nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒12‒09
ten papers chosen by

  2. Monopolistic Competition and Nominal Stickiness in Generalized New Keynesian Model By Rui WANG
  3. Risk-sensitive preferences and age-dependent risk aversion By Phitawat Poonpolkul
  4. Search Complementarities, Aggregate Fluctuations, and Fiscal Policy By Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti
  5. Long-term business relationships, bargaining and monetary policy By Mirko Abbritti; Asier Aguilera-Bravo; TommasoTrani
  6. Is government budget constraint binding? By Kim, Minseong
  7. Household Income, Portfolio Choice and Heterogeneous Consumption Responses to Monetary Policy Shocks By Fumitaka Nakamura
  8. Sectoral Impacts of International Labour Migration and Population Ageing in the Czech Republic By Martin Stepanek
  9. The effects of capital requirements on good and bad risk-taking By Pancost, N. Aaron; Robatto, Roberto
  10. News Uncertainty in Brexit U.K By Renato Faccini; Edoardo Palombo

  1. By: Nur M. Adhi Purwanto (Bank Indonesia); Ina Nurmalia Kurniati (Bank Indonesia); Reni Indriani (Bank Indonesia)
    Abstract: Penelitian ini bertujuan untuk membangun model makrofinansial berbasis Dynamic Stochastic General Equilibrium (DSGE) yang digunakan untuk mempelajari transmisi kebijakan makroprudensial dan interaksinya dengan kebijakan moneter untuk mencapai stabilitas makroekonomi dan stabilitas sistem keuangan. Model dalam penelitian ini dibangun dengan asumsi bahwa small open economy dikalibrasi dengan menggunakan data Indonesia yang diambil pada periode mulai dari 2000Q3 sampai dengan 2107Q4. Instrumen kebijakan yang dimodelkan terdiri atas suku bunga kebijakan, LTV ratio, minimum CAR requirement, dan RIM. Hasil simulasi model menunjukkan bahwa instrumen kebijakan makroprudensial yang terdapat di dalam model dapat digunakan untuk meredam pertumbuhan kredit dan akan berdampak pada penurunan PDB (bersifat countercyclical). Hasil simulasi model juga menunjukkan bahwa penerapan bauran kebijakan moneter dan makroprudensial memiliki kinerja yang lebih baik dalam mencapai stabilitas makroekonomi dan sistem keuangan jika dibandingkan dengan implementasi kebijakan moneter dalam menghadapi technological shock.
    Keywords: DSGE, monetary policy, macroprudential policy
    JEL: E32 E44 E52 E58
    Date: 2018–11
  2. By: Rui WANG (Department of Economics,Kanto Gakuen University)
    Abstract: In this paper, we extend the standard New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to allow both staggered price setting and staggered wage setting and derive a gen-eralized version of New Keynesian model to study how these distortions affect the steady state and dynamics of model given different annual target inflation rates. The main finding is that the imperfec-tion of labor market has more distortionary power on aggregate output and aggregate welfare given positive target inflation rate. Sensitivity analysis of structural parameters in the context of static steady state provides us a macroeconomic structural model-based explanation for the stylized fact that many central banks set the target inflation rate within a range from 1% to 2%. Also, given positive target inflation rate, the dynamic responses of macroeconomic variables on exogenous shocks are more sen-sitive to the change of structural parameters related to labor market. By comparing the dynamics generated under different sets of calibration, we find that the structure of labor market with high de-gree of monopolistic competition, low wage stickiness and low wage indexation is more desirable in an economy with positive target inflation rate.
    Date: 2019–11
  3. By: Phitawat Poonpolkul
    Abstract: People in different age groups have shown to differ in their degrees of risk aversion. This study investigates the macroeconomic implications of population aging when households are assumed to be increasingly risk-averse in future utility when they age. The model incorporates risk-sensitive preferences used in Hansen & Sargent (1995), which is the only recursive preferences that can separate risk aversion and intertemporal elasticity of substitution while being monotonic, into a 16-generation discrete-time OLG model with undiversifiable income risk. Compared to a time-additive counterpart, risk-sensitive preferences capture precautionary saving motive that exacerbates adverse responses of aggregate macroeconomic variables under a population aging scenario through demographic re-weighting and life-cycle redistribution channels. Varying risk aversion also allows households to internalize future uncertainties when evaluating their welfare impacts of demographic change, resulting in non-monotonic welfare dynamics with higher welfare loss under a high-risk environment and vice versa. Risk-sensitive preferences with age-dependent risk aversion can play an important role in optimal policy settings by introducing uncertainties into the welfare impact analysis, while taking into account more realistic risk-taking behavior of different age cohorts.
    Keywords: Demographic change, risk-sensitive preferences, overlapping-generation model, precautionary savings, risk aversion
    JEL: D52 E21 E60
    Date: 2019–11
  4. By: Jesús Fernández-Villaverde (University of Pennsylvania); Federico Mandelman (Federal Reserve Bank of Atlanta); Yang Yu (Shanghai University of Finance and Economics); Francesco Zanetti (University of Oxford (E-mail: francesco.zanetti@
    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, Strategic complementarities, Macroeconomic volatility, Government spending
    JEL: C63 C68 E32 E37 E44 G12
    Date: 2019–11
  5. By: Mirko Abbritti (University of Navarra); Asier Aguilera-Bravo (Public University of Navarra and INARBE); TommasoTrani (University of Navarra)
    Abstract: A growing empirical literature documents the importance of long-term relationships and bargaining for price rigidity and firms' dynamics. This paper introduces long-term business-to-business (B2B) relationships and price bargaining into a standard monetary DSGE model. The model is based on two assumptions: first, both wholesale and retail producers need to spend resources to form new business relationships. Second, once a B2B relationship is formed, the price is set in a bilateral bargaining between firms. The model provides a rigorous framework to study the effect of long-term business relationships and bargaining on monetary policy and business cycle dynamics. It shows that, for a standard calibration of the product market, these relationships reduce both the allocative role of intermediate prices and the real effects of monetary policy shocks. We also find that the model does a good job in replicating the second moments and cross-correlations of the data, and that it improves over the benchmark New Keynesian model in explaining some of them.
    Keywords: Monetary Policy, PriceBargaining, ProductMarketSearch, B2B
    JEL: E52 E3 D4 L11
    Date: 2019–10–28
  6. By: Kim, Minseong
    Abstract: A common question against macroeconomics of public debts is: why should one think government budget constraint is binding when government, at least technically, can print out money to pay for debts. Out of compatible answers, we explore an answer that is not usually invoked. While in OLG models, government bonds can successfully exist as rational bubbles, concerns of time consistency leave trade-offs in exploiting breakdown of the economy-wise public debt transversality condition. Government budget constraint is one of most certain means to fight time consistency issues and ensure that market stability is achieved.
    Keywords: government budget constraint; transversality condition
    JEL: E13 E42 E52 E61 E62 E63
    Date: 2019–11–24
  7. By: Fumitaka Nakamura (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In order to analyze the transmission mechanism of monetary policy, a recent body of literature combines nominal rigidities with heterogeneous agent models. The key property of these models is that the income level of agents is heterogeneous. This paper quantifies the roles played by income level heterogeneity in the response of consumption to monetary policy shocks using U.S. household data. We show empirically that the response of consumption to expansionary monetary policy shocks is larger for high income households than low income households. This result cannot be explained by standard Aiyagari-Bewley-Huggett type heterogeneous agent models, where low income households have a higher marginal propensity to consume due to borrowing constraints. Empirical facts related to household characteristics suggest two potential channels: the presence of illiquid assets and heterogeneity in government transfers. Motivated by these empirical findings, we develop a model that incorporates illiquid assets and heterogeneity in government transfers. Simulations based on the model indicate that the presence of illiquid assets is essential for explaining the heterogeneous consumption response.
    Keywords: Consumption, Household income, Monetary policy, Liquidity
    JEL: E21 E52
    Date: 2019–11
  8. By: Martin Stepanek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: This study assesses macroeconomic and sectoral impacts of demographic changes in the Czech Republic, as a result of population ageing and international migration. To do so, it develops a unique dynamic Overlapping Generations Computable General Equilibrium (OLG-CGE) model with detailed representation of individuals of different ages, educational attainment and occupations, as well as interrelations among industrial sectors in producing intermediate and final outputs. The numeric simulations show that the Czech economy will face a substantial reduction in its effective labour supply and changes in sectoral demand patterns, leading to an increase in unit labour costs and consequent shift towards more capitalbased production, price increase for the consumers, and a long-term decrease in demand particularly for agricultural products. While international migration may alleviate the pressure, the annual net immigration would need to increase by at least 8 thousand individuals on average in the 2020-2035 period and by 17 thousand individuals in the 2036-2050 period to offset the negative effects in the long term.
    Keywords: OLG, CGE, migration, labour force, economic impact
    JEL: C68 E27 J11
    Date: 2019–06
  9. By: Pancost, N. Aaron; Robatto, Roberto
    Abstract: We study optimal capital requirement regulation in a dynamic quantitative model in which nonfinancial firms, as well as households, hold deposits. Firms hold deposits for precautionary reasons and to facilitate the acquisition of production inputs. Our theoretical analysis identifies a novel general equilibrium channel that operates through firms’ deposits and mitigates the cost of increasing capital requirements. We calibrate our model and find that the optimal capital requirement is 18.7% but only 13.6% in a comparable model in which only households hold deposits. Our novel channel accounts for most of the difference. JEL Classification: E21, G21, G32
    Keywords: capital requirements, deposit insurance, idiosyncratic risk, safe assets
    Date: 2019–12
  10. By: Renato Faccini (Centre for Macroeconomics (CFM); Danmarks Nationalbank; Queen Mary, University of London); Edoardo Palombo (Queen Mary, University of London)
    Abstract: After the Brexit referendum the behavior of the U.K. economy defied expectations, as it did notexhibit a V-shaped recession, but a slow decline in production. We address this puzzle through the lens of a setup with heterogeneous firms facing non-convex capital adjustment costs. We model the referendum as a news shock, with the time horizon and the content of the news being uncertain. Brexit uncertainty is informed by expectation data from the Decision Maker Panel, a novel survey of U.K. businesses, where each CFO provides probability distributions over the expected Brexit date and the long-run expected outcome of Brexit on firm-level sales, for different Brexit scenarios. We show that the long expected duration of the negotiations is key for the model to reproduce the post-referendum behavior of the U.K. economy. Intuitively, if the chances that uncertainty resolves in the short run are small, only relatively few firms find it worth to pay the inefficiency cost associated with an investment freeze. Concurrently, if the expected horizon of the news is longer, anticipation effects are smaller. The long-run effects of Brexit implied by U.K. business expectations are large, entailing losses of 4.8% and 7.7% of GDP for Soft and Hard Brexit, respectively. The transitional dynamics under policy uncertainty show that the referendum has produced significant economic damage, with a three-year cumulative loss of about 2% of GDP.
    Keywords: News shocks, Uncertainty, Firms heterogeneity, Long-run productivity, Survey-data
    JEL: E22 E32 E65
    Date: 2019–12

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