywords: Credit, Default, Bankruptcy, Optimal Health Insurance
    JEL: E21 H51 I13 K35
    Date: 2019–07
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:95705&r=all
  5. By: John Stachurski; Junnan Zhang
    Abstract: This paper extends the core results of discrete time infinite horizon dynamic programming theory to the case of state-dependent discounting. The traditional constant-discount condition requires that the discount factor of the controller is strictly less than one. Here we replace the constant factor with a discount factor process and require, in essence, that the process is strictly less than one on average in the long run. We prove that, under this condition, the standard optimality results can be recovered, including Bellman's principle of optimality, convergence of value function iteration and convergence of policy function iteration. We also show that the condition cannot be weakened in many standard settings. The dynamic programming framework considered in the paper is general enough to contain features such as recursive preferences. Several applications are discussed.
    Date: 2019–08
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1908.08800&r=all
  6. By: Anagnostopoulos, A.; Atesagaoglu, O.; Faraglia, E.; Giannitsarou, C.
    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 increase 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.
    Keywords: stock market comovements, foreign direct investment, business cycle synchronisation, multinational firms, asset pricing
    JEL: G15 F21 F23 G12 F44
    Date: 2019–07–22
    URL: http://d.repec.org/n?u=RePEc:cam:camdae:1978&r=all
  7. By: Sameera Awawda (Aix-Marseille University); Mohammad Abu-Zaineh (Aix-Marseille University); Bruno Ventelou (Aix-Marseille University)
    Abstract: In their quest for Universal Health Coverage (UHC), many developing countries use alternative financing strategies including general revenues and budget transfers to expand health coverage to the whole population. Unless a policy adjustment is undertaken, future generations may foot the bill of the UHC. This raises the important policy questions of who bears the burden of the UHC and whether the UHC-fiscal stance is sustainable in the long-term. These two questions are addressed using an overlapping generations model within a general equilibrium framework (OLG-CGE) applied to Palestine. We assessed and compare alternative ways of financing the deficit-ridden UHC (viz. deferred-debt-finance, current, and phased-manner finance) and their implications on intergenerational inequalities. Results show that in the absence of any policy adjustment, the implementation of UHC would explode the fiscal deficit and debt-GDP ratio. This indicates that the UHC-fiscal stance is rather unsustainable in the long-term, thus, calling for a policy adjustment to service the UHC-debt. Among the policies we examined, a current rather, than deferred, debt-finance through consumption taxation emerged to be preferred over other policies in terms of its implications for both fiscal sustainability and intergenerational inequality.
    Date: 2019–08–21
    URL: http://d.repec.org/n?u=RePEc:erg:wpaper:1335&r=all
  8. By: Thorben Korfhage
    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:diw:diwsop:diw_sp1051&r=all
  9. By: Ibhagui, Oyakhilome
    Abstract: Drawing upon the experience of Africa’s largest economies, this paper examines the phenomenon of income discrepancies in Africa and applies the combined methodologies of Development Accounting (DA) à la Caselli (2005) and Business Cycle Accounting (BCA) à la Chari, Kehoe and McGrattan (2007) in a standard neoclassical, small open economy model. Classified into 2 equal-numbered groups – G1 and G2 – based on output size and region of location, the economies comprise Sub-Saharan Africa’s top 3 economies (G1: Nigeria, South Africa and Angola), and North Africa’s top 3 economies (G2: Egypt, Algeria and Morocco). Distortions in production efficiency, labour and capital, collectively termed wedges, are calculated, and the extent, evolution and impact of the wedges are determined for the period 1990 to 2013. Empirical results show that although efficiency wedge plays an important role in explaining income differences, labour wedge and investment wedge are also important for understanding income differences in Africa and, by extension, bridging the gap.
    Keywords: Business cycle accounting; efficiency, capital and labour markets distortions; development accounting; distortions; African economies.
    JEL: O11
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:95622&r=all
  10. By: Jang, Youngsoo; Lee, Soyoung
    Abstract: We develop an endogenous grid method for models with the option to default in which price schedules are endogenously determined in equilibrium and depend on individuals’ states. The algorithm has noticeable computational benefits in efficiency and accuracy. We obtain these computational benefits by combining Fella’s (2014) identification for non-concave regions with our algorithm that numerically searches for risky borrowing limits. These two procedures identify the region of solution sets to which Carroll’s (2006) endogenous grid method is applicable. To demonstrate the method, we apply our method to Nakajima and Rios-Rull’s(2014) model. In terms of computation time, this method is seven to twenty-seven times faster than the conventional grid search method. Moreover, various types of accuracy tests indicate that our method yields more accurate results than the grid search method.
    Keywords: Endogenous grid method, Default, Bankruptcy
    JEL: C63
    Date: 2019–08
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:95721&r=all
  11. By: Albrecht, James; Cai, Xiaoming; Gautier, Pieter A.; Vroman, Susan
    Abstract: We consider a labor market with search frictions in which workers make multiple applications and firms can post and commit to general mechanisms that may be conditioned both on the number of applications received and on the number of offers received by its candidate. When the contract space includes application fees, there exists a continuum of equilibria of which only one is socially efficient. In the inefficient equilibria, firms have market power that arises from the fact that the value of a worker's application portfolio depends on what other firms offer, which allows individual firms to free ride and offer workers less than their marginal contribution. Finally, by allowing for general mechanisms, we are able to examine the sources of inefficiency in the multiple applications literature.
    Keywords: competing mechanisms; directed search; efficiency; market power; multiple applications
    JEL: C78 D44 D83
    Date: 2019–08
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:13912&r=all
  12. By: Kjetil Storesletten; Bo Zhao; Fabrizio Zilibotti
    Abstract: We document that the nature of business cycles evolves over the process of development and structural change. In countries with large declining agricultural sectors, aggregate employment is uncorrelated with GDP. During booms, employment in agriculture declines while labor productivity increases in agriculture more than in other sectors. We construct a unified theory of business cycles and structural change consistent with the stylized facts. The focal point of the theory is the simultaneous decline and modernization of agriculture. As capital accumulates, agriculture becomes increasingly capital intensive as modern agriculture crowds out traditional agriculture. Structural change accelerates in booms and slows down in recessions. We estimate the model and show that it accounts well for both the structural transformation and the business cycle fluctuations of China.
    JEL: E32 O11 O13 O14 O41 O53 Q11
    Date: 2019–08
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:26181&r=all
  13. By: Jean-Bernard Chatelain (PSE - Paris School of Economics); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: A number of macroeconomic theories, very popular in the 1980s, seem to have completely disappeared and been replaced by the dynamic stochastic general equilibrium (DSGE) approach. We will argue that this replacement is due to a tacit agreement on a number of assumptions, previously seen as mutually exclusive, and not due to a settlement by ‘nature'. As opposed to econometrics and microeconomics and despite massive progress in the access to data and the use of statistical software, macroeconomic theory appears not to be a cumulative science so far. Observational equivalence of different models and the problem of identification of parameters of the models persist as will be highlighted by examining two examples: one in growth theory and a second in testing inflation persistence.
    Keywords: economic growth,convergence,identification,Macroeconomic theory,controversies,inflation persistence
    Date: 2018
    URL: http://d.repec.org/n?u=RePEc:hal:journl:hal-01465858&r=all
  14. By: Heinisch, Katja; Holtemöller, Oliver; Schult, Christoph
    Abstract: In the fight against global warming, the reduction of greenhouse gas emissions is a major objective. In particular, a decrease in electricity generation by coal could contribute to reducing CO2 emissions. Using a multi-region dynamic general equilibrium model, this paper studies potential economic consequences of a coal phase-out in Germany. Different regional phase-out scenarios are simulated with varying timing structures. We find that a politically induced coal phase-out would lead to an increase in the national unemployment rate by about 0.10 percentage points from 2020 to 2040, depending on the specific scenario. The effect on regional unemployment rates varies between 0.18 to 1.07 percentage points in the lignite regions. However, a faster coal phase-out can lead to a faster recovery. The coal phase-out leads to migration from German lignite regions to German non-lignite regions and reduces the labour force in the lignite regions by 10,000 people by 2040.
    Keywords: general equilibrium model,labour market friction,energy,structural change
    JEL: E17 O11 O21 O44 Q28
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:zbw:iwhdps:162019&r=all
  15. By: Cristina Arellano; Xavier Mateos-Planas; José-Víctor Ríos-Rull
    Abstract: In the data sovereign default is always partial and varies in its duration. Debt levels during default episodes initially increase and do not experience reductions upon resolution. This paper presents a theory of sovereign default that replicates these properties, which are absent in standard sovereign default theory. Partial default is a flexible way to raise funds as the sovereign chooses its intensity and duration. Partial default is also costly because it amplifies debt crises as the defaulted debt accumulates and interest rate spreads increase. This theory is capable of rationalizing the large heterogeneity in partial default, its comovements with spreads, debt levels, and output, and the dynamics of debt during default episodes. In our theory, as in the data, debt grows during default episodes, and large defaults are longer, and associated with higher interest rate spreads, higher debt levels, and deeper recessions.
    JEL: E44 F3
    Date: 2019–07
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:26076&r=all
  16. By: Maria Manuel Campos; Cristina Checherita-Westphal; Pascal Jacquinot; Pablo Burriel; Francesco Caprioli
    Abstract: The aim of this paper is to reflect on the economic consequences of high public debt and the challenges ahead for the euro area. The paper reviews the economic risks associated with regimes of high public debt through DSGE model simulations and stresses the need for comprehensive solutions to mitigate such risks in the future. While the large public debt build-up following the global financial and economic crisis acted as a shock absorber for output, keeping public debt at high levels is a source of vulnerability in itself, particularly given the arising fiscal and economic pressures from ageing. Moreover, in the euro area, where monetary policy focuses on the area-wide aggregate, countries with high levels of indebtedness are poorly equipped to withstand asymmetric shocks. Looking at the historical evidence, the paper reviews the menu of tools at hand for euro area governments to further reduce their debt ratios. It posits that the urgency of efforts in this respect depends on risks to public debt sustainability. In the context of the broader reform agenda on how to strengthen EMU resilience, the paper acts as a reminder that further risk reduction and institutional reform is needed.
    JEL: E43 E62 H63 O40
    Date: 2019
    URL: http://d.repec.org/n?u=RePEc:ptu:wpaper:o201904&r=all
  17. By: Shekhar Aiyar; Simon Voigts
    Abstract: We argue that in an economy with downward nominal wage rigidity, the output gap is negative on average. Because it is more difficult to cut wages than to increase them, firms reduce employment more during downturns than they increase employment during expansions. This is demonstrated in a simple New Keynesian model with asymmetric wage adjustment costs. Using the model's output gap as a benchmark, we further show that common output gap estimation methods exhibit a systematic bias because they assume a zero mean. The bias is especially large in deep recessions when potential output tends to be most severely underestimated.
    Date: 2019–08–23
    URL: http://d.repec.org/n?u=RePEc:imf:imfwpa:19/183&r=all

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