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on Dynamic General Equilibrium |
| By: | Moez Ben Hassine; Nooman Rebei |
| Abstract: | We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial. |
| Date: | 2019–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/255&r=all |
| By: | Jolan Mohimont (Economics and Research Department, NBB and University of Namur) |
| Abstract: | This paper evaluates the welfare cost of business cycles and the effects of monetary policies in a DSGE model tailored to a small open emerging economy. The model generates rich business cycle fluctuations, features labor market idiosyncratic risks and accounts for imperfect financial and capital markets inclusion. In this context, households excluded from financial and capital markets experience larger costs of business cycle fluctuations due to their inability to hedge against labor market idiosyncratic risks. Different degrees of exposure to different types of risks generate divergent preferences regarding the conduct of monetary policy. While a strong response to inflation deviation from target maximizes welfare for included households, excluded households benefit the most from unemployment and wage stabilization policies. |
| Keywords: | Monetary policy, financial exclusion, idiosyncratic risks, labor markets, emerging economies, SOE, DSGE. |
| JEL: | E3 E52 E32 C51 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201911-376&r=all |
| By: | Jean-Bernard Chatelain (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); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE, INSEEC U. Research Center - ESCE International Business School, INSEEC U. Research Center) |
| Abstract: | This article presents an algorithm that extends Ljungqvist and Sargent's (2012) dynamic Stackelberg game to the case of dynamic stochastic general equilibrium models including forcing variables. Its first step is the solution of the discounted augmented linear quadratic regulator as in Hansen and Sargent (2007). It then computes the optimal initial anchor of "jump" variables such as inflation. We demonstrate that it is of no use to compute non-observable Lagrange multipliers for all periods in order to obtain impulse response functions and welfare. The algorithm presented, however, enables the computation of a history-dependent representation of a Ramsey policy rule that can be implemented by policy makers and estimated within a vector auto-regressive model. The policy instruments depend on the lagged values of the policy instruments and of the private sector's predetermined and "jump" variables. The algorithm is applied on the new-Keynesian Phillips curve as a monetary policy transmission mechanism. |
| Keywords: | forcing variables,new-Keynesian Phillips curve,Stackelberg dynamic game,augmented linear quadratic regulator,Ramsey optimal policy,algorithm |
| Date: | 2019–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01577606&r=all |
| By: | Kohei Okada (Graduate School of Economics, Osaka University,) |
| Abstract: | Employing an overlapping-generations model of R&D-based growth with endogenous fertil- ity, mortality, and education choice, we examine how demographic changes and human capital accumulation influence R&D activity. We show that multiple steady states can exist in this economy. One steady state has a high level of human capital and the other has a low level. In the steady state with high (low) level of human capital, there is a high (low) level of R&D activity, a low (high) fertility rate, and a high (low) old-age survival rate. In addition, we show that the government can steer an economy away from a poverty trap trajectory by investing in public health. We also show that an improvement in the government's public health policy has an inverted U-shaped effect on the growth rate at the steady state. |
| Keywords: | Demographic change, Human capital accumulation, R&D |
| JEL: | I25 J10 O10 O30 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1918&r=all |
| By: | Agustín Arias; Juan Guerra-Salas |
| Abstract: | Roughly one third of migrants worldwide reside in developing countries, yet most papers on the macroeconomiceffects of immigration focus on advanced economies. We investigate the medium- and long-term effects of immigration in an emerging country, considering a salient feature of this type of economies: the importance of labor informality. We build an overlapping generations model featuring 24 cohorts, an informal sector, and households with heterogeneous skill levels, among other features, that help us match key demographic and economic characteristics of Chile, an emerging country that has recently experienced an important immigration wave. An immigration wave increases the supply of labor, creating downward pressure on wages in the formal sector. Workers respond by reallocating labor effort to the informal sector, which allows them to mitigate the decline in consumption per worker triggered by lower formal-sector wages. Our model, thus, constitutes a framework for the quantitative analysis of immigration in emerging countries. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:857&r=all |
| By: | Cole, Alexandre Lucas; Guerello, Chiara; Traficante, Guido |
| Abstract: | We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or both. |
| Keywords: | Fiscal Policy, International Policy Coordination, Monetary Union, New Keynesian |
| JEL: | E12 E62 E63 F42 F45 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:97380&r=all |
| By: | Agnes Kovacs (Institute for Fiscal Studies and University of Manchester); Patrick Moran (Institute for Fiscal Studies and IFS) |
| Abstract: | The vast majority of household wealth in the U.S. is held in illiquid assets, primarily housing, making households vulnerable to unexpected income shocks. To rationalize this preference for illiquidity, we build a life-cycle model where households are tempted to consume their liquid wealth but can use illiquid housing as a savings commitment device. The importance of temptation and commitment is identi?ed using data on consumption, liquid assets, and housing wealth over the life-cycle. Our model matches observed portfolio choices and gives rise to a high demand for illiquid housing partially driven by the need for commitment. Preference for illiquidity has important implications for the consumption response to unexpected income shocks. Our model is able to replicate the recent empirical evidence that MPCs remain high in response to large shocks, a ?nding that cannot be explained by current heterogeneous agent models, but that has great signi?cance for ?scal stimulus targeting. |
| Date: | 2019–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:19/18&r=all |
| By: | Nakajima, Makoto (Federal Reserve Bank of Philadelphia); Telyukova, Irina A. (Mulligan Funding) |
| Abstract: | Retired homeowners dissave more slowly than renters, which suggests that homeownership affects retirees’ saving decisions. We investigate empirically and theoretically the life-cycle patterns of homeownership, housing and nonhousing assets in retirement. Using an estimated structural model of saving and housing decisions, we find, first, that homeowners dissave slowly because they prefer to stay in their house as long as possible but cannot easily borrow against it. Second, the 1996-2006 housing boom significantly increased homeowners’ assets. These channels are quantitatively significant; without considering homeownership, retirees’ net worth would be 28-44 percent lower, depending on age. |
| Keywords: | Housing; Retirement Saving Puzzle; Mortgage; Health; Life cycle; Medical expenditure; Bequest |
| JEL: | D91 E21 G11 J26 |
| Date: | 2019–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:19-50&r=all |
| By: | Goutsmedt, Aurélien (Duke University) |
| Abstract: | L’article montre que la vision de la macroéconomie de Sargent contraste d'avec celle de Lucas. Pour Lucas, les hypothèses d'un modèle sont « a-réalistes », le modèle ne vise pas à représenter la réalité. Il est un outil de simulation qui doit permettre de simuler différentes politiques économiques. L'idéal « lucassien » est celui d'un macroéconomiste qui a donc vocation à devenir un ingénieur chargé de fournir un « logiciel de politiques économiques » aux autorités publiques, logiciel qu'il manipule afin d'aiguiller les choix de politiques sur une base scientifique. Sargent, quant à lui, considère que pour suppléer le paradigme keynésien, la nouvelle économie classique doit être capable de remplir les mêmes tâches, et l'une de ces tâches est de conseiller le pouvoir en lui fournissant une grille de lecture des phénomènes économiques et des outils intuitifs pour débattre des politiques économiques à mettre en place. Sargent cherche à appliquer ce qu'il nomme la théorie des anticipations rationnelles à un ensemble de cas concrets (stabilisation Poincaré, hyperinflation allemande, politique de Thatcher et Reagan) pour montrer la pertinence de ce cadre d'analyse pour penser les problèmes économiques contemporains. |
| Date: | 2019–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:eprxu&r=all |
| By: | Christoph Görtz; Mallory Yeromonahos |
| Abstract: | A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. Key for this result are endogenous fluctuations in uncertainty which induce procyclical variations in agent’s nowcast accuracy. In addition to matching moments of the risk premium, the model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data, and in matching the cyclical relation between quantities and the risk premium. |
| Keywords: | risk premium, business cycles, Bayesian learning, asymmetry, uncertainty, nowcasting |
| JEL: | E20 E30 G10 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7959&r=all |
| By: | Andrés Erosa (Universidad Carlos III de Madrid); Beatriz González (Banco de España and Universidad Carlos III de Madrid) |
| Abstract: | The Hopenhayn and Rogerson (1993) framework is extended to understand how different forms of taxing capital income affect firms’ investment and financial policies over their life cycle. Corporate income taxation slows down firm growth over the life cycle by reducing after-tax profits available for reinvesting, and it distorts optimal firms’ size. Dividend income taxation reduces external equity financing, but it does not affect size at maturity. Capital gains taxes make firms start larger, so that internal growth is lower. With these mechanisms in mind, we calibrate our economy to the US and discuss different revenue-neutral tax reforms that might lead to increases in aggregate output and capital. |
| Keywords: | macroeconomics, capital income taxation, firm dynamics, investment |
| JEL: | D21 E22 E62 G32 H32 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1943&r=all |
| By: | Icefield, William |
| Abstract: | Contrary to the understanding prevalent in both mainstream and heterodox economics, a general equilibrium model featuring monopolistic competition can be compatible with the principle of effective demand. The key to ensuring the principle of effective demand in such a model is to have demand function of each firm to depend on aggregate demand, as in New Keynesian models. It is a particular outside-model interpretation imposed by mainstream economists that disallow the role of effective demand in a model. |
| Date: | 2019–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:kg6rt&r=all |