nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒01‒06
eighteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Firm and Worker Dynamics in a Frictional Labor Market By Adrien G. Bilal; Niklas Engbom; Simon Mongey; Giovanni L. Violante
  2. Flexibility or certainty? The aggregate effects of casual jobs on labour markets By Rachel Scarfe
  3. Private news and monetary policy - Forward guidance as Bayesian persuasion By Ippei Fujiwara; Yuichiro Waki
  4. New VAR evidence on monetary transmission channels: temporary interest rate versus inflation target shocks By Elizaveta Lukmanova; Katrin Rabitsch
  5. Labor productivity, effort and the euro area business cycle By Lewis, Vivien; Villa, Stefania; Wolters, Maik H.
  6. The Determination of Public Debt under both Aggregate and Idiosyncratic Uncertainty By YiLi Chien; Yi Wen
  7. Estimating a Behavioral New Keynesian Model By Joaquim Andrade; Pedro Cordeiro; Guilherme Lambais
  8. Deep Habits in New Keynesian model with durable goods By Rui Faustino
  9. Understanding Why Fiscal Stimulus Can Fail through the Lens of the Survey of Professional Forecasters By Hyeongwoo Kim; Shuwei Zhang
  10. SFX Interventions, Financial Intermediation, and External Shocks in Emerging Economies By Alex Carrasco; David Florian Hoyle; Rafael Nivin
  11. (Un)expected monetary policy shocks and term premia By Kliem, Martin; Meyer-Gohde, Alexander
  12. Welfare gains of bailouts in a sovereign default model By Pancrazi, Roberto; Seoane, Hernán D.; Vukotic, Marija
  13. Why are Average Hours Worked Lower in Richer Countries? By Alexander Bick; Nicola Fuchs-Schündeln; David Lagakos; Hitoshi Tsujiyama
  14. Economic Models in the Aftermath of the Financial Crisis–the Deflationary Equilibrium and the Managed Growth of Debt (Japanese) By KOBAYASHI Keiichiro
  15. Determinants of Wealth Inequality and Mobility in General Equilibrium By Fischer, Thomas
  16. Unconventional monetary policy and funding liquidity risk By d'Avernas, Adrien; Vandeweyer, Quentin; Darracq Pariès, Matthieu
  17. Neighborhood Effects and Housing Vouchers By Morris A. Davis; Jesse Gregory; Daniel A. Hartley; Kegon T. K. Tan
  18. High-Skill Migration, Multinational Companies, and the Location of Economic Activity By Nicolas Morales

  1. By: Adrien G. Bilal; Niklas Engbom; Simon Mongey; Giovanni L. Violante
    Abstract: This paper develops a random-matching model of a frictional labor market with firm and worker dynamics. Multi-worker firms choose whether to shrink or expand their employment in response to shocks to their decreasing returns to scale technology. Growing entails posting costly vacancies, which are filled either by the unemployed or by employees poached from other firms. Firms also choose when to enter and exit the market. Tractability is obtained by proving that, under a parsimonious set of assumptions, all workers’ and firm decisions are characterized by their joint marginal surplus, which in turn only depends on the firm’s productivity and size. As frictions vanish, the model converges to a standard competitive model of firm dynamics which allows a quantification of the misallocation cost of labor market frictions. An estimated version of the model yields cross-sectional patterns of net poaching by firm characteristics (e.g., age and size) that are in line with the micro data. The model also generates a drop in job-to-job transitions as firm entry declines, offering an interpretation to U.S. labor market dynamics around the Great Recession. All these outcomes are a reflection of the job ladder in marginal surplus that emerges in equilibrium.
    JEL: E24 E32 J41 J63 J64
    Date: 2019–12
  2. By: Rachel Scarfe
    Abstract: There is much debate about the extent to which governments should regulate labour markets. One discussion concerns casual jobs, where ï¬ rms do not need to guarantee workers certain, ï¬ xed, hours of work and instead “call-up†workers as and when needed. These jobs, sometimes known as “zero-hours†, “contingent†or “on-demand†, provide flexibility for ï¬ rms to change the size of their workforce cheaply and quickly and for workers to choose whether to supply labour in every period. This flexibility comes at the expense of certainty for both ï¬ rms and workers. In this paper I develop a search and matching model incorporating casual jobs, which I use to evaluate the effect of labour market policies on aggregate outcomes. I ï¬ nd that a ban on casual jobs leads to higher unemployment, but also to higher production and aggregate worker utility. I also consider the effect of a higher minimum wage for casual jobs. I ï¬ nd that the effects are limited. These results are due to an offsetting mechanism: although higher wages lead to higher unemployment, as ï¬ rms offer more full-time jobs, the number of workers actually called-up to work increases.
    Keywords: unemployment; welfare; minimum wages; contingent work; ondemand work; policy
    JEL: E24 J21 J48 J64
    Date: 2019–12
  3. By: Ippei Fujiwara; Yuichiro Waki
    Abstract: When the central bank has information that can help the private sector predict the future better, should it communicate such information to the public? In a simple New Keynesian model, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. In other words, it cannot persuade private agents to change their actions in favor of the central bank. In more elaborate DSGE models, the welfare effect may be either positive or negative, depending on the type of shock as well as distortions and frictions. These results suggest that improving welfare by Delphic forward guidance may be particularly difficult under model uncertainty.
    Keywords: news shock, optimal monetary policy, private information, Bayesian persuasion, forward guidance, New Keynesian models
    JEL: E30 E40 E50
    Date: 2019–12
  4. By: Elizaveta Lukmanova; Katrin Rabitsch
    Abstract: We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle.
    Date: 2018–11–28
  5. By: Lewis, Vivien; Villa, Stefania; Wolters, Maik H.
    Abstract: The Euro Area is characterized by little variation in unemployment and strongly procyclical labor productivity. We capture both characteristics in a New Keynesian business cycle model with labor search frictions, where labor can vary along three margins: employment, hours, and effort. We estimate the model with Bayesian methods and find evidence for a significant use of the effort margin in generating procyclical productivity. We show that a model with labor effort is more successful at matching the business cycle facts than is one with variable capital utilization or dominant technology shocks. Finally, we demonstrate that effort dampens the response of inflation to exogenous shocks.
    Keywords: effort,labor utilization,labor productivity,inflation
    JEL: E30 E50 E60
    Date: 2019
  6. By: YiLi Chien; Yi Wen
    Abstract: We analyze the Ramsey planner's decisions to finance stochastic public expenditures under incomplete insurance markets for idiosyncratic risk. We show analytically that whenever the market interest rate lies below the time discount rate, the Ramsey planner has a dominant incentive to increase debt to meet the private sector's demand for full self-insurance regardless of the relative size of aggregate shocks---suggesting a departure from tax smoothing. However, if a full self-insurance Ramsey allocation is infeasible in the absence of a government debt limit, an interior or bounded Ramsey equilibrium does not exist. The strong incentives for the Ramsey planner to smooth both individual consumption (via increasing public debt) and aggregate consumption (via tax smoothing) imply that (i) the long-run Ramsey equilibrium is characterized by full self-insurance and constant taxes if state-contingent bonds are available and (ii) when state-contingent bonds are not available, the government's attempt to balance the competing incentives between tax smoothing and individual consumption smoothing---even at the cost of extra tax distortion---implies a bounded stochastic unit root component in optimal taxes and in the bond supply. In all cases considered in this paper, a sufficiently high average level of public debt (financed by distortionary taxation) to support full self-insurance is desirable and welfare improving. Therefore, adding a liquidity premium into the value of government bonds via incomplete financial markets can bring the theory of public finance into closer conformity with realty.
    Keywords: Optimal Public Debt; Tax Smoothing; Ramsey Problem; Incomplete Markets
    JEL: E13 E62 H21 H30
    Date: 2019–12–05
  7. By: Joaquim Andrade; Pedro Cordeiro; Guilherme Lambais
    Abstract: This paper analyzes identification issues of a behavorial New Keynesian model and estimates it using likelihood-based and limited-information methods with identification-robust confidence sets. The model presents some of the same difficulties that exist in simple benchmark DSGE models, but the analytical solution is able to indicate in what conditions the cognitive discounting parameter (attention to the future) can be identified and the robust estimation methods is able to confirm its importance for explaining the proposed behavioral model.
    Date: 2019–12
  8. By: Rui Faustino
    Abstract: Empirical evidence for the United States suggests that private consumption of durable and nondurable goods have a positive response to government spending shocks. Moreover, the markups for both goodstend be procyclical on productivity shocks and countercyclical on demand shocks.These facts contrast with the results obtained from standard two-sector New Keynesian models with perfect financial markets. In this paper we address these shortcomings by introducing habit formation on the consumption of bothdurable and nondurable goods. Habit formation on differentiated goods - i.e. Deep Habits - proves to significantly alter the dynamics of the model. However, the effects from habits on durable goods are only meaningful when defined over purchases rather than stocks. When we introduce capital formation into the model, it continues to be consistent with the responses observed in the data.
    Keywords: Durable goods, sticky prices, habit formation, time varying markups
    JEL: E21 E32 L16
    Date: 2019–12
  9. By: Hyeongwoo Kim; Shuwei Zhang
    Abstract: This paper shows that fiscal policy in the U.S. has become ineffective due to lack of coordination between monetary and fiscal policy. We present a New Keynesian model that generates strong output effects of government spending shocks only when monetary policy coordinates well with fiscal policy. Employing the post-war U.S. data, we report strong stimulus effects of fiscal policy during the pre-Volcker era, which rapidly dissipate when we shift the sample period to the post-Volcker era. Finding a negligible role of the real interest rate in the propagation of government spending shocks, we propose an alternative explanation using a consumer sentiment channel. Employing the Survey of Professional Forecasters data, we show that forecasters tend to systematically over-estimate real GDP growth in response to positive innovations in government spending when policies coordinate well with each other. On the other hand, they are likely to formulate pessimistic forecasts when the monetary authority maintains a hawkish stance that conflicts with the fiscal stimulus. The fiscal stimulus, under such circumstances, may generate consumer pessimism, which decreases private spending and ultimately weakens the output effects of fiscal policy. We also provide statistical evidence that confirms an important role of the sentiment channel under different regimes of policy coordination.
    Keywords: Fiscal Policy; Time-varying Effectiveness; Policy Coordination; Consumer Sentiment; Survey of Professional Forecasters
    JEL: E32 E61 E62
    Date: 2019–12
  10. By: Alex Carrasco (Central Reserve Bank of Peru); David Florian Hoyle (Central Reserve Bank of Peru); Rafael Nivin (Central Reserve Bank of Peru)
    Abstract: In this document, we study the role of sterilized foreign exchange (SFX) interventions as an additional monetary policy instrument for emerging market economies in response to external shocks. We develop a model in order to analyze SFX interventions as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and depositors. The severity of the bank’s agency problem depends directly on a measure of currency mismatch at the bank level. Moreover, credit and deposit dollarization coexists in equilibrium as endogenous variables. In this context, SFX interventions can lean against the response of the bank’s lending capacity and ultimately the response of real variables by moderating the response of the exchange rate. Furthermore, we take the model to data by calibrating it to replicate some financial steady-state targets for the Peruvian banking system as well as matching the impulse responses of the macroeconomic model to the impulse responses implied by an SVAR model. Our results indicate that SFX interventions successfully reduce GDP and investment volatility by about 6% and 14%, respectively, when compared to a flexible exchange rate regime. Moreover, SFX interventions reduce the response of GDP to foreign interest rate and commodity price shocks by around 11 and 22 percent, respectively. Hence, this policy produces significant welfare gains when responding to external shocks: if the Central Bank does not intervene in the Forex market in the face of external shocks, there would be a welfare loss of 1.1%.
    Keywords: Sterilized Forex Interventions, External Shocks, Financial Cycle, Dollarization, Monetary Policy
    Date: 2019–12
  11. By: Kliem, Martin; Meyer-Gohde, Alexander
    Abstract: The term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates and term premia, is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time-varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.
    Keywords: DSGE model,Bayesian estimation,Time-varying risk premia,Monetary policy
    JEL: E13 E31 E43 E44 E52
    Date: 2019
  12. By: Pancrazi, Roberto; Seoane, Hernán D.; Vukotic, Marija
    Abstract: We examine the welfare effects of bailouts in economies exposed to sovereign default risk. When a government of a small open economy requests a bailout from an international financial institution, it receives a non-defaultable loan of size G that comes with imposed debt limits. The government endogenously asks for the bailout during recessions and repays it when the economy recovers. Hence, the bailout acts as an imperfect state contingent asset that makes the economy better off. The bailout duration is endogenous and increases with its size. The bailout size creates non-trivial tradeoffs between receiving a larger amount of relatively cheap resources precisely in times of need on the one hand, and facing longer-lasting financial constraints and accumulated interest payments, on the other hand. We characterize and quantify these tradeoffs and document that welfare gains of bailouts are hump-shaped in the size of bailout loans.
    JEL: E44 F32 F34
    Date: 2019–12–18
  13. By: Alexander Bick; Nicola Fuchs-Schündeln; David Lagakos; Hitoshi Tsujiyama
    Abstract: Why are average hours worked per adult lower in rich countries than in poor countries? Two natural candidates to consider are income effects in preferences, in which leisure becomes more valuable when income rises, and distortionary tax systems, which are more prevalent in richer countries. To assess the importance of these two forces, we build a simple model of labor supply by heterogeneous individuals and calibrate it to match international data on labor income taxation, government transfers relative to GDP, and hours worked per adult. The model predicts that income effects are the main driving force behind the decline of average hours worked with GDP per capita. We reach a similar conclusion in an extended model that matches cross-country patterns of labor supply along the extensive and intensive margins and of the prevalence of subsistence self-employment.
    JEL: E24 H2 O11
    Date: 2019–12
  14. By: KOBAYASHI Keiichiro
    Abstract: This paper compares the standard models of macroeconomics before and after the global financial crisis. It shows that the standard models cannot address crucial issues such as the growth and collapse of asset-price bubbles and the deflationary stagnation in the aftermath of the crisis. The problem comes from the transversality condition (TVC). We consider a new theoretical model in which the TVC does not hold in the equilibrium. The findings present new implications for the deflationary equilibrium and growing government debt.
    Date: 2019–10
  15. By: Fischer, Thomas (Department of Economics, Lund University)
    Abstract: What determines inequality and mobility of wealth? This paper quantifies in closed form both the bottom and the top (Pareto) tail of the distribution for a rich continuous-time model. The distribution is especially shaped by bequest motives, demographics, and the asset portfolio composition under idiosyncratic wealth risk. Factors that increase inequality also reduce mobility. The model - enriched by a realistic income process and non-trivial portfolio constraints - is solved in general equilibrium and calibrated to match US evidence. A bequest tax is shown to reduce inequality and increase mobility. Several partial-equilibrium intuitions do not carry over into general equilibrium.
    Keywords: wealth inequality; mobility of wealth; portfolio selection; fat tails; bequest tax
    JEL: C68 D31 E21 G11 H23
    Date: 2019–12–19
  16. By: d'Avernas, Adrien; Vandeweyer, Quentin; Darracq Pariès, Matthieu
    Abstract: This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring both traditional and shadow banks subject to funding risk. When banks are well capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle arises between declining asset prices and funding risks. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector, but fails to reach the shadow banking sector. When the shadow banking sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities. JEL Classification: E43, E44, E52, G12
    Keywords: asset pricing, money markets, quantitative easing, shadow banks
    Date: 2020–01
  17. By: Morris A. Davis; Jesse Gregory; Daniel A. Hartley; Kegon T. K. Tan
    Abstract: Researchers and policy-makers have explored the possibility of restricting the use of housing vouchers to neighborhoods that may positively affect the outcomes of children. Using the framework of a dynamic model of optimal location choice, we estimate preferences over neighborhoods of likely recipients of housing vouchers in Los Angeles. We combine simulations of the model with estimates of how locations affect adult earnings of children to understand how a voucher policy that restricts neighborhoods in which voucher-recipients may live affects both the location decisions of households and the adult earnings of children. We show the model can replicate the impact of the Moving to Opportunity experiment on the adult wages of children. Simulations suggest a policy that restricts housing vouchers to the top 20% of neighborhoods maximizes expected aggregate adult earnings of children of households offered these vouchers.
    Keywords: neighborhood choice, housing vouchers, Los Angeles, Moving to Opportunity, dynamic models
    JEL: I24 I31 I38 J13 R23
    Date: 2019–12
  18. By: Nicolas Morales
    Abstract: This paper examines the relationship between high-skill immigration and multinational activity. I assemble a novel firm-level dataset on high-skill visa applications and show that there is a large home-bias effect. Foreign multinational enterprises (MNEs) in the US tend to hire more migrant workers from their home countries compared to US firms. To quantify the general equilibrium implications for production and welfare, I build and estimate a quantitative model that includes trade, MNE production, and the migration decisions of high-skill workers. I use an instrumental variables approach to show that the relationship between immigration and MNEs proposed by the model holds in the data. The model is then used to run two counterfactual exercises. The first, evaluates the implications of a more restrictive immigration policy in the US. I find that MNEs play a significant role in how immigration affects the location of production and welfare. In the second counterfactual exercise, I increase the barriers to MNE production to calculate the welfare gains generated by MNEs. I show that a model not incorporating migration would overestimate the MNE welfare gains for high-skill workers by 35% and underestimate welfare gains for low-skill workers by 8%.
    Keywords: H-1B visas; IT sector; Multinational companies; High-skill immigration
    JEL: F16 F22 F23 J61
    Date: 2019–12–17

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