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on Dynamic General Equilibrium |
| By: | Okano Eiji (Nagoya City University); Kazuyuki Inagaki (Nanzan University) |
| Abstract: | We revisit Uribe’s[32]‘fiscal theory of sovereign risk,’ which suggests a trade-off between stabilizing inflation and suppressing default. Unlike Uribe[32], we develop a class of dynamic stochastic general equilibrium models in which the fiscal surplus is endogenous, but where the default mechanism follows Uribe[32] with nominal rigidities. We find that an optimal monetary and fiscal policy, in which both the nominal interest rate and the tax rate are policy instruments, not only stabilizes inflation and the output gap, but also default through stabilizing the fiscal surplus. Thus, there is not necessarily a trade-off between stabilizing inflation and suppressing default. |
| Keywords: | Sovereign Risk; Optimal Monetary Policy; Fiscal Theory of the Price Level |
| JEL: | E52 E60 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkcam:1901&r=all |
| By: | Paul Owusu Takyi (National Graduate Institute for Policy Studies, Tokyo, Japan); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, Tokyo, Japan) |
| Abstract: | This study develops and estimates a standard New-Keynesian DSGE model for the Ghanaian economy, for the analysis of the impacts of government spending, consumption tax, and labor income tax shocks on household consumption and workinghours. It also applies the model to examination of the effects of fiscal policy shocks on key macroeconomic variables in the Ghanaian economy. The model features heterogeneous households of two types, financially excluded and financially included, and considers two labor markets: perfectly and monopolistically competitive labormarkets. We use quarterly time series data from 1985Q1-2017Q4 to estimate the model’s parameters using a Bayesian approach. The results show that a positive government spending shock has an expansionary effect on the consumption of financially excluded households but has a decreased effect on that of fully financially included ones. We find that positive consumption and labor income tax shocks decrease the consumption of financially excluded househo lds more than that of financially included ones. From a policy perspective, government spending is effective for increasing output, employment, and the consumption of financially excluded households, although it reduces that of financially included ones. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:19-15&r=all |
| By: | Jonathan J Adams (Department of Economics, University of Florida) |
| Abstract: | This paper characterizes a general class of macroeconomic models with incomplete information, particularly when the information process includes endogenous variables. I derive conditions for existence and uniqueness of equilibrium, which apply even when the model contains endogenous state variables. I introduce an algorithm to solve the general model, which is easily applied whether the information process is exogenous or endogenous. As an application I consider a business cycle model where firms must make inferences about aggregate shocks through the movements of endogenous prices. Observed prices do not fully reveal the state of the economy, so monetary shocks can have real effects. In this model there is a role for policy: the central bank's money supply rule determines the size of the real effects of nominal shocks, by controlling how informative prices are about the aggregate state. The optimal policy targets acyclical inflation, which makes money neutral. Finally, I demonstrate an advantage of models with endogenous information: the noisy signals are driven by fundamental shocks, rather than ad hoc noise. These shocks are observable ex post, so data can discipline the information structure. Accordingly, I calibrate the model using US industry-level panel data. |
| JEL: | D84 E32 C62 C63 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ufl:wpaper:001004&r=all |
| By: | Ibrahima Sangaré |
| Abstract: | This study investigates the optimal macroprudential policies for Luxembourg using an estimated closed-economy DSGE model. The model features a monopolistically competitive banking sector, a collateral constraint and an explicit differentiation between the flow and the stock of household mortgage debt. Based on a welfare-oriented approach and in a context of easy monetary policy environment, we first find that the non-joint optimal loan-to-value (LTV) and risk weighted capital requirement (RW) ratios for Luxembourg seem to be 90% and 30%, respectively, while the joint optimal ratios are found to be 100% and 10% respectively. Our results from the combination of instruments suggest that the policy scenario that provides better stabilization effects on mortgage credits isn’t necessarily the one that is welfare improving. In other words, we find a complementarity between LTV and RW in terms of welfare, while their optimal combination diminishes the stabilization effects on mortgage debt and house prices. However, the time-varying and endogenous rules for LTV and RW improve the social welfare and better stabilizes mortgage loans and house prices compared to their static exogenous ratios. We further find that the optimal interactions between LTV and RW ratios in our modelling framework exhibit a convex shape. It should be recalled that the results are conditional on the model’s specific assumptions. |
| Keywords: | LTV, Risk weights, optimal macroprudential policy, combination of macroprudential instruments |
| JEL: | E32 E44 R38 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp129&r=all |
| By: | Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti |
| Abstract: | We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium. |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26210&r=all |
| By: | Georgios Georgiadis (European Central Bank); Ben Schumann (European Central Bank) |
| 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 gen- eral 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 trans- mission 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. |
| Keywords: | Dominant-currency pricing, US shocks, spillovers |
| JEL: | F42 E52 C50 |
| Date: | 2019–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_021&r=all |
| By: | Ben Broadbent (Bank of England; Centre for Macroeconomics (CFM)); Federico Di Pace (Bank of England); Thomas Drechsel (University of Maryland; Centre for Macroeconomics (CFM)); Richard Harrison (Bank of England; Centre for Macroeconomics (CFM)); Silvana Tenreyro (Bank of England; London School of Economics (LSE); Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)) |
| Abstract: | The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. This paper develops and estimates a small open economy model with tradable and non-tradable sectors to characterise these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualised as news about a future slowdown in productivity growth in the tradable sector. Simulations show that the responses of the model economy to such news are consistent with key patterns in UK data. While overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary ‘sweet spot’ for tradable producers before the slowdown in tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector, tradable output growth rises and net exports increase. These developments reverse after the productivity decline in the tradable sector materialises. The negative news about tradable sector productivity also leads to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable. As a by-product of our analysis, we provide a quantitative analysis of the UK business cycle. |
| Keywords: | Brexit, Small open economy, Productivity, Tradable sector, UK economy |
| JEL: | E13 E32 F17 F47 O16 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1916&r=all |
| By: | Okano Eiji (Nagoya City University); Masataka Eguchi (Komazawa University) |
| Abstract: | We develop a class of dynamic stochastic general equilibrium models with nominal rigidities and we introduce default risk in the model. We find that if productivity changes are observed, policy authorities should be aware of default risk, although being aware of such risk is not very important following government expenditure changes. Welfare gains from awareness of default risk are nonnegligible if productivity changes, although welfare gains from awareness of default risk are tiny following government expenditure changes. |
| Keywords: | Sovereign Risk; Optimal Monetary Policy; Fiscal Theory of the Price Level |
| JEL: | E52 E60 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkcam:1902&r=all |
| By: | Adam M. Guren; Timothy J. McQuade |
| Abstract: | This paper uses a structural model to show that foreclosures played a crucial role in exacerbating the recent housing bust and to analyze foreclosure mitigation policy. We consider a dynamic search model in which foreclosures freeze the market for non-foreclosures and reduce price and sales volume by eroding lender equity, destroying the credit of potential buyers, and making buyers more selective. These effects cause price-default spirals that amplify an initial shock and help the model fit both national and cross-sectional moments better than a model without foreclosure. When calibrated to the recent bust, the model reveals that the amplification generated by foreclosures is significant: Ruined credit and choosey buyers account for 25.4 percent of the total decline in non-distressed prices and lender losses account for an additional 22.6 percent. For policy, we find that principal reduction is less cost effective than lender equity injections or introducing a single seller that holds foreclosures off the market until demand rebounds. We also show that policies that slow down the pace of foreclosures can be counterproductive. |
| JEL: | E30 R31 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26216&r=all |
| By: | George A. Alessandria; Horag Choi |
| Abstract: | We study how international trade and the exporting decisions of establishments affect establishment creation over the business cycle in a general equilibrium model. The model captures two key features of establishment and exporter dynamics: i) new establishments start small and grow over time and ii) exporters tend to be bigger and more productive than non-exporters and remain so for some time. When the cost of creating establishments fluctuates with aggregate productivity, we find the model can generate procyclical fluctuations in the stock of domestic establishments and importers similar to the data. Without international trade, entry is weakly countercyclical and too smooth. The model also generates fluctuations in the stock of importers, exporters, and domestic establishments of similar magnitude to those in the data. With an entry margin, we also find that output is hump-shaped following a productivity shock since investments in creating establishments and exporters generate an incentive to delay accumulating physical capital. This hump is stronger in an open economy model and strongly increases the value of creating new establishments in a boom. |
| JEL: | E32 F41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26212&r=all |
| By: | Tomoo Kikuchi; Kazuo Nishimura; John Stachurski; Junnan Zhang |
| Abstract: | We show that competitive equilibria in a range of useful production chain models can be recovered as the solutions to a class of dynamic programming problems. Bringing dynamic programming to bear on the equilibrium structure of production chains adds analytical power and opens new avenues for computation. In addition, the dynamic programming problem that we use to explore production chains is of interest in its own right, since it provides new optimality results for intertemporal choice in an empirically relevant setting. |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1908.10557&r=all |
| By: | Michał Rubaszek (SGH Warsaw School of Economics) |
| Date: | 2019–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_024&r=all |