nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒11‒25
25 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Occupation Mobility, Human Capital and the Aggregate Consequences of Task-Biased Innovations By Maximiliano Dvorkin; Alexander Monge-Naranjo
  2. Costly default and asymetric real business cycles By Fève, Patrick; Garcia Sanchez, Pablo; Moura, Alban; Pierrard, Olivier
  3. Cross-Sectional and Aggregate Labor Supply By Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson
  4. Waiting for the Prince Charming: Fixed-Term Contracts as Stopgaps By Normann Rion
  5. The (ir)relevance of real wage rigidity for optimal monetary policy By Kohlbrecher, Britta
  6. Has fiscal expansion inflated house prices in China? Evidence from an estimated DSGE model By Liu, Chunping; Ou, Zhirong
  7. How Would 401(k) ‘Rothification’ Alter Saving, Retirement Security, and Inequality? By Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
  8. The Global Multi-Country Model (GM): An Estimated DSGE Model for Euro Area Countries By Alice Albonico; Ludovic Calés; Roberta Cardani; Olga Croitorov; Fabio Di Dio; Filippo Ferroni; Massimo Giovannini; Stefan Hohberger; Beatrice Pataracchia; Filippo Pericoli; Philipp Pfeiffer; Rafal Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel
  9. Real indeterminacy and dynamics of asset price bubbles in general equilibrium By Pham, Ngoc-Sang; Le Van, Cuong; Bosi, Stefano
  10. Pricing Sovereign Debt in Resource-Rich Economies By Thomas McGregor
  11. Ramsey Optimal Policy in the New-Keynesian Model with Public Debt By Jean-Bernard Chatelain; Kirsten Ralf
  12. Recapitalization in an Economy with State-Owned Banks - A DSGE Framework By Ghosh, Saurabh; Gopalakrishnan, Pawan; Satija, Sakshi
  13. A Quantitative Analysis of Female Employment in Senegal By Vivian Malta; Angelica Martinez; Marina Mendes Tavares
  14. Recessions in a two-sector model: Capitalists’ risk preferences determine workers' real wages By Maruyama, Yuuki
  15. How Sticky Wages In Existing Jobs Can Affect Hiring By Mark Bils; Yongsung Chang; Sun-Bin Kim
  16. Policy Interventions in Sovereign Debt Restructurings By Dvorkin, Maximiliano; Sanchez, Juan M.; Sapriza, Horacio; Yurdagul, Emircan
  17. Entry Costs and the Macroeconomy By Germán Gutiérrez; Callum Jones; Thomas Philippon
  18. Pollution in a globalized world: Are debt transfers among countries a solution? By Marion Davin; Mouez Fodha; Thomas Seegmuller
  19. Saving Rates in Latin America: A Neoclassical Perspective By Andrés Fernández; Ayse Imrohoroglu; Cesar Tamayo
  20. Demographic Changes and the Labor Income Share By Hippolyte d'Albis; Ekrame Boubtane; Dramane Coulibaly
  21. Heterogeneous spillovers of housing credit policy By Myroslav Pidkuyko
  22. Dynamics of cash holdings, learning about profitability, and access to the market By Décamps, Jean-Paul; Villeneuve, Stéphane
  23. Symmetry condition and re-assessing Blanchard-Kiyotaki decades later By Kim, Minseong
  24. Optimal Taxation with Private Insurance By Yena Park; Yongsung Chang
  25. When Do Currency Unions Benefit From Default ? By Xuan Wang

  1. By: Maximiliano Dvorkin; Alexander Monge-Naranjo
    Abstract: We construct a dynamic general equilibrium model with occupation mobility, human capital accumulation and endogenous assignment of workers to tasks to quantitatively assess the aggregate impact of automation and other task-biased technological innovations. We extend recent quantitative general equilibrium Roy models to a setting with dynamic occupational choices and human capital accumulation. We provide a set of conditions for the problem of workers to be written in recursive form and provide a sharp characterization for the optimal mobility of individual workers and for the aggregate supply of skills across occupations. We craft our dynamic Roy model in a production setting where multiple tasks within occupations are assigned to workers or machines. We solve for the balanced-growth path and characterize the aggregate transitional dynamics ensuing task-biased technological innovations. In our quantitative analysis of the impact of task-biased innovations in the U.S. since 1980, we find that they account for an increased aggregate output in the order of 75% and for a much higher dispersion in earnings. If the U.S. economy had higher barriers to mobility, it would have experienced less job polarization but substantially higher inequality and lower output as occupation mobility has provided an "escape" for the losers from automation.
    Keywords: dynamic roy models, automation, human capital, aggregation
    JEL: E24 J23 J24 J62 O33 E25
    Date: 2019–11
  2. By: Fève, Patrick; Garcia Sanchez, Pablo; Moura, Alban; Pierrard, Olivier
    Abstract: We augment a simple Real Business Cycle model with financial intermediaries that may default on their liabilities and a financial friction generating social costs of default. We provide a closed-form solution for the general equilibrium of the economy under specific assumptions, allowing for analytic results and straightforward simulations. Endogenous default generates asymmetric business cycles and our model replicates both the negative skew of GDP and the positive skew of credit spreads found in US data. Stronger financial frictions cause a rise in asymmetry and amplify the welfare costs of default. A Pigouvian tax on financial intermediation mitigates most of these negative effects at the cost of a steady-state distortion.
    Keywords: Real Business Cycle model, default, financial frictions, asymmetry, skewness.
    JEL: E32 E44 G21
    Date: 2019–11
  3. By: Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson
    Abstract: Standard heterogeneous agent macro models that highlight idiosyncratic productivity shocks do not generate the near zero cross-sectional correlation between hours and wages found in the data. We ask whether matching this moment matters for business cycle properties of these models. To do this we explore two extensions of the model in Chang et al. (2019) that can match this empirical cross-section correlation. One of these departs from the assumption of balanced growth preferences. The other introduces an idiosyncratic shock to the opportunity cost of market work that is highly correlated with the shock to market productivity. While both extensions can match the empirical correlation, they have large and opposing effects on the cyclical volatility of the labor market. We conclude that the cross-sectional moment is important for business cycle analysis and that more work is needed to distinguish the potential mechanisms that can generate it.
    Keywords: Hours; Employment; Cross-section; Business Cycles; Comparative Advantage
    Date: 2019–02
  4. By: Normann Rion (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this paper, I build a simple Mortensen-Pissarides model embedding a dual labor market. I derive conditions for the existence of an equilibrium with coexisting strongly protected open-ended contracts and exogeneously short fixed-term contracts. I also study dynamics after a reform on employment protection legislation. Temporary contracts play the role of fillers while permanent contracts are used to lock up high-productivity matches. High firing costs favor the emergence of a dual equilibrium. Employment protection legislation encourages the resort to temporary employment in job creation. This scheme is intertwined with a general-equilibrium e_ect: permanent contracts represent the bulk of employed workers and a more stringent employment protection reduces aggregate job destruction. This pushes down unemployment and in turn reduces job creation ows through temporary contracts. The model is calibrated to match the French labor market. Policy experiments demonstrate that there is no joint gain in employment and social welfare through reforms on firing costs around the baseline economy. The optimal policy consists in implementing a unique open-ended contract with a strong cut in firing costs. Increases in firing costs within a dual labor market lead to a sluggish adjustment, while large cuts in firing costs lead to a quick one. The adjustment time of the labor market is highly non-monotonous between these two extremes. Policy-related uncertainty significantly strengthens fixed-term employment on behalf of open-ended employment. Considering extensions, I draw conclusions on the inability of a large class of random-matching models to mimic the distribution of temporary contracts' duration while maintaining possible the expiring temporary contracts' conversion into permanent contracts.
    Keywords: Fixed-term Contracts,Unemployment,Employment Protection,Policy,Dynamics
    Date: 2019–10
  5. By: Kohlbrecher, Britta
    Abstract: Real wage rigidity is known to create a substantial trade-off between inflation and employment stabilization for monetary policy in New Keynesian models with search frictions on the labor market. This paper shows that, quantitatively, this finding hinges very much on the assumption of constant returns to scale in production. With decreasing returns to scale, monetary policy with a single focus on inflation stabilization is close to optimal. The reason is twofold: Firms cushion the impact of rigid real wages on marginal costs by adjusting the marginal product of labor over the cycle. In addition, given employment fluctuations have a smaller effect on consumption volatility. Decreasing returns to scale thus remove the need for active monetary policy even if wages are rigid. Importantly, this contrasts with the implications of combining real wage rigidity and decreasing returns to scale for other policy instruments.
    Keywords: optimal monetary policy,Ramsey policy,search and matching,real wage rigidity
    JEL: E24 E32 E52 J64
    Date: 2019
  6. By: Liu, Chunping (Nottingham Trent University); Ou, Zhirong (Cardiff Business School)
    Abstract: A canonical DSGE model for housing, extended to embrace government spending and government investment, is estimated on Chinese data to evaluate the impact of fiscal policy on house prices. Government spending substitutes for housing; a rise in government spending lowers house prices, but its impact is weak. Government investment generates a wealth effect, causing housing demand, and therefore prices, to rise; its variation had a substantial impact on the boom-bust cycles of house prices in the past decade. Both government spending and government investment are effective instruments for manipulating output. However, their different impacts on house prices would recommend policies to count more on spending if fiscal expansion is not to sacrifice the stability of house prices.
    Keywords: fiscal policy; housing price; China; DSGE model
    JEL: E62 R31
    Date: 2019–11
  7. By: Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
    Abstract: The US has long incentivized retirement saving in 401(k) and similar retirement accounts by permitting workers to defer taxes on contributions, levying them instead when retirees withdraw funds in retirement. This paper develops a dynamic life cycle model to show how and whether ‘Rothification’ – that is, taxing 401(k) contributions rather than payouts – would alter household saving, investment, and Social Security claiming patterns. We show that these changes differ importantly for low- versus higher-paid workers. We conclude that moving to a system that taxes pension contributions instead of withdrawals will lead to later retirement ages, particularly for the better-educated. It also would reduce work hours and lifetime tax payments and increase wealth and consumption inequality. In addition, we show how these behaviors would differ in a persistently low interest rate environment versus a more “normal” historical return world.
    JEL: D14 D91 G11 G22 G23 G28
    Date: 2019–11
  8. By: Alice Albonico; Ludovic Calés; Roberta Cardani; Olga Croitorov; Fabio Di Dio; Filippo Ferroni; Massimo Giovannini; Stefan Hohberger; Beatrice Pataracchia; Filippo Pericoli; Philipp Pfeiffer; Rafal Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel
    Abstract: This paper introduces the Global Multi-country (GM) model, an estimated multi-country Dynamic Stochastic General Equilibrium (DSGE) model of the world economy. We present the model in 3-region configurations for Euro area (EA) countries that include an individual EA Member State, the rest of the EA (REA), and the rest of the world (RoW). We provide and compare estimates of this model structure for the four largest EA countries (Germany, France, Italy, and Spain). The novelty of the paper is the estimation of ex-ante identical country models on the basis of a unified information set, which allows for clean crosscountry comparison of parameter estimates and drivers of economic dynamics. The paper also provides an overview of applications of the GM model such as the structural interpretation of business cycle dynamics, the contribution to the European Commission’s economic forecast, the scenario analysis and policy counterfactuals.
    JEL: C51 E32 F41 F45
    Date: 2019–07
  9. By: Pham, Ngoc-Sang; Le Van, Cuong; Bosi, Stefano
    Abstract: In a simple infinite-horizon exchange economy with a single consumption good and a financial asset, real indeterminacy and asset price bubble may arise. We show how heterogeneity (in terms of preferences, endowments) and short-sale constraints affect the emergence and the dynamics of asset price bubbles as well as the equilibrium indeterminacy. We also bridge the literature of bubbles in models with infinitely lived agents and that in OLG models.
    Keywords: asset price bubble, real indeterminacy, borrowing constraint, intertemporal equilibrium, infinite horizon
    JEL: D5 D9 E4 G12
    Date: 2019–11–12
  10. By: Thomas McGregor
    Abstract: How do oil price movements affect sovereign spreads in an oil-dependent economy? I develop a stochastic general equilibrium model of an economy exposed to co-moving oil price and output processes, with endogenous sovereign default risk. The model explains a large proportion of business cycle fluctuations in interest-rate spreads in oil-exporting emerging market economies, particularly the countercyclicallity of interest rate spreads and oil prices. Higher risk-aversion, more impatient governments, larger oil shares and a stronger correlation between domestic output and oil price shocks all lead to stronger co-movements between risk premiums and the oil price.
    Date: 2019–11–08
  11. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: This paper compares Ramsey optimal policy for the new-Keynesian model with public debt with its .scal theory of the price level (FTPL) equilibrium. Both the fiscal theory of the price level and Ramsey optimal policy implies that a de.cit shock is instantaneously followed by an increase of in.ation and output gap. But each optimal policy parameters belongs in di¤erent sets with respect to FTPL. The optimal .scal rule parameter implies local stability of public debt dynamics ("passive fiscal policy"). The optimal Taylor rule parameter for in.ation is larger than one. The optimal Taylor rule parameter for output gap is negative, because of the intertemporal substitution e¤ect of interest rate on output gap. Both Taylor rule optimal parameters implies the local stability of inflation and output gap dynamics.
    Keywords: Fiscal theory of the Price Level,Ramsey optimal policy
    Date: 2019–09
  12. By: Ghosh, Saurabh; Gopalakrishnan, Pawan; Satija, Sakshi
    Abstract: We simulate a DSGE model with state owned banks to analyze the impact of bank recapitalization as a policy action in response to loan defaults by firms. As a special case, we calibrate the model to India, an emerging economy with state-owned banks facing a minimum investment requirement in safe assets and a sectoral lending requirement. We analyze two different scenarios of government infused recapitalization - an unconditional transfer to banks and an "equity in exchange for transfer". Our analysis shows that a government infused recapitalization in response to a negative TFP shock may increase output in the short run. However, there is a welfare loss in both cases, although higher for the unconditional transfers as compared with the "equity in exchange for transfer". Our analysis suggests that while bank recapitalization is a welcome move to kick-start credit creation, capital formation and growth, especially during a cyclical downturn, there is need for appropriate policy vigil to protect the quality of public expenditure in the social sector that matters for welfare in the long run.
    Keywords: Bank recapitalization, SLR requirements, Emerging Market Economies, Financial Frictions, state owned banks
    JEL: E32 E62
    Date: 2019–11–14
  13. By: Vivian Malta; Angelica Martinez; Marina Mendes Tavares
    Abstract: Female-to-male employment in Senegal increased by 14 percentage points between 2006 and 2011. During the same period years of education of the working age population increased 27 percent for females and 13 percent for males, reducing gender gaps in education. In this paper, we quantitatively investigate the impact of this increase in education on female employment in Senegal. To that end, we build an overlapping generations model that captures barriers that women face over their life-cycle. Our main findings are: (i) the improvement in years of education can explain up to 44 percent of the observed increased in female-to-male employment ratio and (ii) the rest can be explained by a decline in the discrimination against women in the labor market.
    Date: 2019–11–08
  14. By: Maruyama, Yuuki
    Abstract: With a two-sector model of the consumer goods sector and the capital goods sector, I analyze the real wages of workers. The less capitalists become risk averse, the higher the proportion of capital goods in savings, the labor demand in the capital goods sector will rise, the marginal product of labor will increase in both sectors, and the real wages of workers will increase. It also shows that sudden rises in capitalists' risk aversion can cause a recession. In addition, this model is used to analyze capital income taxation, monetary policy, suppression of an overheating economy, and two positive externalities from capitalists to workers.
    Date: 2019–10–19
  15. By: Mark Bils; Yongsung Chang; Sun-Bin Kim
    Abstract: We consider a matching model of employment with flexible wages for new hires, but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort¡¯s response can greatly increase wage inertia.
    Keywords: E?ort; Employment; Sticky Wages; Wage Inertia
    JEL: E32 E24 J22
    Date: 2019–02
  16. By: Dvorkin, Maximiliano (Federal Reserve Bank of St. Louis); Sanchez, Juan M. (Federal Reserve Bank of St. Louis); Sapriza, Horacio (Federal Reserve Board); Yurdagul, Emircan (Universidad Carlos III)
    Abstract: The wave of sovereign defaults in the early 1980s and the string of debt crises in the decades that followed have fostered proposals involving policy interventions in sovereign debt restructurings. A key question about these proposals that has proved hard to handle is how they in influence the behavior of creditors and debtors. We address such challenge by incorporating these policy proposals into a quantitative model in the tradition of Eaton and Gersovitz (1981) that includes renegotiation in sovereign debt restructurings. Critically, the model also endogenizes the choice of debt maturity, an essential aspect of sovereign defaults and restructurings. We evaluate several policy interventions, and we identify the crucial features that matter to improve the outcome of distressed debt restructurings and reduce the frequency of debt distress events.
    Keywords: Crises; Default; Sovereign Debt; Restructuring; Rescheduling; Country Risk; Maturity; International Monetary Fund; Dynamic Discrete Choice
    JEL: F34 F41 G15
    Date: 2019–11–15
  17. By: Germán Gutiérrez; Callum Jones; Thomas Philippon
    Abstract: We combine a structural model with cross-sectional micro data to identify the causes and consequences of rising concentration in the US economy. Using asset prices and industry data, we estimate realized and anticipated shocks that drive entry and concentration. We validate our approach by showing that the model-implied entry shocks correlate with independently constructed measures of entry regulations and M&As. We conclude that entry costs have risen in the U.S. over the past 20 years and have depressed capital and consumption by about seven percent.
    Date: 2019–11–01
  18. 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: Capital market integration,Pollution,Abatement,Overlapping generations,Public debt
    Date: 2019–10
  19. By: Andrés Fernández; Ayse Imrohoroglu; Cesar Tamayo
    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 find 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.
    Date: 2019–11
  20. By: Hippolyte d'Albis (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Ekrame Boubtane (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Dramane Coulibaly (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this article, we study the impact of demographic changes on the inequality between capital and labor. More precisely, we analyze the impact of exogenous changes in both the rate of natural increase and the net migration rate on the labor income as a share of total income. We estimate a structural vector autoregression (VAR) model on a panel of 18 OECD countries with annual data for 1985-2015. We obtain that the response of the labor income share to an exogenous change in the rate of natural increase is signi_cantly negative a few years after the shock whereas its response to an exogenous change in the net migration rate is significantly positive. This suggests that inequality between capital and labor is reduced by international migration while fostered by the natural increase. We rationalize these _ndings in an original representative agent model where the rate of natural increase and the net migration rate are both modeled. The theoretical model reproduces the empirical _ndings and highlight the crucial roles of both the elasticity of substitution between capital and labor and the participation rate of migrants to the labor market. The model is then used to evaluate the dynamics consequences of permanent demographic changes and, most notably, reveals that in the long run, the labor income share is likely to fall with both the natural increase and the net migration.
    Keywords: International migration,natural increase,labor income share,panel VAR
    Date: 2019–09
  21. By: Myroslav Pidkuyko (Banco de España)
    Abstract: We study the spillovers from government intervention in the mortgage market on households’ consumption using the household survey data from the US. After an expansionary mortgage market operation, the increase in consumption of homeowners with mortgage debt is large and significant, while the consumption response of homeowners without the mortgage debt is small and insignificant. Non-homeowners also increase their consumption but less than mortgagors. We also find that expansionary policy significantly increases the consumption inequality of mortgagors. We explain these facts through the lens of a lifecycle model with incomplete markets and endogenous housing choice. Reduction in credit rates creates extra wealth for the mortgagors while a reduction in interest rates shifts this wealth towards consumption. An increase in wealth is bigger for those with a larger mortgage- this exacerbates consumption inequality.
    Keywords: mortgage debt, life-cycle models, government-sponsored enterprises, credit policy
    JEL: E21 E44 R38 G28
    Date: 2019–11
  22. By: Décamps, Jean-Paul; Villeneuve, Stéphane
    Abstract: We develop a dynamic model of a firm whose shareholders learn about its long-term profitability, face costs of external financing and costs of holding cash. Cash management policy generates a corporate life-cycle with two stages: a "probation stage" where the firm has no access to the capital markets, pays little in dividends, increases its cash target levels and a "mature stage" where the firm does have access to external financing, pays dividends, decreases its cash target levels. The model provides new insights on the corporate propensity to save and the firm's value dynamics when its profitability is difficult to ascertain.
    Date: 2019–11
  23. By: Kim, Minseong
    Abstract: We re-assess Blanchard-Kiyotaki (1987). We conclude that there are multiple equilibria even under the flexible-price Blanchard-Kiyotaki model, and that the model only obtains equilibrium uniqueness through the symmetry condition that is partially justified only when there are infinitely many firms. Without imposition of the symmetry condition, monetary policy has a significant role in determining a flexible-price equilibrium under the Blanchard-Kiyotaki setup. While the Blanchard-Kiyotaki framework is becoming deprecated, the symmetry condition is still sometimes invoked in monopolistic competition literature, and thus logic behind it is in need of more scrutiny. We discuss implications on understanding New Keynesian paradoxes in zero lower bound circumstances.
    Keywords: Blanchard-Kiyotaki; symmetry condition; New Keynesian economics; multiple equilibria; monetary non-neutrality; monopolistic competition; New Keynesian paradoxes; zero lower bound
    JEL: B22 B41 E13 E30 E50 E60
    Date: 2019–10–12
  24. By: Yena Park; Yongsung Chang
    Abstract: We derive a fully nonlinear optimal income tax schedule in the presence of private insurance. As in the standard taxation literature without private insurance (e.g., Saez (2001)), the optimal tax formula can still be expressed in terms of sufficient statistics. With private insurance, however, the formula involves additional terms that reflect how the private market interacts with public insurance. For example, in our benchmark model-Huggett (1993)-the optimal tax formula should also consider pecuniary externalities as well as changes in the asset holdings of households. According to our analysis, the difference in optimal tax rates (with and without a private insurance market) can be as large as 11 percentage points.
    Keywords: Optimal Taxation; Private Insurance; Pecuniary Externalities; Variational Approach
    JEL: E62 H21 D52
    Date: 2018–11
  25. By: Xuan Wang
    Abstract: Since the Eurozone Crisis of 2010-12, a key debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country international finance model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative financial mechanism to improve the welfare of a currency union. When domestic credit risks are present, I show that a lenient union-wide bankruptcy code that allows for default in the cross-border capital markets union leads to a Pareto improvement within the currency union. However, if the union-wide bankruptcy code is too lenient, default may cause the collapse of the capital markets union and impede cross-border risk sharing. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the union-wide bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the economic and welfare implications of bankruptcy within a capital markets union in the Eurozone.
    JEL: E64 F55
    Date: 2019–11–07

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