|
on Dynamic General Equilibrium |
|
Issue of 2019‒10‒14
forty-five papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Bertha C. Bangara |
| Abstract: | The existing literature is clear that low income economies tend to suffer from foreign exchange shortages exacerbated by their exports. Most importantly, the concentration of their exports renders these countries susceptible to international price fluctuations. This frequently affects the level of foreign exchange, causing excess demand for foreign exchange leading to foreign exchange shortages. Using a four-sector New Keynesian dynamic stochastic general equilibrium (DSGE) model with foreign exchange constraints faced by importing rms, we calibrate the model to Malawian economy to investigate the implications of foreign exchange constraints on key macroeconomic variables in low income import dependent economies. We demonstrate that imports are a vital part of the production process for LIEs and determine the response and direction of output and consumption. Second, the degree of the foreign exchange constraint determines the degree of variability of the shock, but, does not change the direction of the shock. Third, increasing imports in an effort to increase productivity reduces output and consumption and induces a depreciation of the exchange rate. Fourth, the model illustrates that the domestic contractionary monetary policy produces the conventional results on output, consumption and other variables. |
| Keywords: | Low income economies, Foreign Exchange Constraints, DSGE, Malawi |
| JEL: | E32 F31 F35 O55 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:795&r=all |
| By: | Bertha C. Bangara; Amos C. Peters |
| Abstract: | Most of the recent literature analysing the adjustments of macroeconomic variables to fiscal policy shocks rely on the inclusion of non-Ricardian households to generate a positive response of consumption to an increase in government spending. This paper examines the dynamic effects of government financing behaviour in a foreign exchange constrained low income economy on key macroeconomic aggregates such as output, consumption, wages and labour supply. Using a dynamic stochastic general equilibrium (DSGE) model with Ricardian households calibrated to Malawian data, we find that consumption, wages and labour supply increase with increased government expenditure. This is contrary to popular arguments that government expenditure is inversely associated with the private consumption of intertemporal optimizing households in DSGE models. We argue that the positive response of consumption to increased government expenditure arises from the inclusion of aid in the government budget since government expenditure in low income economies may rise with increases in aid inflows for a given level of taxes. We also show that a positive shock to aid relaxes the foreign exchange constraint and improves the economy although it induces an appreciation of the real exchange rate. |
| Keywords: | fiscal policy, Foreign Exchange Constraint, DSGE, Malawi |
| JEL: | E32 F31 F35 H32 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:778&r=all |
| By: | Ivan Jaccard (European Central Bank) |
| Abstract: | Many southern European economies experience large capital inflows during periods of expansion that are followed by abrupt reversals when a recession hits. This paper studies the dynamics of capital flows between the North and South of Europe in a two-country DSGE model with incomplete international asset markets. Over the business cycle, the direction of capital flows between the two regions can be explained in a model in which common shocks have asymmetric effects on debtor and creditor economies. This mechanism explains why aggregate consumption is more volatile in the South than in the North and generates a higher welfare cost of business cycle fluctuations in the region that experiences procyclical net capital inflows. We also study the adjustment to asymmetric financial shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:988&r=all |
| By: | Francisco Buera (Washington University at St. Louis); Juan Pablo Nicolini (Minneapolis Fed) |
| Abstract: | We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the financial crisis that unraveled in 2007 in the United States. As a reaction to the crisis, the US government increased substantially the net supply of its liabilities (money and bonds, which at the zero bound are perfect substitutes). A calibrated model that incorporates both the credit crunch and the policy response of the government can account for a substantial fraction of the slow recovery in investment and output, as observed since the great recessio |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:492&r=all |
| By: | Margaret Jacobson (Indiana University) |
| Abstract: | This paper investigates the quantitative importance of the interaction of beliefs with credit conditions in explaining the run-up of house prices during the U.S. housing boom. To allow for interacting beliefs and credit conditions while maintaining computational tractability, I will introduce adaptive expectations into a general equilibrium life-cycle model with aggregate risk, incomplete markets, and defaultable debt. I will compare results from the model solved under adaptive expectations derived from ZIP code level house price data to results solved under rational expectations. Although house prices grew by 40 percent relative to their pre-boom level in the data, positive income shocks only generate a 5 percent increase in house prices under rational expectations in the model. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1549&r=all |
| By: | Chunzan Wu (University of Miami); Dirk Krueger (University of Pennsylvania) |
| Abstract: | We show that a calibrated life-cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri and Saporta-Eksten (2016) in U.S. data. With additively separable preferences, 43% of male and 23% of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 34% and 20%. With non-separable preferences the model predicts more consumption insurance, with pass-through rates of 29% and 16%. Most of the consumption insurance against permanent male wage shocks is provided through the labor supply response of the female earner. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:493&r=all |
| By: | xavier Ragot (SciencesPo) |
| Abstract: | We present a projection theory on the space of idiosyncratic histories for heterogeneous-agents models. This allows solving for optimal Ramsey policies in heterogeneous-agent models with aggregate shocks, using a Lagrangian approach. In addition, it allows improving current simulation methods using perturbation techniques, by using more steady-state information. We apply this to study the optimal level distorting tax on labor and unemployment insurance over the business cycle in a production economy. In the quantitative exercise, the average optimal replacement rate is 10% higher than the one implies by a sufficient-statistics approach, due to saving distortions. Moreover, the optimal replacement rate is countercyclical. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1090&r=all |
| By: | Chao He (East China Normal University); Min Zhang (East China Normal University) |
| Abstract: | Existing studies of liquidity either focus on firms or consumers. However, both hold significant cash, and firms' share increased since the '90s and fell after the 07-08 financial crisis. We propose a theory of how endogenous investment liquidity and consumption liquidity compete and interact. The consumption-investment liquidity allocation (CILA) channel amplifies the effect of monetary policy on unemployment, as it accounts for 40 percent of the effect in the calibrated model. We also show that a lower nominal interest rate directs relatively more cash to firms, whereas financial frictions induce the opposite and high unemployment, consistent with the observed patterns. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:869&r=all |
| By: | Stéphane Dupraz; Emi Nakamura; Jón Steinsson |
| Abstract: | In standard models, economic activity fluctuates symmetrically around a “natural rate” and stabilization policies can dampen these fluctuations but do not affect the average level of activity. An alternative view—labeled the “plucking model” by Milton Friedman—is that economic fluctuations are drops below the economy’s full potential ceiling. If this view is correct, stabilization policy, by dampening these fluctuations, can raise the average level of activity. We show that the dynamics of the unemployment rate in the US display a striking asymmetry that strongly favors the plucking model: increases in unemployment are followed by decreases of similar amplitude, while the amplitude of the increase is not related to the amplitude of the previous decrease. We develop a microfounded plucking model of the business cycle. The source of asymmetry in our model is downward nominal wage rigidity, which we embed in an explicit search model of the labor market. Our search framework implies that downward nominal wage rigidity is consistent with optimizing behavior and equilibrium. In our plucking model, stabilization policy lowers average unemployment and thereby yields sizable welfare gains. |
| JEL: | E24 E32 E52 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26351&r=all |
| By: | Jing Cynthia Wu (University of Notre Dame); Ji Zhang (PBC School of Finance, Tsinghua University) |
| Abstract: | In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable framework to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between countries. Empirically, we nd the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:47&r=all |
| By: | Peter Zorn (University of Munich) |
| Abstract: | I document the effects of macroeconomic and sector-specific shocks on investment in disaggregate sectoral capital expenditure data. The response of sectoral investment to macroeconomic shocks is hump-shaped, just as in aggregate data. By contrast, the effects of sector-specific innovations are monotonically decreasing. I build and calibrate a model of investment with convex capital adjustment costs and rational inattention to explain these features of the data. The model matches the empirical responses of sectoral investment to both shocks. The interaction of information frictions and physical adjustment costs is key to this result. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:577&r=all |
| By: | Patrick Feve |
| Abstract: | We argue that shocks to credit supply by shadow and retail banks were key to understand the behavior of the US economy during the Great Recession and the Slow Recovery. We base this result on an estimated DSGE model featuring a rich representation of credit flows. Our model selects the two banking shocks as the most important drivers of the crisis because they account simultaneously for the fall in real activity, the decline in credit intermediation, and the rise in lending-borrowing spreads. On the other hand, in contrast with the existing literature, our results assign only a moderate role to productivity and investment efficiency shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:199&r=all |
| By: | Cooper Howes (UT Austin) |
| Abstract: | While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of US manufacturing firms, I show this increase is driven by the types of firms which are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms are able to take advantage of the decline in the user cost of capital caused by the monetary contraction while constrained firms are forced to cut back. Counterfactual exercises suggest that aggregate investment should become more strongly countercyclical as fewer sectors face financial constraints. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1581&r=all |
| By: | Lukas Altermatt (University of Wisconsin-Madison) |
| Abstract: | I develop a new monetarist model to analyze why an economy can fall into a liquidity trap, and what the effects of unconventional monetary policy measures such as helicopter money and negative interest rates are under these circumstances. I find that liquidity traps can be caused by a decrease in the bonds-to-money ratio, by a decrease in productivity of capital, or by an increase in demand for consumption. The model shows that, while conventional monetary policy cannot control inflation in a liquidity trap, unconventional monetary policies allow the monetary authority to regain control over the inflation rate, and that an increase in the bonds-to-money ratio is the only welfare-improving policy. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:470&r=all |
| By: | Anastasios Karantounias (Federal Reserve Bank of Atlanta) |
| Abstract: | This paper organizes, reinterprets and extends the dynamic theory of optimal fiscal policy with a representative agent, by highlighting the underlying principles that hide under each particular economic environment. I use a generalized version of recursive preferences in order to allow for richer asset pricing implications. I allow markets to be complete or incomplete and study a policymaker that acts under commitment or discretion. The resulting theories are interpreted through the excess burden of taxation, a multiplier that makes precise the notion of ``tax-smoothing.'' Variants of a law of motion in terms of the inverse excess burden emerge in each environment. The basic policy prescription is simple and intuitive and revolves around interest rate manipulation: issue new debt and tax more in the future if this can lead to lower interest rates today. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1356&r=all |
| By: | Fernández-Villaverde, Jesús; Hurtado, Samuel; Nuño, Galo |
| 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. |
| Keywords: | Aggregate shocks; continuous-time; Heterogeneous Agents; Machine Learning; structural estimation |
| JEL: | C45 C63 E32 E44 G01 G11 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14002&r=all |
| By: | Louphou Coulibaly (University of Montreal) |
| Abstract: | Monetary policy procyclicality is a pervasive feature of emerging market economies. In this paper, I propose a parsimonious theory explaining this fact in a model where access to foreign financing depends on the real exchange rate and the government lacks commitment. The discretionary monetary policy is procyclical to mitigate balance sheet effects originating from exchange rate depreciations during sudden stops. Committing to an inflation targeting regime is found to increase social welfare and reduce the frequency of financial crises, despite increasing their severity. Finally, the ability to use capital controls induces a less procyclical discretionary monetary policy and delivers higher welfare gains than an inflation targeting regime by reducing both the frequency and the severity of crises. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:529&r=all |
| By: | Vasilev, Aleksandar |
| Abstract: | This paper takes an otherwise standard real-business-cycle setup with government sector, and augments it with shocks to consumer confidence to study business cycle fluctuations. A surprise increase in consumer confidence generates higher utility, as the household values consumption more in that scenario. As a test case, the model is calibrated to Bulgaria after the introduction of the currency board (1999-2018). We find that shocks to consumer confidence by themselves cannot be the main driving force behind business cycle fluctuations, but when combined with technology shocks, model performance improves substantially. Therefore, allowing for additional factors, such as consumer confidence, to interact with technology shocks can be useful in explaining business cycle movements. |
| Keywords: | consumer confidence shocks,business cycles,Bulgaria |
| JEL: | E32 E62 E21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:leafwp:1903&r=all |
| By: | Siddhartha Chattopadhyay (Department of Humanities and Social Sciences, IIT Kharagpur); Taniya Ghosh (Indira Gandhi Institute of Development Research) |
| Abstract: | This paper analyzes the implementation of the optimal policies at the Zero Lower Bound (ZLB) by the Taylor rule in the presence of cost channel. We find that, the presence of cost channel significantly impairs the ability of the Taylor rule to implement optimal policies when economy is subject to the ZLB. The main findings of the paper are, (i) the Taylor rule with optimally chosen inflation target partially implements the optimal discretionary policy but cannot implement the optimal policy under commitment, and (ii) the T-only policy, which follows discretion after an optimally chosen exit date from the ZLB, is the best that can be implemented by the Taylor rule in the presence of cost channel. |
| Keywords: | New-Keynesian Model, Cost Channel, ZLB |
| JEL: | E63 E52 E58 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2019-021&r=all |
| By: | Alexander Zentefis (Yale University) |
| Abstract: | I develop an asset pricing model and show that collateral constraints that are common to the literature—ones that guarantee no loan loss—can generate multiple equilibria in a dynamic rational expectations economy. In the model, expectations of the future value of collateral affect leverage and thus investor demand for assets. High expected collateral value implies high leverage and hence high asset prices, which confirms the initial beliefs. And conversely for low collateral value. As a consequence, asset prices can be self-fulfilling. Price crashes and booms, excess volatility, long price recoveries, price overshooting and misfiring, as well as leverage cycles transpire purely from shifts in investor expectations without corresponding shifts in fundamentals (i.e., from sentiments). |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:747&r=all |
| By: | Thien Nguyen (Ohio State University) |
| Abstract: | This paper documents that the public debt-to-GDP ratio predicts negatively one- to five-year cumulative nominal consumption growth. Moreover, a higher debt-to-GDP ratio is associated with higher yield spreads, controlling for output gap and inflation. I examine these facts in a New Keynesian DSGE model in which growth and inflation are endogenous. In this model, high government debt forecasts low growth and deflation, making bonds attractive assets in high debt states. Furthermore, due to mean-reversions of fundamental processes that drive the economy, longer-term bonds are better hedges than shorter-term ones, resulting in increases in the slope of the term structure at times of high public debt and hence the empirical regularities seen in the data. My paper thus furthers our understanding of what determine bond yields and the impact of quantitative easing. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:957&r=all |
| By: | Broadbent, Ben; DiPace, Federico; Drechsel, Thomas; Harrison, Richard; Tenreyro, Silvana |
| Abstract: | The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. This paper develops and estimates a small open economy model with tradable and non-tradable sectors to characterize these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualized as news about a future slowdown in productivity growth in the tradable sector. Simulations show that the responses of the model economy to such news are consistent with key patterns in UK data. While overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary "sweet spot" for tradable producers before the slowdown in the tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector, tradable output growth rises and net exports increase. These developments reverse after the productivity decline in the tradable sector materializes. The negative news about tradable sector productivity also lead to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable. As a by-product of our Brexit simulations, we provide a quantitative analysis of the UK business cycle. |
| Keywords: | Brexit; Exchange Rate Adjustment; growth; productivity; Tradable Sector; Trade; UK Economy |
| JEL: | E13 E32 F17 F47 O16 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13993&r=all |
| By: | Andres Hincapie (University of North Carolina at Chapel H) |
| Abstract: | Most individuals do not start a business and, if they do, they start well into their thirties. I study multiple mechanisms explaining these stylized facts. Using the Panel Study of Income Dynamics, I estimate a dynamic Roy model with accumulation of experience, risk aversion, and imperfect information about ability. Risk aversion reduces entrepreneurship by up to 40% and providing full information about ability increases it by 35%. The gap in first entry ages between paid employment and entrepreneurship results mainly from entry costs and information frictions. I study counterfactual policies (subsidies and education) that target these barriers to young entrepreneurship, thereby closing the gap, and show that fostering young entrepreneurship can yield higher returns than fostering entrepreneurship later in individuals' careers because the gains from early information are larger. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:735&r=all |
| By: | Renato Faccini (Queen Mary University); Leonardo Melosi (Chicago Fed) |
| Abstract: | Low-frequency variations in current and expected unemployment rates are important to identify TFP news shocks and to allow a general equilibrium rational expectations model to generate Pigouvian cycles: a large fraction of the comovement of output, consumption, investment, employment, and real wages is explained by changes in expectations unrelated to TFP fundamentals. The model predicts that the start (end) of most U.S. recessions is associated with agents realizing that previous enthusiastic (lukewarm) expectations about future TFP would not be met. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:977&r=all |
| By: | Hanming Fang; Andrew J. Shephard |
| Abstract: | Health insurance in the United States for the working age population has traditionally been provided in the form of employer-sponsored health insurance (ESHI). If employers offered ESHI to their employees, they also typically extended coverage to their spouse and dependents. Provisions in the Affordable Care Act (ACA) significantly alter the incentive for firms to offer insurance to the spouses of employees. We evaluate the long-run impact of ACA on firms’ insurance offerings and on household outcomes by developing and estimating an equilibrium job search model in which multiple household members are searching for jobs. The distribution of job offers is determined endogenously, with compensation packages consisting of a wage and menu of insurance offerings (premiums and coverage) that workers select from. Using our estimated model we find that households’ valuation of employer-sponsored spousal health insurance is significantly reduced under ACA, and with an “employee-only” health insurance contract emerging among low productivity firms. We relate these outcomes to the specific provisions in the ACA. |
| JEL: | G22 I11 I13 J32 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26350&r=all |
| By: | Antonio Bellofatto (University of Queensland) |
| Abstract: | I study the optimal taxation of wealth in a dynastic economy with heterogeneous mortality risk, and various sources of wealth accumulation (including savings and bequests). Working individuals are indexed by skills which are private information. Skills not only determine earning abilities but also correlate with survival probability, so that more productive agents on average live longer. My analysis points to the longevity gradient as a crucial determinant for optimal wealth taxation, both from a theoretical and from a quantitative angle. In particular, due to longevity variations, savings should be marginally taxed in expectation, while bequests received early in life should be marginally subsidized on average. When calibrated to U.S. data, such forces are commensurate with the actual levels of wealth taxation in a sample of developed countries. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1278&r=all |
| By: | Marion Davin (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier); Mouez Fodha (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This article analyzes the impacts of debt relief on production and pollution. We develop a two-country overlapping generations model with environmental externalities, public debts and perfect mobility of assets. Pollutant emissions arise from production, but agents may invest in pollution mitigation. Could debt relief be an efficient tool to encourage less developed countries to engage in the fight against climate change? We consider a decrease of the debt of the poor country balanced by an increase of the richer country's debt. We show that debt relief makes it possible to engage poor countries in the process of pollution abatement. Capital, environmental quality and welfare can increase in both countries. This result relies on the environmental sensitivity and the discount factor in the poor country relative to the rich one: the greater they are the more beneficial the debt relief is. |
| Keywords: | Pollution,Abatement,Overlapping generations,Public debt,Capital market integration |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-02303265&r=all |
| By: | Niklas Engbom (Federal Reserve Bank of Minneapolis) |
| Abstract: | This paper asserts that separation rate shocks are a dominant source of business cycle fluctuations in the vacancy-to-unemployment ratio, overturning conventional wisdom. Motivated by new micro-data, I develop a richer model of the hiring process in which unemployed and employed workers decide what positions to apply for based on an imperfect signal of how good a fit they would be, while firms screen applicants to determine whom to hire. Because the unemployed apply for many positions that they are unlikely to be a good fit for, it is harder for firms to ascertain who is qualified for the job during periods of high unemployment, dampening incentives to create jobs. By highlighting an additional source of congestion in labor markets, I find that separation rate shocks explain two thirds of business cycle volatility in the vacancy-to-unemployment ratio and generate a strong negative Beveridge curve, in line with the data. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1170&r=all |
| By: | Lucas Herrenbrueck (Simon Fraser University) |
| Abstract: | The Euler equation of a representative consumer is at the heart of modern macroeconomics. But in empirical applications, it is badly misapplied: it prices a bond that is short-term, perfectly safe, yet perfectly illiquid. Such a bond does not exist. Real-world safe assets are highly tradable or pledgeable as collateral, hence their prices reflect their moneyness as much as their dividends. Indeed, I estimate the return on a hypothetical illiquid bond, for the postwar United States, via inflation and consumption growth, and show that it behaves very differently from the return on safe and liquid assets. I also argue that this distinction helps resolve every puzzle ever associated with the Euler equation (or its long-run counterpart, the Fisher equation), and points to a better way of understanding how monetary policy affects the economy. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1409&r=all |
| By: | Maliar, Lilia; Maliar, Serguei; Winant, Pablo |
| Abstract: | Artificial intelligence (AI) has impressive applications in many fields (speech recognition, computer vision, etc.). This paper demonstrates that AI can be also used to analyze complex and high-dimensional dynamic economic models. We show how to convert three fundamental objects of economic dynamics -- lifetime reward, Bellman equation and Euler equation -- into objective functions suitable for deep learning (DL). We introduce all-in-one integration technique that makes the stochastic gradient unbiased for the constructed objective functions. We show how to use neural networks to deal with multicollinearity and perform model reduction in Krusell and Smith's (1998) model in which decision functions depend on thousands of state variables -- we literally feed distributions into neural networks! In our examples, the DL method was reliable, accurate and linearly scalable. Our ubiquitous Python code, built with Dolo and Google TensorFlow platforms, is designed to accommodate a variety of models and applications. |
| Keywords: | artificial intelligence; Bellman equation; deep learning; Dynamic Models; Dynamic programming; Euler Equation; Machine Learning; neural network; stochastic gradient; value function |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14024&r=all |
| By: | Simona Cociuba (University of Western Ontario); James MacGee (University of Western Ontario) |
| Abstract: | We show that a decline in the young share of the population exacerbates sectoral reallocation costs. We develop a three sector, perpetual youth search model with sector-specific human capital and two interconnected frictions: sectoral preferences, which imply that only some workers are mobile across sectors, and a wage bargaining distortion, whereby mobile workers’ outside option of searching in the growing sector dampens the fall in shrinking sector wages, leading to rest unemployment. In our parameterized model, output losses after a sectoral reallocation are significant. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:920&r=all |
| By: | Roman Horvath (Charles University in Prague); Lóránt Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Ales Marsal (National Bank of Slovakia) |
| Abstract: | We estimate a New Keynesian model on post-war US data with generalised method of moments using either constant or time-varying debt and labor income taxes. We show that accounting for government debt and distortionary taxes help the New Keynesian model match the level of the nominal term premium with a lower relative risk-aversion than typically found in the literature. |
| Keywords: | zero-coupon bond, nominal term premium, balanced budget rule, government debt, income taxation |
| JEL: | E13 E31 E43 E44 E62 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2019/2&r=all |
| By: | Stephie Fried (Arizona State University) |
| Abstract: | Investment in adaptation capital reduces the damage from extreme weather, mitigating the welfare cost of climate change. Federal aid for disaster relief reduces the net costs to localities that experience extreme weather, decreasing their incentives to invest in adaptation capital. I develop a heterogenous-agent macro model to quantify the relationship between adaptation capital, federal disaster policy, and climate change. I find that federal aid for disaster relief substantially reduces adaptation investment. However, the federal subsidy for adaptation more than offsets this moral hazard effect. I introduce climate change into the model as a permanent, increase in the severity of extreme weather. I find that adaptation reduces the welfare cost of this climate change by 15-20 percent. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:898&r=all |
| By: | Walker Ray (UC Berkeley) |
| Abstract: | With conventional monetary policy unable to stabilize the economy in the wake of the global financial crisis, central banks turned to unconventional tools. This paper embeds a model of the term structure of interest rates featuring market segmentation and limits to arbitrage within a New Keynesian model to study these policies. Because the transmission of monetary policy depends on private agents with limited risk-bearing capacity, financial market disruptions reduce the efficacy of both conventional policy as well as forward guidance. Conversely, financial crises are precisely when large scale asset purchases are most effective. Policymakers can take advantage of the inability of financial markets to fully absorb these purchases, which can push down long-term interest rates and help stabilize output and inflation. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:692&r=all |
| By: | Colin Caines (Federal Reserve Board); Fabian Winkler (Federal Reserve Board) |
| Abstract: | We characterize optimal monetary policy when agents have extrapolative beliefs about asset prices. Such boundedly rational expectations induce inefficient asset price and aggregate demand fluctuations. We find that the optimal monetary policy raises interest rates when expected capital gains or the level of current asset prices is high, but does not eliminate deviations of asset prices from their fundamental value. When the asset is in elastic supply, optimal policy also leans against the wind, tolerating low inflation and output when asset prices are too high. Optimal policy can be reasonably approximated by simple interest rate rules that respond to capital gains. Our results are robust to a wide range of belief specifications. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:713&r=all |
| By: | Kathrin Ellieroth (Indiana University Bloomington) |
| Abstract: | I document that aggregate hours worked and employment are significantly less cyclical for married women than for married men and single women. Married women are less likely to leave the labor force and are more attached to employment in recessions. Furthermore, I show that men have a strongly countercyclical job loss probability. Using a two-person household model with labor market frictions, I show that married women exhibit precautionary labor supply in response to the higher threat of job loss experienced by their husband in recessions and thus, offer spousal insurance. The cyclicality of men’s job loss probability accounts for the majority of married women’s low cyclicality of employment. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1134&r=all |
| By: | Aleksander Berentsen (Department of Business and Economics - University of Basel - Unibas - University of Basel); Mariana Rojas Breu (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Christopher Waller (Deakin University - Deakin University [Burwood]) |
| 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' ifthey are a high quality seller. We show that new sellers charge a low price to attractbuyers and if they receive a star they post a high price. Furthermore, high qualitysellers sell with a higher probability than new sellers. We show that welfare is higherwith a ratings system. Using data on Airbnb rentals to compare the pricing decisionsof Superhosts (elite rentals) to non-Superhosts we show that Superhosts: 1) chargehigher prices, 2) have a higher occupancy rate and 3) higher revenue than non-Superhosts. |
| Keywords: | superhosts,Ratings,Price Posting,Airbnb |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02302566&r=all |
| By: | Lepetyuk, Vadym; Maliar, Lilia; Maliar, Serguei |
| Abstract: | The Canadian economy was not initially hit by the 2007-2009 Great Recession but ended up having a prolonged episode of the effective lower bound (ELB) on nominal interest rates. To investigate the Canadian ELB experience, we build a "baby" ToTEM model -- a scaled-down version of the Terms of Trade Economic Model (ToTEM) of the Bank of Canada. Our model includes 49 nonlinear equations and 21 state variables. To solve such a high-dimensional model, we develop a projection deep learning algorithm -- a combination of unsupervised and supervised (deep) machine learning techniques. Our findings are as follows: The Canadian ELB episode was contaminated from abroad via large foreign demand shocks. Prolonged ELB episodes are easy to generate in open-economy models, unlike in closed-economy models. Nonlinearities associated with the ELB constraint have virtually no impact on the Canadian economy but other nonlinearities do, in particular, the degree of uncertainty and specific closing condition used to induce the model's stationarity. |
| Keywords: | central banking; clustering analysis large-scale model; deep learning; Machine Learning; neural networks; New Keynesian Model; supervised learning; ToTEM; ZLB |
| JEL: | C61 C63 C68 E31 E52 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14025&r=all |
| By: | Cesaire Meh (Bank of Canada); Vincenzo Quadrini (USC); Yaz Terajima (Bank of Canada) |
| Abstract: | We study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic and Ueda (1997). More constrained firms sign contracts that are less indexed to inflation and, as a result, their investment is more sensitive to nominal price shocks. We also nd that the overall degree of nominal indexation increases with price uncertainty. An implication of this is that economies with higher inflation uncertainty are less vulnerable to a price shock of a given magnitude. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:486&r=all |
| By: | Flavien Moreau (UCLA); Ludovic Panon (Sciences Po) |
| Abstract: | This paper develops a quantitative framework with heterogenous firms and endogenous markups to assess the macroeconomic implications of sectoral distortions to market structure, namely the existence of cartels. The direct negative welfare impact of cartels is compounded by increases in non-colluders’ prices (umbrella pricing). We then build a dataset on firm- and sector-level collusive cases constructed from the textual analysis of two decades of antitrust decisions taken by the French Competition Authority that we combine with exhaustive administrative firm microdata to test the predictions of our model. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:579&r=all |
| By: | Stephen Williamson (University of Western Ontario) |
| Abstract: | A model of multiple means of payment is constructed to analyze the effects of the introduction of central bank digital currency (CBDC). The introduction of CBDC has three beneficial effects. It mitigates crime associated with physical currency, permits the payment of interest on a key central bank liability, and economizes on scarce safe collateral. CBDC admits another instrument of monetary policy, but may require that the central bank take on private assets in its portfolio if CBDC significantly displaces privately supplied means of payment. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:386&r=all |
| By: | Hassan Afrouzi (Columbia University) |
| Abstract: | In an analytical framework, we study how an economy with rationally inatten- tive firms responds to supply and demand shocks. Firms optimally choose to ignore the nature of shocks in favor of having a better estimate of how those shocks affect their prices. As a result, in our economy, when firms get signals that they should increase their price, they are confused about whether the underlying shock is a positive demand shock or a negative supply shock. This has significant implications for monetary policy: we prove that if monetary policy shocks are not persistent enough, every expansion caused by a positive policy shock will lead to a recession as firms would interpret it as a negative supply shock. This favors policies such as interest rate smoothing. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1467&r=all |
| By: | Rodolfo Manuelli (Washington University); Juan Sanchez (Federal Reserve Bank of St. Louis) |
| Abstract: | We study the endogenous determination of debt maturity in a setting with default risk. Firms have access to a bond with a flexible structure. The optimal bond maturity balances liquidity risk and default risk. Firms with poor prospects and firms in more unstable industries will choose shorter maturities even if it is feasible to issue longer debt. The model also offers predictions on how asset maturity, asset salability, and leverage influence maturity. Even though our model is extremely stylized, predictions are roughly consistent with the evidence. Moreover, it o¤ers some insights into the factors that determine the structure of debt. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1103&r=all |
| By: | Baris Kaymak (University of Montreal) |
| Abstract: | The corporate tax code allows corporations to write off operating losses against past or future tax obligations, resulting in effective tax rates that are firm-specific and dependent on the history of the firm's performance. Since losses are partly an indication of a drop in productivity, which is generally persistent over time, firms with higher expected productivity face, on average, higher marginal taxes on their investment. In this paper, we analyze the distortionary effects of loss-offset provisions on investment and assess the associated aggregate output losses implied by the misallocation of capital. We find that replacing the corporate income tax with a revenue-neutral value-added tax which eliminates the firm-level differences in effective tax rates leads to a 13.9 percent increase in aggregate output. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1177&r=all |
| By: | Max Groneck (University of Groningen); Johanna Wallenius (Stockholm School of Economics) |
| Abstract: | In this paper, we study the labor supply effects and the redistributional consequences of the U.S. social security system. We focus particularly on auxiliary benefits, where eligibility is linked to marital status. To this end, we develop a dynamic, structural life cycle model of singles and couples, featuring uncertain marital status and survival. We account for the socio-economic gradients to both marriage stability and life expectancy. We find that auxiliary benefits have a large depressing effect on married women’s employment. Moreover, we show that a revenue neutral minimum benefit scheme would moderately reduce inequality relative to the current U.S. system. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:776&r=all |