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on Dynamic General Equilibrium |
| By: | Youngsoo Jang; Takeki Sunakawa; Minchul Yum |
| Abstract: | Abstract: This paper studies how transfer progressivity influences aggregate fluctuations when interacted with household heterogeneity. Using a simple static model of the extensive margin labor supply, we analytically characterize how transfer progressivity influences differential labor supply responses to aggregate conditions across heterogeneous households. We then build a quantitative dynamic general equilibrium model with both idiosyncratic and aggregate productivity shocks and show that the model delivers moderately procyclical average labor productivity and a large cyclical volatility of aggregate hours relative to output. Counterfactual exercises indicate that redistributive policies have very different implications for business cycle fluctuations, depending on whether tax progressivity or transfer progressivity is used. Finally, we provide empirical evidence on the heterogeneity of employment responses across the wage distribution, which supports the key mechanism of our model. |
| Keywords: | Progressivity, government transfers, extensive margin labor supply, business cycles, redistributive policies |
| JEL: | E32 E24 H31 H53 E21 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_085v2&r=all |
| By: | Veronica ACURIO VASCONEZ |
| Abstract: | The consequences of oil price shocks in the real economy have preoccupied economists since the 1970s and the absence of a reaction has stunned them in the 2000s. However, despite the huge literature devoted to the subject, no dynamic stochastic general equilibrium (dsge) model has been able to capture, all at the same time, four of the well-known stylized effects observed after the oil price increase of the 2000s: the absence of recession, coupled with a low but persistent increase in the inflation rate, a decrease in real wages and low price elasticity of oil demand in the short run. One of the reasons is that theoretical papers assume a high degree of substitutability between oil and other factors, an assumption that is not backed up empirically. This paper enlarges the dsge model developed in Acurio-Vásconez et al. (2015) by introducing imperfect substitutability between oil and other factors. The Bayesian estimation of the model over the period 1984:Q1-2007:Q3 suggests that the elasticities of substitution of oil are 0.086 in production and 0.014 in consumption. Furthermore, a sensitivity analysis of the estimated model points towards two main policy conclusions: (a) a stronger anti-inflationary Taylor rule can lead to a recession after an oil shock and; (b) wage flexibility could create a stronger increase in inflation and provoke a decrease in domestic consumption. This latter result contradicts the conclusions of Blanchard and Galí (2009) and Blanchard and Riggi (2013). |
| Keywords: | New-Keynesian model, dsge, oil, ces, stickiness, oil substitution. |
| JEL: | D58 E32 E52 Q43 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2020-08&r=all |
| By: | Carlo Pizzinelli (International Monetary Fund); Konstantinos Theodoridis (Cardiff Business School, European Stability Mechanism); Francesco Zanetti (University of Oxford) |
| Abstract: | This paper documents state dependence in labor market fluctuations. Using a Threshold Vector Autoregression model (TVAR), we establish that the unemployment rate, the job separation rate, and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. We calibrate the model to match the standard deviation of the job-transition rates explained by productivity shocks in the TVAR, and show that the model explains 88 percent of the state dependence in the unemployment rate, 76 percent for the separation rate and 36 percent for the job finding rate. The key channel underpinning state dependence in both job separation and job finding rates is the interaction of the _rm's reservation productivity level and the distribution of match-specific idiosyncratic productivity. Results are robust across several variations to the baseline model. |
| JEL: | E24 E32 J64 C11 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkcam:2001&r=all |
| By: | Chung Tran; Sebastian Wende |
| Abstract: | We study the incidence of capital income taxation in a dynamic general equilibrium model with heterogeneous firms and lifecycle households. In this incomplete market setting, marginal excess burdens of three capital taxes, namely corporate income, dividend and capital gains taxes, are vastly different due to heterogeneous responses of firms and households, and heterogeneous effects of general equilibrium adjustments. It is indeed important to account for firm heterogeneity in productivity and investment financing as well as household heterogeneity in age and skill. Overall, taxing capital with a corporate income tax at the firm level results in higher excess burden than taxing capital with dividend and capital gains taxes at the household level. Given the existing U.S. tax treatment for capital income, reforms that shift tax burden from the firm to household side potentially result in efficiency gains and overall welfare improving. However, the welfare benefits of the tax reforms are quite different across households and generations over transition time, depending on skill, age-cohort and budget balancing tax instruments. In particular, majority of currently alive households, especially retirees, experience welfare gains under moderate corporate income tax cuts, but suffer from welfare losses under more radical tax cuts. |
| Keywords: | Excess burden; Tax incidence; Distributional eects; Overlapping generations; Dynamic general equilibrium |
| JEL: | D21 E62 H21 H22 H25 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2019-670&r=all |
| By: | Marcelo Veracierto (Federal Reserve Bank; Federal Reserve Bank of Chicago) |
| Abstract: | I consider a real business cycle model in which agents have private information about the i.i.d. realizations of their value of leisure. For the case of logarithmic preferences I provide an analytical characterization of the solution to the associated mechanism design problem. Moreover, I show a striking irrelevance result: That the stationary behavior of all aggregate variables are exactly the same in the private information economy as in the full information case. Numerical simulations indicate that the irrelevance result approximately holds for more general CRRA preferences. |
| Keywords: | heterogenous agent; business cycles; private information; social insurance; RBC model; Log consumption; optimal contracts |
| JEL: | F44 E60 F41 |
| Date: | 2019–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:87508&r=all |
| By: | Klaus Adam; Michael Woodford |
| Abstract: | We analytically characterize optimal monetary policy for an augmented New Keyne- sian model with a housing sector. With rational private sector expectations about housing prices and inflation, optimal monetary policy can be characterized by a standard 'target criterion' that refers to inflation and the output gap, without making reference to housing prices. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. For empirically realistic cases, the central bank should then 'lean against' housing prices, i.e., following unexpected housing price increases (decreases), policy should adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap. Robustly optimal policy does not require that the central bank distinguishes between 'fundamental' and 'non-fundamental' movements in housing prices. |
| JEL: | D81 D84 E52 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_154&r=all |
| By: | Aleksandar Vasilev (Lincoln International Business School, UK) |
| Abstract: | We introduce Epstein-Zin (1989, 1991) preferences into a real-business-cycle setup augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999- 2018). We investigate the quantitative importance of the presence of Óearly resolution of uncertaintyÓ motive for the propagation of cyclical fluctuations in Bulgaria. Al- lowing for Epstein-Zin preferences improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework, e.g., Vasilev (2009). |
| Keywords: | Business fluctuations, Epstein-Zin preferences, Bulgaria. |
| JEL: | E32 E22 E37 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:sko:wpaper:bep-2020-01&r=all |
| By: | Moritz Drechsel-Grau; Fabian Greimel |
| Abstract: | We evaluate the hypothesis that rising inequality was a causal source of the US household debt boom since 1980. The mechanism builds on the observation that households care about their social status. To keep up with the ever richer Joneses, the middle class substitutes status-enhancing houses for status-neutral consumption. These houses are mortgage-financed, creating a debt boom across the income distri- bution. Using a stylized model we show analytically that aggregate debt increases as top incomes rise. In a quantitative general equilibrium model we show that Keeping up with the Joneses and rising income inequality generate 60% of the observed boom in mortgage debt and 50% of the house price boom. We compare this channel to two competing mechanisms. The Global Saving Glut hypothesis gives rise to a similar debt boom, but does not generate a house prices boom. Loosening collateral constraints does not generate booms in either debt or house prices. |
| Keywords: | mortgages, housing boom, social comparisons, consumption networks, keeping up with the Joneses |
| JEL: | D14 D31 E21 E44 R21 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_159&r=all |
| By: | Christian Bayer (University of Bonn); Benjamin Born (Frankfurt School of Business and Management; CEPR; CESifo); Ralph Luetticke (CEPR; University College London; Centre for Macroeconomics (CFM)) |
| Abstract: | How much does inequality matter for the business cycle and vice versa? Using a Bayesian likelihood approach, we estimate a heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice between liquid and illiquid assets. The model enlarges the set of shocks and frictions in Smets and Wouters (2007) by allowing for shocks to income risk and taxes. We nd that adding data on inequality does not materially change the estimated shocks and frictions driving the US business cycle. The estimated shocks, however, have signicantly contributed to the evolution of US wealth and income inequality. The systematic components of monetary and scal policy are important for inequality as well. |
| Keywords: | Bayseian estimation, Business cycles, Income inequality, Incomplete markets, Monetary and fiscal policy, Wealth inequality |
| JEL: | C11 D31 E32 E63 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2003&r=all |
| By: | Christian Bayer; Benjamin Born; Ralph Luetticke |
| Abstract: | How much does inequality matter for the business cycle and vice versa? Using a Bayesian likelihood approach, we estimate a heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice between liquid and illiquid assets. The model enlarges the set of shocks and frictions in Smets and Wouters (2007) by allowing for shocks to income risk and taxes. We find that adding data on inequality does not materially change the estimated shocks and frictions driving the US business cycle. The estimated shocks, however, have significantly contributed to the evolution of US wealth and income inequality. The systematic components of monetary and fiscal policy are important for inequality as well. |
| Keywords: | Bayesian estimation, business cycles, income inequality, incomplete markets, monetary and fiscal policy, wealth inequality |
| JEL: | C11 D31 E32 E63 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8085&r=all |
| By: | Jean-Bernard Chatelain (PSE); Kirsten Ralf |
| Abstract: | This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory. |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2002.07479&r=all |
| By: | Pizzinelli, Carlo (International Monetary Fund); Theodoridis, Konstantinos (Cardiff Business School); Zanetti, Francesco (University of Oxford) |
| Abstract: | This paper documents state dependence in labor market fluctuations. Using a Threshold Vector Autoregression model (TVAR), we establish that the unemployment rate, the job separation rate, and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. We calibrate the model to match the standard deviation of the job-transition rates explained by productivity shocks in the TVAR, and show that the model explains 88 percent of the state dependence in the unemployment rate, 76 percent for the separation rate and 36 percent for the job finding rate. The key channel underpinning state dependence in both job separation and job finding rates is the interaction of the firm’s reservation productivity level and the distribution of match-specific idiosyncratic productivity. Results are robust across several variations to the baseline model. |
| Keywords: | Forecast Breaks, Statistical Decision Making, Central Banking |
| JEL: | C53 E47 E58 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2020/2&r=all |
| By: | Matteo Leombroni; Monika Piazzesi; Martin Schneider; Ciaran Rogers |
| Abstract: | In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% portfolio shift out of equity into real estate. This study uses an overlapping generations model with uninsurable nominal risk to quantify the role of structural change in these events. We attribute the dip in wealth to the entry of baby boomers into asset markets, and to the erosion of bond portfolios by surprise inflation, both of which lowered the overall propensity to save. We also show that the Great Inflation led to a portfolio shift by making housing more attractive than equity. Disagreement about inflation across age groups matters for the size of tax effects, the volume of nominal credit, and the price of housing as collateral. |
| JEL: | E1 E2 E3 E44 G1 G11 G12 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26740&r=all |
| By: | Max Franks; Ottmar Edenhofer |
| Abstract: | We show how normative standpoints determine optimal taxation of wealth. Since wealth is not equal to capital, we find very different welfare implications of land rent-, bequest- and capital taxation. It is mainly land rents that should be taxed. We develop an overlapping generations model with heterogeneous agents and calibrate it to OECD data. We compare three normative views. First, the Kaldor-Hicks criterion favors the laissez-faire equilibrium. Second, with prioritarian welfare functions based on money-metric utility, high land rent taxes are optimal due to a portfolio effect. Third, if society disapproves of bequeathing, bequest taxation becomes slightly more desirable. |
| Keywords: | optimal taxation, social welfare, wealth inequality, land rent tax, Georgism |
| JEL: | D31 D63 E62 H21 H23 Q24 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8093&r=all |
| By: | Phuong Ngo (Cleveland State University); Francois Gourio |
| Abstract: | Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing correlation in turn reduces the term premium, and hence contributes to explaining the decline in long-term interest rates. We use the model to evaluate this mechanism quantitatively. Our results shed light on the validity of the New Keynesian ZLB model, a cornerstone of modern macroeconomic theory. |
| Keywords: | Liquidity trap; inflation premia; risk premia; term premia; stock market |
| JEL: | E31 E62 E52 C61 |
| Date: | 2020–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:87504&r=all |
| By: | van Rens, Thijs (University of Warwick and Centre for Macroeconomics); Vukotic, Marija (University of Warwick) |
| Abstract: | Estimated impulse responses of investment and hiring typically peak well after the impact of a shock. Standard models with adjustment costs in capital and labor do not exhibit such delayed adjustment, but we argue that it arises naturally when we relax the assumption that the production technology is separable over time. This result holds for both non-convex and convex cost functions, and for reasonable parameter values the e⁄ect is strong enough to match the persistence observed in the data. We discuss some evidence for our explanation and ways to test the model. |
| Keywords: | persistence ; adjustment costs ; organizational capital JEL codes: E24 ; J61 ; J62 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1245&r=all |
| By: | Pietro Garibaldi (Collegio Carlo Alberto, University of Torino); Pedro Gomes (University of London; Centre for Macroeconomics (CFM)); Thepthida Sopraseuth (University of Cergy-Pontoise) |
| Abstract: | We propose a simple theory of under- and over-employment. Individuals of high type can perform both skilled and unskilled jobs, but only a fraction of low-type workers can perform skilled jobs. People have different non-pecuniary values over thesejobs, akin to a Roy model. We calibrate two versions of the model to match moments of 17 OECD economies, considering separately education and skills mismatch. The cost of mismatch is 3% of output on average but varies between -1% to 9% across countries. The key variable that explains the output cost of mismatch is not the percentage of mismatched workers but their wage relative to well-matched workers. |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2006&r=all |
| By: | Den Haan, Wouter J.; Drechsel, Thomas |
| Abstract: | Constructing empirical specifications for structural economic models is difficult, if not impossible. As shown in this paper, even minor misspecifications may lead to large distortions for parameter estimates and implied model properties. We propose a novel concept, namely an agnostic structural disturbance (ASD), that can be used to both detect and correct for misspecification of structural disturbances and is easy to implement. While agnostic in nature, the estimated coefficients and associated impulse response functions of the ASDs allow us to give them an economic interpretation. We adopt the methodology to the Smets–Wouters model and formulate an improved risk-premium and an improved investment-specific productivity disturbance. |
| Keywords: | DSGE; full-information model estimation; Structural disturbances; ES/R009295/1 |
| JEL: | C13 C52 E30 |
| Date: | 2020–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:103147&r=all |
| By: | González-Gómez, Andrés; Guarín-López, Alexander; Rodríguez, Diego; Vargas-Herrera, Hernando |
| Abstract: | This paper introduces 4GM, a semi-structural model for monetary policy analysis and macroeconomic forecasting in Colombia. This model is based on a New-Keynesian rational expectation framework for an oil-exporting small open economy. In this paper, we present the model structure and examine the response of its variables to domestic, foreign and oil-price shocks. Further, we assess 4GM in terms of its historical shock decomposition and its out-of-sample forecasting. |
| Keywords: | Semi-structural model; Monetary policy; Macroeconomic forecasting |
| JEL: | E17 E37 E47 E52 E58 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:rie:riecdt:31&r=all |
| By: | Warwick McKibbin; Roshen Fernando |
| Abstract: | The outbreak of coronavirus named COVID-19 has disrupted the Chinese economy and is spreading globally. The evolution of the disease and its economic impact is highly uncertain which makes it difficult for policymakers to formulate an appropriate macroeconomic policy response. In order to better understand possible economic outcomes, this paper explores seven different scenarios of how COVID-19 might evolve in the coming year using a modelling technique developed by Lee and McKibbin (2003) and extended by McKibbin and Sidorenko (2006). It examines the impacts of different scenarios on macroeconomic outcomes and financial markets in a global hybrid DSGE/CGE general equilibrium model.The scenarios in this paper demonstrate that even a contained outbreak could significantly impact the global economy in the short run. These scenarios demonstrate the scale of costs that might be avoided by greater investment in public health systems in all economies but particularly in less developed economies where health care systems are less developed and popultion density is high. |
| Keywords: | Pandemics, infectious diseases, risk, macroeconomics, DSGE, CGE, G-Cubed |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-19&r=all |
| By: | Marcelo Veracierto (Federal Reserve Bank; Federal Reserve Bank of Chicago) |
| Abstract: | This paper introduces a general method for computing equilibria with heterogeneous agents and aggregate shocks that is particularly suitable for economies with private information. Instead of the cross-sectional distribution of agents across individual states, the method uses as a state variable a vector of spline coefficients describing a long history of past individual decision rules. Applying the computational method to a Mirrlees RBC economy with known analytical solution recovers the solution perfectly well. This test provides considerable confidence on the accuracy of the method. |
| Keywords: | private information; business cycles; heterogenous agents; Computational methods |
| JEL: | E32 C63 E27 |
| Date: | 2020–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:87509&r=all |
| By: | Ricardo Lagos; Shengxing Zhang |
| Abstract: | We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions directly with money strengthens the stance of sellers of goods and services vis-á-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these "latent money demand" considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small. |
| JEL: | D83 E5 G12 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26756&r=all |
| By: | Giancarlo Corsetti (Centre for Economic Policy Research; Centre for Macroeconomics (CFM); University of Cambridge); Luca Dedola (Centre for Economic Policy Research; European Central Bank); Sylvain Leduc (Federal Reserve Bank of San Francisco) |
| Abstract: | How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete – implying that misalignment and exchange rate volatility are higher in economies where incomplete pass through contains the effects of exchange rates on price competitiveness. |
| Keywords: | Currency misalignments, Trade imbalances, Asset markets and risk sharing, Optimal targeting rules, International policy cooperation, Exchange rate pass-through |
| JEL: | E44 E52 E61 F41 F42 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2008&r=all |