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on Dynamic General Equilibrium |
| By: | Yang Liu (University of Hong Kong); Amir Yaron (Wharton-University of Pennsylvania); Lukas Schmid (Duke University) |
| Abstract: | US government bonds exhibit many characteristics often attributed to safe assets: They are very liquid and lenders readily accept them as collateral. Indeed, a growing literature documents significant convenience yields, perhaps due to liquidity, in scarce US Treasuries, suggesting that rising Treasury supply and government debt comes with a declining liquidity premium and a fall in firms' relative cost of debt financing. In this paper, we empirically document a dual role for government debt. Through a liquidity channel, an increase in government debt improves liquidity and lowers liquidity premia by facilitating debt rollover, thereby reducing credit spreads. Through an uncertainty channel, however, rising government debt creates policy uncertainty, raising credit spreads and default risk premia. We interpret and quantitatively evaluate these two channels through the lens of a general equilibrium asset pricing model with risk-sensitive agents subject to liquidity shocks, in which firms issue defaultable bonds and the government issues tax-financed bonds that endogenously enjoy liquidity benefits. The calibrated model generates quantitatively realistic liquidity spreads and default risk premia, in line with historical US debt policies and low corporate default rates. Quantitatively, our model suggests that while rising government debt reduces liquidity spreads, it not only crowds out corporate debt financing, and therefore, investment, but also creates uncertainty reflected in endogenous tax volatility, credit spreads, and risk premia, and ultimately consumption volatility. Therefore, increasing safe asset supply can be risky. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1418&r=all |
| By: | Nobuhide Okahata (Ohio State University) |
| Abstract: | The increasing availability of micro data has led researchers to develop increasingly rich heterogeneous agent models. Solving these models involves nontrivial computational costs. The continuous-time solution method proposed by Ahn, Kaplan, Moll, Winberry, and Wolf (NBER Macroeconomics Annual 2017, volume 32) is dramatically fast, making feasible the solution of heterogeneous agent models with aggregate shocks by applying local perturbation and dimension reduction. While this computational innovation contributes enormously to expanding the research frontier, the essential reliance on the local linearization limits a class of problems researchers can investigate to the one where certainty equivalence with respect to aggregate shocks holds. This implies that it may be unsuitable for analyzing models where large aggregate shocks exist or nonlinearity matters. To resolve this issue, I propose an alternative solution method for continuous-time heterogeneous agent models with aggregate shocks by extending the Backward Induction method originally developed for discrete time models by Reiter (2010). The proposed method is nonlinear and global with respect to both idiosyncratic and aggregate shocks. I apply this method to solve a Krusell and Smith (1998) economy and evaluate its performance along two dimensions: accuracy and computation speed. I find that the proposed method is accurate even with large aggregate shocks and high curvature without surrendering computation speed (the baseline economy is solved within a few seconds). This new method is also applied to a model with recursive utility and an Overlapping Generations (OLG) model, and it is able to solve both models quickly and accurately. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1470&r=all |
| By: | Ibrahima Amadou Diallo (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper performs a comparison of the Taylor Rule and Nominal GDP Targeting by estimating a DSGE model with Bayesian techniques. The first part builds a New Keynesian DSGE model with investment adjustment costs, prices and real wages rigidities, a government sector, and imperfect competition, alongside various shocks. The second part estimates and contrasts the models using Bayesian methods on Euro Area data. The results show that the data strongly prefer the Nominal GDP Targeting Rule over the Taylor Rule. We conduct numerous robustness checks to guarantee the solidity of our results. We also provide impulse response functions evaluation of the two Monetary Policy Rules. |
| Keywords: | Nominal GDP Targeting,Taylor Rule,Bayesian Model Comparison,DSGE Model,Monetary Policy |
| Date: | 2019–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02281971&r=all |
| By: | Rasaki, Mutiu Gbade; Malikane, Christopher |
| Abstract: | The paper formulates and estimates an open economy monetary DSGE model to investigate the quantitative significance of the financial accelerator mechanism in business cycle fluctuations for African countries. We employ the Bayesian technique to evaluate the statistical importance of the financial accelerator channel in African countries. We compare the model with financial accelerator model to the model without financial accelerator. The estimation shows that financial accelerator channels are empirically important in African economies. The marginal likelihood results clearly favour the model with financial accelerator in African economies. Moreover, the results show that the financial accelerator channel dampens the expansionary effects of exchange rate depreciation in African economies. African countries should deepen their domestic debt markets to minimize their vulnerability to exchange rate shocks. |
| Keywords: | Financial accelerator, Bayesian technique, Marginal likelihood, Business cycle. |
| JEL: | C11 E32 F41 |
| Date: | 2017–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95977&r=all |
| By: | Aubhik Khan (Ohio State University); Julia Thomas (Ohio State University); Tatsuro Senga (Queen Mary University of London) |
| Abstract: | We develop a model with endogenous entry and exit in an economy subject to non-stationary shocks to aggregate total factor productivity. Firms exhibit a life-cycle consistent with microeconomic data, and our model reproduces key moments of the empirical firm age and size distribution. In this setting, persistent shocks to trend growth can drive long term reductions in business formation. The economic consequences of a persistent decline in entry grow over time and, together with "wait-and-see" effects on aggregate capital investment, can compound and protract a productivity slowdown. We apply our model to understanding the last decade of U.S. economic activity, an episode marked by slow GDP growth and persistently low entry rates and business fixed investment in the aftermath of the Great Recession. Firms vary in the permanent and transitory components affecting their productivity and in their capital stocks, and their capital adjustments are subject to one period time-to-build, alongside convex and nonconvex costs. Thus, the economy's aggregate state includes a distribution of firms over productivity and capital, and changes in this distribution have a persistent influence on economic activity. Epstein-Zin preferences and a time-varying relative price of capital goods combine to accommodate countercyclical risk premia capable of driving large changes in firm values. Following a persistent shock to trend growth, equilibrium movements in firms' stochastic discount factors imply long-run reductions in the value of entry. The resulting declines in new business formation propagate the shock's effects on investment and GDP, slowing aggregate recovery. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1453&r=all |
| By: | Pedro Brinca (Universidade Nova de Lisboa); Hans Holter (University of Oslo); Miguel Faria-e-Castro (Federal Reserve Bank of St. Louis); Miguel Ferreira (Nova SBE) |
| Abstract: | We argue that the fiscal multiplier of government purchases is increasing in the shock, in contrast to what is assumed in most of the literature: the fiscal multiplier is largest for large positive government spending shocks and smallest for large contractions in government spending. We empirically document this fact by analyzing two independent datasets and using two different empirical approaches. We find that a neoclassical, life-cycle, incomplete markets model calibrated to match key features of the US economy, including the distribution of wealth, can well explain this empirical finding. The mechanism works through the relationship between fiscal shocks, the distribution of wealth and the aggregate labor supply elasticity: liquidity constrained agents have less elastic labor supply responses to changes in future income. An increase (decrease) in government spending today acts as a negative (positive) shock to future income, as future wages will be lower (higher). A large increase (decrease) in government spending today will induce saving (borrowing) and move a larger fraction of the agents in the economy away from (towards) the borrowing limit. Analysis of micro-data confirms the mechanism. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:934&r=all |
| By: | Siddhartha Sanghi (Washington University in St. Louis) |
| Abstract: | The paper investigates the role of insurance and technological progress on the rising health inequality across income groups and its aggregate output costs for the US. We develop a continuous-time life-cycle model of an economy where individuals decide consumption-hours worked, whether to take up health insurance, when to visit a doctor, how much to invest in their health capital and whether to engage in bad behavior. A simple version of the model is able to explain about 50% of the gap in life-expectancy across income groups observed in data. In our model, consistent with the pattern in data, uninsured individuals, having deferred the treatment aren’t able to reap the benefits of the technological progress, thus resulting in poorer outcomes. The policy simulation with a plausible public health insurance scheme reduces the disparity in health outcomes to half. We use National Longitudinal Mortality Survey (NLMS), Mortality Differentials Across Communities (MDAC) and linked National Health Interview Survey (NHIS)- Medical Expenditures Panel Survey (MEPS) data to estimate the parameters of the model. As a cross-validation exercise using National Longitudinal Mortality Survey (NLMS) data, we exploit the state variation in Medicaid eligibility and find that among the working age individuals with low family income, Medicaid reduces the probability of dying by 9%. Using propensity score matching estimator, we find that private insurance reduces the probability of dying by upto 25% when compared to the uninsured. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:703&r=all |
| By: | Aubhik Khan (Ohio State University); Ben Lidofsky (Ohio State University) |
| Abstract: | We explore business cycles in overlapping generations economies driven by shocks to total factor productivity growth. Households have uncertain lifetimes and face both uninsurable earnings and employment risk. Unemployment risk is countercyclical and we allow for time-varying volatility of aggregate shocks. Households, with non-separable preferences, save using capital and the relative price of capital varies over time. This setting--with both idiosyncratic and aggregate uncertainty shocks--drives large, countercyclical risk premium and generates high levels of precautionary savings. We find that changes in precautionary savings have important implications for aggregate consumption. Persistent negative shocks to TFP growth, and increases in their uncertainty, drive large declines in consumption. This helps explain the slowdown observed since the onset of the Great Recession. An empirically consistent, moderate shock to TFP growth rates implies a large and persistent fall, against trend, in aggregate consumption. Moreover, a rise in aggregate uncertainty reconciles the recovery in TFP growth rates with a more protracted decline in consumption. Uninsurable income risk helps shape the aggregate response of the economy over the business cycle. Changes in households' precautionary savings motives not only affect the distribution of wealth, it also changes the volatility of aggregate consumption and investment. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1459&r=all |
| By: | Christopher Clayton (Harvard University); Andreas Schaab (Harvard University); Xavier Jaravel (London School of Economics) |
| Abstract: | This paper investigates the implications of heterogeneous price rigidities across sectors for the distributional and aggregate effects of monetary policy. First, we identify and characterize analytically a new set of earnings and expenditure channels of monetary policy that emerge in the presence of sectoral heterogeneity. Second, we establish empirically that (i) prices are more rigid in sectors selling to college-educated households, (ii) prices are more rigid in sectors employing college-educated households, and (iii) sectors that employ college-educated households also sell more to these households. These new facts suggest that monetary policy stabilizes sectors that matter relatively more for college-educated households, due to an expenditure channel (from (i)), an earnings channel (from (ii)), and their amplification by feedback loops (from (iii)). Finally, we develop a multi-sector incomplete-markets Heterogeneous Agent New Keynesian model, in which households of different education levels work and consume in different sectors. We quantify the aggregate and distributional effects from heterogeneous price rigidities using this model. In the baseline calibration, we find that the consumption of college-educated households is 22% more sensitive to monetary policy shocks as that of non-college households, while the aggregate real effect of monetary policy is 5% stronger than with homogeneous price rigidities. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1480&r=all |
| By: | Jamie Hentall MacCuish (University College London) |
| Abstract: | This paper presents evidence that incorporating costly thought, modelled with rational inattention, solves two well-established puzzles in the retirement literature. The first puzzle is that, given incentives, the extent of bunching of labour market exits at legislated state pension ages (SPA) seems incompatible with rational expectations (e.g. Cribb, Emmerson, and Tetlow, 2016). Adding to the evidence for this puzzle, this paper includes an empirical analysis focusing on whether liquidity constraints can account for this bunching and finds they cannot. The nature of this puzzle is clarified by exploring a life-cycle model with rational agents that does match aggregate profiles. This model succeeds in matching these aggregates only by overestimating the impact of the SPA on poorer individuals whilst underestimating its impact on wealthier people. The second puzzle is that people are often mistaken about their own pension provisions (e.g. Gustman and Steinmeier, 2001). Concerning this second puzzle, I incorporate rational inattention to the SPA into the aforementioned life-cycle model, thus allowing for mistaken beliefs. To the best of my knowledge, this paper is the first to incorporate rational inattention into a life-cycle model. Rational inattention not only improves the aggregate fit of the data but better matches the response of participation to the SPA across the wealth distribution, hence simultaneously offering a resolution to the first puzzle. This paper researches these puzzles in the context of the ongoing reform to the UK female state pension age |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:336&r=all |
| By: | Jesper Bagger (Royal Holloway, University of London); Kazuhiko Sumiya (Royal Holloway, University of London); Mads Hejlesen (Aarhus University); Rune Majlund Vejlin (Aarhus University) |
| Abstract: | We study the impact of labor income taxation on workers' job search behavior and the implications it has for the equilibrium allocation of labor in a complete markets equilibrium on-the-job search model with two-sided heterogeneity, endogenous job search effort and hiring intensity, equilibrium wage formation, and firm entry and exit. By appropriating part of the gain from finding a better paid job, income taxation reduces the return to job search effort, and distorts workers' job search effort, which, in turn, distorts the equilibrium allocation of labor. The model is estimated on Danish matched employer-employee data, and is used to evaluate a series of tax reforms in Denmark in the 1990s and 2000s. We find that these income tax reforms increased aggregate productivity by 2.2% through improved labor allocation, provide a novel structural decomposition of the elasticity of taxable labor income, and to identify a Pareto optimal income tax reform. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:841&r=all |
| By: | YiLi Chien (Federal Reserve Bank of St. Louis); Yi Wen (Federal Reserve Bank of St. Louis) |
| Abstract: | We build a tractable infinite-horizon Aiyagari-type model with quasi-linear preferences to address a set of long-standing issues in the optimal Ramsey taxation literature. The tractability of our model enables us to analytically establish several strong and novel results: (i) The optimal capital tax is exclusively zero in a Ramsey steady state regardless of the modified golden rule and government debt limits. (ii) Along the transition path toward a Ramsey steady state, optimal capital tax depends positively on the elasticity of intertemporal substitution. (iii) When a Ramsey steady state (featuring a non-binding government debt limit) does not exist but is erroneously assumed to exist, the modified golden rule always "holds" and the implied "optimal" long-run capital tax is strictly positive, reminiscent of the result obtained by Aiyagari (1995). (iv) Whether the modified golden rule holds depends critically on the government's capacity to issue debts, but has no bearing on the planner's long-run capital tax scheme. (v) The optimal debt-to-GDP ratio in the absence of a binding debt limit, however, is determined by a positive wedge times the modified-golden-rule saving rate; the wedge is decreasing in the strength of the individual self-insurance position and approaches zero when the idiosyncratic risk vanishes or markets are complete. The key insight behind our results is the Ramsey planner's ultimate concern for self-insurance. Since taxing capital in the steady state permanently hinders individuals' self-insurance positions, the Ramsey planner prefers (i) taxing capital only in the short run and (ii) issuing debt rather than imposing a steady-state capital tax to correct the capital-overaccumulation problem under precautionary saving motives. Thus, in sharp contrast to Aiyagari's argument, permanent capital taxation is not the optimal tool to achieve aggregate allocative efficiency despite overaccumulation of capital, and the modified golden rule can fail to hold in a Ramsey equilibrium whenever the government encounters a debt-limit. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:258&r=all |
| By: | Dan Cao (Georgetown University); Guangyu Nie (Shanghai University of Finance and Economics); Wenlan Luo (Tsinghua University) |
| Abstract: | In this paper, we build a nonlinear two-sector DSGE model with capital accumulation, in which the Zero Lower Bound (ZLB) of interest rate and the collateral constraint are occasionally binding. We show the interaction of ZLB and the deleveraging cycle triggered by a binding collateral constraint can be a powerful mechanism in exacerbating the financial crisis as well as generating the prolonged liquidity trap and stagnation after the crisis. In particular, a binding ZLB can be triggered by capital over-accumulation, and when ZLB is binding, output is decreasing in capital stock. We also find an equilibrium does not exist when the capital stock is too high, while the existence of equilibrium can be restored by adding the adjustment cost of capital into the model. In our numerical results, we find the amplification effect of the collateral constraint is modest when the ZLB is not binding, but is quantitatively large when the ZLB is binding. In addition, with collateral constraint and ZLB, the recovery of the economy is slow since it takes longer for the borrowers to restore their net worth, and due to insufficient demand, the duration of the liquidity trap is longer. Lastly, in a society with better access to the credit market, the borrowers use higher leverage ex ante, and the average duration of ZLB is longer once the economy is hit by adverse shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:961&r=all |
| By: | Sungki Hong (Federal Reserve Bank of St Louis) |
| Abstract: | This paper studies the importance of firm-level price-markup dynamics for business cycle fluctuations. The first part of the paper uses state-of-the-art IO techniques to measure the behavior of markups over the business cycle at the firm level. I find that markups are countercyclical with an average elasticity of -0.9 with respect to real GDP, in line with the earlier industry-level evidence. Importantly, I find substantial heterogeneity in markup cyclicality across firms, with small firms having significantly more countercyclical markups than large firms. In the second part of the paper, I develop a general equilibrium model that matches these empirical findings and explore its implications for business cycle dynamics. In particular, I embed customer capital (due to deep habits as in Ravn, Schmitt-Grohe, and Uribe, 2006) into a standard Hopenhayn (1992) model of firm dynamics with entry and exit. A key feature of the model is that a firm's decision about markups becomes dynamic -- firms accumulate customer capital in the periods of fast growth by charging low markups, and choose to exploit it by charging high markups in the downturns. In particular, during recessions, the endogenous higher exit probability for smaller firms implies that they place lower weight on future profits, leading them to charge higher markups. This mechanism serves to endogenously increase the dispersion of firm sales and employment in recessions, a property that is consistent with the data. I further show that the resulting input misallocation amplifies both the volatility and persistence of the exogenous productivity shocks driving the business cycle. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:959&r=all |
| By: | Juergen Jung (Towson University); Chung Tran (Australian National University) |
| Abstract: | We study the optimal progressivity of personal income taxes in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our analysis is based on a large-scale overlapping generations general equilibrium model that is calibrated to the US economy. Our results indicate that the presence of health risk and health insurance has a strong effect on the amount of redistribution and social in- surance provided by progressive income taxes. In an environment with a non-universal health insurance system, such as the US system, the optimal income tax system is highly progressive in order to provide a sufficient level of redistribution to unhealthy low income individuals. The total welfare gain from optimizing the progressivity level is 5.6 percent in compensating lifetime consumption. More inclusive health insurance systems, such as Medicare for all, lead to large decreases in the optimal level of tax progressivity. When health expenditure risk is eliminated, the optimal income tax code becomes more similar to the findings of previous studies that used models without health risk. Our findings highlight the quantitative importance of accounting for the interdependence of health insurance and income taxes when designing optimal income tax policies. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:620&r=all |
| By: | Alexander Bick (Arizona State University); David Lagakos (University of California, San Diego); Hitoshi Tsujiyama (Goethe University Frankfurt); Nicola Fuchs-Schündeln (Goethe University Frankfurt) |
| Abstract: | Why are aggregate hours worked per adult lower in rich countries than in poor countries? Why is the individual hours-wage gradient positively sloped within rich countries and negatively sloped within poor countries? To answer these questions we build a model in which hours worked at the individual and aggregate level are shaped primarily by two distinct forces. The first force is preferences in which income effects dominate substitution effects in labor supply. The second force is the larger tax-and-transfer systems of richer countries, which lowers labor supply of all workers, particularly those with the lowest earning ability. In spite of its simplicity, the model performs well in quantitatively explaining the cross-country patterns of hours worked at the individual and aggregate level. Counterfactual exercises using the model predict that income effects are the most relevant factor for understanding how aggregate hours worked vary with GDP per capita across countries. Both income effects and tax-and-transfer systems are necessary to explain why individual hours-wage gradients turn from negative to positive with a country’s development level. These conclusions hold in an extended model that includes capital accumulation, self-employment, transitory income shocks and extensive and intensive labor supply decisions. We conclude that ignoring either one of the two forces in models of aggregate labor supply could lead to misleading inferences about the importance of income effects or taxation in determining aggregate hours worked. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1363&r=all |
| By: | Yongheng Deng (University of Wisconsin-Madison); Jing Wu; Yang Tang (Nanyang Technological University); ping wang (Washington University in St.Louis) |
| Abstract: | Housing and land prices in China have experienced dramatic growth in the past decade. In conjunction with the rapid growth, housing and land price dispersion across Chinese cities have also become more dispersed. This paper intends to explore how market frictions affect the aggregate as well as the spatial distribution of prices. We first document the spatial variations of housing and land market frictions. Larger cities receive less housing and land subsidizes. Land frictions are improving over time. We then embed both frictions into a dynamic competitive spatial equilibrium framework featured with endogenous rural-urban migration. The calibrated model can reasonably mimic the price growth in the data. The counter-factual results suggest that the frictionless economy leads to a slower housing price growth but faster land price growth. In addition, land frictions tend to inhibit land price growth while housing price growth will slow down if only housing frictions are eliminated. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1351&r=all |
| By: | Don schlagenhauf (federal reserve bank of st louis) |
| Abstract: | Conservative politicians have advocated tax cuts for business as a way to foster faster growth. In 2012, the State of Kansas sought to boost economic growth by enhancing investment spending and thus employment with a sweeping business tax-cut program. This program lowered the (state) tax rate on pass-through business income to zero. The Kansas Tax Experiment is widely viewed as a dismal failure, and a cautionary tale for all future tax cuts. In this paper, we carefully analyze this policy in terms of a dynamic stochastic occupational choice model with heterogeneous firms. The model explicitly allows firms to enter and exit as well as to allow firms to make a decision on their legal form of organization (LFO). This is important as the tax cut in Kansas targeted pass-through firms rather that C-corporate firms. Because firms of different legal forms face different tax obligations, the lowering of the tax rate for pass-through firms means lowering the personal income tax for this type of firm. C-corporate firms may switch their LFO to take advantage of this favorable tax treatment. The Kansas tax policy distort firms LFO impacting the allocation of capital among firms. The model calibrated to the Kansas economic environment using data obtained from the State of Kansas Department of Revenue. When the Kansas tax policy is studied, we find that the economy experiences sluggish growth in both output and employment, while government deficits sharply increase. This is the same result that Kansas experienced, and is explained by pass-through firms facing tighter capital constraints and a decline in capital formation. In contrast, a lower corporate income tax rate leads to an expansion in the C corporate sector resulting an increase in output, consumption, and capital formation. Moderate job growth follows. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:392&r=all |
| By: | Juan Hatchondo (University of Western Ontario); Francisco Roch (International Monetary Fund); Leonardo Martinez (International Monetary Fund) |
| Abstract: | We propose a tractable algorithm for solving quantitative models of sovereign default with constrained efficient borrowing (i.e., with commitment to a borrowing policy but not to a default policy). Our algorithm utilizes the government's optimality condition that, compared to the Markov condition, only requires one additional state variable that summarizes the effect of current borrowing on past consumption. Comparing the simulations of the model with and without commitment, we find that the overindebtedness chosen by the Markov government is small but accounts for most of the default risk. Higher bond prices with commitment imply that the Markov government is overindebted but underborrows. These results underscore the importance of governments' efforts to limit their future policies with fiscal rules and independent fiscal councils. Commitment does not affect significantly the procyclicality of fiscal policy, which casts doubts on the emphasis on countercyclical fiscal policy in existing fiscal rules. The government may commit to debt buybacks, showing that such policies may be part of optimal deleveraging plans. Our algorithm could be extended to study other aspects of debt management in which time inconsistency plays a role. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:899&r=all |
| By: | Kathleen McKiernan (Vanderbilt University) |
| Abstract: | As populations age, countries across the globe are dealing with the issue of how to fund retirement consumption for their workers. The design of Social Security programs is more difficult when the country also exhibits an informal economy in which workers avoid the taxation of the government and are not entitled to its benefits. In this paper, I study the example of Chile–a country that transitioned from a pay-as-you-go Social Security system to a system of private, individual retirement accounts in 1981 and also exhibits a significant informal sector– in order to quantify the transitional welfare impact of Social Security privatization when workers have the option to evade the public system through informality. I construct an OLG model which allows households to split working time between a taxed formal sector, an un-taxed informal sector, and home production. I find large long-run welfare gains of roughly 10 and 15 percent for low and high-productivity workers, respectively. However, these gains come at the expense of losses for two groups: those low-productivity workers who are retired at the time of the reform and those high-productivity workers within 5 years of retirement at the time of the reform. The presence of informality has two conflicting impacts: (1) including an outside option to formal work leads to smaller long-run transfers as government revenue is lower due to substitution from the formal to the informal sector, and (2) the privatization of the Social Security system causes wage growth that informal workers can receive without facing the distortions of any remaining taxation. Quantitative results indicate that these conflicting effects roughly cancel one another out and lead to long-run welfare gains that are similar to those in an economy without informality. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:389&r=all |
| By: | Grey Gordon (FRB Richmond); Pablo Guerron-Quintana (Boston College) |
| Abstract: | Empirical research on sovereign default shows "hard defaults"---defined as defaults with above-average haircuts---have worse outcomes for GDP growth than "soft defaults" and that sovereigns continue to borrow post-default. We propose a model capable of capturing these and other empirical regularities. In it, the sovereign makes period-by-period decisions of whether to make the prescribed debt payments or not. Hard defaults arise when the sovereign repeatedly \emph{chooses} to not pay over the course of many years. Unlike in the standard model, default does not exogenously result in autarky. Rather, autarky-like conditions arise endogenously as the shocks leading to default result in higher spreads than the sovereign is willing to pay. The calibrated model predicts that growth shocks are the main determinant of whether default is hard or soft. We use the model and the particle filter to decompose how much of the empirical correlation between default intensity and output growth is selection and how much is causal. Decomposition of model forces shows that one-third (one-tenth) of hard (soft) defaults are explained by actual default costs with the rest explained by selection. A historical decomposition of shocks reveals that transitory shocks and trend shocks were the primary drivers of the Argentinean defaults in the 1980s and the 2000s, respectively. Estimated haircuts were 20 percentage points higher in the 2001 default than in the one in the 1980s, consistent with the data. Our estimated productivity shocks coincide with major events such as the convertibility plan and the Asian crisis. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:412&r=all |
| By: | Adrien Auclert (Stanford University); Paul Goldsmith-Pinkham (Yale University); Will Dobbie (Princeton University) |
| Abstract: | This paper argues that the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize the level of employment during the Great Recession. We begin by documenting that states with more and less generous bankruptcy exemptions had statistically identical employment outcomes during the 2001-2007 period. Starting in 2008, however, states with more generous bankruptcy exemptions had significantly smaller declines in local non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these responses as the causal effect of the debt relief provided by the consumer bankruptcy system on employment across states, and develop a general equilibrium model to recover the aggregate effect of this debt relief. The model yields three key results. First, substantial nominal rigidities are required to rationalize our reduced form cross-state estimates. Second, with monetary policy at the zero lower bound, traded good demand spillovers from more generous to less generous states boosted employment everywhere. Finally, the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:355&r=all |
| By: | Margherita Borella (Unversity of Torino and and CeRP-Collegio Carlo Alberto); Fang Yang (Louisiana State University); Mariacristina De Nardi (Minneapolis Fed, UCL, CEPR, and NBER) |
| Abstract: | We show that white, non-college-educated Americans born in the 1960s face lower life expectancies and higher medical expenses compared to those born in the 1940s. In addition, men's wages for each unit of human capital declined much more than women's across these cohorts. We calibrate a life-cycle model of couples and singles to match the labor market and savings outcomes of the white, non-college-educated 1960s cohort and use it to evaluate the effects of these changes. The changes in wages depressed the labor supply of men and increased that of women, especially in married couples. The decrease in life expectancy reduced retirement savings but the increase in out-of-pocket medical expenses increased them by more. Single men experienced the largest welfare losses, requiring a one-time asset compensation corresponding to 12.5% of the present discounted value of their earnings. Single women experienced a 7.2% welfare loss. Couples had a welfare loss of 8%. Lower wages explain 47-58% of these losses, shorter life expectancies explain 25-34%, and higher medical expenses account for the rest. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:206&r=all |
| By: | Bruno Biais (HEC); Albert Menkveld (VU University Amsterdam); Catherine Casamatta (Toulouse School of Economics); Christophe Bisière (Université Toulouse Capitole); Matthieu Bouvard (McGill University, Desautels Faculty) |
| Abstract: | We offer an overlapping generations equilibrium model of cryptocurrency pricing and confront it to new data on bitcoin transactional benefits and costs. The model emphasizes that the fundamental value of the cryptocurrency is the stream of net transactional benefits it will provide, which depend on its future prices. The link between future and present prices implies that returns can exhibit large volatility unrelated to fundamentals. We construct an index measuring the ease with which bitcoins can be used to purchase goods and services, and we also measure costs incurred by bitcoin owners. Consistent with the model, estimated transactional net benefits explain a statistically significant fraction of bitcoin returns. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:360&r=all |
| By: | Tiago Cavalcanti (University of Cambridge); Bruno Martins (Central Bank of Brazil); Cezar Santos (Fundacao Getulio Vargas); Joseph Kaboski (University of Notre Dame) |
| Abstract: | We study how dispersion in financing cost and financial contract enforcement affect entrepreneurship, firm dynamics and productivity. We use employee-employer administrative linked data combined with data on financial transactions of all formal firms in Brazil to show how interest rate spreads vary with firm size, age, among other characteristics. We present a general equilibrium model with endogenous occupational choice based on a modified version of Buera, Kaboski, and Shin (2011), which are consistent with those facts of the the credit market. We then provide evidence on the allocative effects of financial reforms. Eliminating dispersion in financing cost leads to more credit and higher output due to cheaper credit for productive agents with low assets. In addition, abstracting from heterogeneity in interest rate spreads understates the impacts of financial reforms that improve the enforcement of credit contracts. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1576&r=all |
| By: | robert barsky (Federal Reserve Bank of Chicago); Christoph Boehm (UT Austin); Christopher House (University of Michigan); Miles Kimball (University of Colorado at Boulder) |
| Abstract: | We analyze monetary policy in a New Keynesian model with durable and non-durable goods each with a separate degree of price rigidity. The model behavior is governed by two New Keynesian Phillips Curves. If durable goods are sufficiently long-lived we obtain an intriguing variant of the well-known “divine coincidence.” In our model, the output gap depends only on inflation in the durable goods sector. We then analyze the optimal Taylor rule for this economy. If the monetary authority wants to stabilize the aggregate output gap, it places much more emphasis on stabilizing durable goods inflation (relative to its share of value-added in the economy). In contrast, if the monetary authority values stabilizing aggregate inflation, then it is optimal to respond to sectoral inflation in direct proportion to their shares of economic activity. Our results flow from the inherently high interest elasticity of demand for durable goods. We use numerical methods to verify the robustness of our analytical results for a broader class of model parameterizations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:264&r=all |
| By: | Behzad Diba (Department of Economics, Georgetown University); Olivier Loisel (CREST (ENSAE)) |
| Abstract: | We develop a model of monetary policy with a simple departure from the basic New Keynesian (NK) model. In this model, the central bank sets independently the interest rate on bank reserves and the nominal stock of bank reserves. As long as demand for real reserves is not fully satiated, the model delivers local-equilibrium determinacy under permanently exogenous monetary-policy instruments. As a result, it does not share the puzzling and paradoxical implications of the basic NK model under a temporary interest rate peg (e.g., in the context of a liquidity trap). More specifically, it offers a resolution of the “forward-guidance puzzle,” a related puzzle about fiscal multipliers, and the “paradox of flexibility,” even for an arbitrarily small departure from the basic NK model. It still solves or attenuates these puzzles and that paradox for a vanishingly small departure, and also solves the “paradox of toil” in that case. We argue that our non-satiation assumption is reasonable for analyzing the role of monetary policy during the Great Recession. |
| Keywords: | New Keynesian puzzles, forward guidance, interest on reserves, price determinacy |
| JEL: | E52 E58 |
| Date: | 2019–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~19-19-05&r=all |
| By: | Jesus Fernandez-Villaverde; Francesco Zanetti; Federico Mandelman; Yang Yu |
| 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. |
| Keywords: | Aggregate fluctuations, strategic complementarities, macroeconomic volatility, government spending |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2019–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:880&r=all |
| By: | Ngotran, Duong |
| Abstract: | The author develops a dynamic model with two types of electronic money: reserves for transactions between bankers and zero-maturity deposits for transactions in the non-bank private sector. Using this model, he assesses the efficacy of unconventional monetary policy since the Great Recession. After quantitative easing, keeping the interest on reserves near zero too long might create deflation. The central bank can safely get out of the "low rate-cum-deflation" trap by "raising rate and raising money supply". |
| Keywords: | interest on reserves,quantitative easing,unwinding QE,e-money,excess reserves,raise rate raise money supply |
| JEL: | E4 E5 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201949&r=all |
| By: | Sunha Myong (Singapore Management University); Jungho Lee (Singapore Management University) |
| Abstract: | We study a college-financing problem by a family when children can self-finance by working. We develop and estimate a model in which children's human-capital accumulation depends on both monetary and time investment. The model explains how endogenous interactions between parental transfer, student loans, and self-financing lead to heterogeneous human-capital accumulation during college. Consumption smoothing is an important motive for self-financing if children can borrow only for education but not for consumption (the tied-to-investment constraint). When the constraint binds, parental transfer can increase children's monetary and time investment by reducing children's labor supply during college. This effect is more pronounced among high-ability students, and the model predicts the parental transfer in college financing increases by child ability, as observed in the data. Heterogeneous working hours by college students explain 14\% of the standard deviation of the within-group-income inequality among four-year-college attendees. Work-study program with a cap in working hours can effectively reduce income inequalities without substantial crowd-out by parents. Expanding loans for consumption are more effective in reducing income inequalities, but it results in substantial crowd-out by parents. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:106&r=all |
| By: | George Alessandria (University of Rochester); Carter Mix (University of Rochester) |
| Abstract: | We evaluate the aggregate effects of changes in trade barriers in a model in which trade re- sponds gradually to changes in trade policy and trade policy changes are gradual. Our model offers insights into how changing trade barriers affects the economy and how business cycle shocks can affect trade. We find that a fall in current trade barriers has an expansionary effect while a decline in future trade costs can be recessionary on impact. We find that cancelling agreed upon declines in barriers to be expansionary in the short-run but substantially lowers growth over the medium run. We also find that even controlling for composition, trade tends to lag the recovery in demand for tradables. We capture the growth and trade factors driving the economy with movements in productivity, investment efficiency, the labor wedge, and trade costs. We estimate the model to match the key time series on trade integration and business cycles since 1970. Our estimation yields a path for current and expected future trade barriers and allows us to decompose the source of aggregate fluctuations and integration. We find that trade barriers have been expected to decline but that these declines have been repeatedly delayed. We find that aside from these delays that the outlook on future trade barriers did not change much between 2012 and 2016, but deteriorated substantially since. We also decompose the sources of the trade and growth slowdowns since the Great Recession. We show that data on export participation is helpful to identify future trade costs when exporting is a dynamic decision. We use our model to consider the impact of alternative unilateral and bilateral changes in trade barriers being contemplated. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:545&r=all |
| By: | David Koll (European University Institute); Dominik Sachs (LMU Munich); Fabian Stuermer-Heiber (LMU Munich); Helene Turon (University or Bristol) |
| Abstract: | We study the long-term fiscal implications of childcare subsidies through their impact on maternal labour supply. Taking human capital accumulation into account, we explicitly capture life-cycle career aspects in a dynamic structural household model of female labour supply and childcare decisions: higher labour supply of mothers today can result in higher future earnings. In our dynamic structural model, we allow households to be heterogeneous in their taste for home produced childcare, their taste for leisure and in their access to informal childcare (e.g. by grandparents). Using German survey data, we provide a structural estimate of the degree to which childcare subsidies are dynamically self-financing through higher labour income tax revenue. Further, we explore how the marginal fiscal returns of childcare subsidies depend on the group of families targeted (e.g. low income, single parents, number of children). |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1081&r=all |
| By: | Juan Cordoba (Iowa State University); Marla Ripoll (University of Pittsburgh); Xiying Liu (Economics and Management School of Wuhan University) |
| Abstract: | We investigate what accounts for the observed international differences in schooling and fertility, and draw lessons for the underlying sources of cross-country income differences. For this purpose, we extend a life-cycle dynastic model to include features relevant for schooling and fertility choices. Our approach allows for country-specific human capital technologies in addition to differences in TFP, public education policies, and demographic factors. We find that differences in human capital production functions, specifically in the degree of complementarity of educational investments, are key to match schooling data, and result in novel estimates of human capital stocks and TFP levels. According to the model, differences in TFP, public education spending per pupil and retiree survival rates are the most important factors explaining the international dispersion of fertility. Differences in the number of years of public education provision and working-age survival rates are key determinants of the schooling dispersion. Our model suggests that human capital policies are key for development. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:156&r=all |
| By: | Hertweck, Matthias S.; Lewis, Vivien; Villa, Stefania |
| Abstract: | We introduce two types of effort into an otherwise standard labor search model to examine indeterminacy and sunspot equilibria. Variable labor effort gives rise to increasing returns to hours in production. This makes workers more valuable and contributes to self-fulfilling profit expectations, raising the likelihood of indeterminacy. Variable search effort makes workers search more intensively in a tighter labor market, which alleviates congestion and reduces the likelihood of indeterminacy. Indeterminacy disappears completely when vacancy posting costs are replaced with hiring costs. |
| Keywords: | determinacy,effort,hours,labor market frictions,search intensity |
| JEL: | E23 E24 E32 E64 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:292019&r=all |
| By: | Robert Calvert Jump (University of the West of England, Bristol); Cars Hommes (University of Amsterdam); Paul Levine (University of Surrey) |
| Abstract: | We present a New Keynesian model in which a fraction n of agents are fully rational, and a fraction 1 − n of agents are bounded rational. After deriving a simple reduced form, we demonstrate that the Taylor condition is sufficient for determinacy and stability, both when the proportion of fully rational agents is held fixed, and when it is allowed to vary according to reinforcement learning. However, this result relies on the absence of persistence in the monetary policy rule, and we demonstrate that the Taylor condition is not sufficient for determinacy and stability in the presence of interest rate smoothing. For monetary policy rules that imply indeterminacy, we demonstrate the existence of limit cycles via Hopf bifurcation, and explore a rational route to randomness numerically. Our results support the broader literature on behavioural New Keynesian models, in which the Taylor condition is known to be a useful guide to monetary policy, despite not always being sufficient for determinacy and/or stability. |
| Date: | 2018–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:20181807&r=all |
| By: | François Fontaine (Paris School of Economics); Janne Nyborg Jensen (Aarhus University); Rune Vejlin (Aarhus University) |
| Abstract: | We use administrative data on individual balance sheets in Denmark to document how an individual's financial position affects job search behavior. We look at the effect of wealth at the entry into unemployment on the exit rate from unemployment, as well as the effect on the subsequent job stability. We show that if the distinction between liquid and illiquid net wealth is important, the decomposition of wealth between asset and liabilities is key to measure the effect of liquidity on job search behaviors. We show that liquid assets reduce the probability of becoming re-employed, but we do not see an effect of liquid liabilities or the illiquid wealth components, while interest payments speed up re-employment. We show that these stylized facts can be rationalized by a job search model where individuals can simultaneously save and borrow and where we make the distinction between the stock of liabilities and the stock of assets. In this model, greater indebtedness, by lowering net wealth, damages the ability to borrow in employment and thus lowers the consumption level during the first periods of re-employment. This lowers the return of job search and thus the search intensity. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:949&r=all |
| By: | Schmöller, Michaela; Spitzer, Martin |
| Abstract: | This paper analyses the procyclicality of euro area total factor productivity and its role in business cycle amplification by estimating a medium-scale DSGE model with endogenous productivity mechanism on euro area data. Total factor productivity evolves endogenously as a consequence of costly investment in R&D and adoption of new technologies. We find that the endogeneity of TFP induces a high degree of persistence in the euro area business cycle via a feedback mechanism between overall economic conditions and investment in productivity-enhancing technologies. As to the sources of the euro area productivity slowdown, we conclude that a decrease in the efficiency of R&D investment is among the key factors generating the pre-crisis productivity slowdown, while starting from the Great Recession an increase in liquidity demand is identified as the most important driving force. The endogenous technology mechanism further exerts a dampening effect on the inflation response over the business cycle which helps rationalizing both the negligible fall in inflation during the Great Recession and the sluggish increase of inflation in the subsequent recovery. |
| JEL: | E24 E32 O31 |
| Date: | 2019–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2019_021&r=all |
| By: | Shutao Cao (Bank of Canada); Wei Dong (Bank of Canada) |
| Abstract: | Commodity price fluctuations have macroeconomic implications not only through resource reallocation, currency value changes and monetary policy reaction, but also through production network linkages. In this paper, we study the propagation of commodity price shocks in a multiple-sector general equilibrium model for a small open economy that exports commodity. In the small open economy, a shock to commodity prices is both aggregate and sectoral. As an aggregate shock, commodity price movements lead to changes in the value of domestic currency, impacting the macro economy due to its size and triggering monetary policy responses. As a sectoral shock, changes in commodity price impact non-commodity sectors in two aspects: impacting demand for the upstream goods and impacting the cost of production in the downstream sectors. Calibrated to the Canadian data, our model suggests that, following a positive shock to commodity prices, production and exports in the commodity sector rises, while the net impact on the rest of the economy's production is negative. The aggregate gross domestic output increases primarily owing to growth in investment and improved trade balance. The export connection with the rest of the world in the open economy production network plays an important role in the process of adjusting to a commodity price shock, while the import connections do not matter nearly as much. We show that these propagation channels of shocks to commodity price explain a large fraction of drop in Canadian real GDP in 2015 following the sharp decline in commodity prices that started in late 2014. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:612&r=all |
| By: | Francesco Sergi (University of the West of England, Bristol) |
| Abstract: | This contribution to the history of the economic thought aims at describing how “Econometric Policy Evaluation: A Critique” (Lucas, 1976) has been interpreted through four decades of debates. This historical appraisal clarifies how Lucas’s argument is currently understood and discussed within the dynamic stochastic general equilibrium (DSGE) approach. The article illustrates how two opposite interpretations of the Lucas Critique arose in the early 1980s. On the one hand, a “theoretical interpretation” has been championed by the real business cycle (RBC) approach; on the other hand, an “empirical interpretation” has been advocated by Keynesians. Both interpretations can be understood as addressing a common question: Do microfoundations imply parameters’ stability? Following the RBC theoretical interpretation, microfoundations do imply stability; conversely, for Keynesians, parameters’ stability (or instability) should be supported by econometric evidence rather than theoretical considerations. Furthermore, the article argues that the DSGE approach represent a fragile compromise between these two opposite interpretations of Lucas (1976). This is especially true for the recent literature criticizing the DSGE models for being vulnerable to the Lucas Critique. |
| Date: | 2018–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:20181806&r=all |
| By: | Ernesto Pasten; Raphael Schoenle; Michael Weber |
| Abstract: | We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real effects. Quantitatively, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects. Heterogeneity in input-output linkages and consumption shares contribute only marginally to real effects but alter substantially the identity and contribution of the most important sectors to the transmission of monetary shocks. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and for the real effects of nominal shocks and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:842&r=all |
| By: | Maximiliano Dvorkin (Federal Reserve Bank of St. Louis); Emircan Yurdagul (Universidad Carlos III de Madrid); Horacio Sapriza (Federal Reserve Board); Juan Sanchez (Federal Reserve Bank of St. Louis) |
| Abstract: | Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news may play an important role in these episodes. The empirical evidence also shows that a news shock has a significantly larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. We develop a quantitative model of news and sovereign debt default with endogenous maturity choice that generates impulse responses very similar to the empirical estimates. The model allows us to interpret the empirical evidence and to identify key parameters. We find that, first, the increase in sovereign yield spreads around a debt crisis episode is due mostly to the lower expected productivity following a bad news shock, and not to the borrowing choices of the government. Second, a shorter debt maturity increases the chance that bad news shocks trigger a debt crisis. Third, an increase in the precision of news allows the government to improve its debt maturity management, especially during periods of high financial stress, and thus face lower spreads and default risk while holding the amount of debt constant. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:918&r=all |
| By: | Alan Finkelstein-Shapiro (Tufts University); Victoria Nuguer (Inter-American Development Bank) |
| Abstract: | The Global Financial Crisis (GFC) of 2008-2009 highlighted the role of the banking system as an important propagation mechanism of U.S. financial shocks to emerging economies (EMEs). Recent evidence shows that compared to advanced economies (AEs), emerging economies (EMEs) exhibit considerably lower levels of firm participation in the domestic banking system, leading several EMEs to promote greater firm domestic financial participation. What are the implications of this greater firm participation in the banking system for the response to external financial shocks, such as those experienced by EMEs during the GFC? How should cyclical financial policies adapt to increasingly greater levels of firm domestic financial participation? We build a two-country RBC model with banking frictions, endogenous firm entry, and limited domestic financial participation by firms. Using the model, we show that greater firm financial participation in EMEs limits the effect of adverse external financial shocks on EME financial and macro aggregates, with endogenous firm entry playing a critical role in the volatility-reducing effects of greater firm financial participation in EMEs. We provide empirical evidence for EMEs that broadly supports our model findings and mechanisms. More broadly, our findings suggest that cyclical financial policies aimed at stabilizing credit market fluctuations may need to adapt to the average degree of domestic financial participation. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1479&r=all |
| By: | Alexander Ludwig (Research Center SAFE, Goethe University); Jochen Mankart (Deutsche Bundesbank); Jorge Quintana (SAFE and Goethe University); Mirko Wiederholt (Sciences Po); Nathanael Vellekoop (Goethe University Frankfurt) |
| Abstract: | What is the role of heterogenous house-price expectations for boom-bust cycles in the housing market? We exploit a unique Dutch panel data set on households' house price expectations and their consumption, savings and housing choices for the period 2003-2016. This period was characterized by a pronounced boom-bust cycle in the housing market. Conditioning the sample on household heads who report non-zero house price expectations, we find that expectations closely track realized house prices. We next develop a structural life-cycle model of the Dutch housing market where we distinguish household types according to their house price expectations. We employ a calibrated model variant to test if observed variations in expectations can account for the housing boom-bust cycle. First results show that our model closely matches the observed fluctuations of the rent-to-price ratio in the data but overshoots the size of the housing boom. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:848&r=all |
| By: | Janet Hua Jiang (Bank of Canada); Cathy Zhang (Purdue University); Daniela Puzzello (Indiana University) |
| Abstract: | We integrate theory and experimental evidence to study the effects of alternative inflationary monetary policies on allocations and welfare. The framework of our experiment is based on the Lagos and Wright (2005) model of monetary exchange that provides a role for money as a medium of exchange. We compare a baseline laissez-faire policy with constant money growth and three different inflationary policies where the government fixes the money growth rate. In the first scheme (Government Spending), the government adjusts expenditures financed through seigniorage; in the second scheme (Lump Sum Transfers), the government injects new money through lump-sum transfers; in the third scheme (Proportional Transfers), the government makes transfers proportional to individual money holdings. Theory predicts inflation is constant at the money growth rate in a stationary equilibrium under all inflationary policies. However, while the first two policies yield the same stationary equilibrium with lower welfare relative to the laissez-faire setting, the third policy is neutral. Consistent with theory, output and welfare in the experimental economies are significantly lower with Government Spending relative to baseline while there are no significant effects with Proportional transfers. Our findings have implications on monetary policy implementation and provide support for policies in line with the quantity theory. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:263&r=all |
| By: | Uta Bolt (University College London); Cormac O'Dea (Yale University); Eric French (University College London); Jamie Hentall MacCuish (University College London) |
| Abstract: | Parental investments in children can take one of three broad forms: (1) Time investments during childhood and adolescence that aid child development, and in particular cognitive ability (2) Educational investments that improve school quality and hence educational outcomes (3) Cash investments in the form of inter-vivos transfers and bequests. We develop a dynastic model of household decision making with intergenerational altruism that nests a child production function, incorporates all three of these types of investments, and allows us to quantify their relative importance and estimate the strength of intergenerational altruism. Using British cohort data that follows individuals from birth to retirement, we find that around 40\% of differences in average lifetime income by paternal education are explained by ability at age 7, around 40\% by subsequent divergence in ability and different educational outcomes, and around 20\% by inter-vivos transfers and bequests received so far. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1262&r=all |
| By: | Mons Chan (Aarhus University); Ming Xu (Aarhus University); Sergio Salgado (University of Minnesota) |
| Abstract: | In this paper, we use matched employer-employee data from Denmark to analyze the extent to which firms’ productivity shocks are passed to workers wages. The richness of our dataset allows us to separately study continuing and non-continuing workers (switchers), to correct for selection, and to investigate how the passthrough varies across narrow population groups. Our results show a much larger degree of passthrough from firms’ shocks to workers’ wages than reported in previous research. On average, an increase of one standard deviation in firm-level TFP commands an increase of 3.0% in annual wages ($1500 USD for the average worker). Furthermore, we find that the effect of productivity shocks on wage growth for switchers is of larger magnitude relative to workers that stay in the same firm. Finally, we find large differences in the passthrough of productivity shocks to wages for workers of different income levels, ages, industries, and working in firms of different productivity levels. In the second part of our paper, we estimate a stochastic process of income that captures the salient features of the relation between firm-level shocks and the passthrough to workers' wages. We then embed the estimated stochastic process into a life-cycle consumption savings model with incomplete markets in order to evaluate the welfare and distributional implications of the passthrough from firm's TFP shocks to worker's wages we observe in the data. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1447&r=all |
| By: | Oleg Itskhoki (Princeton University); Dmitry Mukhin (Yale University) |
| Abstract: | The Mussa (1986) puzzle - a sharp and simultaneous increase in the volatility of both nominal and real exchange rates after the end of the Bretton Woods System of pegged exchange rates in early 1970s - is commonly viewed as a central piece of evidence in favor of monetary non-neutrality. Indeed, a change in the monetary regime has caused a dramatic change in the equilibrium behavior of a real variable - the real exchange rate. The Mussa fact is further interpreted as direct evidence in favor of models with nominal rigidities in price setting (sticky prices). We show that this last conclusion is not supported by the data, as there was no simultaneous change in the properties of the other macro variables - neither nominal like inflation, nor real like consumption, output or net exports. We show that the extended set of Mussa facts equally falsifies both flexible-price RBC models and sticky-price New Keynesian models. We present a resolution to this broader puzzle based on a model of segmented financial market - a particular type of financial friction by which the bulk of the nominal exchange rate risk is held by a small group of financial intermediaries and not shared smoothly throughout the economy. We argue that rather than discriminating between models with sticky versus flexible prices, and monetary versus productivity shocks, the Mussa puzzle provides sharp evidence in favor of models with monetary non-neutrality arising due to financial market segmentation. Sticky prices are neither necessary, nor sufficient for the qualitative success of the model. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1434&r=all |
| By: | Dan Cao (Georgetown University); Erick Sager (Federal Reserve Board); Henry Hyatt (US Census Bureau); Toshihiko Mukoyama (Georgetown University) |
| Abstract: | This paper analyzes firm growth along two margins: the extensive margin (adding more establishments) and intensive margin (adding more workers per establishment). We utilize administrative datasets to document the behavior of these two margins in relation to changes in the U.S. firm size distribution. Between 1990 and 2015, we find that the significant increase in average firm size was driven primarily by the expansion along the extensive margin, particularly in superstar firms. We develop a general equilibrium model of endogenous innovation that features both extensive and intensive margins of firm growth. We estimate the model to uncover the fundamental forces that caused the changes over this time period through the lens of our model. We find that, over time, the cost of innovations that lead to new establishments has declined for firms who are innovative in that dimension. Meanwhile, the duration that a firm can enjoy high growth through such innovation became shorter, and firm entry became more costly. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1484&r=all |
| By: | Friese, Max |
| Abstract: | This paper investigates how demographic change affects the financial sustainability of a defined benefit pay-as-you-go social security system in an environment with collective bargaining on the labor market. Temporary equilibrium analysis shows that the contribution rate decreases, if the old-age dependency ratio rises. The government balances the social security budget by aiming indirectly at a higher level of employment. In the intertemporal equilibrium the opposite applies. The government increases the contribution rate due to additional effects of demographic change on capital accumulation and labor demand. In contrast to a perfect labor market scenario, the imposed financing burden from an aging society is overcompensated by favorable labor market effects on the social security budget. |
| Keywords: | demographic change,PAYG pension,social security,trade union,collective bargaining,unemployment |
| JEL: | E24 H55 J11 J51 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:roswps:148r&r=all |
| By: | Daniel Barczyk (McGill University); Matthias Kredler (Universidad Carlos III Madrid); Sean Fahle (SUNY Buffalo) |
| Abstract: | We propose that interactions among old-age risks, housing, and family insurance are key for understanding the economic behavior of the elderly. Empirically, we find that homeownership reduces dis-saving while increasing the likelihood and persistence of informal care from children, which in turn protects bequests by preventing nursing home entry. Nonetheless, elderly parents and the childless display strikingly similar savings and bequests. Additionally, we calculate that one-fourth of transfers from retired parents to children flow before death. We build a dynamic model featuring strategic interactions between imperfectly-altruistic parent and child households, a housing choice, and long-term-care risk. The model successfully rationalizes our empirical findings. Homes are valuable for inducing care from children, accounting for 10% of ownership. Although the childless have no altruistic motive for saving, they resemble parents because they lack family insurance and thus have a stronger precautionary motive. Parents withhold most transfers until death for strategic reasons. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:361&r=all |
| By: | Stephie Fried (ASU); Kevin Novan (University of California, Davis); William Peterman (Federal Reserve Board of Governors) |
| Abstract: | While the U.S. does not currently have a federal carbon tax, households could expect the government will introduce a carbon tax policy in the future. To understand how the macroeconomy responds to the expectation of a potential future carbon tax, we develop a quantitative life cycle model that allows us to focus on investment in long-lived, sector-specific assets such as coal power plants or wind farms. We find that expectations of future climate policy reduce the return dirty (carbon-emitting) energy capital, shifting the economy towards cleaner energy production. As a result, the anticipation of future climate policy reduces carbon emissions even though there is not actual policy in place. In particular, we find that a five percent probability of a \$35 dollar per ton carbon tax reduces emissions by one quarter of the amount they would fall if the carbon tax was actually in place. However, the output cost of reducing emissions through expectations of future policy are considerably higher than the output cost of the carbon tax policy itself. This is because the potential costs of reallocating capital between energy producing technologies after the tax is implemented, such as from coal power plants to wind farms, along with the uncertainty depresses savings lowering the aggregate capital stock. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:683&r=all |
| By: | Yusuf Mercan (University of Melbourne); Benjamin Schoefer (UC Berkeley) |
| Abstract: | The risk of job loss is concentrated in the early months of the job; after the initially high levels of unemployment risk, jobs become stable. We argue that this initial excess exposure to unemployment risk renders job-to-job transitions risky. We formalize this mechanism in a search and matching model in which job offers are “lotteries”, placing probabilities on job qualities, which are revealed early on in the new job. Workers know the probability weights, and lotteries are heterogeneous in those weights. A set of job quality realizations lead workers to prefer quitting into unemployment. In this model, job mobility is affected by the value of unemployment, which represents the downside risk of accepting a job lottery. This consideration constitutes a mobility friction for employed workers. We explore all these properties and predictions in a calibrated version of the model. We also highlight a new role of unemployment insurance (UI): In our model, UI insures the downside risk of job-to-job transitions, and thereby subsidizes job mobility of workers already employed, and tilts the job composition to ex-ante riskier jobs. We close by discussing potential implications of this new view of unemployment insurance. Our study therefore sheds light on how labor market policies affect the behavior of employed job seekers through a novel “experimentation subsidy” channel. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1385&r=all |
| By: | Adam, Klaus; Merkel, Sebastian |
| Abstract: | We present a simple model that quantitatively replicates the behavior of stock prices and business cycles in the United States. The business cycle model is standard, except that it features extrapolative belief formation in the stock market, in line with the available survey evidence. Extrapolation amplifies the price effects of technology shocks and - in response to a series of positive technology surprises - gives rise to a large and persistent boom and bust cycle in stock prices. Boom-bust dynamics are more likely when the risk-free interest rate is low because low rates strengthen belief-based amplification. Stock price cycles transmit into the real economy by generating inefficient price signals for the desirability of new investment. The model thus features a 'financial accelerator', despite the absence of financial frictions. The financial accelerator causes the economy to experience persistent periods of over- and under-accumulation of capital. JEL Classification: E32, E44, G12 |
| Keywords: | booms and busts, business cycles, financial accelerator, stock market volatility |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192316&r=all |
| By: | Daiki Maeda |
| Abstract: | Based on findings in the behavioral economics literature, we incorporate non-unitary discounting into a monetary search model to study optimal monetary policy. We apply non-unitary discounting, that is, discount rates that are different across goods. With this extension to the model, we find that there are cases where optimal monetary policy deviates from the Friedman rule. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1062&r=all |
| By: | Juan Morelli (NYU Stern); Diego Perez (New York University); Pablo Ottonello (University of Michigan) |
| Abstract: | We study the role of financial intermediaries in the global market for risky external debt. We first provide empirical evidence measuring the effect of global banks’ net worth on bond prices of emerging-market economies. We exploit within-borrower bond variation and show that, around the collapse of Lehman Brothers, bonds held by more distressed global banks experienced larger price contractions. We then construct a model of global banks’ lending to emerging economies and quantify their role using our empirical estimates and other key data. In the model, banks’ net worths affect bond prices by the combination of a form of market segmentation and banks’ financial frictions. We show that these banks’ exposure to emerging economies is the key to determine their role in propagating shocks. With the current observed exposure, global banks play an important role in transmitting shocks originating in developed economies, accounting for the bulk of the variation of spreads in emerging economies during the recent global financial crisis. Global banks help explain key patterns of debt prices observed in the data, and the evolution of their exposure over the last decades can explain the changing nature of systemic debt crises in emerging economies. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:644&r=all |
| By: | Marek Kapicka (CERGE-EI); Carlos Zarazaga (Federal Reserve Bank of Dallas); Finn Kydland (University of California, Santa Barbara) |
| Abstract: | Argentina’s capital stock has consistently fallen in periods of total factor productivity (TFP) declines, while remaining largely unresponsive in periods of TFP surges. The net result of this asymmetry is that capital appears to have been “missing” from the Argentine economy when conditions were particularly favorable to an investment boom. Models that assume that a country cannot commit to honor its external debt obligations are a natural candidate to capture this “missing capital problem,” because they predict that investment will fall in response to a declining TFP, but not rise much in response to a soaring TFP. This theoretical consideration finds empirical support in the fact that traumatic developments in Argentina’s economic history may have led investors to perceive it as a country prone to external debt “opportunistic defaults.” Accordingly, the paper explores the extent to which Argentina's missing capital can be quantitatively accounted for by a model featuring an optimal contract between foreign lenders and a small open economy subject to a limited commitment constraint. The paper finds that a deterministic version of this analytical framework, calibrated with data from Argentina, accounts surprisingly well for that country’s missing capital. More precisely, the model economy accurately mimics the rapid decline that that country's capital stock experienced, along with a falling TFP, during the 1980's, and the lack of any visible recovery of that stock during the significant surges of TFP observed from 1992 to 1998 and from 2002 to 2008. Numerical experiments show however, and somewhat paradoxically, that by making the limited commitment constraint more binding, low international interest rates played an important role in the disappointing performance of investment in those two periods and, furthermore, that in absence of that constraint, Argentina's capital stock in 2008 would have been 50% higher than it actually was. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:752&r=all |
| By: | Eunseong Ma (Texas A&M University) |
| Abstract: | This study investigates the relation between monetary policy and inequality by asking how one affects the other: the effect of monetary policy on inequality and the impact of the long-run level of inequality on the effectiveness of monetary policy. To this end, I incorporate nominal wage contracts and cash-in-advance constraints into a heterogeneous agent model economy with indivisible labor. I find that expansionary monetary policy reduces income, wealth, and consumption inequalities mainly due to a rise in employment from the bottom of the distributions. There are heterogeneous effects on income across the wealth distribution: in response to an unanticipated monetary easing, households in the bottom of the wealth distribution benefit from an increase in employment while rich households benefit from a rise in the real asset returns in a relative sense. An unexpected monetary expansion also has asymmetric responses of consumption between the poor and the rich: asset-poor households increase their consumption while it falls for wealthy households. This implies that inflation hurts the rich more. I also find that the long-run prevailing levels of inequality matter for the effectiveness of monetary policy by determining the shape of reservation wage distribution. All else being equal, a more equal economy is associated with more effective monetary policy in terms of output. I also provide empirical evidence for this model result using state-level panel data: the effects of monetary policy shocks on output are larger for low-inequality states. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:250&r=all |
| By: | Seongeun Kim (Sejong University); Michele Tertilt (University of Mannheim); Minchul Yum (University of Mannheim) |
| Abstract: | South Korea has been experiencing a very low total fertility rate around 1.2 over the last two decades. A serious concern of the Korean government about low fertility is demonstrated by its billions-dollars worth spending in recent years. In this paper, we aim to understand why the birth rate is so low in Korea and to assess whether there is a reason for the government to be concerned. We ask what, if anything, could and should be done about the low fertility rate. To do so, we propose status externalities as a new reason for inefficiently low fertility. In our model with endogenous fertility, parents care about the education of their children relative to other parent’s children. We find that the equilibrium is characterized by over-investment in education and under-investment in fertility, relative to the first best. We calibrate the model to Korean data to quantify the role of the status externality. We find that without it fertility would be 17% higher. We also find the externality plays a large role in explaining the fertility-income relationship, which is positive in Korea, in contrast to most other countries. We conduct several policy experiment and find that taxing education would not be desirable in welfare terms, even though it reduces the over-investment. Similarly, pronatal transfers do increase the fertility rate but are also not welfare improving. We conclude that more subtle policies are needed to rectify the friction introduced through status concerns. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:604&r=all |
| By: | Yang, Han |
| Abstract: | To what extent does education alleviate income inequality induced by globalization? What are the corresponding intergenerational welfare implications? I incorporate human capital and capital accumulation into a dynamic, multi-country general equilibrium model, and study the exact transitional path. Interactions between comparative advantage, capital accumulation, and endogenous education are the main driving forces of the inequality dynamics. These channels reflect ability to adjust factor supply at different stages of the transition. I parameterize the model for 40 countries, six sectors using the World Input-Output Database. Trade liberalization raise the skill premium, the skill share and the real wage for both skilled and unskilled workers in all countries in my model. Through decomposition, I find that education eliminates trade-induced inequality by 65\% on average. My model also suggests that globalization can cause more intergenerational inequality. Because older and more educated people generally benefit relatively more from globalization. |
| Keywords: | international trade, dynamic,education, inequality, skill premium |
| JEL: | F1 F4 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96054&r=all |
| By: | Strulik, Holger; Werner, Katharina |
| Abstract: | We integrate time-inconsistent decision making due to hyperbolic discounting into a gerontologically founded life cycle model with endogenous aging and longevity. Individuals can slow down aging and postpone death by health investments and by reducing unhealthy consumption, conceptualized as smoking. We show that individuals continuously revise their original plans to smoke less and invest more in their health. Consequently, they accumulate health deficits faster and die earlier than originally planned. This fundamental health consequence of time-inconsistency has not been addressed in the literature so far. Because death is endogenous, any attempt to establish the time-consistent first-best solution by manipulating the first order conditions through (sin-) taxes and subsidies is bound to fail. We calibrate the model with U.S. data for an average American in the year 2010 and estimate that time-inconsistent health behavior causes a loss of about 5 years of life. We show how price policy can nudge individuals to behave more healthy such that they actually realize the longevity and value of life planned at age 20. |
| Keywords: | present bias,time-inconsistency,health behavior,aging,longevity,health policy |
| JEL: | D03 D11 D91 I10 I12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:381&r=all |
| By: | Guido Ascari; Timo Haber |
| Abstract: | This paper proposes a minimal test of two basic empirical predictions that ag-gregate data should exhibit if sticky prices were the key transmission mechanism of monetary policy, as implied by the benchmark DSGE-New Keynesian models. First, large monetary policy shocks should yield proportionally larger initial re-sponses of the price level and smaller real effects on output. Second, in a high trend inflation regime, prices should be more flexible, and thus the real effects of monetary policy shocks should be smaller and the response of the price level larger. Our analysis provides some statistically significant evidence in favor of a sticky price theory of the transmission mechanism of monetary policy shocks. |
| Keywords: | Sticky prices, local projections, smooth transition function, time-dependent pricing, state-dependent pricing |
| JEL: | E30 E52 C22 |
| Date: | 2019–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:869&r=all |
| By: | Haque, Qazi; Groshenny, Nicolas; Weder, Mark |
| Abstract: | The paper re-examines whether the Federal Reserve’s monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era. |
| JEL: | E32 E52 E58 |
| Date: | 2019–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2019_020&r=all |
| By: | Jordi Galí |
| Abstract: | I analyze the effects of a money-financed fiscal stimulus and compare them with those resulting from a conventional debt-financed stimulus. I study the effects of both a tax cut and an increase in government purchases, with and without a binding zero lower bound (ZLB) on the nominal interest rate. When the ZLB is not binding, a money-financed fiscal stimulus is shown to have much larger multipliers than a debt-financed fiscal stimulus. That difference in effectiveness persists, but is much smaller, under a binding ZLB. Nominal rigidities are shown to play a major role in shaping those effects |
| JEL: | E32 E52 E62 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26249&r=all |
| By: | Michael Gelman (Claremont McKenna College); Dan Silverman (Arizona State University); Matthew Shapiro (University of Michigan); Shachar Kariv (University of California, Berkeley) |
| Abstract: | Nearly a third of all personal income tax collected by the US, government is later returned in the form of tax refunds; and households tend to spend disproportionately from those refunds. This paper develops a theory of liquid assets management that explains why households voluntarily reduce liquidity by overwitholding, but then spend in response to the liquidity provided by tax refunds. Liquidity constraints that arise endogenously when income is uncertain and when adjusting tax payments is not frictionless explain these behaviors. Tax refunds tend to arrive in circumstances where income is lower than expected, so liquidity is low and the MPC is endogenously high. The average amount of income not subject to withholding and the average annual fluctuations in that income are more than sufficient to explain the size of tax refunds, and microevidence supports central mechanisms of the model. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:542&r=all |
| By: | Kiyoka Akimoto (Graduate School of Economics, Kobe University) |
| Abstract: | We construct a three-period overlapping generations model in which corrup- tion, mortality and fertility rates, and economic development are determined endogenously. We consider a less developed economy suffering from a high degree of corruption and high mortality and fertility rates in a poverty trap. We focus on two policies: raising public sector wages as a means of reducing corruption and increasing public health spending as a means of improving the mortality rate. Our theoretical analysis shows that implementing both policies simultaneously is essential for less developed economies to escape from the poverty trap and achieve economic development. |
| Keywords: | Corruption, Public sector wage, Public health, Economic development |
| JEL: | D73 I18 J38 O41 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1810r&r=all |
| By: | Neyer, Ulrike; Stempel, Daniel |
| Abstract: | This paper theoretically analyzes the macroeconomic effects of gender discrimination against women in the labor market in a New Keynesian model. We extend standard frameworks by including unpaid household production in addition to paid labor market work, by assuming that the representative household consists of two agents, and by introducing discriminatory behavior on the firms' side. We find that, in steady state, this discrimination implies that women work inefficiently more in the household and less in the paid labor market than men. This inefficient working time allocation between women and men leads to a discrimination-induced gender wage gap, lower wages for women and men, lower aggregate output, and lower welfare. The analysis of dynamic effects reveals that households benefit less from positive technology shocks. Moreover, the transmission of expansionary monetary policy shocks on output and in ation is lower in the discriminatory environment. |
| Keywords: | New Keynesian Models,Gender Discrimination,Household Production,Monetary Policy Transmission |
| JEL: | D13 D31 E32 E52 J71 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:324&r=all |
| By: | Vincenzo Quadrini (USC); Qi Sun (Shanghai University of Finance and Economics); yicheng wang (University of Oslo) |
| Abstract: | In this paper we ask the question of whether the managerial and organizational inputs of entrepreneurs enhance the efficiency of their businesses. We ask this question empirically using registry data from Norway. To identify the managerial skills of the entrepreneur (human capital) we explore how the productivity of the business changes after the premature death of the entrepreneur. We find that, if the entrepreneur is wealth-rich, the productivity of the business falls substantially (close to 40%) after the entrepreneur's death. This supports the view that entrepreneurs’ human capital adds value to the business. But why are the entrepreneurial skills only important for wealth-rich entrepreneurs? The empirical analysis reveals other interesting patterns. New firms founded by wealth-rich entrepreneurs are 40% more productive and they have twice higher capital compared to those founded by wealth-poor entrepreneurs. Furthermore, rich entrepreneurs tend to allocate more of their wealth in the business and hold more shares of the business. These findings show that the wealth of the entrepreneur plays an important role also for the financial structure of the business. Motivated by these empirical findings, we construct a quantitative structural model that is capable of capturing these patterns. In the model, risk-averse entrepreneurs can invest in financial assets and choose to run private businesses in an incomplete market environment. They face possible credit constraints and are heterogeneous in managerial human capital. We study how the entrepreneurs' human capital affects entry, exit, portfolio composition and the consequent macroeconomic implications. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1155&r=all |
| By: | Minsu Chang (University of Pennsylvania) |
| Abstract: | This paper shows that the evolving likelihood of marriage and divorce is an essential factor in accounting for the changes in housing decisions over time in the United States. To quantify the importance of this channel, I build a life-cycle model of single and married households who face exogenous age-dependent marital transition shocks. I then estimate the parameters of the model by a limited information Bayesian method to match the moments from 1995's cross-section data. I conduct a decomposition analysis between 1970 and 1995, two years with similar real house prices but substantially different probabilities of marital transitions. I find that the change in the likelihood of marital transitions accounts for 29% of the observed increase in the homeownership rate of singles. This portion is substantial given that the changes in downpayment requirements, earnings risk, and spousal labor productivity jointly replicate 45% of the change. When the change in marital transitions is shut down, the marrieds' housing asset share increases, which is opposite to the data's pattern. Then I extend my analysis to study whether the ongoing change in marital transitions still plays a role in explaining housing decisions in recent years, which have seen dramatically changing house prices. In addition to other factors such as credit constraints, wages, and beliefs on price appreciation that are often suggested as drivers for homeownership increase during the housing boom in the mid-2000s, I show that the continuing decrease in marriage contributes to an approximately 7% increase in the homeownership rate for young singles. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:514&r=all |