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on Dynamic General Equilibrium |
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Issue of 2020‒03‒23
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Hager Ben Romdhane (Central Bank of Tunisia) |
| Abstract: | This paper estimates an open economy DSGE model with financial accelerator à la Bernanke et al. (1999)2, enriched with wage rigidities and imperfect exchange rate pass through. The objective of this paper is to assess the importance of financial frictions and their role in the transmission of transitory shocks in the Tunisian Economy. The model is estimated by Bayesian technics via Metropolis Hasting algorithm. Using Tunisian data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and the potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, results of the impulse responses functions model support that the inclusion of the financial accelerator magnifies the impact of shocks thereby increasing real fluctuations. |
| Keywords: | DSGE, Financial frictions, Bayesian estimation |
| Date: | 2020–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp06-2020&r=all |
| By: | Fabio Massimo Piersanti; Patrizio Tirelli |
| Abstract: | We develop a stylized two-sector business cycle model with endogenous firm dynamics in the investment goods sector. The positive correlation between firms profitability and the relative price of investment goods generates an endogenous persistence mechanism in productivity dynamics which drives the model response to shocks. A white noise permanent shock to the productivity of new entrants causes endogenous exit and subsequent rounds of productivity increases, due to the competitive pressure generated by falling relative prices of investment goods. The model internal propagation mechanism generates persistent dynamics and a large "multiplier effect" on the initial shock. Neutral productivity shocks affect long run firms productivity in the Investment-goods sector through their effect on relative prices. Firms productivity is also endogenous to shocks to the marginal efficiency of investment. The DSGE version of the model apparently survives the Barro-King curse. |
| Keywords: | Productivity shocks, Investment shocks, relative price of investment, DSGE model, Firms entry, Firms exit |
| JEL: | E13 E21 E22 E30 E32 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:434&r=all |
| By: | Jordi Galí |
| Abstract: | I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model's welfare implications. |
| JEL: | E44 E52 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26796&r=all |
| By: | Cristina Arellano; Yan Bai; Gabriel Mihalache (State University of New York at Stony Brook) |
| Abstract: | This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and spreads. |
| Keywords: | Monetary policy; Inflation; Sovereign default; Interest rates |
| JEL: | E52 F34 F41 |
| Date: | 2020–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:87572&r=all |
| By: | Tomoyuki Nakajima (Faculty of Economics, University of Tokyo); Shuhei Takahashi (Institute of Economic Research, Kyoto University) |
| Abstract: | Previous analyses suggest that a government can finance its expenditure by only using its asset income without taxes in the long run. We show that uninsured idiosyncratic earnings risk may overturn this result. In an Aiyagari-type model, we theoretically show that increasing government assets eventually decreases the interest rate below zero, suggesting an upper bound on government asset income. Hence, when government expenditure exceeds a threshold, there exists no zero-tax steady-state equilibrium, and the zero-tax policy is infeasible. Quantitatively, a government can raise small revenues without taxes. Increasing government assets may also generate rational asset price bubbles. |
| Keywords: | Government assets, Equilibrium existence, Zero taxes, Bubbles, Incomplete markets, Heterogeneous agents |
| JEL: | D52 E62 H63 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1025&r=all |
| By: | Xiao, Bowen; Guo, Xiaodan; Fan, Ying; Voigt, Sebastian; Cui, Lianbiao |
| Abstract: | In light of increased economic integration and global warming, addressing critical issues such as the role of multilateral climate policies and the strategic interaction of countries in climate negotiations becomes paramount. We thus established for this paper an open economy environmental dynamic stochastic general equilibrium model with heterogeneous production sectors, bilateral climate policies, asymmetric economies, and asymmetric stochastic shocks, using China and the EU as case studies in order to analyze the interaction and linking of international carbon markets under dynamic international economic cycles. This led us to some major conclusions. First, with various methods we verified that, due to deadweight loss, the efficiency of the separate carbon market is lower than that of the joint carbon market. Second, the intensity of the spillover effects depends partly on different climate policies. This means that, in terms of supply-side shocks, the EU's economy in a joint carbon market is more sensitive because its cross-border spillover effects are enhanced, while demand-side shocks have a stronger impact on the EU's economy under a separate carbon market. Third, the Ramsey policy rule revealed that both China's and the EU's emission quotas should be adjusted pro-cyclically under separate carbon markets. The cross-border spillover effects of the joint carbon market, however can change the pro-cyclical characteristics of foreign (EU's) optimal quotas. |
| Keywords: | International economic cycle,Carbon market,China,the European Union (EU),Dynamic Stochastic General Equilibrium (DSGE) |
| JEL: | E32 F41 Q53 Q56 Q58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:20011&r=all |
| By: | Nóbrega, Valter |
| Abstract: | In this paper, we look at the relationship between Investment Specific Technological Change (ISTC) and optimal level of labor income progressivity. We develop an incomplete markets overlapping generations model that matches relevant features of the US economy and find that the observed drop in the relative price of investment since the 1980's leads optimal progressivity to increase. This result hinges on ISTC increasing the wage premium through an increase in the variance of the permanent component of labor income. This result is supported by recent findings in the literature that highlight the increasing role of the permanent component of labor income in the observed increase in income inequality. |
| Keywords: | Optimal taxation; Technological Change; Income Inequality |
| JEL: | E21 H21 J0 |
| Date: | 2020–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98917&r=all |
| By: | Zhen Huo; Andrei A. Levchenko; Nitya Pandalai-Nayar |
| Abstract: | This paper develops estimates of TFP growth adjusted for movements in unobserved factor utilization for a panel of 29 countries and up to 37 years. When factor utilization changes are unobserved, the commonly used Solow residual mismeasures actual changes in TFP. We use a general equilibrium dynamic multi-country multi-sector model featuring variable factor utilization to derive a production function estimating equation that corrects for unobserved factor usage. We compare the properties of utilization-adjusted TFP series to the standard Solow residual, and discuss the implications for international business cycle comovement generated by technology shocks. Unlike the Solow residual, utilization-adjusted TFP is virtually uncorrelated across countries, and as a result its direct contribution to GDP comovement is negligible. A general equilibrium model calibrated to the observed levels of international trade cannot generate much comovement through propagation of these TFP shocks. |
| JEL: | F41 F44 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26803&r=all |
| By: | 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); Pierlauro Lopez (Bank of France); 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. |
| Keywords: | Unemployment volatility puzzle; Shimer puzzle; Search model; Search and matching model; Diamond-Mortenson-Pissarides model |
| JEL: | E0 E20 E24 E32 J60 J63 J64 |
| Date: | 2020–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:87571&r=all |
| By: | Santos, Mariana |
| Abstract: | Fiscal multipliers depend on several structural characteristics of each economy. In this work project it is argued that labor income tax progressivity lowers fiscal multipliers of fiscal consolidation programs. By calibrating a model with incomplete-markets and overlapping generations for the United States, for different values of the labor income tax progressivity, it is shown that as progressivity increases, the recessionary impacts of fiscal consolidation programs are lower in the case of consolidation through decrease of government spending and are more recessionary in the case of consolidation financed with tax hikes. The first case is explained through the positive relationship between labor tax progressvity and the percentage of borrowing constrained agents in the economy. In the second case the results are linked to the distortionary effects in the economy of increasing tax progressivity. |
| Keywords: | Fiscal Multipliers; Labor Income Tax Progressivity; Government Spending; Taxation |
| JEL: | H30 |
| Date: | 2020–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98736&r=all |
| By: | Philippe Bacchetta (UNIL - Université de Lausanne); Kenza Benhima (UNIL - Université de Lausanne); Céline Poilly (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | In the aftermath of the U.S. financial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we argue that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across firms. We develop a dynamic general equilibrium model where heterogenous firms need cash and external liquid funds in their production process. We analyze the dynamic impact of aggregate shocks and the cross-firm impact of idiosyncratic shocks. We show that external liquidity shocks generate a negative comovement between the cash ratio and employment, as documented in the data. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01995011&r=all |
| By: | Thorsten Drautzburg; Jesus Fernandez-Villaverde; Pablo Guerron-Quintana |
| Abstract: | We argue that social and political risk causes significant aggregate fluctuations by changing bargaining power. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output and unemployment. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back out the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 28% of aggregate fluctuations and have a welfare cost of 2.4%in consumption units. |
| Keywords: | Redistribution risk; bargaining shocks; aggregate fluctuations; partial filter; histor-ical narrative. |
| JEL: | E32 E37 E44 J20 |
| Date: | 2020–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:87610&r=all |
| By: | Matthias Meier |
| Abstract: | We provide new evidence that (i) time to build is volatile and countercyclical, and that (ii) supply chain disruptions lengthen time to build. Motivated by these findings, we develop a general equilibrium model in which heterogeneous firms face non-convex adjustment costs and multi-period time to build. In the model, supply chain disruptions lengthen time to build. Calibrating the model to US micro data, we show that disruptions, which lengthen time to build by 1 month, depress GDP by 1% and aggregate TFP by 0.2%. Structural vector autoregressions corroborate the quantitative importance of supply chain disruptions. |
| Keywords: | Time to build, supply chain disruptions, business cycles |
| JEL: | E01 E22 E32 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_160&r=all |
| By: | Sven Blank (Deutsche Bundesbank); Mathias Hoffmann (Deutsche Bundesbank); Moritz A. Roth (Banco de España) |
| Abstract: | The vast macroeconomic literature trying to explain the widely observed equity home bias disregards internationally active firms. In a DSGE model that features the endogenous choice of firms to become internationally active through either exports or foreign direct investment (FDI), we find that the optimal equity holdings of agents are biased towards domestic firms. Our finding indicates that international diversification is not as bad as empirical measures of the equity home bias suggest. |
| Keywords: | country portfolios, multinational firms, international diversification, international trade, foreign direct investment |
| JEL: | F12 F21 F23 F41 G11 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2008&r=all |
| By: | Exler, Florian (University of Vienna); Tertilt, Michèle (University of Mannheim) |
| 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: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12966&r=all |
| By: | Chung, Federico; Purkey, Liam; Solis-Garcia, Mario |
| Abstract: | We provide estimates of the size and dollar value of shadow economy for a set of countries between 1950 and 2015, following the methodology of Solis-Garcia and Xie (2018). |
| Keywords: | informal sector; business cycles; DSGE models |
| JEL: | E26 E32 O17 |
| Date: | 2020–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98963&r=all |
| By: | Michael D. Cai; Marco Del Negro; Edward P. Herbst; Ethan Matlin; Reca Sarfati; Frank Schorfheide |
| Abstract: | This paper illustrates the usefulness of sequential Monte Carlo (SMC) methods in approximating DSGE model posterior distributions. We show how the tempering schedule can be chosen adaptively, document the accuracy and runtime benefits of generalized data tempering for “online” estimation (that is, re-estimating a model as new data become available), and provide examples of multimodal posteriors that are well captured by SMC methods. We then use the online estimation of the DSGE model to compute pseudo-out-of-sample density forecasts and study the sensitivity of the predictive performance to changes in the prior distribution. We find that making priors less informative (compared to the benchmark priors used in the literature) by increasing the prior variance does not lead to a deterioration of forecast accuracy. |
| JEL: | C11 C32 C53 E32 E37 E52 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26826&r=all |
| By: | Martin F. Hellwig (Max Planck Institute for Research on Collective Goods) |
| Abstract: | The paper contributes to the discussion on whether real interest rates smaller than real growth rates can be taken as evidence of dynamic inefficiency that calls for fiscal interventions. A seemingly killing objection points to the presence of land, a non-produced durable asset whose value becomes arbitrarily large as interest rates go to zero. Such an asset, it is claimed, can accommodate any need for a store of value at interest rates above growth rates, so dynamic inefficiency cannot arise. The paper shows that this objection is not robust to the presence of an arbitrarily small per-unit-of-value transaction cost. The paper also gives conditions under which fiscal interventions provide for Pareto improvements even though the interventions themselves are also costly. |
| Keywords: | Dynamic inefficiency, fiscal policy, public debt, overlapping-generations models with land, transaction costs, pay-as-you-go retirement provision |
| JEL: | D61 E21 E62 H63 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2020_07&r=all |
| By: | Ryo Kato; Takayuki Tsuruga |
| Abstract: | Pecuniary externalities in models with financial friction justify macroprudential policies for preventing economic agents’ excessive risk taking. We extend the Diamond and Rajan (2012) model of banks with the production factors and explore how a pecuniary externality affects a bank’s leverage. We show that the laissez-faire banks in our model take on excessive risks compared with the constrained social optimum. Our numerical simulations suggest that the crisis probability is 2--3 percentage points higher in the laissez-faire economy than in the constrained social optimum. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1078&r=all |
| By: | Yongyang Cai; Kenneth Judd; Rong Xu |
| Abstract: | We apply numerical dynamic programming techniques to solve discrete-time multi-asset dynamic portfolio optimization problems with proportional transaction costs and shorting/borrowing constraints. Examples include problems with multiple assets, and many trading periods in a finite horizon problem. We also solve dynamic stochastic problems, with a portfolio including one risk-free asset, an option, and its underlying risky asset, under the existence of transaction costs and constraints. These examples show that it is now tractable to solve such problems. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2003.01809&r=all |
| By: | Sebastian Heise; Tommaso Porzio |
| Abstract: | We develop a job ladder model with labor reallocation across firms and regions, and estimate it on matched employer-employee data to study the large and persistent real wage gap between East and West Germany. We find that the wage gap is mostly due to firms paying higher wages per efficiency unit in West Germany and quantify a rich set of frictions preventing worker reallocation across space and across firms. We find that three spatial barriers impede East Germans’ ability to migrate West: migration costs, a preference to live in the East, and fewer job opportunities received from the West. The estimated model highlights that the spatial barriers needed to generate the large wage gap between East and West are small relative to the frictions preventing the reallocation of labor across firms. Therefore, policies that directly promote regional integration lead to smaller aggregate benefits than equally costly hiring subsidies within region. |
| Keywords: | Labor mobility; Regional integration; Spatial wage gaps |
| JEL: | J60 O10 R10 |
| Date: | 2019–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:87578&r=all |