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on Dynamic General Equilibrium |
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Issue of 2019‒11‒04
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Stylianos Asimakopoulos; Marco Lorusso; Francesco Ravazzolo |
| Abstract: | This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model to evaluate the economic repercussions of cryptocurrency. We assume that cryptocurrency offers an alternative currency option to government currency for households and we have an endogenous supply and demand for cryptocurrency. We estimate our model with Bayesian techniques using monthly data for the period 2013:M6-2019:M3. Our results indicate a substitution effect between the real balances of government currency and cryptocurrency in response to technology, preferences and monetary policy shocks. In addition, real balances of cryptocurrency exhibit a countercyclical reaction to these shocks. Moreover, we find that government currency demand shocks have larger effects on the economy than shocks to cryptocurrency demand. Our results also show that cryptocurrency productivity shocks have negative effects on output and on the exchange rate between government currency and cryptocurrency, with a more pronounced negative reaction to output if the central bank increases its weight to government currency growth. Overall, our results provide novel insights on the underlying mechanisms of cryptocurrency and spillover effects to the economy. |
| Keywords: | DSGE Model, Government Currency, Cryptocurrency, Bayesian Estimation |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0079&r=all |
| By: | Miroslav Gabrovski (University of Hawaii Manoa); Victor Ortego-Marti (Department of Economics, University of California Riverside) |
| Abstract: | This paper develops a business cycle model of the housing market with search frictions and entry of both buyers and sellers. The housing market exhibits a well-established cyclical component, which features three stylized facts: prices move in the same direction as sales and the number of houses for sale, but opposite to the time it takes to sell a house. These stylized facts imply that in the data housing vacancies and the number of buyers are positively correlated, i.e. that the Beveridge Curve is upward sloping. A baseline search and matching model of the housing market is unable to match these stylized facts because it inherently generates a downward sloping Beveridge Curve. With free entry of both buyers and sellers, our model reproduces the positive correlation between prices, sales and vacancies, and matches the stylized facts qualitatively and quantitatively. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201911&r=all |
| By: | Sergio de Ferra; Kurt Mitman; Federica Romei |
| Abstract: | We study the role of heterogeneity in the transmission of foreign shocks. We build a Heterogeneous-Agent New-Keynesian Small Open Model Economy (HANKSOME) that experiences a current account reversal. Households' portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows. The contraction is more severe when households are leveraged and owe debt in foreign currency. In this setting, the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households. Closing the output gap via an exchange-rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation. Our HANKSOME framework can rationalize the observed "fear of floating" in emerging market economies, even in the absence of contractionary devaluations |
| JEL: | E21 F32 F41 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26402&r=all |
| By: | Jang-Ting Guo (Department of Economics, University of California Riverside); Miroslav Gabrovski (University of Hawaii at Manoa) |
| Abstract: | In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical fluctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is sufficient low. |
| Keywords: | Progressive Taxation, Nominal Wage Rigidity, Automatic Stabilizer, Business Cycles. |
| JEL: | E12 E32 E62 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201913&r=all |
| By: | Kazuya Kamiya (Research Institute for Economics and Business Administration, Kobe University, Japan); Hajime Kobayashi (Faculty of Economics, Kansai University); Tatsuhiro Shichijo (School of Economics, Osaka Prefecture University); Takashi Shimizu (Graduate School of Economics, Kobe University) |
| Abstract: | In this paper, we investigate a search model with divisible fiat money in a laboratory setting where transaction prices are endogenously determined. In the model, there exist welfare-ranked multiple stationary monetary equilibria and gift-giving equilibria. We find that endogenizing transaction prices enhanced the coordination of subjects through monetary exchange and deteriorated it through gift-giving. In other words, the subjects endogenously reduced the trade friction of monetary exchanges. We also compare our experimental results with those in search models with exogenously given transaction prices. |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2019-21&r=all |
| By: | Vanya Horneff; Daniel Liebler; Raimond Maurer; Olivia S. Mitchell |
| Abstract: | In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers’ wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament. |
| JEL: | D14 D91 G11 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26406&r=all |
| By: | Hirsch, Patrick |
| JEL: | E32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203633&r=all |
| By: | Colin Davis; Ken-ichi Hashimoto |
| Abstract: | We study the effects of import competition on industry locations patterns in a small open economy with two regions. Domestic productivity growth converges to the international rate through firm-level investment in process innovation. With firms locating production and innovation in their lowest cost locations, the concentration of industry in the larger region is linked with firm-level innovation through an import competition effect that is increasing in the market share of imported goods and the productivity differential of domestic firms with the rest of the world. We show that increased import competition, through either a larger number of imported goods or a faster international rate of productivity growth, leads to greater industry concentration by reducing domestic market entry and decreasing the relative productivity of domestic firms. We also consider the implications of improved regional and international economic integration. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1066&r=all |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL); Zeynep Yom (School of Business, Villanova University) |
| Abstract: | This paper shows that technology shocks have the largest impact on economies when industries adopt innovations of other industries at a high rate, if costs of adopting new technologies and adjusting R&D expenditures are low, and if innovators face a high degree of competition. It is not the level but the spillover of innovations across industries that is the key determinant of these findings. Under the conditions mentioned above, R&D becomes less procyclical and smoother along the business cycle yet R&D driven innovations have a larger impact on output since these innovations spillover at a higher rate. These inferences are drawn from a dynamic stochastic general equilibrium framework describing a real economy with endogenous growth. The latter feature allows us to infer the welfare implications of R&D processes. |
| Keywords: | Research and development, spillover effects, endgenous growth |
| JEL: | E30 E32 O30 O33 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2019-04ua&r=all |
| By: | Jiang, Zhengyang (Northwestern Kellogg); Lustig, Hanno (Stanford GSB, NBER); Van Nieuwerburgh, Stijn (Columbia Business School, NBER, and CEPR); Xiaolan, Mindy Z. (UT Austin McCombs) |
| Abstract: | The market value of outstanding government debt reflects the expected present discounted value of current and future primary surpluses. When the discount rate is consistent with the term structure of interest rates and equity prices and government spending growth dynamics are estimated from the data, a government risk premium puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher risk premium and a lower value than the spending claim. This makes the value of the surplus claim negative, and implies that the U.S. government should be a creditor rather than a debtor. We resolve this puzzle by postulating a small but persistent component in expected spending growth, and infer it from the market value of the outstanding government bond portfolio. This component offsets the pro-cyclical movements in current surpluses, reducing its risk and increasing its value. The resulting model is used to study the optimal maturity structure of government debt, and to quantify deviations of the observed portfolio from the optimal one. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3831&r=all |
| By: | Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young |
| Abstract: | There is a new and now extensive literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses often build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. In this paper, we show that the same set of policy tools that implement the constrained efficient allocation can be used optimally by a Ramsey planner to replicate the unconstrained allocation, thus achieving higher welfare. We establish this in the context of a well-known model economy, but the result is relevant whenever the policy instrument that is assigned to the planner can affect the market price that determines the value of collateral in the borrowing constraint. The result implies that a robust normative analysis in this model class requires explicit computations of the Ramsey optimal policy problem. |
| JEL: | E61 F38 F41 G01 G18 H23 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26397&r=all |
| By: | Stempel, Daniel; Neyer, Ulrike |
| JEL: | D13 D31 E32 E52 J71 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203556&r=all |
| By: | George-Marios Angeletos; Karthik Sastry |
| Abstract: | We study the efficiency of competitive markets in the presence of a general form of rational inattention. The appropriate amendments of the Fundamental Welfare Theorems are shown to hold if rational inattention is modeled as an arbitrary cost for obtaining signals about the exogenous state of nature. If instead rational inattention is modeled as a cost for observing prices or other endogenous outcomes, inefficiency can arise because of a cognitive externality: people do not internalize how their choices affect the complexity of the price system and thereby others’ cost of tracking or decoding it. This externality is muted in an important special case, when cognitive costs are given by the mutual information of agents’ decisions with the joint of the price system and the entire state of nature. For more general costs, however, there is room for policies aimed at simplifying or otherwise regulating markets. |
| JEL: | D5 D6 D8 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26413&r=all |
| By: | Sanchez-Romero, Miguel; Lee, Ron; Fürnkranz-Prskawetz, Alexia |
| JEL: | E24 J10 J18 H55 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203628&r=all |
| By: | Hart, Janine; Clemens, Marius |
| JEL: | J61 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203659&r=all |
| By: | Giovannini, Massimo; Hohberger, Stefan; Ratto, Marco; Vogel, Lukas |
| JEL: | E32 F41 F44 F45 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203548&r=all |
| By: | Poeschl, Johannes; Zhang, Xue |
| JEL: | E44 G24 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203520&r=all |
| By: | Strobel, Johannes; Lee, Gabriel; Dorofeenko, Victor; Salyer, Kevin |
| JEL: | E3 E5 E2 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203491&r=all |
| By: | Vogel, Lukas |
| JEL: | E31 E52 E58 E62 C11 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203586&r=all |
| By: | Hott, Christian |
| JEL: | E21 J11 J26 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203642&r=all |
| By: | Merkl, Christian |
| JEL: | E24 E00 E60 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc19:203549&r=all |