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on Dynamic General Equilibrium |
| By: | Lis, Eliza; Nickel, Christiane; Papetti, Andrea |
| Abstract: | Can the aging process affect inflation? The prolonged decline of fertility and mortality rates induces a persistent downward pressure on the natural interest rate. If this development is not internalized by the monetary policy rule, inflation can be on a downward trend. Using the structure of a two-sector overlapping generations model embedded in a New-Keynesian framework with price frictions, calibrated for the euro area, this paper shows that following a commonly specified monetary policy rule the economy features a ”disinflationary bias” since 1990, in a way that can match the downward trend of core inflation found in the data for the euro area. In this model, continuing to follow the same rule makes inflation to be on a declining pattern at least until 2030. At the same time, changing consumption patterns towards nontradable items such as health-care generate a small ”inflationary bias” a positive deviation of inflation from target of less than 0.1 percentage points between 1990 and 2030. In the model setting of this paper, this inflationary bias is not strong enough to counteract the disinflationary bias generated by the downward impact of aging on the natural interest rate. JEL Classification: E43, E52, E58, J11 |
| Keywords: | consumption composition, euro area, inflation, monetary policy, population aging |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202382&r=all |
| By: | Weifeng Liu; Phitawat Poonpolkul |
| Abstract: | This paper provides a framework to endogenize rates of return for risk-free bonds and risky capital in an overlapping generation model. The rate of return on capital is endogenized by introducing idiosyncratic production shocks to avoid computation challenges associated with aggregate production shocks in the literature. The framework enables the interaction between financial markets and macroeconomic conditions in a production economy. Based on this framework, the paper first examines life-cycle portfolio choice without demographic change, and illustrates that several factors such as borrowing costs, labor income and production risk play important roles in life-cycle portfolios. The paper then investigates the impacts of population aging on macroeconomic conditions, life-cycle behaviors and financial market structures. The results show that population aging leads to higher capital-labor ratios, and reduces the rates of return on both assets. The bond market shrinks significantly, and capital decreases if the fertility rate declines but increases if the mortality rate declines, leading to structural change in financial markets. The impacts on life-cycle variables are quite different in the fertility and mortality cases particularly at the late stage of life. |
| Keywords: | Demographic change, portfolio choice, financial market structure, risk premium, idiosyncratic production shock, overlapping generation model. |
| JEL: | J11 G11 C63 C68 E21 E23 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-20&r=all |
| By: | Adrian Pagan; Tim Robinson |
| Abstract: | We show that when a model has more shocks than observed variables the estimated filtered and smoothed shocks will be correlated. This is despite no correlation being present in the data generating process. Additionally the estimated shock innovations may be autocorrelated. These correlations limit the relevance of impulse responses, which assume uncorrelated shocks, for interpreting the data. Excess shocks occur frequently, e.g. in Unobserved-Component (UC) models, filters, including Hodrick- Prescott (1997), and some Dynamic Stochastic General Equilibrium (DSGE) models. Using several UC models and an estimated DSGE model, Ireland (2011), we demonstrate that sizable correlations among the estimated shocks can result. |
| Keywords: | Partial Information, Structural Shocks, Kalman Filter, Measurement Error, DSGE |
| JEL: | E37 C51 C52 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-28&r=all |
| By: | Vladimir Smirnyagin |
| Abstract: | This paper studies firm dynamics over the business cycle. I present evidence from the United Kingdom that more rapidly growing firms are born in expansions than in recessions. Using administrative records from Census data, I find that this observation also holds for the last four recessions in the United States. I also present suggestive evidence that financial frictions play an important role in determining the types of firms that are born at different stages of the business cycle. I then develop a general equilibrium model in which firms choose their managers’ span of control at birth. Firms that choose larger spans of control grow faster and eventually get to be larger, and in this sense have a larger target size. Financial frictions in the form of collateral constraints slow the rate at which firms reach their target size. It takes firms longer to get up to scale when collateral constraints tighten; therefore, businesses with the largest target size are affected disproportionately more. Thus, fewer entrepreneurs find it profitable to choose larger projects when financial conditions deteriorate. Using Bayesian methods, I estimate the model using micro and aggregate data from the United Kingdom. I find that financial shocks account for over 80% of fluctuations in the formation of businesses with a large target size, and TFP and labor wedge shocks account for the remaining 20%. An independently estimated version of the model with no choice over the span of control needs larger aggregate shocks in order to account for the same data series, suggesting that the intensive margin of business formation is important at business cycle frequencies. The model with the choice over the span of control generates an empirically relevant and non-targeted collapse in the right tail of the cumulative growth distribution among firms started in recessions, while the model without such a choice does not. The paper also discusses implications for micro-targeted government stimulus policies. |
| Keywords: | Business cycles, firm dynamics |
| JEL: | E23 E32 H25 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:20-09&r=all |
| By: | Xavier Raurich (Departament de Teoria Econòmica and CREB Universitat de Barcelona - Departament de Teoria Econòmica and CREB Universitat de Barcelona); Thomas Seegmuller (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: | The aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones. A three-period lived overlapping generations model allows us to make this distinction. Agents have a portfolio decision. When young, they can invest in human capital that is a productive long term investment that provides a return during the following two periods. When young or in the middle age, they can invest in a bubble. Young individuals can also borrow on a credit market to finance the productive investment. However, the amount borrowed is limited by a credit constraint. We show that the existence of a stationary bubble raises productive investment and production when the bubleless economy is credit constrained and dynamically efficient. Indeed, young agents sell short the bubble to increase productive investments, whereas traders at middle age transfer wealth to old age. The bubble allows to relax the credit constraint. We outline that a permanent technological shock inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital, production and the bubble size. We use our framework to discuss the effect on the occurrence of bubbles of financial regulation and fiscal policy. |
| Keywords: | Bubble,Efficiency,Vintage capital,Credit,Short sellers,Overlapping generations |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02010648&r=all |
| By: | Jose Carreno |
| Abstract: | The United States has been experiencing a slowdown in productivity growth for more than a decade. I exploit geographic variation across U.S. Metropolitan Statistical Areas (MSAs) to investigate the link between the 2006-2012 decline in house prices (the housing bust) and the productivity slowdown. Instrumental variable estimates support a causal relationship between the housing bust and the productivity slowdown. The results imply that one standard deviation decline in house prices translates into an increment of the productivity gap -- i.e. how much an MSA would have to grow to catch up with the trend -- by 6.9p.p., where the average gap is 14.51%. Using a newly-constructed capital expenditures measure at the MSA level, I find that the long investment slump that came out of the Great Recession explains an important part of this effect. Next, I document that the housing bust led to the investment slump and, ultimately, the productivity slowdown, mostly through the collapse in consumption expenditures that followed the bust. Lastly, I construct a quantitative general equilibrium model that rationalizes these empirical findings, and find that the housing bust is behind roughly 50 percent of the productivity slowdown. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:20-04&r=all |
| By: | Klaus Adam; Michael Woodford |
| Abstract: | We analytically characterize optimal monetary policy for an augmented New Keynesian 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. |
| Keywords: | robust policy design, leaning against housing prices, distorted expectations |
| JEL: | D81 D84 E52 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8127&r=all |
| By: | Klaus Adam; Michael Woodford |
| Abstract: | We analytically characterize optimal monetary policy for an augmented New Keynesian 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” in terms of inflation and the output gap, that makes no reference to housing prices. If instead 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 will also depend on housing prices. For empirically realistic cases, robustness requires the central bank to “lean against” housing prices, i.e., to adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap following unexpected housing price increases (decreases). Notably, robustly optimal policy does not require that the central bank distinguish between “fundamental” and “non-fundamental” movements in housing prices. |
| JEL: | C61 E52 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26833&r=all |
| By: | Marla Ripoll |
| Abstract: | We investigate what accounts for the observed international differences in schooling and fertility,in particular the role of TFP, age-dependent mortality rates and public education policies.We use a generalized version of the Barro-Becker model that: (i) includes accumulation ofhuman capital; (ii) allows for separate roles for intertemporal substitution, intergenerationalsubstitution, and mortality risk aversion; and (iii) considers intergenerational financial frictions.We calibrate the model to a cross-section of countries in 2013. We find that while differences inTFP account for a large fraction of the dispersion in schooling, fertility and income per capita,public education subsidies play a major role. Public education spending per pupil mattersrelatively more in explaining the dispersion of fertility, while both the amount spent per pupil andthe duration (years) of the subsidy are important in accounting for the dispersion of schooling.Eliminating public education subsidies results in an increase in average fertility, a decrease inhuman capital and income per capita, and an increase in the dispersion of schooling, fertilityand income. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:6874&r=all |
| By: | Juan Carlos Cordoba (Iowa State University); Xiying Liu; Marla Ripoll (University of Pittsburgh) |
| Abstract: | We investigate what accounts for the observed international differences in schooling and fertility, in particular the role of TFP, age-dependent mortality rates and public education policies. We use a generalized version of the Barro-Becker model that: (i) includes accumulation of human capital; (ii) allows for separate roles for intertemporal substitution, intergenerational substitution, and mortality risk aversion; and (iii) considers intergenerational financial frictions. We calibrate the model to a cross-section of countries in 2013. We find that while differences in TFP account for a large fraction of the dispersion in schooling, fertility and income per capita, public education subsidies play a major role. Public education spending per pupil matters relatively more in explaining the dispersion of fertility, while both the amount spent per pupil and the duration (years) of the subsidy are important in accounting for the dispersion of schooling. Eliminating public education subsidies results in an increase in average fertility, a decrease in human capital and income per capita, and an increase in the dispersion of schooling, fertility and income. |
| Keywords: | public education subsidies, intergenerational financial frictions, fertility, mortality, schooling, parental altruism, TFP |
| JEL: | I25 J13 O50 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2020-013&r=all |
| By: | Sangyup Choi (Yonsei University); Myungkyu Shim (Yonsei University) |
| Abstract: | This paper establishes new stylized facts about labor market dynamics in developing economies and proposes a simple theory to explain them. We first show that the response of hours worked and employment to a technology shock—identified by a structural VAR model with long-run restrictions—is smaller in developing economies than in advanced economies. We then present the evidence that the level of PPP-adjusted income per capita—a proxy for the importance of subsistence consumption—is strongly and robustly correlated with the relative variability of employment and consumption to output across countries, while other structural characteristics are not. We argue that an RBC model augmented with subsistence consumption can account for the several salient features of business cycle fluctuations in developing economies, including their distinct labor market dynamics under technology shocks. |
| Keywords: | Business cycles; Developing economies; Subsistence consumption; Labor market dynamics; In- come effect; Long-run restrictions |
| JEL: | E21 E32 F44 J20 |
| Date: | 2020–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2020_002&r=all |
| By: | Mehran Ebrahimian; Jessica Wachter |
| Abstract: | What is the connection between financing constraints and the equity premium? To answer this question, we build a model with inalienable human capital, in which investors finance individuals who can potentially become skilled. Though investment in skill is always optimal, it does not take place in some states of the world, due to moral hazard. In other states of the world, individuals acquire skill; however outside investors and individuals inefficiently share risk. We show that this simple moral hazard problem and the resultant financing friction leads to a realistic equity premium, a low riskfree rate, and severe negative consequences for distribution of wealth and for welfare. When investment fails to take place, the economy enters an endogenous disaster state. We show that the possibility of these disaster states distorts risk prices, even under calibrations in which they never occur in equilibrium. |
| JEL: | G12 G32 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26823&r=all |
| By: | Xiaoqing Zhou |
| Abstract: | The Housing Provident Fund (HPF) is the largest public housing program in China. It was created in 1999 to enhance homeownership. This program involves a mandatory saving scheme based on labor income. Past deposits are refunded when the worker purchases a house or retires. Moreover, the program provides mortgages at subsidized rates to facilitate these home purchases. I calibrate a heterogeneous-agent life-cycle model to quantify the effects of these policies. My analysis shows that a housing program with these features is expected to raise the rate of homeownership by 8.7 percentage points and to increase the average home size by 20%. I discuss the economic mechanisms by which these outcomes are achieved and which features of the HPF program are most effective. I also consider several extensions of the model such as requiring employers to contribute to the program and allowing renters to withdraw funds from the HPF. |
| Keywords: | Public policy; Housing Provident Fund; Policy evaluation; China; Life-cycle model; Homeownership |
| JEL: | E2 E6 H3 R2 R3 |
| Date: | 2020–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:87678&r=all |
| By: | Saroj Bhattarai; Konstantin Kucheryavyy |
| Abstract: | We present a unified dynamic framework to study the interconnections between international trade and business cycle models. We prove an aggregate equivalence between a competitive, representative firm model that has aggregate production externalities and dynamic trade models that feature monopolistic competition, endogenous entry, and heterogeneous firms. The production externalities in the representative firm model have to be introduced in the intermediate and final good sectors so that the model is isomorphic to dynamic trade models that embody love-of-variety and selection effects. In a quantitative exercise with multiple shocks, we show that to improve the fit of the dynamic trade models with the data, the most important ingredient is negative capital externality in the intermediate good sector. This presents a puzzle for the literature as standard dynamic trade models provide micro-foundations for positive capital externality. |
| Keywords: | international business cycles, dynamic trade models, heterogeneous firms, production externalities, monopolistic competition, export costs, entry costs |
| JEL: | F12 F41 F44 F32 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8130&r=all |
| By: | Joanna Tyrowicz (University of Regensburg, Germany; FAME|GRAPE; University of Warsaw, Poland; IZA; Rimini Centre for Economic Analysis); Krzysztof Makarski (FAME|GRAPE; Warsaw School of Economics, Poland); Artur Rutkowski (FAME|GRAPE) |
| Abstract: | Financing consumption of the elderly in the face of the projected increase in life expectancy is a key challenge for economic policy. Moreover, standard structural models with fully rational agents suggest that about 50-60 percent of old-age consumption is financed with voluntary savings, even in the presence of a fairly generous public pension system. This is clearly inconsistent with either the data, or the alarming simulations of old-age poverty in the years to come. Old-age saving (OAS) schemes are widely used policy instruments to address this challenge, but structural evaluations of such instruments remain rare. We develop a framework with incompletely rational agents: lacking financial literacy and experiencing commitment difficulties. We study a broad selection of OAS schemes and find that they raise welfare of financially illiterate agents and to a lesser extent improve welfare of agents with a high degree of time inconsistency. They also reduce the incidence of poverty at old age. Unfortunately, these instruments are fiscally costly, induce considerable crowd-out and direct fiscal transfers mostly to those agents, who need it the least. |
| Keywords: | old-age savings, incomplete rationality, welfare effects |
| JEL: | H31 H55 I38 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:20-06&r=all |
| By: | Shang-Jin Wei; Jun Nie; Qingyuan Du |
| Abstract: | We propose a new channel to explain why developing countries may fail to benefit from financial globalization, based on labor market institutions. In our model, financial openness in a developing country with a rigid labor market leads to capital outflow, and both employment and output fall. In contrast, financial openness in a developing country with a flexible labor market benefits the country. Our model suggests that enhancing labor market flexibility is a complementary reform for developing countries opening capital accounts. |
| Keywords: | Developing Countries; Capital Account LIberalization; Labor Market Rigidity; Financial Openness; Unemployment |
| JEL: | E24 F41 F44 J08 |
| Date: | 2019–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:87673&r=all |
| By: | Garibaldi, Pietro (University of Turin); Gomes, Pedro Maia (Birkbeck, University of London); Sopraseuth, Thepthida (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 these jobs, 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. |
| Keywords: | education mismatch, skill mismatch |
| JEL: | E24 J24 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12974&r=all |
| By: | Yakhin, Yossi |
| Abstract: | Breaking the uncovered interest rate parity (UIP) condition is essential to accounting for the empirical behavior of exchange rates, and is a prerequisite for theoretical analysis of sterilized foreign exchange interventions. Gabaix and Maggiori (2015) account for some of the long-standing empirical exchange rate puzzles by introducing financial intermediaries that are willing to absorb international saving imbalances for a premium, thereby deviating from the UIP. In another important contribution, Fanelli and Straub (2019) lay down the principles for foreign exchange interventions. In their model, regulatory exposure limits and participation cost in the international financial markets drive a wedge in the UIP. This paper demonstrates that, to a first order approximation, these models are equivalent to a reduced-form portfolio adjustment cost model, as in Schmitt-Grohé and Uribe (2003). Therefore, to the extent that one is only concerned with first-order dynamics and second moments, there is no gain from adopting the rich microstructure of either models -- a simple portfolio adjustment cost is just as good. |
| Keywords: | UIP; Financial Frictions; Open Economy Macroeconomics |
| JEL: | E58 F31 F41 |
| Date: | 2019–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99267&r=all |
| By: | Gerke, Rafael; Giesen, Sebastian; Scheer, F. Alexander |
| Abstract: | We quantify the macroeconomic effects of interest rate forward guidance in an estimated medium-scale two-agent New Keynesian (TANK) model. In general, such models can dampen or amplify the power of forward guidance compared to a representative agent model. Our empirical estimates indicate a dampening, as there is sufficient countercyclical redistribution.An interaction with asset purchases gives rise to non-linear effects that depend on the horizon of forward guidance. |
| Keywords: | Forward Guidance,Hand-to-mouth households,Redistribution,Bayesian Estimation,Asset purchase program |
| JEL: | E44 E52 E62 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:032020&r=all |
| By: | Miguel Faria-e-Castro |
| Abstract: | I use a dynamic stochastic general equilibrium model to study the effects of the 2019-20 coronavirus pandemic in the United States. The pandemic is modeled as a large negative shock to the utility of consumption of contact-intensive services. General equilibrium forces propagate this negative shock to the non-services and financial sectors, triggering a deep recession. I use a calibrated version of the model to analyze different types of fiscal policies: (i) government purchases, (ii) income tax cuts, (iii) unemployment insurance benefits, (iv) unconditional transfers, and (v) liquidity assistance to services firms. I find that UI benefits are the most effective tool to stabilize income for borrowers, who are the hardest hit, while savers favor unconditional transfers. Liquidity assistance programs are effective if the policy objective is to stabilize employment in the affected sector. |
| Keywords: | fiscal policy; financial stability; pandemic |
| JEL: | E6 G01 H0 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:87616&r=all |