|
on Dynamic General Equilibrium |
|
Issue of 2019‒09‒30
sixty-five papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Rincón-Zapatero, Juan Pablo; Jerez, Belén; Díaz, Antonia |
| Abstract: | In this paper we embed a directed search model of the real estate market into a heterogeneous agents setting to study the effect of credit on housing prices. Households can either rent or own their home and face idiosyncratic turnover shocks which make them want to change residence. They can accumulate financial assets to put a down payment on a home and to smooth consumption. Search and matching frictions generate frictional dispersion in housing prices and financial assets in equilibrium. Our model is “block recursive” and highly tractable. We calibrate it to reproduce selected statistics for the US. We extend the Endogenous Grid Method with non-convexities to our environment to compute it. In our framework the distribution of wealth, housing prices, and trading probabilities (e.g. liquidity of housing assets) are crucially affected by credit conditions. Our mechanism greatly amplifies the effect of changes in financial conditions on housing prices. |
| Keywords: | Endogenous Grid Method; Block-Recursivity; Price Dispersion; Housing Prices; Directed Search; Incomplete Markets; Wealth Inequality |
| JEL: | R30 R21 E21 D83 D31 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:28874&r=all |
| By: | Nicolas Caramp (UC Davis); Dejanir Silva (UIUC) |
| Abstract: | We revisit the monetary paradoxes of standard monetary models in a liquidity trap and study the channels through which they occur. We focus on two paradoxes: the Forward Guidance Puzzle and the Para- dox of Flexibility. First, we propose a decomposition of consumption into substitution and wealth effects, both of which take into account the general equilibrium effects on output and ination, and we show that the substitution effect cannot account for the puzzles. Instead, mon- etary paradoxes are the result of strong wealth effects which, generi- cally, are solely determined by the expected scal response to the mon- etary shocks. We estimate the scal response to monetary policy shocks with US data and nd responses with the opposite sign to the ones im- plied by the standard equilibrium. Finally, we introduce the estimated scal responses into a medium-size DSGE model. We nd that the impulse-response of consumption and ination do not match the data, suggesting that wealth effects induced by scal policy may be impor- tant even outside of the liquidity trap. We show that models with con- strained agents can produce strong wealth effects if gross private debt is different than zero. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1281&r=all |
| By: | William Diamond (Wharton School, University of Pennsylvan); Tim Landvoigt (University of Pennsylvania) |
| Abstract: | We develop a model in which mortgage leverage available to households depends on the risk bearing capacity of financial intermediaries. Our model features a novel transmission mechanism from Wall Street to Main Street, as borrower households choose lower leverage and consumption when intermediaries are distressed. The model has financially constrained young and unconstrained middle-aged households in overlapping generations. Young households choose higher leverage and riskier mortgages than the middle-aged, and their consumption is particularly sensitive to credit supply. Relative to a standard model with exogenous credit constraints, the macroeconomic importance of intermediary net worth is magnified through its effects on household leverage, house prices, and consumption demand. The model quantitatively demonstrates how recessions with housing crises differ from those driven only by productivity, and how a growing demand for safe assets replicates many features of the 2000s credit boom and increases the severity of future financial crises. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:162&r=all |
| By: | Chao Gu (University of Missouri); Cyril Monnet (Universitat Bern); Ed Nosal (Federal Reserve Bank of Atlanta); Randall Wright (University of Wisconsin) |
| Abstract: | Are fi nancial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with fi nancial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Four formalizations are considered: a dynamic version of Diamond-Dybvig incorporating reputational considerations; a model with delegated monitoring as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with Rubinstein-Wolinsky intermediaries in a decentralized asset market as in Duffie et al. In each case we fi nd, for different reasons, that fi nancial intermediation engenders instability in a precise sense. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:352&r=all |
| By: | Renato Faccini (Queen Mary University); Leonardo Melosi (Chicago Fed) |
| Abstract: | Since 2014 the U.S. economy has been characterized by (i) a tight labor market with a record-low unemployment rate and very high job finding rates, (ii) disappointing labor productivity growth, and (iii) low inflation. We propose a model with the job ladder that can reconcile these three facts. In the model inflation picks up only when most jobs are concentrated at the high rung of the ladder: as firms compete for efficiently allocated employed workers, outside offers are declined and matched, triggering an increase in production costs that is not backed by an increase in productivity. The model is estimated using unemployment and quit rates, which allow the model to precisely identify the distribution of the quality of jobs. After the Great Recession, the observed structural drop in the job-to-job rate has slowed down the pace at which the U.S. labor market turns bad jobs into good jobs. As a result, inflation has not escalated even though the labor market appears to be very tight. Furthermore, the model predicts that labor productivity persistently fell by up to 70 bps in the post-Great Recession recovery owing to this protracted misallocation in the labor market. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:970&r=all |
| By: | Guangyu PEI (The Chinese University of Hong Kong) |
| Abstract: | This paper develops a novel theory of uncertainty-driven business cycles that accommodates the notion of non-inflationary aggregate demand shocks out of variations in uncertainty. Instead of thinking uncertainty as risk, we regard uncertainty as ambiguity. We demonstrate that within the real business cycle model, ambiguity shocks, namely shock to the variance of agents' prior belief over possible models, can generate co-movements across real quantities without commensurate movements in labor productivity under the condition that agents are ambiguity averse and there exists a certain type of coordination friction among them. In response to a positive ambiguity, agents behave as if they believe aggregate demand is turning bad and becoming more volatile. The former translates into depressed market confidence, which makes all real quantities plummets. While the latter incentivizes agents use more of their private information both when making economic decisions and forecasts, which heightens the cross-sectional dispersions of beliefs. These predictions regarding agents' belief in our theory are consistent with survey data evidence. Finally, the quantitative potential of our theory is illustrated within a dynamic RBC model. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1494&r=all |
| By: | Giacomo Candian (HEC Montréal); Mikhail Dmitriev (Florida State University) |
| Abstract: | We document that default recovery rates in the United States are highly volatile and strongly pro-cyclical. These facts are hard to reconcile with the existing financial friction literature. Indeed, models with limited enforceability a la Kiyotaki and Moore (1997) do not have defaults and recovery rates, while agency costs models following Bernanke, Gertler, and Gilchrist (1999) underestimate the volatility of recovery rates by one order of magnitude. We extend the standard agency costs model allowing liquidation costs for creditors to depend on the tightness of the market for physical capital. Creditors do not have expertise in selling entrepreneurial assets, but when buyers are plentiful, this disadvantage is minimal. Instead when sellers are abundant, the disadvantage of being an outsider is higher. Following a negative shock, entrepreneurs sell capital and liquidation costs for creditors increase. Creditors cut lending and cause entrepreneurs to sell more capital. This liquidity channel works independently from standard balance sheet effects and amplifies the impact of financial shocks on output by up to 50 percent. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1185&r=all |
| By: | Pierre Mabille (New York University) |
| Abstract: | This paper studies households' precautionary savings when they face macroeconomic shocks, a channel that complements the traditional microeconomic precautionary savings motive. I incorporate continuous aggregate income and credit supply shocks, two prominent sources of risk, into a Bewley-Huggett-Aiyagari model calibrated to the U.S. economy. I then propose a novel solution method that quantifies if and how much the economy departs from certainty equivalence. The precautionary motive associated with movements in credit supply is substantial. Its negative effect on the equilibrium risk-free rate is one fourth as large as for idiosyncratic income changes, and much larger than for aggregate income changes. Therefore, in the long-run, large movements in credit generate a low risk-free rate, low debt environment like the post-Great Recession period. They persistently, albeit mildly, depress consumption and employment, leading to higher estimates of the costs of business cycles. Over time, the model assigns about half of the volatility of consumption and the risk-free rate to credit supply shocks. When inverted to recover the sequence of structural shocks around the Great Recession, it suggests that households' borrowing constraints have remained tight during the recovery, despite rising aggregate consumption. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:344&r=all |
| By: | Diego Gomes (University of Alberta); Cezar Santos (Fundacao Getulio Vargas); Felipe Iachan (FGV) |
| Abstract: | We study labor earnings dynamics in a developing economy with a large informal sector. We use nationally representative Brazilian panel data that cover both formal and informal workers. We provide two main contributions. First, we document large disparities in earnings fluctuations faced across these segments of the labor market, as well as the high intensity of transitions between them. Informality is associated with more volatile earnings, while agents in the formal sector are subject to significant downside risk. Transitions across formal and informal employment bring large earnings shocks on average and have a frequency that depends on age and the initial earnings level. Second, we assess the consequences of these empirical disparities on decisions of consumption and savings. Our tool is a standard life cycle model with heterogeneous agents where the earnings processes are estimated to reflect the aforementioned empirical findings. The simulations reveal sizable impacts. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:793&r=all |
| By: | Oscar Jorda (Federal Reserve Bank of San Francisco an); Alan Taylor (University of California, Davis); Sanjay Singh (University of California, Davis) |
| Abstract: | A well-worn tenet holds that monetary policy does not affect the long-run productive capacity of the economy. Merging data from two new international historical databases, we find this not to be quite right. Using the trilemma of international finance, we find that exogenous variation in monetary policy affects capital accumulation, and to a lesser extent, total factor productivity, thereby impacting output for a much longer period of time than is customarily assumed. We build a quantitative medium- scale DSGE model with endogenous TFP growth to understand the mechanisms at work. Following a monetary shock, lower output temporarily slows down TFP growth. Internal propagation of the monetary shock extends the slow down in productivity, and eventually lowers trend output. Yet the model replicates conventional textbook results in other dimensions. Monetary policy can have long-run effects. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1307&r=all |
| By: | Gajendran Raveendranathan (McMaster University); Kyle Herkenhoff (University of Minnesota) |
| Abstract: | How are the welfare costs from monopoly borne? We answer this question in the context of the U.S. credit card industry, which is highly concentrated, charges interest rates that are 3.4 to 8.8 percentage points above competitive pricing, generates excess profits, and has repeatedly lost antitrust lawsuits. We depart from existing consumer credit models that assume perfect competition (e.g. Livshits, MacGee, and Tertilt (2007,2010) and Chatterjee, Corbae, Nakajima, and Rios-Rull, 2007), by integrating oligopolistic lenders into a Bewley-Huggett-Aiyagariframework. Our model accounts for roughly half of the spreads and excess profits observed in the data. The welfare gains to the current population from competitive reforms in the credit card industry are equivalent to a onetime transfer to households worth 3.4 percent of GDP. Along the transition path, all cohorts realize welfare gains from competitive reforms. Asset poor households benefit the most from increased consumption smoothing. Asset rich households also benefit from higher general equilibrium saving interest rates. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:67&r=all |
| By: | Sushant Acharya; Edouard Challe (CREST & Ecole Polytechnique); Keshav Dogra (Federal Reserve Bank of New York) |
| Abstract: | In this paper, we study the positive and normative implications for monetary policy of cross-sectional wealth dispersion due to uninsured, idiosyncratic labor-income risk. To this purpose we develop a tractable Heterogenous-Agent New Keynesian (HANK) model based on CARA (Constant Absolute Risk Aversion) utility functions and Normally distributed labor-income risk. The distributions of wealth, earnings and consumptions, as well as their dynamics over time, can be solved in closed form, which informs us about the precise impact of monetary policy on those cross-sectional distributions. The Social Welfare Function (SWF) that aggregates agents utility can also be solved in closed form. Besides its usual determinants, the optimal policy response to aggregate shocks gives a central role to (i) the redistribution of wealth through inflation (as emphasized by Bhandari et al., 2018), and (ii) the impact of policy on the marginal propensity to consume out of wealth, which determines the pass-through from income risk to consumption risk |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:381&r=all |
| By: | Tong Zhang |
| Abstract: | This paper contributes to the literature on the effect of financial frictions on business cycle activity. We follow the "leverage cycles" approach in the spirit of Geanakoplos (2010) which argues that equilibrium fluctuations in collateral rates (equivalently haircuts, margins, or leverage), rather than just in interest rates, are a key driver of persistent fluctuations in economic activity. In particular, we focus on how adverse economic shocks can be amplified and prolonged by endogenous variations in haircuts in the standard macrofinance framework à la Kiyotaki and Moore (1997). In our model, collateral constraints are motivated by no-recourse loans, and the interest rate and the haircut are jointly determined as general equilibrium objects. We highlight the difference between the risk and the illiquidity of the collateral in determining the credit market equilibrium: an increase in risk increases both the interest rate and the haircut, while an increase in illiquidity increases the haircut but decreases the interest rate. Compared with the previous literature, our model allows us to decompose the transmission of adverse shocks through the credit market into the interest rate channel and the haircut channel, and evaluate their relative importance. The numerical exercises illustrate that risk shocks can generate sizable business cycle fluctuations through the credit market, and the haircut channel is dominant in times of low market liquidity. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:124&r=all |
| By: | George Alessandria (University of Rochester); Minjie Deng (University of Rochester); Yan Bai (University of Rochester) |
| Abstract: | We study the role of migration in a sovereign debt crisis. Empirically, we document a large worker outflow accompanies a rise in sovereign debt spreads. We develop a model of sovereign default with an endogenous migration choice to understand how migration interacts with the default risk and propagates a debt crisis. In the model, the outflow of workers increases the government’s debt burden by increasing debt-per-capita, further increasing default risk. As a result, the government decreases investment, which affects the consumption of the workers. Lower consumption, in turn, increases the probability of emigration. Compared with a model without endogenous migration, our model generates a higher default risk, lower investment, and deeper and more prolonged recession. The impact of the migration channel is even more substantial when the average migrant has higher levels of human capital relative to locals. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1085&r=all |
| By: | Davide Debortoli (Universitat Pompeu Fabra, CREI and BGSE); Pierre Yared (Columbia University); Ricardo Nunes (University of Surrey) |
| Abstract: | According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time-consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not tax on the downward slopping side of the Laffer curve, even if it is ex-ante optimal to do so. In light of this finding, we propose a new framework to characterize time-consistent policy. We consider a Markov Perfect Competitive Equilibrium where a government reoptimizes sequentially and may deviate from the optimal commitment policy. We find that, in a deterministic economy, any stationary distribution of debt maturity must be flat, with the government owing the same amount at all future dates. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:926&r=all |
| By: | Thomas Phelan (Federal Reserve Bank of Cleveland) |
| Abstract: | This paper characterizes a class of stationary constrained-efficient allocations and optimal taxes in an economy with endogenous firm formation and dynamic moral hazard. I consider an environment in which entrepreneurs hire workers and rent capital to produce output subject to privately-observed shocks and have the ability to both divert capital to private consumption and abscond with a fraction of assets. To provide incentives to invest, high realizations of output must be accompanied by high future consumption, leading to ex-post inequality in the efficient allocation. I show that the distributions of consumption and wealth associated with the stationary efficient allocation exhibit thick right (Pareto) tails, with the degree of inequality monotonically increasing in the number of workers per entrepreneur. This constrained-efficient allocation is then implemented in a general equilibrium model using linear taxes on labour income, risk-free savings and business profits. The tax on entrepreneurs’ savings may be positive or negative, while the tax on business profits depends solely upon the degree of private information and is independent of all technological and demographic parameters. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1350&r=all |
| By: | Emily Moschini (University of Minnesota) |
| Abstract: | The implementation of child care subsidies has varied widely across countries and states, as well as over time, ranging from universal to poverty-tested eligibility. I study the implications of eligibility rules for child care subsidies in a general equilibrium, overlapping generations framework where altruistic parents invest in child skill. I allow for one- and two-parent families, and endogenize family formation with a marriage market. This explicitly incorporates single mothers, who currently parent 20% of children under 5 in the United States. Using individual-level data from the US Department of Education, I estimate how mother time, father time, and non-parental child care affect child skill for each family structure. These estimates allow me to account for the differential effect of child care subsidies on one- and two-parent families. My general equilibrium framework accounts for the effect of the subsidy on government expenditures as well as the skill distribution and, through that, on endogenous tax rates. I find that universal subsidies yield ex ante welfare gains of 5.9 percentage points, while targeting child care subsidies to one-parent families or poor families yields welfare gains of 2.4 and 2.0 percentage points, respectively. Universal subsidies more fully insure newborns against the risks they face than targeted subsidies, and do not disincentivize skill investment as happens with subsidies to the poor. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:42&r=all |
| By: | Andrea Caggese (Pompeu Fabra University); Ander Perez-Orive (Federal Reserve Board); Angelo Gutierrez (Universitat Pompeu Fabra) |
| Abstract: | Deleveraging shocks that increase household precautionary savings, and financial and uncertainty shocks to firms, interact and amplify each other, even when these same shocks separately have moderate effects on output and employment. This result is obtained in a model in which heterogeneous households face financial frictions and unemployment risk and in which heterogeneous firms borrow funds using nominally fixed long-term debt and face costly bankruptcy. This novel amplification mechanism is based on a dynamic feedback between the precautionary behavior of households and the bankruptcy and entry decisions of firms. Our results support the view that firm financial frictions are important to understand the effect of household deleveraging on unemployment, consistent with recent empirical studies examining the 2007-2009 Great Recession. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1331&r=all |
| By: | Tatjana Kleineberg (Yale) |
| Abstract: | Neighborhoods in the US differ substantially in the educational and economic opportunities that they offer to children who grow up in them. We develop and estimate a structural spatial equilibrium model of residential and education choice to study the effects of school financing policies on education outcomes, intergenerational mobility, and welfare at the local and aggregate level. Our model generates persistent effects of children's neighborhoods on adult outcomes through local labor market access and local human capital formation. Local school funding is an important component of the latter. Schools are funded through income taxation and local rent taxation. We estimate the model using a range of US Census datasets by fitting model predictions to regional data of the actual US geography. We use the estimated model to study the effects of counterfactual policy interventions, in particular, the equalization of school funding across all students and the use of rent subsidies. We find that general equilibrium responses in local prices and local skill compositions significantly dampen the partial equilibrium effects of the policy, so that effects on education outcomes and intergenerational mobility are positive but only moderate in general equilibrium. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1197&r=all |
| By: | Skander Van den Heuvel (Federal Reserve Board) |
| Abstract: | The stringency of bank liquidity and capital requirements should depend on their social costs and benefits. This paper investigates the welfare effects of these regulations and provides a quantification of their welfare costs. The special role of banks as liquidity providers is embedded in an otherwise standard general equilibrium growth model. In the model, capital and liquidity regulation mitigate moral hazard on the part of banks due to deposit insurance, which, if unchecked, can lead to excessive risk taking by banks through credit or liquidity risk. However, these regulations are also costly because they reduce the ability of banks to create net liquidity and they can distort capital accumulation. For the liquidity requirement, the reason is that safe, liquid assets are necessarily in limited supply and may have competing uses. A key insight is that equilibrium asset returns reveal the strength of preferences for liquidity, and this yields two simple formulas that express the welfare cost of each requirement as a function of observable variables only. Using U.S. data, the welfare cost of a 10 percent liquidity requirement is found to be equivalent to a permanent loss in consumption of about 0.03%. Even using a conservative estimate, the cost of a similarly-sized increase in the capital requirement is about five times as large. At the same time, the financial stability benefits of capital requirements are also found to be broader. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:325&r=all |
| By: | Schön, Matthias; Stähler, Nikolai |
| Abstract: | In a three-region New Keynesian life-cycle model calibrated to Germany, the Euro area (without Germany) and the rest of the world, we analyze the impact of population ageing on net foreign asset and current account developments. Using unsynchronized demographic trends by taking those of Germany as given and assuming constant population everywhere else, we are able to generate German current account surpluses of up to 15% of GDP during the first half of this century. However, projected demographic trends from 2000 to 2080 in OECD countries (and China in an additional analysis) are much more synchronized. Feeding these into our model suggests that the average annual German current account surplus from 2000 to 2018 that should be attributed to ageing reduces to around 2.83% (1.23%) of GDP, with a maximum at 4.3% (2.7%) in 2006 (when taking into account China), turning negative around 2035. |
| Keywords: | Population Ageing,Net Foreign Assets,Global Imbalances,DSGE Models |
| JEL: | E43 E44 E52 E58 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:332019&r=all |
| By: | Dejanir Silva (UIUC) |
| Abstract: | This paper studies, in the context of a New Keynesian open-economy model, the optimal response of fiscal policy to a risk premium shock for a country in a currency union. First, I show that the planner should not use government spending to stimulate the economy. Instead of distorting the provision of public goods, it is optimal to use simple tax instruments, as consumption, sales, and payroll tax, to achieve stabilization goals. Second, it is optimal to front-load taxes, i.e., the overall level of taxes increase in response to a positive risk premium shock, and it declines over time. The composition of taxes is also time-varying. Consumption tax is increasing, while either VAT or payroll taxes decline over time after an initial increase. Under downward nominal wage rigidities, it is optimal to implement a form of fiscal appreciation, a decline in the VAT accompained by an increase in the payroll tax. Government debt is smaller under the optimal policy than under a passive fiscal policy where the government does not react to the shock. Under some circumstances, it may be optimal to stabilize the government debt at its pre-shock level. Therefore, under the optimal policy, there is no necessary trade off between stabilization policy and fiscal consolidation. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1338&r=all |
| By: | Carlos Garriga (Federal Reserve Bank of St. Louis); Aaron Hedlund (University of Missouri); Yang Tang (Nanyang Technological University); ping wang (Washington University in St.Louis) |
| Abstract: | This paper explores the contribution of the structural transformation and urbanization process in the housing market in China. City migration flows combined with an inelastic land supply, due to entry restrictions, has raised house prices. This issue is examined using a multi-sector dynamic general-equilibrium model with migration and housing market. Our quantitative findings suggest that this process accounts for about 80 percent of urban housing prices. This mechanism remains valid in an extension calibrated to the two largest cities where housing booms have been particularly noticeable. Overall, supply factors and productivity account for most of the housing price growth. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1511&r=all |
| By: | Jesus Fernandez-Villaverde (University of Pennsylvania, NBER, and CEPR); Federico Mandelman (Federal Reserve Bank of Atlanta); Yang Yu (Shanghai University of Finance and Economics); Francesco Zanetti (University of Oxford) |
| Abstract: | We develop a quantitative business cycle model with search complementarities in the inter-?rm 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 ?uctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Su?ciently 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 Auctuations, strategic complementarities, macroeconomic volatility, government spending |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2019–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:19-016&r=all |
| By: | Carlos Carrillo-Tudela (Essex); David Wiczer (Stony Brook University); Ludo Visschers (The University of Edinburgh/Universidad) |
| Abstract: | Recessions increase unemployment risk and decrease job and occupation flows. This paper connects cyclical differences in the earnings change distribution with cyclical differences in workers flows. Earnings changes are typically larger when workers change jobs and even larger when switching occupation. This implies that the incidence of flows directly affects earnings changes. However, the business cycle also affects earnings outcomes conditional on a job, employment status and/or occupation change. We formally decompose cyclical movements in the earnings change distribution into worker-flow components and ``returns'' components. Then, because job and occupation switching are endogenous, we look through the lens of a business cycle model with on-the-job search and occupational mobility to rationalize observed behaviour, thereby distinguishing who moves and why, and how this relates to the underlying risks workers face. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1548&r=all |
| By: | Avihai Lifschitz (Tel Aviv University); Ofer Setty (Tel Aviv University); Yaniv Yedid-Levi (Interdisciplinary Center (IDC) Herzliya) |
| Abstract: | Labor market outcomes demonstrate considerable variation between and within skill groups. We construct a general equilibrium model with incomplete markets and exogenous differences that matches these facts. We study the role of exogenous heterogeneity in choosing the optimal re- placement rate and the maximum benefit for an unemployment insurance (UI) system. The optimal average replacement rate is 54%, compared to 10% in a model without the features of exogenous heterogeneity. The relatively generous choice in our model is due to the redistributive role of UI – a manifestation of two elements. First, workers who are unemployed more often receive positive net transfers from the UI system because they draw resources more frequently. Second, the existence of a cap makes UI benefits progressive. Our main result holds even in the presence of a generous progressive taxation system. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:391&r=all |
| By: | Sophia Gilbukh (Baruch College, CUNY); Paul Goldsmith-Pinkham (Federal Reserve Bank of New York) |
| Abstract: | The real estate market is highly intermediated, with 90% of buyers and sellers hiring an agent to help them transact a house. However, low barriers to entry and fixed commission rates result in a market where inexperienced intermediaries have a large market share, especially following house price booms. Using rich micro-level data on 10.4 million listings, we show that seller agents’ experience is an important determinant of client outcomes, particularly during real estate busts. Houses listed for sale by inexperienced agents spend more time on the market and have a lower probability of selling. We then study the aggregate implications of the agents’ experience distribution on real estate market liquidity by building a theoretical entry and exit model of real estate agents with aggregate shocks. Several policies that raise the barriers to entry for agents are considered: 1) increased entry costs; 2) lower commission rates; and 3) more informed clients. Across each counterfactual, increasing barriers to entry shift the distribution of agents across experience to the right, improves liquidity, and reduces the amplitude of liquidity cycles in the housing market. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:932&r=all |
| By: | Jesus Fernandez-Villaverde (University of Pennsylvania, NBER, and CEPR); Samuel Hurtado (Banco de Espana); Galo Nuno (Banco de Espana) |
| Abstract: | This paper investigates how, in a heterogeneous agents model with ?nancial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate time-varying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be e?ciently computed, despite its substantial nonlinearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with di?usions. We document, ?rst, the strong nonlinearities created by ?nancial frictions. Second, we report the existence of multiple stochastic steady states with properties that di?er from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse re-sponse functions of the model are highly state-dependent. In particular, we ?nd that the recovery after a negative aggregate shock is more sluggish when the economy is more lever-aged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks. |
| Keywords: | Heterogeneous agents; aggregate shocks; continuous-time; machine learning; neural networks; structural estimation; likelihood functions |
| JEL: | C45 C63 E32 E44 G01 G11 |
| Date: | 2019–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:19-015&r=all |
| By: | Daniel Carroll (Federal Reserve Bank of Cleveland); Sewon Hur (Federal Reserve Bank of Cleveland) |
| Abstract: | How are the gains and losses from trade (disruptions) distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with non-homothetic preferences---to generate the documented relationship between tradable expenditure shares, income, and wealth---and uninsurable earnings risk---to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade on households along the income and wealth distribution. In a numerical exercise, we increase trade costs by 20 percentage points and allow the economy to transition to a new steady state. We find that households in the lowest wealth decile experience welfare losses over the transition, measured by permanent consumption equivalents, that are 35 percent larger than those in the highest wealth decile. Finally, we find that the distributional impacts of trade significantly depend on how the tariff revenue is spent. In particular, using tariff revenue to reduce labor income taxes is close to welfare-neutral. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1358&r=all |
| By: | James Bullard (Federal Reserve Bank of St. Louis); Riccardo DiCecio (Federal Reserve Bank of St. Louis) |
| Abstract: | We study nominal GDP targeting as optimal monetary policy in a simple and stylized model with a credit market friction. The macroeconomy we study has considerable income inequality, which gives rise to a large private sector credit market. There is an important credit market friction because households participating in the credit market use non-state contingent nominal contracts (NSCNC). We extend previous results in this model by allowing for substantial intra-cohort heterogeneity. The heterogeneity is substantial enough that we can approach measured Gini coefficients for income, financial wealth, and consumption in the U.S. data. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supplying their desired amount of labor, a type of "divine coincidence" result. We also further characterize monetary policy in terms of nominal interest rate adjustment. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:347&r=all |
| By: | Jelena Zivanovic |
| Abstract: | I use a structural vector autoregression (SVAR) with sign restrictions to provide conditional evidence on the behavior of the US external finance premium (EFP). The results indicate that the excess bond premium, a proxy for the EFP, reacts countercyclically to supply and monetary policy shocks and procyclically to demand shocks. I confront my empirical evidence with the predictions from financial dynamic stochastic general equilibrium (DSGE) models with respect to the finance premium in order to identify an empirically relevant financial friction. The Bernanke, Gertler and Gilchrist (1999) model generates transmission mechanisms that are favored by the data. |
| Keywords: | Economic models; Financial markets; Recent economic and financial developments |
| JEL: | E32 E44 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-38&r=all |
| By: | Pooya Molavi (Massachusetts Institute of Technology) |
| Abstract: | This paper explores a form of bounded rationality where agents learn about the economy with possibly misspecified models. I consider a recursive general-equilibrium framework that nests a large class of macroeconomic models. Misspecification is represented as a constraint on the set of beliefs agents can entertain. I introduce the solution concept of constrained-rational expectations equilibrium (CREE), in which each agent selects the belief from her constrained set that is closest to the endogenous distribution of observables in the Kullback–Leibler divergence. If the set of permissible beliefs contains the rational-expectations equilibria (REE), then the REE are CREE; otherwise, they are not. I show that a CREE exists, that it arises naturally as the limit of adaptive and Bayesian learning, and that it incorporates a version of the Lucas critique. I then apply CREE to a particular novel form of bounded rationality where beliefs are constrained to factor models with a small number of endogenously chosen factors. Misspecification leads to amplification or dampening of shocks and history dependence. The calibrated economy exhibits hump-shaped impulse responses and co-movements in consumption, output, hours, and investment that resemble business-cycle fluctuations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1584&r=all |
| By: | Lorenzo Bretscher (London Business School); Alex Hsu (Georgia Institute of Technology); Andrea Tamoni (London School of Economics) |
| Abstract: | Uncertainty shocks are also risk premium shocks. With countercyclical risk aversion (RA), a positive shock to uncertainty not only increases risk, but it also elevates RA as consumption growth falls. The combination of high RA and high uncertainty produces significant risk premia in bad times, which in turn exacerbate the decline of macroeconomic aggregates and equity prices. Empirically, we document that local projection coefficients capturing the data response to the interaction of risk aversion and uncertainty are statistically significant and economically large. Indeed, heightened levels of RA during the 2008 crisis amplified the drop in output and investment by 41% and 28%, respectively, at the recession trough. Theoretically, we show that a New-Keynesian model with endogenously time-varying risk aversion via Campbell and Cochrane (1999) can produce large falls in output and investment close to matching their data counterparts following positive uncertainty shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1567&r=all |
| By: | Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey) |
| Abstract: | Sovereigns' public capital influences sovereign debt crises and resolution. We compile a dataset on public expenditure composition around restructurings with private external creditors. We show that during restructurings, public investment (i) experiences severe decline and slow recovery, (ii) differs from public consumption and transfers, (iii) reduces share in public expenditure, and (iv) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows severe decline and slow recovery in public investment – “sovereign debt overhang” – delay debt settlement. Data support these theoretical predictions. |
| JEL: | F34 F41 H63 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1519&r=all |
| By: | Donadelli, Michael; Jüppner, Marcus; Prosperi, Lorenzo |
| Abstract: | According to current regulation, European banks can apply zero risk weights to sovereign exposures in their balance sheet, irrespective of the assigned rating. We show that a zero risk weighting of sovereign bonds has implications by distorting banks' asset allocation decisions. Due to the lower regulatory cost of sovereign bonds, banks invest more in those bonds at the expense of lending to the real sector. To quantify the effect of this distortion, we build a standard RBC model featuring financial intermediation and a government sector calibrated to the euro area economy. Financial regulation is introduced via a penalty function that punishes banks if they deviate from the target capital ratio. We study the zero risk weight policy during normal times when there is no sovereign default risk and find that a policy introducing positive risk weights on government bonds has both long-run effects and stabilising properties with respect to the business cycle. This policy makes the steady state lending spread on loans to firms decline, stimulating investment and output. Also, it stabilises the lending spread, leading to a lower volatility of investment and output. |
| Keywords: | sovereign bonds,risk weighting,RBC,lending |
| JEL: | E44 E32 G21 G32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:302019&r=all |
| By: | Sergio Salgado (University of Minnesota); Fatih Guvenen (University of Minnesota); Nicholas Bloom (Stanford University) |
| Abstract: | We show in panels of US Census and international firm data that the cross-sectional skewness of employment and sales growth distributions are procyclical. In particular, during recessions they display a large left-tail of negative growth rates (and during booms a large right tail of positive growth rates). These results are extremely robust to different selection criteria, across countries, industries, and measures. We build a heterogeneous-agents model in which entrepreneurs face shocks with time varying skewness risk that matches the firm-level distributions we document for the US. This model shows that a negative shock to skewness (that keeps the mean and variance constant) to firms’ productivity growth generates significant and persistent decreases in investment, hiring, growth and consumption. Hence, we argue that periods of heightened left-tail risk help to drive business cycle fluctuations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1189&r=all |
| By: | Florin Bilbiie (University of Lausanne) |
| Abstract: | An analytical (heterogeneous-agent New-Keynesian) HANK model allows a closed-form treatment of a wide range of NK topics: determinacy properties of interest-rate rules, resolving the forward guidance FG puzzle, amplification and fiscal multipliers, liquidity traps, and optimal monetary policy. The key channel shaping all the model's properties is that of cyclical inequality: whether the income of constrained agents moves less or more than proportionally with aggregate income. With countercyclical inequality, good news on aggregate demand gets compounded, making determinacy less likely and aggravating the FG puzzle (the resolution of which requires procyclical inequality)---a Catch-22, because countercyclical inequality is what HANK (and TANK) models need to deliver desirable amplification. The dilemma can be resolved if a distinct, "cyclical-risk" channel is procyclical enough. Even when both channels are countercyclical a Wicksellian rule of price-level targeting ensures determinacy and cures the puzzle. Optimal monetary policy is isomorphic to RANK and TANK but calls for less inflation stabilization. In a liquidity trap, even with countercyclical inequality and FG amplification, optimal policy does not imply larger FG duration because as FG power increases, so does its welfare cost. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:178&r=all |
| By: | Felipe Benguria (University of Kentucky); Felipe Saffie (University of Maryland); Hidehiko Matsumoto (Bank of Japan) |
| Abstract: | This paper studies productivity and trade dynamics during sudden stop episodes. Sudden stops of capital inflows to emerging economies are characterized by deep recessions, slow recoveries, sharp devaluations, and reversals in the trade balance. We develop a framework to capture these salient features of sudden stops. The model features endogenous productivity and trade dynamics, and endogenous sudden stops. In this environment, firm and product entry and exit into domestic and export markets play a key role in shaping the dynamic response of the economy to a sudden stop. We discipline the model using unique firm-product level data in both domestic and export markets from a census of manufacturing firms in an emerging economy. The calibrated model matches the key stylized facts of sudden stops and their aftermath. In addition, we show that the models’ predictions are consistent with the dynamics of firms’ product portfolios during the Chilean sudden stop of 1998. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1378&r=all |
| By: | Shekhar Tomar (TSE) |
| Abstract: | This paper introduces the concept of diffusion of shocks in a macroeconomic network consisting of inter-sectoral production linkages. Using sectoral and firm level data, the paper documents two empirical facts. First, sectoral output do not react contemporaneously to shocks in input sectors (it only reacts with a lag). Second, different sectors take different time horizon to respond to shocks to their input sectors. I incorporate these features in a model of production network to study the contribution of sectoral shocks to aggregate fluctuations. I show that if sectors have different reaction horizons it leads to diffusion of shocks through the network over time which prevents the inter-sectoral linkages to form the feedback loop structure essential to generate aggregate volatility. So, the impact of a given sectoral shock lingers over a longer time period but contributes less to aggregate volatility in any given period. After accounting for diffusion, the first order network interconnections still matter but the contribution of higher order interconnections to aggregate volatility gets diluted. Finally, I use a factor model to estimate the contribution of aggregate vs idiosyncratic sectoral shocks to aggregate fluctuations in US industrial production (IP) data. I find that in the case of a diffusion adjusted network model, the contribution of sectoral shocks to aggregate volatility is 27 percent and is of the same order of magnitude as in statistical factor analysis. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1026&r=all |
| By: | Juergen Jung (Towson University); Chung Tran (Australian National University) |
| Abstract: | We quantitatively explore the welfare benefits of health insurance over the lifecycle in a dynamic general equilibrium model with health risk and a health care sector. We consider three distinct approaches to designing a health insurance system: (i) a mixed private and public health insurance system similar to the US system, (ii) private health insurance (PHI), and (iii) universal public health insurance (UPHI). Our results indicate that the introduction of the US system into an economy without any health insurance results in large welfare gains, but does not produce the best welfare outcome. The PHI system with some government regulation on premiums is viable and produces welfare gains comparable to the welfare gains generated by the US system. The UPHI system with a high enough coinsurance rate produces better overall welfare outcomes than the other two systems. There exists an optional coinsurance rate that maximizes the welfare benefits of the UPHI system. A structural reform that replaces the US system with the UPHI system—i.e., Medicare for all—is welfare improving, but would face political headwinds due to opposing welfare effects across income groups. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:690&r=all |
| By: | Juan Carlos Conesa (Stony Brook University); Begoña Dominguez (University of Queensland) |
| Abstract: | Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an infinitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero at steady state from the point of view of any agent. However, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For Pareto weights that lead to Pareto-improving reforms, we find that labor tax rates should be eliminated while dividend tax rates should be increased to around 36 per cent at steady state. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:243&r=all |
| By: | Diego Comin (Dartmouth College); Ana Danieli (Northwestern University); Marti Mestieri (Northwestern University) |
| Abstract: | We document that income elastic sectors are more intensive in high- and low-skill oc-cupations than income inelastic sectors, which are relatively more middle-skill intensive.As a result, increases in aggregate expenditure have an asymmetric effect on labor demandacross occupations and cause labor-market polarization. We quantify the importance of thisdemand-driven labor market polarization for the US using a general equilibrium modelwith endogenous job assignment and nonhomothetic demand. Our model is calibrated toaggregate variables from 1980 and household-level estimates of sectoral income elasticity.We find that the increase in aggregate expenditure from 1980 to 2016 accounts for 50% of theincrease in the wage bill share of high-skill occupations, 60% of the decline for medium-skilloccupations and virtually all of the increase in the wage bill share of low-skill occupations.This mechanism is also quantiatively important to understand the evolution of labor marketoutcomes across occupations in the period 1950-1980 and in other developed economies. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1398&r=all |
| By: | Margherita Borella (Unversity of Torino); Fang Yang (Louisiana State University); Mariacristina De Nardi (UCL, Federal Reserve Bank of Chicago, CE) |
| Abstract: | In the U.S., both taxes and old age Social Security benefits depend on one's marital status and tend to discourage the labor supply of the secondary earner. To what extent are these provisions holding back female labor supply? We estimate a rich life-cycle model of labor supply and savings for couples and singles using the Method of Simulated Moments (MSM) on the 1945 and 1955 birth-year cohorts and we use it to evaluate what would happen without these provisions. Our model matches well the life cycle profiles of labor market participation, hours, and savings for married and single people and generates plausible elasticities of labor supply. Eliminating marriage-related provisions drastically increases the participation of married women over their entire life cycle, reduces the participation of married men after age 55, and increases the savings of couples in both cohorts, including in the later one, which has similar participation to that of more recent generations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:917&r=all |
| By: | John Duffy (University of California, Irvine); Daniela Puzzello (Indiana University) |
| Abstract: | We explore the celebrated Friedman rule for optimal monetary policy in the context of a laboratory economy based on the Lagos-Wright model. The rule that Friedman proposed can be shown to be optimal in a wide variety of different monetary models, including the Lagos-Wright model. However, we are not aware of any prior empirical evidence evaluating the welfare consequences of the Friedman rule. We explore two implementations of the Friedman rule in the laboratory. The first is based on a deflationary monetary policy where the money supply contracts to offset time discounting. The second implementation pays interest on money removing the private marginal cost from holding money. We explore the welfare consequences of these two theoretically equivalent implementations of the Friedman Rule and compare results with two other policy regimes, a constant money supply regime and another regime advocated by Friedman, where the supply of money grows at a constant k-percent rate. We find that, counter to theory, the Friedman rule is not welfare improving, performing no better than a constant money regime. By one welfare measure, we find that the k-percent money growth rate regime performs best. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:541&r=all |
| By: | Elias Albagli (Central Bank of Chile); Alberto Naudon (Banco Central de Chile); Benjamin Garcia (Central Bank of Chile); Matias Tapia (Central Bank of Chile); Sebastian Guarda (Central Bank of Chile) |
| Abstract: | Recent microeconomic evidence suggests that the composition of match qualities among employed workers deteriorates in recessions. We interpret this as evidence of the destruction of valuable job ladders, a form an intangible capital. This paper builds an equilibrium search model with a stylized job ladder to study the relationship between the composition of match qualities and the dynamics of aggregate productivity and output. Our results show that shocks that destroy high quality matches and their associated job ladders can have signifcant and very persistent effects on labor productivity and output, even after aggregate employment has recovered. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:880&r=all |
| By: | Musab Kurnaz (University of North Carolina at Charlotte); Mehmet Soytas (Ozyegin University) |
| Abstract: | We study the impact of the income taxation on parental investment for children and its consequence on intergenerational income correlation. We estimate a life-cycle dynastic model of households and conduct counterfactual analysis to observe the effects of various tax regimes. Comparing to a no tax environment, we find that the flat taxes reduce the correlation only by one percentage points. The reduction is, however, much significant (seven percentage points) if the taxes are progressive, the average tax rate is increasing in income. The increase in income mobility is due to the increase in the fertility rate (quantity) and the decrease in the educational outcome of children (quality). We also show that when the taxes are flat within same size households but provide child benefits, which is an important component of the US income taxation, the intergenerational income correlation is four percentage points less compared to the correlation under the flat tax regime. This reduction occurs because parents with lower education invest more time in children’s human capital comparing to a flat tax regime which increases their children’s educational outcome and increases income mobility. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:290&r=all |
| By: | Marcos R. Castro |
| Abstract: | We develop and estimate a closed economy DSGE model with banking sector to assess the impact of introducing sectoral countercyclical capital buffers as a macroprudential tool. The model is developed to represent Brazilian bank credit markets. It features three types of bank credit — housing, consumer and commercial — as well as loans provided by a development bank. Loans are long-term, and government regulates housing loans, influencing both interest rates and loan supply. Banks are subject to bank capital requirement, and both broad (CCyB) and sectoral (SCCyB) countercyclical buffers can be introduced by macroprudential authorities. We simulate alternative policies using SCCyBs and CCyB with implementable nonlinear rules using broad and sectoral credit gaps as indicators, and compared the resulting performances. We conclude that, compared with CCyB alone, SCCyBs provide a more flexible set of instruments that allows achieving better macroeconomic stabilization in terms of variances of credit, total capital requirement and capital adequacy ratio. However, the marginal benefit of those SCCyB policies relative to the CCyB-only policy is lower than the improvements obtained by this latter policy compared with the reference scenario with no buffer. Also, SCCyB policies imply more frequent intervention, suggesting that in practice introducing these additional instruments may require more complex implementation procedures. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:503&r=all |
| By: | Victor Dorofeenko; Gabriel Lee; Kevin Salyer; Johannes Strobel |
| Abstract: | This paper demonstrates that risk (uncertainty) along with the monetary (interest rates) shocks to thehousing production sector that is subject to nominal frictions in prices and wages are a quantitativelyimportant impulse mechanism for the business and housing cycles. Our model framework is that ofthe housing supply/banking/monetary sector model as developed in Dorofeenko, Lee, Salyer and Strobel(2016) with the model of housing demand with sticky pricing (Calvo) presented in Iacoviello and Neri(2010). We provide empirical evidence that large housing price and residential investment boom and bustcycles over the last few years are driven largely by economic fundamentals and financial constraints. Wefind the impact of risk and monetary shocks are the main impulse in explaining the aggregate and sectoralfluctuations. Moreover, in the presence of nominal frictions in prices and wages, the Loan to Value ratiothat affects the household borrowing constraint plays a critical role for real aggregate variables. Thiscomparison carries over to housing market variables such as the price of housing, the risk premium onloans, and the bankruptcy rate of housing producers. |
| Keywords: | credit constraint; hetrogenous households; Monetary Policy; residential investment; uncertainty and demand shocks |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_214&r=all |
| By: | Aleksander Berentsen (University of Basel); Christopher Waller (Federal Reserve Bank of St. Louis); Mariana Rojas Breu (University of Paris Dauphine) |
| Abstract: | We construct a search model where sellers post prices and produce goods of unknown quality. A match between a buyer and a seller reveals the quality of the seller. We look at the pricing decisions of the sellers in this environment. We then introduce a rating system whereby buyers reveal the seller's type by giving them a `star' if they are a high quality seller. We show that new sellers charge a low price to attract buyers and if they receive a star they post a high price. Furthermore, high quality sellers sell with a higher probability than new sellers. We show that welfare is higher with a ratings system. Using data on Airbnb rentals to compare the pricing decisions of Superhosts (elite rentals) to non-Superhosts we show that Superhosts: 1) charge higher prices, 2) have more bookings and 3) higher revenue than non-Super hosts. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:933&r=all |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | The objective of this paper is to show that the proposal by Froot and Thaler (1990) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all targeted moments related to these puzzles. |
| JEL: | F3 F31 F41 G11 G12 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26259&r=all |
| By: | Daisoon Kim (London Business School); Yoonsoo Lee (Sogang University) |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model to analyze endogenous mechanisms of changes in the first and second moments of firm heterogeneity over the business cycle. In the model, monopolistic competition and endogenous firm entry generate procyclical marginal cost, which implies a procyclical selection mechanism (i.e., increase in a production cutoff during booms). As more firms enter during booms, competition increases in factor markets, resulting in an increase in factor prices. Such an increase in the production costs makes less productive firms shrink: an increase in the production cutoff. While this mechanism explains the countercyclical dispersion in firm-level productivity endogenously, it cannot account for the cyclical changes in the first moment (i.e., relative productivity of entering and exiting firms). We introduce initial uncertainty for entrants to generate empirically consistent movements of both first and second moments. We assume that entrants face additional uncertainty because it is more challenging to predict firm-specific productivity before they produce. Our results suggest that a part of countercyclical dispersion of productivity (at lease, 20%) can be endogenously generated in a model, without the help of the second moment shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:927&r=all |
| By: | Thomas Cooley (New York University); Ramon Marimon (European University Institute and UPF - Barcelona GSE); Vincenzo Quadrini (USC) |
| Abstract: | Two core principles of economics are that welfare can be enhanced with stronger commitment to individual arrangements (contracts) and with more competition. However, in the presence of search frictions, commitment may deter entry with consequent reduction in the reallocation of human resources. We study these tradeoffs when there are different degrees of commitment in a model with on-the-job search. Since the degree of commitment depends on the organizational structure of a firm, we contrast the equilibrium of an industry where firms are organized in the form of partnerships with the equilibrium where firms are public companies. We show that in the equilibrium with public companies there is more investment in high return but uncertain activities (risk-taking), higher productivity (value added per employee) and greater income dispersion (inequality). These predictions are consistent with the observed evolution of the financial sector where the switch from partnerships to public companies has been especially important in the decades that preceded the 21st Century financial crisis. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:424&r=all |
| By: | Ana Maria Santacreu (Federal Reserve Bank of Saint Louis); Jing Zhang (Federal Reserve Bank of Chicago); Michael Sposi (Southern Methodist University) |
| Abstract: | We build a multisector general equilibrium model of trade to quantify the effect of U.S. tariffs both at the national and global level. The model incorporates region-specific input-output linkages, endogenous capital accumulation and endogenous trade imbalances. We estimate sector-specific bilateral trade frictions and productivity levels for 50 U.S. states and 41 non-U.S. countries across 2 sectors of the economy using detailed bilateral trade and production data. We then simulate welfare Laffer curves for each state by varying the U.S. tariff rate. We consider two cases: (i) No retaliation from the foreign countries and (ii) Tit-for-Tat retaliation. We find that the tariff rate that maximizes consumption varies across states and it ranges from 14% to 45% when there is no retaliation and from 0% to 13% when there is retaliation. Furthermore, we find that these tariffs correlate negatively with the ratio of foreign exports to GDP. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:259&r=all |
| By: | Liyan Shi (Einaudi Institute for Economics and Finance) |
| Abstract: | This paper assesses the aggregate effect of non-compete employment contracts, agreements that exclude employees from joining competing firms for a duration of time, in the managerial labor market. These contracts encourage firm investment but restrict manager mobility. To explore this tradeoff, I develop a dynamic contracting model in which firms use non-compete to enforce buyout payment when their managers are poached, ultimately extracting rent from outside firms. Such rent extraction encourages initial employing firms to undertake more investment, as they partially capture the external payoff, but distorts manager allocation. The privately-optimal contract, however, over-extracts rent by setting an excessively long non-compete duration. Therefore, restrictions on non-compete can improve efficiency. To quantitatively evaluate the theory, I assemble a new dataset on non-compete contracts for executives in U.S. public firms. Using the contract data, I quantify the extent that executives under non-compete are associated with a lower separation rate and higher firm investment. I also provide new empirical evidence consistent with non-compete reducing wage-backloading in the model. The calibrated model suggests that the optimal restriction on non-compete duration is close to banning non-compete. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:852&r=all |
| By: | Jorge Miranda-Pinto (University of Queensland); Daniel Murphy (University of Virginia); Eric Young (University of Virginia); Kieran Walsh (University of Virginia) |
| Abstract: | We develop a theory of saving-constrained households to explain the following facts that are difficult to reconcile with existing theories: 1) Consumption is excessively volatile relative to income (established fact), 2) a large fraction of high-debt households exhibit marginal propensities to consume near zero, 3) lagged high expenditure is associated with low contemporaneous spending propensities. Our proposed interpretation of these facts is that household expenditure depends on time-varying minimum consumption thresholds that, if violated, yield substantial utility costs. We demonstrate that such a model can match many features of the joint dynamics of income and consumption. Our theory has implications for the propagation of macroeconomic shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1456&r=all |
| By: | Pablo D'Erasmo (FRB Philadelphia); Hernan Moscoso Boedo (University of Cincinnati); Maria Olivero (Drexel University) |
| Abstract: | We study the impact of banks' exposure to defaulted sovereign debt on their supply of credit. As a natural experiment and to identify the credit supply effects of an unanticipated shock to banks funding, we use the default of 2001 in Argentina and the sharp currency devaluation that followed. We start by exploiting the variation in the data at the bank-level and bank-firm linked data in the context of a reduced form empirical model. Then, we build a model characterized by search and matching frictions in which firms (borrowers) develop long-term relationships with their lenders. Using bank-firm linked data for the period 2001-2005 we find evidence consistent with our theory. Exposure to defaulted bonds in 2001 of the lenders that a firm borrows from has a negative effect on the post-default growth rate of the supply of credit available to that firm. This exposure effect is weaker for firms that were able to grow even after the default. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1326&r=all |
| By: | Danial Lashkari (Boston College); Arthur Bauer (CREST); Jocelyn Boussard (Banque de France) |
| Abstract: | The rise of Information Technology (IT) is often linked to recent secular macroeconomic trends such as the fall in the labor share and the rise in industry concentration. This paper demonstrates a novel causal mechanism through which the fall in the price of IT capital con- tributes to these trends. It relies on newly constructed measures of software and hardware capital in the universe of French firms to document a strong correlation between firm size and the intensity of demand for IT. Using exogenous destination-level demand shocks in the sample of exporting firms, the paper identifies a positive elasticity of IT intensity with respect to firm output. A simple heterogeneous-firm model of industry equilibrium can rationalize these empirical patterns, if firm-level production function is nonhomothetic and the relative marginal product of IT rises with output. Given a large fall in the price of IT inputs, the calibrated model generates a sizable rise in industry concentration, and a fall in aggregate labor share and entry. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1380&r=all |
| By: | Julien Hugonnier (EPFL); Benjamin Lester (Dr.); Pierre-Olivier Weill (University of California, Los Angeles) |
| Abstract: | We extend Duffie, Garleanu, and Pedersen’s (2005) search-theoretic model of over-the-counter (OTC) asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers’ valuations or inventory costs. We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analyzed in empirical studies of the intermediation process in OTC markets. A calibration to the market for municipal securities reveals that the model can generate trading patterns and prices that are quantitatively consistent with the data. We use the calibrated model to compare the gains from trade that are realized in this frictional market with those from a hypothetical, frictionless environment, and to distinguish between the quantitative implications of various types of heterogeneity across dealers. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:327&r=all |
| By: | Bersson, Betsy; Hürtgen, Patrick; Paustian, Matthias |
| Abstract: | At the zero lower bound (ZLB), expectations about the future path of monetary or fiscal policy are crucial. We model expectations formation under level-k thinking, a form of bounded rationality introduced by García-Schmidt and Woodford (2019) and Farhi and Werning (2017), consistent with experimental evidence. This process does not lead to a number of puzzling features from rational expectations models, such as the forward guidance and the reversal puzzle, or implausible large fiscal multipliers. Optimal monetary policy at the ZLB under level-k thinking prescribes keeping the nominal rate lower for longer, but short-run macroeconomic stabilization is less powerful compared to rational expectations. |
| Keywords: | expectations formation,optimal monetary policy,New Keynesian model,zero lower bound,forward guidance puzzle,reversal puzzle,fiscal multiplier |
| JEL: | E32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:342019&r=all |
| By: | Horvath, Roman; Kaszab, Lorant; Marsal, Ales; Rabitsch, Katrin |
| Abstract: | We generalize a simple New Keynesian model and show that a flattening of the Phillips curve reduces the size of fiscal multipliers at the zero lower bound (ZLB) on the nominal interest rate. The factors behind the flatting are consistent with micro- and macroeconomic empirical evidence: it is a result of, not a higher level of price rigidity, but an increase in the degree of strategic complementarity in price-setting -- invoked by the assumption of a specific instead of an economy-wide labour market, and decreasing instead of constant-returns-to-scale. In normal times, the efficacy of fiscal policy and resulting multipliers tends to be small because negative wealth effects crowd out consumption, and because monetary policy endogenously reacts to fiscally-driven increases in inflation and output by raising rates, offsetting part of the stimulus. In times of a binding ZLB and a fixed nominal rate, an increase in (expected) inflation instead lowers the real rate, leading to larger fiscal multipliers. Conditional on being in a ZLB-environment, under a flatter Phillips curve, increases in expected inflation are lower, so that fiscal multipliers at the ZLB tend to be lower. Finally, we also discuss the role of solution methods in determining the size of fiscal multipliers. |
| Keywords: | Fiscal multipliers, strategic complementarity, Phillips curve, zero lower bound, New Keynesian model |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:7167&r=all |
| By: | Thomas Cooley (New York University); Edwin Nusbaum (University of California, Santa Barbara); Espen Henriksen (University of California, Davis) |
| Abstract: | Since the early 1990’s there have been persistent slowdowns in the growth rates of the four largest European economies: France, Germany, Italy, and the United Kingdom. This persistence suggests a low-frequency structural change is at work. Aging populations, both in terms of longer individual life expectancies and declining fertility have caused a shift in the age-cohort distribution. Growth accounting identifies the following five sources of economic growth: total factor productivity, capital accumulation, labor supply on the intensive and extensive margin, and population growth. Changing demographics affect all these five margins. The effects of aging populations on economic growth are also exacerbated by the pension systems in place. In order to fund increasing liabilities with a shrinking tax base, tax rates must increase to balance budgets. This will impose distortions to individual factor-supply choices, providing further headwinds for economic growth. We quantify the additional growth effects resulting from these distortions. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1352&r=all |
| By: | Anmol Bhandari (University of Minnesota); David Evans (University of Oregon); Mikhail Golosov (University of Chicago); Thomas Sargent (New York University) |
| Abstract: | We develop a novel class of perturbations to study the optimal composition of a government's debt portfolio. We derive a formula for the optimal portfolio and show that it can be expressed in terms of estimable “sufficient statistics”. We use U.S. data to calculate the key moments required by our theory and show that they imply that the optimal portfolio is approximately geometrically declining in bonds of different maturities and requires little rebalancing in response to aggregate shocks. Our optimal portfolio differs from portfolios prescribed by existing models often used in the business cycle literature and also from those adopted by the U.S. Treasury. The key normative differences are driven by counterfactual asset pricing implications of standard models. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1011&r=all |
| By: | Hengjie Ai (University of Minnesota); Anmol Bhandari (University of Minnesota); Chao Ying (University of Minnesota); Yuchen Chen (University of Minnesota) |
| Abstract: | This paper shows that factor misallocation is closely tied to the risk-sharing avenues available to firm owners. In contrast to the commonly studied bond-only economy with collateral constraints (for example Moll (2014)), we find that the degree of misallocation is increasing in persistence of the idiosyncratic risk when firms have access to state-contingent contracts. The possibility to transfer wealth from high productivity states to low productivity states allows firm owners to trade off efficient allocation of consumption against efficient allocation of capital. We show that for reasonable values of risk aversion, insurance needs more than offset production efficiency concerns and thereby generates large capital misallocation. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1215&r=all |
| By: | Adrien Auclert (Stanford); Frederic Martenet (Stanford University); Hannes Malmberg (University of Minnesota) |
| Abstract: | Macroeconomists agree that population aging is likely to reduce equilibrium real interest rates. However, there is disagreement regarding the magnitude of this effect, and the mechanisms through which it operates. In this paper, we reconsider the pressure of demographic change on interest rates. Using a rich overlapping generation model, we show that this effect can be expressed as a function of a few interpretable elasticities. We calculate some of these elasticities directly using empirical age-wealth profiles and projected population age distributions. Our results suggest that, if interest rates were to remain constant, the twenty-first century would see a very large increase in the wealth-to-GDP ratios of rich countries. We use our decomposition framework to guide our calibration of the remaining parameters of our model and to bound the decline in equilibrium interest rates we should expect from this phenomenon. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:952&r=all |
| By: | Fernando Leibovici (Federal Reserve Bank of St. Louis); David Wiczer (Stony Brook University) |
| Abstract: | This paper studies the role of credit constraints in accounting for the dynamics of firm-level default during the Great Recession. We present novel firm-level evidence on the role of credit ratings in exit behavior during the Great Recession. Firms with low credit rating are more likely to default than firms with high credit ratings and the difference widened substantially in the Great Recession while, in contrast, default rates did not vary much by size, age, or productivity. Because credit ratings may capture the long-term solvency of firms and their access to short-term liquidity, we interpret this evidence using a model of heterogeneous firms with endogenous default and delinquency choices, where intertemporal loans are taken to pay for working capital expenditures and loan prices depend on the firms' payment history. Our findings suggest that credit constraints played an important role in accounting for the dynamics of firm-level default during the Great Recession. We investigate the extent to which credit ratings reflect imperfect information about firms, and examine their implications for the dynamics of default as well as for the design of policies during episodes of financial distress. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1389&r=all |