nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒03‒16
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Fiscal Consolidations: Welfare Effects of the Adjustment Speed By Fonseca, Miguel
  2. Technical Appendix: “International Business Cycle and Financial Intermediation” By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  3. Natural Interest Rate and Asset Price Bubbles: How Bubbles Counteract Low Interest Rates By Jacopo Bonchi
  4. Opportunity and Inequality across Generations By Winfried Koeniger; Carlo Zanella
  5. Endogenous Preferences for Parenting and Macroeconomic Outcomes By Nigar Hashimzade
  6. Uncertainty Shocks and Business Cycle Research By Jesús Fernández-Villaverde; Pablo A. Guerrón-Quintana
  7. Labor Share Heterogeneity and Fiscal Consolidation Programs By Pedro Brinca; Bruno Freitas; Margarida Isabel Mano Tavares Simões Lopes Marques Almeida
  8. Reducing the income tax burden for households with children: An assessment of the child tax credit reform in Austria By Christl, Michael; De Poli, Silvia; Varga, Janos
  9. Long-run inheritance tax and capital income tax with rational altruism By Pascal Belan; Erwan Moussault
  10. Consumer Debt and Default: A Macro Perspective By Florian Exler; Michèle Tertilt
  11. Asset Prices and Unemployment Fluctuations By Pierlauro Lopez; Patrick J. Kehoe; Virgiliu Midrigan; Elena Pastorino
  12. Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions By Jean-Bernard Chatelain; Kirsten Ralf
  13. Buying and Selling Entrepreneurial Assets By Kankanamge, Sumudu; Gaillard, Alexandre
  14. 非分割的な労働供給のもとでの非自発的失業の存在 - 単純な世代重複完全競争モデルによって - By Tanaka, Yasuhito

  1. By: Fonseca, Miguel
    Abstract: This work studies the response of social welfare to fiscal consolidations, by focusing on a less debated characteristic of fiscal plans: the speed of deleveraging. A neoclassical overlapping generations model is calibrated to the German economy, and a sequence of reductions of the same size in the debt-to-GDP ratio are simulated considering different adjustment periods. Welfare gains are found to be larger in slow, delayed fiscal consolidations, due to the presence of incomplete markets. It is also found that the aggregate welfare response depends on the distribution of wealth and the type of fiscal instrument used.
    Keywords: Fiscal Consolidation, Wealth Inequality, Incomplete Markets, Consumption Smoothing Hypotesis
    JEL: E13 E21 E62 H63
    Date: 2020–01–06
  2. By: Tamas Csabafi (Department of Economics, University of Missouri-St. Louis); Max Gillman (Department of Economics, University of Missouri-St. Louis); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: A technical appendix for “International Business Cycle and Financial Intermediation.” The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more Önancially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated.
    Keywords: international real business cycles, financial intermediation, credit spread, bank productivity, 2008 crisis.
    JEL: E13 E32 E44 F41
    Date: 2020–02
  3. By: Jacopo Bonchi (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: By developing a three-period OLG model with rational asset price bubbles and non-neutral monetary policy, I show how bubbles prevent low interest rates, when the natural rate of interest declines permanently. Bubbles push the natural interest rate up by serving as store of value (saving channel) and collateral (borrowing channel), and this avoids a long-lasting ZLB episode. Bubbles reallocate resources across generations too, and this reallocation implies welfare losses. These results shed light on the pattern of the US risk-free interest rates and on that of net worth and consumption across generations before the Great Recession.
    Keywords: Asset price bubbles; Natural interest rate; Zero lower bound
    JEL: E13 E32 E44 E52
    Date: 2020–02
  4. By: Winfried Koeniger; Carlo Zanella
    Abstract: We analyze inequality and mobility across generations in a dynastic economy. Nurture, in terms of bequests and the schooling investment into the next generation, is observable but the draw of nature in terms of ability is hidden, stochastic and persistent across generations. We calibrate the model to U.S. data to illustrate mechanisms through which nurture and nature affect mobility and the transmission of income inequality across generations, thus complementing the vast empirical literature. To provide a benchmark for the observed status quo, we solve for the social optimum in which the planner weighs dynasties equally and chooses optimal tax schedules subject to incentive compatibility. Analyzing the transition from the calibrated steady state to this social optimum, we find that insurance against intergenerational ability risk increases on the transition path by making welfare of family dynasties more dependent on nurture relative to nature. The insurance comes at the cost of less social mobility. We compare welfare in the social optimum and economies with a simple history-independent tax and subsidy system.
    Keywords: human capital, schooling, bequests, asymmetric information, intergenerational mobility, inequality
    JEL: E24 H21 I24 J24 J62
    Date: 2020
  5. By: Nigar Hashimzade
    Abstract: This paper investigates the effects of parenting time on macroeconomic outcomes and welfare when parenting choices are determined by own childhood experience and social norms in an overlapping generations framework. Parenting time and material expenditures on children generate children’s human capital. When the share of parenting time is relatively low and parenting and leisure are complements or weak substitutes the model has two steady-state equilibria with different welfare levels. In the high-welfare equilibrium parents have stronger endogenous taste for parenting and spend more time with children and less in paid work. Higher productivity due to the higher human capital more than compensates for the reduction in working hours, leading to a higher output level, in comparison to the low-welfare equilibrium.
    Keywords: endogenous preferences, parenting, time use, overlapping generations, human capital
    JEL: D91 J13
    Date: 2020
  6. By: Jesús Fernández-Villaverde; Pablo A. Guerrón-Quintana
    Abstract: We review the literature on uncertainty shocks and business cycle research. First, we motivate the study of uncertainty shocks by documenting the presence of time-variation in the volatility of macroeconomic time series. Second, we enumerate the mechanisms that researchers have postulated to link uncertainty shocks and business cycles. Third, we outline how we can specify uncertainty shocks. Fourth, we postulate a real business cycle model augmented with financial frictions and uncertainty shocks. Fifth, we use the model to illustrate our previous discussions and to show how uncertainty shocks can be expansionary.
    JEL: E30 E32 E50
    Date: 2020–02
  7. By: Pedro Brinca (Nova School of Business and Economics (SBE)); Bruno Freitas (Nova School of Business and Economics (SBE)); Margarida Isabel Mano Tavares Simões Lopes Marques Almeida (Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra)
    Abstract: We show that the labor share of income is an important factor affecting the mechanisms behind fiscal consolidation programs, thus requiring consideration when evaluating fiscal multipliers across countries. We calibrate a life-cycle, overlapping generations model to match key characteristics of different European economies and evaluate the recessive impacts of fiscal consolidation programs. We find a positive relationship between the labor share and the impact fiscal multipliers generated by our model. This result directly follows from the higher weight of labor on production and the lower opportunity cost of leisure present in economies with a higher labor share. Following the impact period, the relationship between the labor share and the fiscal multipliers is dependent on the type of fiscal instrument employed in the consolidation.
    Keywords: Political connections, Gender diversity, Bank performance, ECB, GMM; Fiscal Consolidation,Labor Share,Fiscal Multipliers,Public Debt.
    JEL: D33 E21 E62 H31
    Date: 2020–04
  8. By: Christl, Michael; De Poli, Silvia; Varga, Janos
    Abstract: This paper analyses the impact of the implementation of a child tax credit in Austria in 2019, both on micro and macro level. First, we assess the fiscal and distributional impact of this reform using EUROMOD. Second, we estimate labour supply impacts of the reform based on a structural discrete choice framework. Third, we evaluate the macroeconomic impacts, by calibrating and shocking the DSGE model QUEST, with the micro-based results. We show that the reform reduces inequality, lowers the poverty rate for households with children. Overall the reform has a positive impact on labour supply, especially for women. On the macro-level (and in the long-run), our model suggests a small but positive impact on employment, investment, consumption and GDP. Additionally, using the macro impact of the reform, we show that accounting for those behavioural responses at the micro level is important to asses the long-run impact of tax reforms, especially on the income distribution.
    Date: 2020–02–27
  9. By: Pascal Belan; Erwan Moussault (Université de Cergy-Pontoise, THEMA)
    Abstract: We consider a two-period overlapping generation model with rational altruism à la Barro. The government finances public spending with taxes on labor income, capital income and inheritance. We show that, in the long-run, inheritance tax and capital income tax are generally different from zero, even if the optimal tax policy leads to the modified Golden-rule.
    Keywords: inheritance tax, capital income tax, altruism.
    JEL: D64 H21 D91
    Date: 2020
  10. By: Florian Exler; Michèle Tertilt
    Abstract: In this survey, we review the quantitative macroeconomic literature analyzing consumer debt and default. We start by providing an overview of consumer bankruptcy law in the US and document the relevant institutional changes over time. We proceed with a comprehensive empirical section, describing key facts about consumer debt, defaults and delinquencies, as well as charge-off and interest rates for the United States. In addition to the evolution of these variables over time, we construct life-cycle profiles using data from the Survey of Consumer Finances and show that debt and defaults display a clear hump-shaped profile by age. Third, we show how credit card debt has evolved along the income distribution. Finally, we document a large amount of heterogeneity in credit card interest rates across consumers. In the second part of the survey, we describe what has by now become the workhorse model of consumer credit and default. We discuss a quantitative version of the model and use it to decompose the main reasons for default. We also use the model to illustrate how the details of default costs matter. The remainder of the survey then discusses the literature centered around two questions. First, what are the welfare implications of various bankruptcy laws? And second, what caused the rise in filings over time? We end with a discussion of open questions and fruitful avenues for future research.
    Keywords: consumer debt, bankruptcy, Chapter 7, default, credit cards, charge-offs
    JEL: C60 E20 G20 O30
    Date: 2020
  11. By: Pierlauro Lopez (Bank of France); Patrick J. Kehoe (Stanford University; University of Minnesota; Federal Reserve Bank of Minneapolis; Harvard University; National Bureau of Economic Research; University College London; Federal Reserve Bank; University of Pennsylvania); Virgiliu Midrigan; Elena Pastorino
    Abstract: Recent critiques have demonstrated that existing attempts to account for the unemployment volatility puzzle of search models are inconsistent with the procylicality of the opportunity cost of employment, the cyclicality of wages, and the volatility of risk-free rates. We propose a model that is immune to these critiques and solves this puzzle by allowing for preferences that generate time-varying risk over the cycle, and so account for observed asset pricing fluctuations, and for human capital accumulation on the job, consistent with existing estimates of returns to labor market experience. Our model reproduces the observed fluctuations in unemployment because hiring a worker is a risky investment with long-duration surplus flows. Intuitively, since the price of risk in our model sharply increases in recessions as observed in the data, the benefit from creating new matches greatly drops, leading to a large decline in job vacancies and an increase in unemployment of the same magnitude as in the data.
    JEL: E24 E32 E44 J64
    Date: 2020–03–05
  12. 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); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: We consider a frictionless constant endowment economy based on Leeper (1991). In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hoc fiscal rule, there are two equilibria. One has active monetary policy and passive fiscal policy, while the other has passive monetary policy and active fiscal policy. We consider an extended setup in which the policy maker minimizes a loss function under quasi-commitment, as in Schaumburg and Tambalotti (2007). Under this formulation there exists a unique Ramsey equilibrium, with an interest rate peg and a passive fiscal policy. We thank John P. Conley, Luis de Araujo and one referree for their very helpful comments.
    Keywords: Ramsey optimal policy,Fiscal theory of the Price Level,Frictionless endowment economy,Interest Rate Rule,Fiscal Rule
    Date: 2020–02–05
  13. By: Kankanamge, Sumudu; Gaillard, Alexandre
    Abstract: This paper introduces a theory of entrepreneurial assets transfer consistent with empirical evidence and centered around a business for sale market that values firms based on their intangible assets. We consider the key endogenous entrepreneurial choices to purchase, found, sell or liquidate business assets and the equilibrium price designed to capture both the intertemporal and the intangible value of a firm. We distinguish earlystage and mature firms as the latter are less likely to fail, make higher profits and face less stringent financial constraints. We argue that maturity translates the intangible value of a firm. We discipline our model using U.S. surveys and a new dataset of business selling transactions. We show that the absence of the business for sale market leads to a severe drop in aggregate output. Then, decomposing the effects of maturity, we show how they shape aggregate outcomes and wealth concentration.
    Keywords: Entrepreneurship, Business transfers, Intangible Assets
    JEL: E21 E23 J24
    Date: 2020–02
  14. By: Tanaka, Yasuhito
    Abstract: We show the existence of involuntary unemployment without assuming wage rigidity. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations model under perfect competition with constant returns to scale technology. We show that there exists involuntary unemployment in a case where labor supply is indivisible. We also show that reduction of nominal wages can not rescue involuntary unemployment.
    Keywords: 非自発的失業,完全競争,非分割的労働供給,世代重複モデル
    JEL: E12 E24
    Date: 2020

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