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on Dynamic General Equilibrium |
| By: | Huber, Florian; Rabitsch, Katrin |
| Abstract: | In this paper, we reconsider the question how monetary policy influences exchange rate dynamics. To this end, a vector autoregressive (VAR) model is combined with a two-country dynamic stochastic general equilibrium (DSGE) model. Instead of focusing exclusively on how monetary policy shocks affect the level of exchange rates, we also analyze how they impact exchange rate volatility. Since exchange rate volatility is not observed, we estimate it alongside the remaining quantities in the model. Our findings can be summarized as follows. Contractionary monetary policy shocks lead to an appreciation of the home currency, with exchange rate responses in the short-run typically undershooting their long-run level of appreciation. They also lead to an increase in exchange rate volatility. Historical and forecast error variance decompositions indicate that monetary policy shocks explain an appreciable amount of exchange rate movements and the corresponding volatility. |
| Keywords: | Monetary policy, Exchange rate overshooting, stochastic volatility modeling, DSGE priors |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:7210&r=all |
| By: | OH, Joonseok; ROGANTINI PICCO, Anna |
| Abstract: | This paper illustrates how households' heterogeneity is crucial for the propagation of uncertainty shocks. We empirically show that an uncertainty shock generates a drop in aggregate consumption, job finding rate, and inflation: the aggregate consumption response is mainly driven by the consumption response of the bottom 60% of the income distribution. A heterogeneous-agent New Keynesian model with search and matching frictions and Calvo pricing rationalizes our findings. Uncertainty shocks induce households' precautionary saving and firms' precautionary pricing behaviors, triggering a fall in aggregate demand and supply. The two precautionary behaviors increase the unemployment risk of the imperfectly insured, who strengthen their precautionary saving behavior. When the feedback loop between unemployment risk and precautionary saving is strong enough, a rise in uncertainty leads to a decrease in inflation. Contrary to standard representative agent New Keynesian models, our model qualitatively and quantitatively matches the empirical evidence on uncertainty shock propagation. |
| Keywords: | Uncertainty; Inflation; Unemployment risk; Precautionary savings |
| JEL: | E12 E31 E32 J64 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2019/02&r=all |
| By: | Olatunji A. Shobande (Business School, University of Aberdeen, UK); Oladimeji T. Shodipe (Eastern Illinois University, USA); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | The study examines the role of global predictors on national monetary policy formation for Kenya and Ghana within the New Keynesian DSGE framework. We developed and automatically calibrated our DSGE model using the Bayesian estimator, which made our model robust to rigorous stochastic number of subjective choices. Our simulation result indicates that global factors account for the inability of national Central Banks to predict the behaviour of macroeconomic and financial variables among these developing nations. |
| Keywords: | Business Cycle, Macroeconomic policy, Financial crises |
| JEL: | E32 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:19/066&r=all |
| By: | Florian Huber (Paris Lodron University of Salzburg, Salzburg Centre of European Union Studies); Katrin Rabitsch (Institute for International Economics and Development, Department of Economics, Vienna University of Economics and Business) |
| Abstract: | In this paper, we reconsider the question how monetary policy influences exchange rate dynamics. To this end, a vector autoregressive (VAR) model is combined with a two-country dynamic stochastic general equilibrium (DSGE) model. Instead of focusing exclusively on how monetary policy shocks affect the level of exchange rates, we also analyze how they impact exchange rate volatility. Since exchange rate volatility is not observed, we estimate it alongside the remaining quantities in the model. Our findings can be summarized as follows. Contractionary monetary policy shocks lead to an appreciation of the home currency, with exchange rate responses in the short-run typically undershooting their long-run level of appreciation. They also lead to an increase in exchange rate volatility. Historical and forecast error variance decompositions indicate that monetary policy shocks explain an appreciable amount of exchange rate movements and the corresponding volatility. |
| Keywords: | Monetary policy, Exchange rate overshooting, stochastic volatility modeling, DSGE priors |
| JEL: | E43 E52 F31 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp295&r=all |
| By: | Hanming Fang (University of Pennsylvania); Andrew Shephard (University of Pennsylvania) |
| 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 the 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 the 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. |
| Keywords: | Health, Health Insurance, Labor Market Equilibrium, Household Search |
| JEL: | G22 I11 I13 J32 |
| Date: | 2019–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:19-019&r=all |
| By: | Fernández-Villaverde, Jesús; Mandelman, Federico; Yu, Yang; Zanetti, Francesco |
| Abstract: | We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium. |
| Keywords: | Aggregate fluctuations; government spending; Macroeconomic volatility; strategic complementarities |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13950&r=all |
| By: | Guangling Liu; Thabang Molise |
| Abstract: | This paper develops a dynamic general equilibrium model with banking and a macro-prudential authority, and studies the extent to which the Basel III bank capital regulation promotes financial and macroeconomic stability in the context of South African economy. The decomposition analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. Basel III has a pronounced impact on the financial sector compared to the real sector and is more effective in mitigating fluctuations in financial and business cycles when the economy is hit by financial shocks. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust capital requirement to changes in credit and output when implementing the counter-cyclical buffer. |
| Keywords: | Bank capital regulations, Financial Stability, counter-cyclical capital buffer, DSGE |
| JEL: | E44 E47 E58 G28 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:757&r=all |
| By: | Bell, Clive (Heidelberg University); Gersbach, Hans (ETH Zurich); Komarov, Evgenij (ETH Zurich) |
| Abstract: | This paper analyses the effects of disease and war on the accumulation of human and physical capital. We employ an overlapping-generations frame-work in which young adults, confronted with such hazards and motivated by old-age provision and altruism, make decisions about investments in schooling and reproducible capital. A poverty trap exists for a wide range of stationary war losses and premature adult mortality. If parents are altruistic and their sub-utility function for own consumption is more concave than that for the children's human capital, the only possible steady-state growth path involves full education. Otherwise, steady-state paths with incompletely educated children may exist, some of them stationary ones. We also examine, analytically and with numerical examples, a growing economy's robustness in a stochastic environment. The initial boundary conditions have a strong influence on outcomes in response to a limited sequence of destructive shocks. |
| Keywords: | premature mortality, capital accumulation and destruction, steady states, poverty traps, overlapping generations |
| JEL: | D91 E13 I15 I25 O11 O41 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12680&r=all |
| By: | Lagos, Ricardo; Zhang, Shengxing |
| Abstract: | We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that-in contrast to current conventional wisdom in policy-oriented research in monetary economics-the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable-even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations- even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances. |
| Keywords: | asset prices; Cashless; credit; leverage; liquidity; margin; monetary policy |
| JEL: | D83 E52 G12 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14057&r=all |
| By: | Marek Kapička; Finn Kydland; Carlos Zarazaga |
| Abstract: | We study why capital accumulation in Argentina was slow in the 1990s and 2000s, despite high productivity growth and low international interest rates. We show that limited commitment constraints introduce two mechanisms. First, the response of investment to a total factor productivity increase is muted and short-lived, while the response to a decrease is large and persistent. Second, unlike in a first-best economy, low international interest rates may reduce capital accumulation, because they increase the relevance of future commitment constraints. A quantitative implementation of the model economy shows that the two mechanisms are quantitatively important for the dynamics of Argentina’s capital accumulation. The model accounts for between 50% and 85% of the capital missing from Argentina in these two periods, relative to what it would be in the absence of the limited commitment frictions. |
| JEL: | F34 F41 F42 F43 O19 O54 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26359&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 (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: | Capital market integra- tion,Pollution,Abatement,Overlapping generations,Public debt,Capital market integration |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpceem:halshs-02305967&r=all |
| By: | Guido Ascari (Department of Economics, University of Oxford (UK).); Jacopo Bonchi (Department of Social Sciences and Economics, Sapienza University of Rome (IT).) |
| Abstract: | We investigate the possibility to reflate an economy experiencing a long-lasting zero lower bound episode with subdued or negative inflation, by imposing a minimum level of wage inflation. Our proposed income policy relies on the same mechanism behind past disinflationary policies, but it works in the opposite direction. It is formalized as a downward nominal wage rigidity (DNWR) such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows to dissolve the zero lower bound steady state equilibrium in an OLG model featuring “secular stagnation” and in a infinite-life model, where this equilibrium emerges due to deflationary expectations. |
| Keywords: | zero lower bound, wage indexation, income policy, inflation expectations. |
| JEL: | E31 E52 E64 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:10/19&r=all |
| By: | Tamayo, Cesar E.; Fernandez, Andres; Imrohoroglu, Ayse |
| Abstract: | This paper examines the time path of saving rates between 1970 and 2010 in Chile, Colombia, and Mexico through the lens of the neoclassical growth model. The findings indicate that two factors, the growth rate of TFP and fiscal policy, are able to account for some of the major fluctuations in saving rates observed during this period. In particular, we nd that the model accounts for the low saving rates in Chile compared to Colombia until the late 1980s and the reversal in the saving rates thereafter. Also, a combination of high TFP growth and tax reforms that substantially reduced capital taxation seems to be responsible for the impressive increase in Chile's saving rate in mid 1980s. |
| Keywords: | Total factor productivity; Saving rate; Latin America |
| JEL: | E21 O47 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:rie:riecdt:19&r=all |
| By: | Hansjoerg Albrecher; Pablo Azcue; Nora Muler |
| Abstract: | We address a long-standing open problem in risk theory, namely the optimal strategy to pay out dividends from an insurance surplus process, if the dividend rate can never be decreased. The optimality criterion here is to maximize the expected value of the aggregate discounted dividend payments up to the time of ruin. In the framework of the classical Cram\'{e}r-Lundberg risk model, we solve the corresponding two-dimensional optimal control problem and show that the value function is the unique viscosity solution of the corresponding Hamilton-Jacobi-Bellman equation. We also show that the value function can be approximated arbitrarily closely by ratcheting strategies with only a finite number of possible dividend rates and identify the free boundary and the optimal strategies in several concrete examples. These implementations illustrate that the restriction of ratcheting does not lead to a large efficiency loss when compared to the classical un-constrained optimal dividend strategy. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1910.06910&r=all |
| By: | Lagos, Ricardo; Zhang, Shengxing |
| Abstract: | We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions directly with money strengthens the stance of sellers of goods and services vis-a-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these latent money demand considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small. |
| Keywords: | Cashless; credit; liquidity; monetary policy; money |
| JEL: | D83 E52 G12 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14051&r=all |
| By: | Marion Davin (CEE-M, Univ Montpellier, CNRS, INRA, SupAgro, Montpellier, France); Mouez Fodha (University Paris 1 Panthéon-Sorbonne and Paris School of Economics, France); Thomas Seegmuller (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France) |
| Abstract: | This article analyzes the impacts of debt relief on production and pollution. We develop at wo-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 |
| JEL: | F43 H23 Q56 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1925&r=all |