|
on Dynamic General Equilibrium |
|
Issue of 2019‒10‒07
sixty-two papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Minseong Kim |
| Abstract: | We demonstrate that if all agents in an economy make time-consistent decisions and policies, then there exists no rational expectation equilibrium in a dynamic stochastic general equilibrium (DSGE) model, unless under very restrictive and special circumstances. Some time-consistent interest rate rules, such as Taylor rule, worsen the equilibrium non-existence issue in general circumstances. Monetary policy needs to be lagged in order to avoid equilibrium non-existence due to agents making time-consistent decisions. We also show that due to the transversality condition issue, either fiscal-monetary coordination may need to be modeled, or it may be necessary to write a model such that bonds or money provides utility as medium of exchange or has liquidity roles. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.10915&r=all |
| By: | Roger Farmer (University of Warwick); Pawel Zabczyk (International Monetary Fund) |
| Abstract: | We demonstrate that the Fiscal Theory of the Price Level (FTPL) cannot be used to determine the price level uniquely in the overlapping generations (OLG) model. We provide two examples of OLG models, one with 3-period lives and one with 62-period lives. Both examples are calibrated to an income profile chosen to match the life-cycle earnings process in U.S. data estimated by Guvenen et al. (2015). In both examples, there exist multiple steady-state equilibria. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies. As long as the primary deficit or the primary surplus is not too large, the fiscal authority can conduct policies that are unresponsive to endogenous changes in the level of its outstanding debt. Monetary and fiscal policy can both be active at the same time. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:39&r=all |
| By: | Feng Dong (Shanghai Jiao Tong University); Yi Wen (Federal Reserve Bank of St. Louis) |
| Abstract: | We build an analytically tractable model of dynamic production networks with incomplete insurance markets and heterogeneous money demand. We use the model to quantify the classic Baumol-Tobin redistribution channel of monetary policy. Our model can explain (i) the joint distribution of household consumption and money demand and (ii) the strong propagation mechanism of monetary shocks for the business cycle found in empirical VARs across production sectors. We show that the Baumol-Tobin redistribution channel of monetary non-neutrality can be greatly magnified and propagated through endogenous leisure choices and production networks. Our model can account for the hump-shaped impulse responses of sectoral output and employment to monetary shocks, thanks to the endogenous linkage between the distribution of household money demand and firms' input-output coefficient matrix. Our model provides an alternative framework to the Heterogeneous Agent New Keynesian (HANK) model for monetary policy analysis. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1464&r=all |
| By: | Diego Anzoategui (Rutgers University) |
| Abstract: | I study the impact of austerity programs implemented in the Eurozone since 2010. To do so I incorporate strategic sovereign default into a DSGE model where the government follows fiscal rules, which are estimated from data. I calibrate the model using data from Spain and estimate the size and impact of scal policy shocks associated with austerity policies. I then use the model to predict what would have happened to output, consumption, employment, sovereign debt levels and spreads if Spain had continued to follow the pre-2010 fiscal rule instead of switching to the austerity track. I find that, contrary to the expectations of policy makers at the time, austerity did not decrease sovereign spreads or debt-to-GDP ratios during 2010-2013. Furthermore it had a negative impact on employment and GDP. Nevertheless, the short run pain is related to a long run gain. The model predicts that as a consequence of austerity Spain is more likely to show lower levels of debt and spreads in the future. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:441&r=all |
| By: | Dániel Baksa (International Monetary Fund & Central European University); Zsuzsa Munkácsi (International Monetary Fund) |
| Abstract: | The empirical and theoretical evidence on the inflation impact of population aging is mixed, and there is no evidence regarding the volatility of inflation. Based on advanced economies’ data and a DSGE-OLG model - a multi-period general equilibrium framework with overlapping generations, - we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper is also the first to discuss, using this framework, how aging affects the short-term cyclical behavior of the economy and the transmission channels of monetary policy. Further, we are also the first to examine the interplay between aging and optimal central bank policies. As aging redistributes wealth among generations, generations behave differently, and the labor force becomes more scarce with aging, our model suggests that aging makes monetary policy less effective, and aggregate demand less elastic to changes in the interest rate. Moreover, in more gray societies central banks should react more strongly to nominal variables, and in a very old society the nominal GDP targeting rule might become the most effective monetary policy rule to compensate for higher inflation volatility. |
| Keywords: | aging, monetary policy transmission, optimal monetary policy, inflation targeting |
| JEL: | E31 E52 J11 |
| Date: | 2019–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:67&r=all |
| By: | Hsuan-Li Su (National Taiwan University) |
| Abstract: | This paper studies how input-output linkages amplify the aggregate impact of sectoral financial distortions through the lens of a dynamic general equilibrium model with endogenous capital wedges. The aggregate impact of a shock can be decomposed into weighted productivity changes and changes in capital allocative efficiency. Uncertainty shocks, second-moment shocks to Solow-neutral (capital-augmenting) productivity, induce heterogenous responses in sectoral capital wedges, reducing allocative efficiency and aggregate TFP. In the calibrated model to the U.S. data, I show input-output linkages amplify the aggregate effect of financial distortions by two-fold more than an equivalent economy without linkages. Shocks that generates the spike of credit spreads similar to the magnitude during the Great Recession can decrease aggregate TFP by 0.3\% and aggregate output by 1.6\%. Among all sectors, the model indicates that the Financial sector is most sensitive to changes in its financial constraint and has the largest impact on aggregate output. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:978&r=all |
| By: | Pedro Cavalcanti Ferreira (EPGE-FGV); Rafael Parente (Princeton University) |
| Abstract: | In most countries, the rules governing public and private pension systems are different, and so are hiring procedures and job contracts. The tenures of government employees are longer and their wages, in general, higher. This article studies, in a life-cycle economy with three sectors - formal, informal and public – and endogenous retirement, the macroeconomic and occupational impacts of social security reforms in an economy with multiple pension systems. In a model calibrated to Brazil, we simulate and assess the long-run impact of reforms being discussed and/or implemented in different economies. Among them, the unification of pension systems and the increase of minimum retirement age. These reforms are found to affect the decision to apply to a public job, savings during the life cycle and skill composition across sectors. They also lead to higher output, less informality and average welfare gains. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:208&r=all |
| By: | Angelos Angelopoulos; Konstantinos Angelopoulos; Spyridon Lazarakis; Apostolis Philippopoulos |
| Abstract: | Rent seeking leads to a misallocation of resources that worsens economic outcomes and reduces aggregate welfare. We conduct a quantitative examination of the distributional effects of rent extraction via the financial sector. Rent seeking introduces a possibility for insurance against idiosyncratic earnings risk that is more valuable for poorer households that are lacking in means of self insurance. However, it also creates a wedge that discourages savings, thus reducing self insurance via asset accumulation. When the model is calibrated to US data, the distorting effects dominate, implying welfare losses for all households, and an increase in wealth inequality. Nevertheless, welfare losses are bigger for households with higher initial wealth. Therefore, a policy reform to reduce rent seeking via the financial sector, despite being Pareto improving, will benefit predominantly wealthier households. |
| Keywords: | conditional welfare changes, wealth distribution, rent seeking |
| JEL: | E02 D31 H10 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7835&r=all |
| By: | Vladimir Asriyan (CREi, UPF, and Barcelona GSE) |
| Abstract: | We develop a new theory of information production during credit booms. In our model, entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources towards private consumption. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralization-screening mix depends on the value of aggregate collateral. High collateral values raise investment and economic activity, but they also raise collateralization at the expense of screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g. real estate booms), the economy accumulates physical capital but depletes information about investment projects. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing investment projects, which takes time to rebuild. We provide new empirical evidence using US rm-level data in support of the model's main mechanism. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:147&r=all |
| By: | Siqiang Yang (University of Pittsburgh) |
| Abstract: | The paper investigates how nominal exchange rate volatility affects a sovereign’s default risk and its incentive to accumulate reserves. The model considers an environment where the sovereign faces a currency mismatch problem and is subject to volatile exchange rate fluctuations. This implies that when the exchange rate depreciates, the debt burden in terms of domestic currency increases, leading to higher default risk and borrowing costs. To insure against this risk, the sovereign optimally accumulates reserves to (i) smooth consumption when borrowing becomes costly, (ii) to hedge against the depreciation of the exchange rate, and (iii) to reduce the volatility of the exchange rate. The model is then calibrated using data from Mexico (1991-2015). The model can replicate the positive association between nominal exchange rate volatility and sovereign default risk. It can also generate more than half of the reserve holdings in Mexico. Moreover, all three channels of reserve accumulation are shown to be quantitatively important. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:721&r=all |
| By: | Gabriela Cugat (Northwestern University) |
| Abstract: | I argue that household heterogeneity plays a key role in the transmission of aggregate shocks in emerging market economies. Using Mexico's 1995 crisis as a case study, I first document empirically that working in the tradable versus non-tradable sector is a crucial determinant of the income and consumption losses of different types of households. Specifically, households in the non-tradable sector suffered much larger income and consumption losses regardless of other household characteristics. To account for the effect of this observation on macroeconomic dynamics, I construct a New Keynesian small open economy model with household heterogeneity along two dimensions: uninsurable sector-specific income and limited financial-market participation. I find that the propagation of shocks in this economy is affected by both dimensions of heterogeneity, with uninsurable sector-specific income playing a quantitatively larger role. In terms of policy, a managed exchange rate policy is more costly overall when households are heterogeneous; however, households in the non-tradable sector benefit from it. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:526&r=all |
| By: | Francesco Ferrante (Federal Reserve Board); Matthias Paustian (Federal Reserve Board) |
| Abstract: | We develop an incomplete-markets heterogeneous agent New-Keynesian (HANK) model in which households are allowed to borrow using nominal debt. We show that, in this framework, forward guidance, that is the promise by the central bank to lower future interest rates, can be a powerful policy tool, especially when the economy is in a liquidity trap. In our model, expected lower rates imply a future transfer of wealth from savers to borrowers, reducing precautionary motives and stimulating current demand and inflation. In addition, at the time of the policy announcement, debt deflation generates also a wealth transfer towards constrained agents, who have high marginal propensity to consume, further increasing aggregate consumption and inflation, and igniting a positive feedback loop. These results contrast with previous research on HANK models, which focused on frameworks where agents were not allowed to borrow, and which found negligible effects of forward guidance. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1256&r=all |
| By: | Flora Lutz; Leopold Zessner-Spitzenberg |
| Abstract: | We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which tem-porarily shut out the economy of short-term credit markets. Due to the presence of a pecuniary externality individual agents borrow too much and hold too little liquid assets relative to a social planner. This ine?ciency rationalizes macropru-dential policy interventions in the form of reserve accumulation at the central bank coupled with a tax on foreign borrowing. Unless combined with other measures, a tax on foreign borrowing is detrimental to welfare; it reduces agents’ incentives to invest in liquid assets and thereby increases ?nancial instability. Our model can quantitatively match the simultaneous depreciation of the exchange rate and con-tractions in output, gross trade ?ows, foreign liabilities and liquid reserves during Sudden Stop episodes. |
| JEL: | D62 E44 F32 F34 F41 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1907&r=all |
| By: | Stefania Albanesi (University of Pittsburgh); Ning Zhang (University of Pittsburgh); Rania Gihleb (University of Pittsburgh) |
| Abstract: | This paper demonstrates that living together with parents can work as an insurance against labor market friction for college graduates. Cores- idence with parents alleviates the student debt burden and job searching pressure during economic downturns and facilitates the the pursuit of jobs with better match and higher earnings. Using SIPP data, we estimate the parameters of a dynamic life-cycle model to show that: (1) job types, earn- ings, asset and preference jointly aect the dynamics of coresidence; (2) coresidence can work as an insurance for college graduates in labor mar- ket to nd a better matched job; (3) coresidence has long-term impact on youth earnings through job search. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1565&r=all |
| By: | Lorenzo Bretscher (London Business School); Andrea Tamoni (London School of Economics); Aytek Malkhozov (Federal Reserve Board) |
| Abstract: | We examine the role of expectation, or news, shocks for the measurement of macroeconomic risk and the natural rate of interest. To this end, we estimate a New-Keynesian dynamic stochastic general equilibrium model that allows us to infer agents’ expectations about future fundamentals at different horizons. Accounting for news shocks results in better-specified macroeconomic risk factors that have significant explanatory power for the cross-section of stock and long-term bond returns. Further, anticipated changes in future productivity growth induce sizeable fluctuations in the natural rate of interest, which we show to have important implications for the conduct of monetary policy. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:100&r=all |
| By: | Zheng Liu (Federal Reserve Bank of San Francisco); Pengfei Wang (Hong Kong University of Science and Technology); Tao Zha (Federal Reserve Bank of Atlanta) |
| Abstract: | Housing demand shocks are an important source of housing price fluctuations and, through the collateral channel, they drive macroeconomic fluctuations as well. However, these reduced-form shocks in the standard macro models fail to generate the observed large fluctuations in the housing price-to-rent ratio. We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. Households with high marginal utility of housing face binding credit constraints, giving rise to a liquidity premium in the aggregated housing Euler equation. The liquidity premium drives a wedge between the house price and the average rent and allows credit supply shocks to generate large fluctuations in house prices and the price-to-rent ratio. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:78&r=all |
| By: | Leena Rudanko (Federal Reserve Bank of Philadelphia) |
| Abstract: | This paper studies a labor market with directed search, where multi-worker firms follow a firm wage policy: They pay equally productive workers the same. The policy reduces wages, due to the influence of firms’ existing workers on their wage setting problem, increasing the profitability of hiring. It also introduces a time-inconsistency into the dynamic firm problem, because firms face a less elastic labor supply in the short run. To consider outcomes when firms reoptimize each period, I study Markov perfect equilibria, proposing a tractable solution approach based on standard Euler equations. In two applications, I first show that firm wages dampen wage variation over the business cycle, amplifying that in unemployment, with quantitatively significant effects. Second, I show that firm wage firms may find it profitable to fix wages for a period of time, and that an equilibrium with fixed wages can be good for worker welfare, despite added volatility in the labor market. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:358&r=all |
| By: | Francesco Bianchi (Duke University); Howard Kung (London Business School); Mikhail Tirskikh (London Business School) |
| Abstract: | We construct and estimate a dynamic stochastic general equilibrium model that features demand- and supply-side uncertainty. Using term structure and macroeconomic data, we find sizable effects of uncertainty on risk premia and business cycle fluctuations. Both demand-side and supply-side uncertainty imply large contractions in real activity and an increase in term premia, but supply-side uncertainty has larger effects on inflation and investment. We introduce a novel analytical decomposition to illustrate how multiple distinct risk propagation channels account for these differences. Supply and demand uncertainty are strongly correlated in the beginning of our sample, but decouple in the aftermath of the Great Recession. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:245&r=all |
| By: | Jonathan Chiu (Bank of Canada); Janet Hua Jiang (Bank of Canada); Seyed Mohammadreza Davoodalhosseini (Bank of Canada); Yu Zhu (Bank of Canada) |
| Abstract: | This paper builds a model with imperfect competition in the banking sector. In the model, banks issue deposits and make loans, and deposits can be used as payment instruments by households. We use the model to assess the general equilibrium effects of introducing central bank digital currency (CBDC). We identify a new channel through which CBDC can improve the efficiency of bank intermediation and increase lending and aggregate output even if its usage is low, i.e., CBDC serves as an outside option for households, thus limiting banks' market power in the deposit market. We then calibrate the model to evaluate the quantitative implication of this channel. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:862&r=all |
| By: | Michael Dotsey (Federal Reserve Bank of Philadelphia) |
| Abstract: | We examine the role of demographics and changing industrial policies in accounting for the rapid rise in household savings and in per capita output growth in China since the mid 1970s. The demographic changes come from reductions in the fertility rate and increases in the life expectancy, while the industrial policies take many forms. These policies cause important structural changes; first benefiting private labor-intensive firms by incentivizing them to increase their share of Chinese output, and later on benefiting capital-intensive firms resulting in an increase the share of capital devoted to heavy industries. We conduct our analysis in a general equilibrium economy that also features endogenous human capital investment. We calibrate the model to match key economic variables of the Chinese economy and show that demographic changes and industrial policies both contributed to increases in savings and output growth but with differing intensities and at different horizons. We further demonstrate the importance of endogenous human capital investment in accounting for the economic growth in China. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:640&r=all |
| By: | Jesús Fernández-Villaverde; Samuel Hurtado; Galo Nuño |
| Abstract: | This paper investigates how, in a heterogeneous agents model with financial 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 efficiently 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 diffusions. We document, first, the strong nonlinearities created by financial frictions. Second, we report the existence of multiple stochastic steady states with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse response functions of the model are highly state-dependent. In particular, we find that the recovery after a negative aggregate shock is more sluggish when the economy is more leveraged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks. |
| JEL: | C45 C63 E32 E44 G01 G11 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26302&r=all |
| By: | Michael Peters (Yale University); Conor Walsh (Yale University) |
| Abstract: | A growing body of empirical research highlights substantial changes in the US economy during the last three decades. Business dynamism – namely job reallocation, firm entry and creative destruction – is declining. Market power, as measured by markups and industry concentration, seems to be on the rise. Aggregate productivity growth is sluggish. We show that declines in the rate of growth of the labor force can qualitatively account for all of these features in a standard model of firm-dynamics. Despite its richness we can characterize the link between population growth and dynamism, markups and growth analytically. When we calibrate the model to the universe of U.S. Census data, the labor force channel can explain a large fraction of the aggregate trends. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:658&r=all |
| By: | Matteo Leombroni (Stanford); Ciaran Rogers (Stanford University) |
| Abstract: | We study the heterogeneity of consumption responses across households to a common monetary policy shock. Households vary in age, wealth and ex-ante asset allocation. We combine an asset pricing framework with heterogeneous agents and incomplete markets with a life-cycle model. Within our environment, the transmission of monetary policy does not only work through the usual income and substitution motives, but also through an endogenous portfolio rebalancing effect which generates changes in equilibrium asset prices and a subsequent wealth effect on consumption. We find that, if the shock is such that prices are unchanged, the response of consumption is fully transitory, where younger households increase, and older households decrease, consumption. If equilibrium prices rise as a result of the monetary shock, wealth effects mitigate heterogeneity in current consumption responses, but introduce persistence in responses that increase significantly with age. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:684&r=all |
| By: | Daniel Baksa; Zsuzsa Munkacsi |
| Abstract: | The evidence on the inflation impact of aging is mixed, and there is no evidence regarding the volatility of inflation. Based on advanced economies’ data and a DSGE-OLG model, we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper is also the first, using this framework, to discuss how aging affects the transmission channels of monetary policy. We are also the first to examine aging and optimal central bank policies. As aging redistributes wealth among generations and the labor force becomes more scarce, our model suggests that aging makes monetary policy less effective and in more gray societies central banks should react more strongly to nominal variables. |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/198&r=all |
| By: | Chu, Angus C.; Furukawa, Yuichi; Mallick, Sushanta; Peretto, Pietro; Wang, Xilin |
| Abstract: | This study explores the dynamic effects of patent policy on innovation and income inequality in a Schumpeterian growth model with endogenous market structure and heterogeneous households. We find that strengthening patent protection has a positive effect on economic growth and a positive or an inverted-U effect on income inequality when the number of differentiated products is fixed in the short run. However, when the number of products adjusts endogenously, the effects of patent protection on growth and inequality become negative in the long run. We also calibrate the model to US data to perform a quantitative analysis and find that the long-run negative effect of patent policy on inequality is much larger than its short-run positive effect. This result is consistent with our empirical finding from a panel vector autoregression. |
| Keywords: | patent policy; income inequality; innovation; endogenous market structure |
| JEL: | D3 O3 O4 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96240&r=all |
| By: | Isaac Baley (Universitat Pompeu Fabra, CREi & Barcelona GSE); Julio Blanco (University of Michigan) |
| Abstract: | We develop new tools to analyze the aggregate implications of lumpiness in microeconomic adjustment. We derive a set of structural relationships between the steady state moments and the business cycle dynamics, and we show how to discipline these relationships using micro panel data. As an application, we implement our machinery in a standard framework of rm investment with xed adjustment costs. We demonstrate analytically that, in order to explain aggregate capital dynamics, that model must match two steady state moments related to capital misallocation and the time since the last investment. Using plant-level data from Chile, we compute these two moments, and discover that there does not exist a calibration of the lumpy investment model that is consistent with the data. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:903&r=all |
| By: | Albert Queralto (Federal Reserve Board) |
| Abstract: | We use a two-country New Keynesian model with balance sheet constraints to investigate the magnitude of international spillovers of U.S. monetary policy. Home borrowers obtain funds from domestic households in domestic currency, as well as from residents of the foreign economy (the U.S.) in dollars. In our economy, foreign lenders differ from domestic lenders in their ability to recover resources from defaulting borrowers' assets, leading to more severe financial constraints for foreign debt than for domestic borrowing. As a consequence, a deterioration in borrowers' balance sheets induces a rise in the home currency's premium and an exchange rate depreciation. We use the model to investigate how spillovers are affected by the degree of currency mismatches in balance sheets, and whether the latter make it desirable for policy to target the exchange rate. We find that the magnitude of spillovers is significantly enhanced by the degree of currency mismatches. Our findings also suggest that using monetary policy to stabilize the exchange rate is not necessarily more desirable with greater balance sheet mismatches and may actually exacerbate short-run exchange rate volatility. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:993&r=all |
| By: | Andres Blanco (University of Michigan); Andres Drenik (Columbia University) |
| Abstract: | Large devaluations are associated with reallocation of labor across employment status, sectors and firms. We measure monthly labor income risk across two large devaluations in Argentina, using a novel administrative employer-employee matched dataset covering the universe of formal workers during the 1996-2018 period. We find a substantial increase (resp. decrease) in job finding (resp. separation) rates following these episodes. Additionally, we find an increase in the standard deviation and a decrease in the skewness of the monthly earnings distribution. We rationalized these facts in a search model with risk averse workers and incomplete markets. The model provides an unify theory of endogenous labor income risk and current account determination during large devaluation. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1292&r=all |
| By: | Dean Corbae (University of Wisconsin); Erwan Quintin (Wisconsin Business School) |
| Abstract: | We provide a simple corporate finance environment with endogenous security design which aggregates to a standard macroeconomic model. The model is quantitatively consistent with the cyclical properties of safe corporate debt issues, in particular with the fact that those issues are less procyclical than other sources of corporate financing. It is also consistent with the countercyclicality of risk spreads on corporate debt. We then use the model to measure the effect of a protracted periods of low safe yields, one of the main features of the so-called "saving glut" the global economy is currently experiencing. A long period of low interest rates on safe debt has little impact on the level of economic activity but causes output and investment volatility to fall. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:368&r=all |
| By: | Sumudu Kankanamge (Toulouse School of Economics); Alexandre Gaillard (Toulouse School of Economics) |
| Abstract: | This paper introduces a quantitative stylized life-cycle model with entrepreneurship and endogenous business selling, buying and founding decisions. Using a new dataset on the small business sale market as well as the SSBF, the SBO and the PSID datasets, we document the importance of the buying, selling and founding margins for entrepreneurs and find large mismatches on the business sale market. The data also reveal a key role for age and life-cycle dynamics for entrepreneurial entry and exit decisions. Using the model, we find that the combination of (i) illiquid business assets, (ii) frictions on the business sale market and (iii) the life-cycle components of entrepreneurship are key to reproducing our empirical finding. Finally, we simulate a large demographic event akin to the baby-boomers generation reaching peak retirement age and evaluate the macroeconomic outcome of such a change. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1503&r=all |
| By: | Si Guo (International Monetary Fund); Yun Pei (University at Buffalo, SUNY); Zoe Xie (Federal Reserve Bank of Atlanta) |
| Abstract: | We build an infinite horizon equilibrium model of fiscal federation, where anticipation of transfers from the central government creates incentives for local governments to overborrow. Absent commitment, the central government over-transfers, which distorts the central-local distribution of resources. Applying the model to fiscal decentralization, we find when decentralization widens local government’s fiscal gap, borrowings by both local and central governments rise. Quantitatively, fiscal decentralization accounts for 19–40% of changes in general government debt in Spain during 1988–2006. A macroprudential tax on local borrowing that implements Pareto optimal allocation would reduce debt by 27% and raise welfare by 3.75%. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1229&r=all |
| By: | Similan Rujiwattanapong (Aarhus University) |
| Abstract: | This paper investigates the impact of partially endogenous unemployment insurance (UI) extensions on the dynamics of unemployment and its duration structure in the US. Using a search and matching model with endogenous separations, variable job search intensity, on-the-job search and worker heterogeneity, I allow for the maximum UI duration to depend on unemployment and for UI benefits to depend on observable employment characteristics. The model can account for a large fraction of the observed rise in the long-term unemployment and realistic dynamics of the unemployment duration distribution during the Great Recession. Eliminating all UI extensions during the Great Recession could potentially lower the unemployment rate by 0.9-3.4 percentage points via both the responses of job search and vacancy posting incentives. Disregarding rational expectations about the timing of UI extensions implies an overestimation of unemployment by up to 2 percentage points. Once the heterogeneity in UI status and benefit level is accounted for, unobserved heterogeneity of workers does not account for much of the incidence of long-term unemployment. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:232&r=all |
| By: | Daniel Neuhann (UT Austin, McCombs School of Business); Michael Sockin (University of Texas at Austin) |
| Abstract: | We study investment and risk sharing in complete markets when agents internalize their impact on asset prices. Quantity shading of state-contingent claims by buyers and sellers generates excess exposure to idiosyncratic risk and low asset pledgeability. This depresses investment, the risk-free rate, and aggregate productivity. Rents from market power distort and misalign agents' marginal valuations of state-contingent returns, rendering risk-sharing constrained inefficient and \emph{as if} markets were competitive but incomplete. When there is limited commitment, sellers face borrowing constraints that limit their ability to strategically restrict supply, thereby reallocating market power to buyers. When markets are decentralized, agents distort investment to capture arbitrage profits by acting as pass-through intermediaries. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:118&r=all |
| By: | Michael Fishman (Northwestern University); Jonathan Parker (MIT); Ludwig Straub (Harvard) |
| Abstract: | We develop a dynamic model of credit markets in which both lending standards and the quality composition of the borrower pool are endogenous. Borrowers can be of high or low quality, and each lender privately decides on its lending standard. Lending standards are dynamic strategic complements: tighter screening worsens the future pool of borrowers, increasing the incentive to screen in the future. The market exhibits two steady states, one with loose and one with tight lending standards. Lending standards can inefficiently amplify and propagate temporary deteriorations in fundamentals. We discuss policies that improve on market outcomes, and pitfalls to avoid. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1344&r=all |
| By: | Lukasz Drozd (Federal Reserve Bank of Philadelphia); Michal Kowalik (Federal Reserve Bank of Boston) |
| Abstract: | We analyze the role of promotional "teaser" rates on credit card plans prior, during, and after the 2007-08 financial crisis. We show that promotional offers were ubiquitous prior to the crisis. They were typically chained by borrowers to, in effect, borrow for the long term on low promotional rates. We then show that promotional activity collapsed in mid 2008, which coincided with a massive deleveraging on credit card plans between 2008 and 2011. We build a new equilibrium theory that can relate these phenomenona, analytically characterize equilibrium contracts, and take it to the data. The key insight from our analysis is that a decline in the availability of promotional offerings introduced as an exogenous shock can account for deleveraging. Our model suggests this shock had a discernible impact on consumption demand after 2008, consistent with the narrative that the credit card market played a more direct role in the transmission of the 2008 financial turmoil to aggregate demand. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1047&r=all |
| By: | Moritz Kuhn (University of Bonn); Benjamin Hartung (University of Bonn); Philip Jung (TU Dortmund) |
| Abstract: | A key question in labor market research is how the unemployment insurance system affects unemployment rates and labor market dynamics. We revisit this old question studying the German Hartz reforms. On average, lower separation rates explain 76% of declining unemployment after the reform, a fact unexplained by existing research focusing on job finding rates. The reduction in separation rates is heterogeneous, with long-term employed, high-wage workers being most affected. We causally link our empirical findings to the reduction in long-term unemployment benefits using a heterogeneous-agent labor market search model. Absent the reform, unemployment rates would be 50% higher today. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:284&r=all |
| By: | Michele Boldrin (Washington University in St Louis); Lijun Zhu (Peking University); Yong Wang |
| Abstract: | We review the empirical evidence about factor shares and show that, apart from a varying trend, they are characterized by a strong and persistent cyclical behavior. We argue that existing models of the business cycles cannot replicate these facts. Next we study a model of growth and innovation under competitive conditions. Firms choose how many workers to hire, how much to invest, and which production technique to use. New productive capacity, embodying labor saving techniques, is costly. Central to our theory are endogenous movements in relative factor prices creating incentives for replacing old technologies with new ones. The endogenous interaction between labor-saving innovations and changes in the relative price of labor is the source of both growth and cycles . |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1208&r=all |
| By: | Vincent Sterk (University College London); Wei Cui (University College London) |
| Abstract: | Is Quantitative Easing (QE) an effective substitute for conventional monetary policy? We study this question using a quantitative heterogeneous-agents model with nominal rigidities, as well as liquid and partially liquid wealth. The direct effect of QE on aggregate demand is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to the model and empirical studies. A comparison of optimal QE and interest rate rules reveals that QE is indeed a very powerful instrument to anchor expectations and to stabilize output and inflation. However, QE interventions come with strong side effects on inequality, which can substantially lower social welfare. A very simple QE rule, which we refer to as Real Reserve Targeting, is approximately optimal from a welfare perspective when conventional policy is unavailable. We further estimate the model on U.S. data and find that QE interventions greatly mitigated the decline in output during the Great Recession. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:29&r=all |
| By: | Patrick Hirsch |
| Abstract: | The euro area economies are bound together by monetary policy while still inhibiting many heterogeneities. Amongst them the share of homeowners. This paper presents a medium-scale New Keynesian DSGE model of the euro area with an extensive housing market which explicitly models endogenous tenure choice. Results from the calibrated model indicate that there are various parameters determining the ownership rate. Dependent on the drivers of the heterogeneity, shocks have substantial effects on real variables when homeownership rates differ across countries. |
| Keywords: | Facility Management; indoor environment; Market value of buildings; Smart buildings; Utility value of buildings |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_369&r=all |
| By: | Enrique G. Mendoza; Sergio Villalvazo |
| Abstract: | We propose a simple and fast fixed-point iteration algorithm FiPIt to obtain the global, non-linear solution of macro models with two endogenous state variables and occasionally binding constraints. This method uses fixed-point iteration on Euler equations to avoid solving two simultaneous nonlinear equations (as with the time iteration method) or creating modified state variables requiring irregular interpolation (as with the endogenous grids method). In the small-open-economy RBC and Sudden Stops models provided as examples, FiPIt is used on the bonds and capital Euler equations to solve for the bonds decision rule and the capital pricing function. In a standard Matlab platform, FiPIt solves both models much faster than time iteration and various hybrid methods. The choice of functions that FiPIt iterates on using the Euler equations can vary across models, and there can be more that one arrangement for the same model. |
| JEL: | E17 E44 F34 F41 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26310&r=all |
| By: | Kolasa, Marcin; Rubaszekz, Michał; Walerych, Małgorzata |
| Abstract: | In this paper we challenge the conventional view that increasing working time exibility limits the amplitude of unemployment fluctuations. We start by showing that hours per worker in European countries are much less procyclical than in the US, and in some economies even co-move negatively with output. This is confirmed by the results from a structural VAR model for the euro area, in which working hours increase after a contractionary monetary shock, exacerbating the upward pressure on unemployment. To understand these counterintuitive results, we develop a structural search and matching macroeconomic model with endogenous job separation. We show that this feature is key to generate countercyclical adjustments in working hours. When we augment the model with frictions in working hours adjustment and estimate it using euro area time series, we find that increasing flexibility of working time amplifies cyclical movements in unemployment. |
| JEL: | E24 E32 J22 J64 |
| Date: | 2019–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2019_024&r=all |
| By: | David Kohn (Pontificia Universidad Católica de Chile); Fernando Leibovici (Federal Reserve Bank of St. Louis); Michal Szkup (University of British Columbia) |
| Abstract: | We investigate the extent to which frictions in financial markets affect the gains from trade liberalization. We study a small open economy populated with entrepreneurs heterogeneous in productivity and net worth who can trade internationally and are subject to financing constraints. We calibrate the model to match key features of Colombian plant-level data and use it to quantify the role of credit frictions in shaping the economy's response to trade liberalization. We find that frictions in financial markets slow down the response of capital and output in the aftermath of trade liberalization; in contrast, the dynamics of exports adjustment are largely independent of financial development. We document evidence consistent with these findings for the Colombian trade liberalization in the early 1990s. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1212&r=all |
| By: | Nathaniel Pancost (University of Texas at Austin McCombs Sc); Roberto Robatto (University of Wisconsin-Madison) |
| Abstract: | We study optimal capital requirement regulation in a dynamic quantitative model in which deposits facilitate real economic activity and thus the value of deposits is microfounded. We identify a novel general equilibrium effect that drives a wedge between the private value of deposits (i.e., the value to price-taking agents, measured by the deposit premium) and the social value of deposits (i.e., the value that matters for regulation). The wedge reduces the social value of deposits, and as a result, the optimal capital requirement is substantially higher than in comparable models in the literature. Nonetheless, even when the marginal social value of deposits is very low, setting capital requirements too high is suboptimal. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:638&r=all |
| By: | Pedro Henrique da Silva Castro |
| Abstract: | Is monetary policy power reduced in the presence of governmental credit with subsidized interest rates, insensitive to the monetary cycle? I argue this question has not yet been reasonably answered even though a virtual consensus seems to have been reached. Using a general analytical decomposition I show that the available microeconometric evidence is not necessarily informative about the macroeconomic effect of interest, due to the presence of general equilibrium effects. Moreover, evidence of decreased power over output does not imply that power over inflation is also decreased. A simple New Keynesian model where fi rms take credit, from both the market and the government, to finance working capital needs is presented to exemplify those possibilities. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:505&r=all |
| By: | Jonathan Chiu; Thorsten Koeppl |
| Abstract: | A cryptocurrency system such as Bitcoin relies on a decentralized network of anonymous validators to maintain and update copies of the ledger in a process called mining. In such a permissionless system, someone can cheat by spending a coin twice, which leads to the so-called double-spending problem. A well-functioning cryptocurrency system must ensure that users do not have an incentive to double spend. We develop a general-equilibrium model of a cryptocurrency. We use the model to obtain a condition that rules out double spending and study the optimal design of cryptocurrencies. We also quantify the welfare costs of using a cryptocurrency as a payment instrument. We find that it is better to use the revenue from currency creation rather than transaction fees to finance the costly mining process. We estimate that Bitcoin generates a large welfare loss that is about 500 times bigger than the welfare loss in a monetary economy with 2 percent inflation. This welfare loss can be lowered in an optimal design to the equivalent of that in a monetary economy with moderate inflation of about 45 percent. |
| Keywords: | Digital Currencies and Fintech; Monetary Policy; Payment clearing and settlement systems |
| JEL: | E4 E5 L5 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-40&r=all |
| By: | Christopher Johnson (UC Davis) |
| Abstract: | The Great Recession featured a global collapse in real and financial economic activity that was highly synchronized across countries. Two unique precursors to the crisis were the rise in the shadow banking sector and increased securitization. I develop a model that is the first to explain the extent to which these factors contributed to the international transmission of the crisis that mostly originated in the United States. Using a two-country model with commercial and shadow banking sectors, I show that a country-specific financial shock leads to a simultaneous decline in real and financial aggregates in both countries. My model is the first to include both shadow and commercial banking in an open-economy framework. While commercial banks transfer funds from borrowers to lenders, shadow banks securitize loans and sell them to intermediaries internationally as asset-backed securities. Transmission occurs through a balance sheet channel, which is stronger when intermediaries hold more securities from abroad. I also consider the implications of capital controls on the transmission of a financial crisis. In general, I find that capital controls can reduce transmission. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:780&r=all |
| By: | Mi Luo (Emory University); Simon Mongey (University of Chicago) |
| Abstract: | Higher student debt causes college students to take jobs with higher wages and lower job satisfaction. We arrive at this finding using representative samples of college graduates and exploiting variation in financial aid policies to identify the causal effect of debts on job choices. When we extend the search with asset framework of Lise (2013) to accommodate non-pecuniary amenities the model matches our empirical findings: higher debt tilts acceptance policies toward high wage, low satisfaction jobs. In a quantitative extension we identify the utility value of amenities through observed search behavior conditional on reported satisfaction and income, finding that high satisfaction jobs are valued at 6 percent of lifetime consumption relative to low satisfaction jobs. This trade-off is large enough that computing welfare gains in a counterfactual income-based repayment policy using only wages leads to a mistaken inference that students prefer a fixed repayment policy. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1220&r=all |
| By: | Jeanne Commault (Sciences Po) |
| Abstract: | I show that a generalized version of the semi-structural estimation method developed by Blundell, Pistaferri, and Preston (2008), which relaxes their assumption that log-consumption is a random walk, estimates the elasticity of consumption to a transitory income shock to be large. With the same PSID dataset, the average yearly elasticity of nondurable consumption rises to 0.59, a magnitude consistent with findings from natural experiments. I explain that the seminal random walk expression of consumption initially developed by Hall (1978) is not an approximation of the standard life-cycle model but erroneously obtained by linearizing an identity. Contrary to this, in general, the standard life-cycle model generates a consumption process that departs from a random walk because of precautionary behavior. Numerical simulations show that, when calibrated with the persistence of the transitory income process and of the variance of the transitory and permanent shocks that I re-estimated, the standard life-cycle model generates an elasticity of 0.42. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1223&r=all |
| By: | Fernando Martin (Federal Reserve Bank of St. Louis) |
| Abstract: | Societies have come to rely on simple rules to restrict the size and behavior of governments: constraints on monetary policy, revenue, budget balance and debt. I study the merit of these constraints in a dynamic stochastic model in which fiscal and monetary policies are jointly determined. Under several specifications, a revenue ceiling is the only rule that effectively induces the government to lower spending and dominates other policy constraints in terms of welfare by an order of magnitude. However, the reduction in spending is modest and comes at the cost of higher debt and inflation. Monetary policy rules are not desirable as they severely hinder distortion-smoothing and may lead to large welfare losses if implemented incorrectly. Budget balance and debt rules are generally benign, with the former being always preferable to the latter. All types of fiscal rules are usually best implemented at all times, but can be suspended in adverse times, often at a minor cost. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1181&r=all |
| By: | Gu, Ran |
| Abstract: | Postgraduate degree holders experience lower cyclical wage variation than those with undergraduate degrees. Moreover, postgraduates have more specific human capital than undergraduates. Using an equilibrium search model with long-term contracts and imperfect monitoring of worker effort, this paper attributes the cyclicality of the postgraduate-undergraduate wage gap to the differences in specific capital. Imperfect monitoring creates a moral hazard problem that requires firms to pay efficiency wages. More specific capital leads to lower mobility, thereby alleviating the moral hazard and improving risk-sharing. Estimates reveal that specific capital explains the differences both in labour turnover and in wage cyclicality across education groups. |
| Keywords: | specific human capital, postgraduate, wage premium, wage cyclicality, long-term contracts |
| JEL: | E24 E32 I24 J31 J64 |
| Date: | 2019–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96254&r=all |
| By: | Aleksandra Babii (Toulouse School of Economics) |
| Abstract: | Nominal exchange rates strongly co-move. However, little is known about the economic source of common variation. This paper examines how international trade links nominal exchange rates. First, I document that two countries that trade more intensively with each other have more correlated exchange rates against the U.S dollar. Second, I develop a general equilibrium multi-country model, where a shock to a single country propagates to the exchange rates of its trading partners and serves as a source of common variation. In the baseline three-country model, I show that the sign and the strength of correlation between exchange rates depend on the elasticities of trade balances of countries with respect to both exchange rates. As a result, the model’s prediction about the relationship between bilateral trade intensity and exchange rates correlation depends on the currency in which international prices are set. Lastly, an augmented model is calibrated to twelve countries to quantitatively assess the importance of trade linkages. I find that trade linkages alone, with uncorrelated shocks across countries, account for 50% of the empirical trade-exchange-rates-correlation slope coefficient. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1150&r=all |
| By: | Kyle Dempsey (The Ohio State University); Felicia Ionescu (Federal Reserve Board) |
| Abstract: | How much do changes in credit supply affect consumers’ ability to insure against income risk over the business cycle and what is the valuation of such insurance? Using loan-level data from the Senior Loan Officer Opinion Survey (SLOOS), we construct measures of key credit supply variables, such as lending standards and terms for consumer credit in the U.S. and build a heterogeneous model of unsecured credit and default that accounts for credit supply dynamics as estimated from these data. Our economy is quantitatively consistent with key features of the unsecured credit market, earnings dynamics, and measures of consumption volatility in the U.S. We find that variability in standards and terms for credit is welfare improving despite the loss in consumption insurance that such an environment may induce. The key mechanism behind this result is the asymmetric effect that changes in standards induce for loan pricing in good and bad states of the economy. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1428&r=all |
| By: | Sergio Salgado (University of Minnesota) |
| Abstract: | Abstract The proportion of entrepreneurs in the US working-age population has declined over the last three decades. Over the same period, there has been a substantial increase in the returns to highly educated workers. This paper relates these two facts. Using individual-level data, I provide evidence on the decline in the population share of entrepreneurs and in the entry rate into entrepreneurship. I also show that the decline is most concentrated among college graduates. Then, using an otherwise standard entrepreneurial choice model with two skill groups of individuals, I show that the decline in entrepreneurship is the equilibrium outcome of two forces that have increased the returns to high skill labor: the skill-biased technical change and the decrease in the cost of capital goods. I find that these two technological forces jointly account for three-quarters of the decline in the share of entrepreneurs observed in the United States over the last 30 years. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:634&r=all |
| By: | Michael Sposi (Southern Methodist University); Jing Zhang (Federal Reserve Bank of Chicago); Kei-Mu Yi (University of Houston) |
| Abstract: | We confirm two of Rodrik's (2016) premature deindustrialization facts: Compared to the advanced economies, countries that have industrialized more recently have had a lower industry share of employment and lower income per capita at their industrial peak. To understand these facts better, we develop a dynamic, multi-sector, multi-country model of structural change that embodies several channels by which structural change can affect industrial employment. We calibrate the model, and back out the "wedges" that account for the evolution of the model's endogenous variables. We then feed the wedges into the model to assess the relative importance of each in accounting for the deindustrialization in recent years. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1328&r=all |
| By: | Nina Biljanovska (International Monetary Fund); Alexandros Vardoulakis (Federal Reserve Board); Lucyna Gornicka (International Monetary Fund) |
| Abstract: | An asset bubble relaxes collateral constraints and increases borrowing of credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles in a non-linear fashion depending on the underlying indebtedness. If credit is moderate, policy should accommodate the bubble to reduce the incidence of binding collateral constraints. If credit is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:663&r=all |
| By: | Joseph Briggs (Federal Reserve Board of Governors); Christopher Tonetti (Stanford GSB) |
| Abstract: | We use a new survey to document significant perceived counterparty risk in annuity, life insurance, and long-term care insurance markets. We find that nonpayment risk significantly predicts insurance product ownership. In fact, annuity and long-term care insurance markets would be approximately twice as large if products were perceived as risk-free. To interpret our measures, we develop a new lifecycle model of the joint demand for these three products that allows for uninsurable counterparty risk and other dimensions of incomplete markets. We find that these risks significantly decrease insurance demand, and, as a result, welfare costs of sub-optimal insurance portfolios are small. However, the welfare costs of counterparty risk and incomplete markets – whether real or perceived – are large relative to a complete market benchmark. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1388&r=all |
| By: | Ricardo Reyes-Heroles (Federal Reserve Board); Gabriel Tenorio |
| Abstract: | We characterize optimal macroprudential policy in response to external risks---shocks to the level and volatility of world interest rates--in a small open economy subject to financial crises. Low and stable world interest rates reinforce overborrowing arising from a pecuniary externality generated by collateral constraints that depend on asset prices. We show that this mechanism leads to greater exposure to crises typically accompanied by abrupt increases in interest rates and a persistent rise in their volatility, as commonly observed for crises in emerging market economies. A tax on international borrowing implementing the optimal policy depends on two factors, the incidence and severity of future crises. We show that the interaction of these factors implies that the tax responds to external risks even though equilibrium allocations do not, and that it does so non-monotonically with respect to the direction of external shocks|higher macroprudential taxes are not always the optimal policy in response to an increase in external risks|. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1138&r=all |
| By: | William Bednar (Tepper School of Business); Nick Pretnar (Carnegie Mellon University, Tepper School of Business) |
| Abstract: | We construct a general equilibrium model with home production where consumers choose how much time to spend using market purchases. With aggregate United States consumption data and the American Time Use Survey, we observe that relative consumption of goods to services has fallen while the relative time households' spending using goods to services has risen. Our estimates reveal that using services has become relatively more productive than using goods in home production. This is because the outputs of the home production process are complementary, so price elasticities of relative goods/services consumption and relative goods/services time use have opposite sign. Our framework explains the observed negative co-movement of relative consumption to relative off-market time use since the early 2000s. In counterfactual analyses, we discuss the implications of our findings for the structural transformation of the U.S. economy from a goods dominated one to one where services play a larger role. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:328&r=all |
| By: | Makoto Nirei (University of Tokyo); Jose Scheinkman (Columbia University) |
| Abstract: | We present a state-dependent pricing model that generates inflation fluctuations from idiosyncratic shocks on firms. A firm's nominal price increase lowers the other firms' relative prices, thereby inducing those firms' nominal price increases. This snow-ball effect of repricing causes the fluctuations of aggregate price without exogenous aggregate shocks. The fluctuations caused by this mechanism are more volatile when the density of firms at repricing threshold is high, and the density at the threshold is high when the trend inflation level is high. Thus, the model implies that the higher trend inflation causes the larger volatility of short-term inflation rates. Analytical and numerical analyses show that the model can account for the positive relationship between inflation level and volatility that has been observed empirically. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1451&r=all |
| By: | Jonathan Eaton (Pennsylvania State University); Francis Kramarz (CREST, ENSAE); Samuel Kortum (Yale University) |
| Abstract: | Firm-level customs and production data reveal both the heterogeneity and the granularity of individual buyers and sellers. We seek to capture these firm-level features in a general equilibrium model that is also consistent with observations at the aggregate level. Our model is one of product trade through random meetings. Buyers, who may be households looking for final products or firms looking for inputs, connect with sellers randomly. At the firm level, the model generates predictions for buyer-seller connections and the share of labor in production broadly consistent with observations on French manufacturers and their customers in other countries of the European Union. At the aggregate level, firm-to-firm trade determines bilateral trade shares as well as labor's share of output in each country. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:702&r=all |
| By: | Anthony Savagar (University of Kent) |
| Abstract: | I show that sluggish variation in firm entry over the business cycle can account for significant variation in measured TFP through profit and markup channels. I develop a model of dynamic firm entry, oligopolistic competition and returns to scale in order to decompose TFP fluctuations into technical change, economic profit and markup fluctuations. I show that economic profits cause short-run upward bias in measured TFP, but this subsides to upward bias from endogenous markups as firm entry adjusts. I analyze dynamics analytically through a nonparametric DGE model that allows for a perfect com-petition equilibrium such that there are no biases in measured TFP. Given market power, simulations show that measured TFP is 40%higher than technology in the short-run, due solely to profits, and 20% higher in the long-run due solely to markups. The speed of firm adjustment (‘business dynamism’) will determine importance of each bias. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:819&r=all |
| By: | Juan Passadore (Einaudi Institute for Economics and Fina); Juan Xandri (Princeton) |
| Abstract: | Dynamic policy games feature a wide range of equilibria. This paper provides a methodology for obtaining robust predictions. We begin by focusing on a model of sovereign debt although our methodology applies to other settings, such as models of monetary policy or capital taxation. The main result of the paper is a characterization of outcomes that are consistent with a subgame perfect equilibrium conditional on the observed history. Our methodology provides observable implications common across all equilibria that we illustrate by characterizing, conditional on an observed history, the set of all possible continuation prices of debt and comparative statistics for this set; by computing bounds on the maximum probability of a crisis; and by obtaining bounds on means and variances. In addition, we propose a general dynamic policy game and show how our main result can be extended to this general environment. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1345&r=all |