nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2019‒12‒16
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Welfare Cost of Fluctuations When Labor Market Search Interacts with Financial Frictions By Eleni Iliopulos; Francois Langot; Thepthida Sopraseuth
  2. The failure of stabilization policy: balanced-budget scal rules in the presence of incompressible public expenditures By Nicolas Abad; Teresa Lloyd-Braga; Leonor Modesto
  3. Waiting for the Prince Charming: Fixed-Term Contracts as Stopgaps By Normann Rion
  4. Confidence Collapse in a Multi-Household, Self-Reflexive DSGE Model By Federico Morelli; Michael Benzaquen; Marco Tarzia; Jean-Philippe Bouchaud
  5. Rare but Long-lasting Liquidity Traps and Fiscal Stimulus By Kevin XD Huang; Nam T Vu
  6. Differences in euro-area household finances and their relevance for monetary-policy transmission By Hintermaier, Thomas; Koeniger, Winfried
  7. Be healthy, be employed: A comparison between the US and France based on a general equilibrium model By Xavier Fairise; François Langot; Ze Zhong
  8. The impact of reducing the pension generosity on inequality and schooling By Sanchez-Romero, Miguel; Fürnkranz-Prskawetz, Alexia
  9. Endogenous Hours and the Wealth of Entrepreneurs By Wellschmied, Felix; Yurdagul, Emircan
  10. Réserves de change et fonctionnement de l'économie marocaine: enseignements à partir d'un modèle DSGE By Aya, Achour
  11. Stuctural transformation in general equilibrium By Moro, Alessio; Valdes, Carlo
  12. Financial cycles, credit bubbles and stabilization policies By Schuler, Tobias; Corrado, Luisa
  13. Dynamic Optimal Choice When Rewards are Unbounded Below By Qingyin Ma; John Stachurski

  1. By: Eleni Iliopulos; Francois Langot (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique); Thepthida Sopraseuth (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We study the welfare costs of business cycles in a search and matching model with financial frictions à la Kiyotaki & Moore (1997). We investigate the mechanisms thatnallow the model to replicate the volatility on labor and financial markets and show that business cycle costs are sizable. We first demonstrate that the interactions between labor market and financial frictions magnify the impact of shocks via (i) a credit multiplier effect and (ii) an endogenous wage rigidity inherent to financial frictions. Secondly, in a non-linear framework, we show that the large welfare costs of fluctuations are also explained by the high average unemployment and the low job finding rates with respect to their deterministic steady-state values.
    Keywords: Welfare,business cycle,financial friction,labor market search
    Date: 2019–10–25
  2. By: Nicolas Abad (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université); Teresa Lloyd-Braga (FCEE - Faculdade de Ciencias Economicas e Empresariais - Universidade Catolica Portuguesa); Leonor Modesto (FCEE - Faculdade de Ciencias Economicas e Empresariais - Universidade Catolica Portuguesa)
    Abstract: We consider an innite horizon neoclassical model with a government that (i) balances its budget at each point in time, (ii) needs to nance unavoidable (incompressible) public expenditures, and (iii) further uses a scal rule for the share of variable government spending in output with the purpose of stabilizing the economy. We show that insulating this economy from belief driven uctuations is not possible if the government needs to nance (with distortionary taxes) incompressible public expenditures. In this case, we always have steady state multiplicity (two steady states) and global indeterminacy, while local indeterminacy is also possible. More precisely, even if a suciently procyclical share of the variable government spending component in output is still able to eliminate local indeterminacy, two saddle steady states prevail, so that, depending on expectations, the economy may either converge to the low steady state or to the high steady state. This implies that a regime switching rational expectation equilibrium, where the economy switches between paths converging to the two dierent steady states, easily arises. As expectations inuence long run outcomes, our model is able to generate large and sudden expansions and contractions in response to expectation shocks.
    Date: 2019–10–24
  3. 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
  4. By: Federico Morelli (LPTMC - Laboratoire de Physique Théorique de la Matière Condensée - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique); Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique); Marco Tarzia (LPTMC - Laboratoire de Physique Théorique de la Matière Condensée - CNRS - Centre National de la Recherche Scientifique - UPMC - Université Pierre et Marie Curie - Paris 6); Jean-Philippe Bouchaud (SPEC - UMR3680 - Service de physique de l'état condensé - CEA - Commissariat à l'énergie atomique et aux énergies alternatives - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We investigate a multi-household DSGE model in which past aggregate consumption impacts the confidence, and therefore consumption propensity, of individual households. We find that such a minimal setup is extremely rich, and leads to a variety of realistic output dynamics: high output with no crises; high output with increased volatility and deep, short lived recessions; alternation of high and low output states where relatively mild drop in economic conditions can lead to a temporary confidence collapse and steep decline in economic activity. The crisis probability depends exponentially on the parameters of the model, which means that markets cannot efficiently price the associated risk premium. We conclude by stressing that within our framework, narratives become an important monetary policy tool, that can help steering the economy back on track.
    Date: 2019–10–21
  5. By: Kevin XD Huang (Vanderbilt University); Nam T Vu (Miami University of Ohio)
    Abstract: A DSGE model with (i) state-dependent pricing and (ii) history-dependent monetary policy that compensates for lost opportunities of cutting the nominal interest rate due to a binding effective zero lower bound (ZLB) generates rare but long-lasting liquidity traps with endogenous transitions between the traps and normal times. Dynamic government spending multipliers (GSMs) are typically above unity in the liquidity traps but are uniformly below unity in normal times. Without (i) or (ii), the model generates only short-lived ZLB events while producing below-unity GSMs irrespective of the state of the economy.
    Keywords: State-dependent pricing, history-dependent monetary policy, zero lower bound, fiscal stimulus, dynamic government spending multipliers
    JEL: E0 E5
    Date: 2019–12–08
  6. By: Hintermaier, Thomas; Koeniger, Winfried
    Abstract: This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a financial asset and housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across countries, and within countries by household characteristics such as age, housing tenure, and asset positions. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission in the euro area.
    Keywords: European household portfolios,consumption,monetary policy transmission,international comparative finance,housing
    JEL: D14 D31 E21 E43 G11
    Date: 2019
  7. By: Xavier Fairise (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique); François Langot (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique); Ze Zhong (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique)
    Keywords: Unemployment risk,Health inequalities,heterogenous agent model
    Date: 2019–10–25
  8. By: Sanchez-Romero, Miguel; Fürnkranz-Prskawetz, Alexia
    Abstract: In this paper we investigate the impact of a reduction in the pension replacement rate on the schooling choice and on inequality. We develop an overlapping generations model in which individuals differ by their life expectancy and in the cost of attending schooling. Individuals optimally choose their consumption path and their educational attainment. Within our framework we first show how many progressive pension systems are ex ante regressive due to the difference in life expectancy across skill groups and, second, we derive the level of progressivity that restores an equal treatment of the pension system across skill groups.
    Keywords: Human capital,Longevity,Inequality,Life cycle,Social security,Pension,Progressivity
    JEL: E24 J10 J18 H55
    Date: 2019
  9. By: Wellschmied, Felix (Universidad Carlos III de Madrid); Yurdagul, Emircan (Universidad Carlos III de Madrid)
    Abstract: US entrepreneurs typically work long hours in their firms and these hours form a large part of the firms' labor input. This paper studies the role of endogenous owner hours in shaping the wealth distribution among entrepreneurs. We introduce owners' endogenous labor supply into a model of entrepreneurial choice and financial frictions. The model fits well the levels and the dispersion of wealth among entrepreneurs. Long owner hours incentivize poor, highly productive individuals to be owners and help the most productive owners to accumulate large quantities of wealth. On net, owners working long hours decreases the median owner wealth and increase wealth dispersion among owners. Differently, the ability to work sufficiently short hours incentivizes owners to run low productivity firms with high wealth to income ratios. Finally, alternative calibrations ignoring the endogenous labor supply of owners lead to owners that are much richer than in the data and overstate the effect of financial frictions in the economy.
    Keywords: entrepreneurship, wealth accumulation, labor supply, firm dynamics
    JEL: E23 J22 J23 L26
    Date: 2019–11
  10. By: Aya, Achour (Bank Al-Maghrib, Département de la Recherche)
    Abstract: Ce document de travail investigue le rôle des réserves de change dans le fonctionnement de l’économie marocaine à travers la proposition et l’estimation d’une version augmentée du modèle dynamique stochastique d’équilibre général (DSGE) séminal de Smets and Wouters en économie ouverte. A l’opposé des formes standards relevées dans la littérature, le DSGE proposé tente de combler l’écart entre les travaux sur les régimes de change et ceux sur la théorie de pricing des actifs financiers en testant l’effet du niveau des réserves de change sur la prime à terme des taux des bons du trésor. Les résultats obtenus en matière de qualité d’ajustement et de fonctions de réponse impulsionnelles du modèle démontrent l’existence d’une relation procyclique entre le niveau des réserves de change et le cycle économique au Maroc. Les effets de second tour que celles-ci sont amenées à exercer sur les variables réelles et que l’on peut traduire en un mécanisme d’amplification des chocs, accroissent la volatilité de l’économie marocaine et réduisent les marges de manœuvre de la politique monétaire. En termes d’implications économiques, l’occultation d’un tel mécanisme reviendrait à négliger une limite supplémentaire du régime de change fixe qui pourrait, lorsqu’elle n’est pas intégrée, biaiser la comparaison avec le régime de change flexible au Maroc. Enfin, une flexibilité plus accrue du régime de change au Maroc participerait à atténuer l’excès de volatilité qui résulte des fluctuations des réserves de change dans la mesure où le taux de change peut s’ajuster en continue pour absorber les différents chocs économiques.
    Keywords: DSGE; rigidités; estimation bayésienne; politique monétaire
    JEL: C11 C32 E32 E60
    Date: 2019–12–11
  11. By: Moro, Alessio (University of Cagliari); Valdes, Carlo (Cassa Depositi e Prestiti)
    Abstract: Models of structural change in general equilibrium are commonly used to address a number of questions regarding the behaviour of the macro-economy. In this paper, we first revise the main mechanisms at work in generating structural change in a multi-sector environment. These effects emerge due to both an interaction between consumers' preferences and technological change and to different income elasticities of the various goods and services entering the utility function. Next, we address the issue of measurement of these models when comparing them to the data. The typical assumption in multi-sector models is to define GDP as aggregate output in units of a numeraire good, often chosen to be the investment good. However, this procedure is equivalent to deriving nominal GDP in the data (i.e. total output of the economy in units of one particular good), and not to deriving a measure of real GDP. We then discuss how GDP in the model should be measured to provide a statistic that is comparable with the data in national accounts. The last part of the paper is devoted to show how structural transformation from manufacturing to services, when appropriately compared to the data, generates a decline in GDP growth and volatility along the growth path of an economy.
    Keywords: Technological Change, Structural Change, Growth, Volatility
    JEL: O33 C67 C68 E25 E32
    Date: 2019–12–04
  12. By: Schuler, Tobias; Corrado, Luisa
    Abstract: This paper analyzes the effects of several policy instruments for mitigating financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios, allow for interbank trading and show how a credit bubble can develop from a financial innovation. We then evaluate the efficacy of several policy instruments in counteracting financial bubbles. We find that an endogenous capital requirement reduces the impact of a financial bubble significantly while central bank intervention (“leaning against the wind”) proves to be less effective. A welfare analysis ranks the policy reaction through an endogenous capital requirement highest. We therefore provide a rationale for the use of countercyclical capital buffers. JEL Classification: E44, E52
    Keywords: Basel III, CCyB, credit-to-GDP gap
    Date: 2019–12
  13. By: Qingyin Ma; John Stachurski
    Abstract: We propose a new approach to solving dynamic decision problems with rewards that are unbounded below. The approach involves transforming the Bellman equation in order to convert an unbounded problem into a bounded one. The major advantage is that, when the conditions stated below are satisfied, the transformed problem can be solved by iterating with a contraction mapping. While the method is not universal, we show by example that many common decision problems do satisfy our conditions.
    Date: 2019–11

This nep-dge issue is ©2019 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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