nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒04‒27
twenty-two papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Are Government Bonds Net Wealth or a Liability? ---Optimal Debt and Taxes in an OLG Model with Uninsurable Income Risk By YiLi Chien; Yi Wen; HsinJung Wu
  2. Should Germany Have Built a New Wall? Macroeconomic Lessons from the 2015-18 Refugee Wave By Christopher Busch; Dirk Krueger; Alexander Ludwig; Irina Popova; Zainab Iftikhar
  3. Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach By Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
  4. Switching Volatility in a Nonlinear Open Economy By Benchimol, Jonathan; Ivashchenko, Sergey
  5. The Demand for Trade Protection over the Business Cycle By Stéphane AURAY; Michel B. DEVEREUX; Aurélien EYQUEM
  6. Complementarity and Macroeconomic Uncertainty By Tyler Atkinson; Michael D. Plante; Alexander W. Richter; Nathaniel Throckmorton
  7. The Micro and Macro of Managerial Beliefs By Barrero, Jose Maria
  8. Comparative Advantage and Moonlighting By Stéphane AURAY; David L. FULLER; Guillaume VANDENBROUCKE
  9. Endogenous lifetime, intergenerational mobility and economic development By Aso, Hiroki
  10. Differential Fertility, Intergenerational Mobility and the Process of Economic Development By Aso, Hiroki
  11. Growth and instability in a small open economy with debt By Leonor Modesto; Carine Nourry; Thomas Seegmuller; Alain Venditti
  12. Are the liquidity and collateral roles of asset bubbles different? By Lise Clain-Chamosset-Yvrard; Xavier Raurich; Thomas Seegmuller
  13. Financial Crisis and Slow Recovery with Bayesian Learning Agents By Ryo Horii; Yoshiyasu Ono
  14. The Economic Outcomes of an Ethnic Minority: The Role of Barriers By Kasir, Nitsa Kaliner; Yashiv, Eran
  15. Health versus Wealth: On the Distributional Effects of Controlling a Pandemic By Andrew Glover; Jonathan Heathcote; Dirk Krueger; Jose-Victor Rios-Rull
  16. Fiscal expenditure spillovers in the euro area: an empirical and model-based assessment By Alloza, Mario; Ferdinandusse, Marien; Jacquinot, Pascal; Schmidt, Katja
  17. Behavioral Equilibrium and Evolutionary Dynamics in Asset Markets By Igor V. Evstigneev; Thorsten Hens; Valeriya Potapova; Klaus Reiner Schenk-Hoppé
  18. A framework for assessing the costs of pension reform reversals By Baksa, Daniel; Munkacsi, Zsuzsa; Nerlich, Carolin
  19. Capacity Choice, Monetary Trade, and the Cost of Inflation By Garth Baughman; Stanislav Rabinovich
  20. News and Uncertainty about COVID-19: Survey Evidence and Short-Run Economic Impact By Alexander Dietrich; Keith Kuester; Gernot J. Muller; Raphael Schoenle
  21. Monetary policy transmission with downward interest rate rigidity By Grégory LEVIEUGE; Jean-Guillaume SAHUC
  22. A Tale of Two Major Postwar Business Cycle Episodes By Hashmat Khan; Louis Phaneuf; Jean-Gardy Victor

  1. By: YiLi Chien; Yi Wen; HsinJung Wu
    Abstract: The rapidly growing national debt in the U.S. since the 1970s has alarmed and intrigued the academic world. Consequently, the concept of dynamic (in)efficiency in an overlapping generations (OLG) world and the importance of the heterogeneous-agents and incomplete markets (HAIM) hypothesis to justify a high debt-to-GDP ratio have been extensively studied. Two important consensus emerge from this literature: (i) The optimal quantity of public debt is positive—due to insufficient private liquidity to support private saving and investment (see, e.g., Barro (1974), Woodford (1990), and Aiyagari and McGrattan (1998)); (ii) the optimal capital tax is positive—because of precautionary saving and the consequent failure of the modified golden rule (see, e.g., Aiyagari (1995)). But these two consensus views are seldom derived jointly in the same model, so the dynamic relationship between optimal debt and optimal taxation remains unclear in HAIM models, especially considering that the optimal quantity of debt must be judged by the golden-rule saving rate and any debt must be financed by future taxes. We use a primal Ramsey approach to analytically characterize optimal debt and tax policy in an OLG-HAIM model. We show that since precautionary saving and oversaving are not necessarily the same thing, they have different policy implications—the Ramsey planner opts to issue bonds to crowd out private savings if and only if a competitive equilibrium is dynamically inefficient regardless of precautionary savings. In other words, optimal debt can be negative even if households cannot insure themselves against idiosyncratic risk under borrowing constraints. The sign and magnitude of the optimal quantity of debt in turn dictate the sign and magnitude of optimal taxes as well as the priority order of tax tools such as a labor tax vs. a capital tax.
    Keywords: Role of Public Debt; Optimal Fiscal Policy; Ramsey Problem; Overlapping Generation; Incomplete Markets
    JEL: E13 E62 H21 H30
    Date: 2020–04–08
  2. By: Christopher Busch; Dirk Krueger; Alexander Ludwig; Irina Popova; Zainab Iftikhar
    Abstract: In 2015-2016 Germany experienced a wave of predominantly low-skilled refugee immigration. We evaluate its macroeconomic and distributional effects using a quantitative overlapping generations model calibrated using German micro data to replicate education and productivity differentials between foreign born and native workers. Workers are modelled as imperfect substitutes in aggregate production leading to endogenous wage differentials. We simulate the dynamic effects of this refugee wave, with specific focus on the welfare impact on low skilled natives. Our results indicate that the small losses this group suffers can be compensated by welfare gains of other parts of the native population.
    JEL: E20 F22 H55
    Date: 2020–04
  3. By: Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
    Abstract: We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.
    Keywords: Financial Crises; Endogenous Regime-Switching; Bayesian Estimation; Business Cycles; Mexico; Occasionally Binding Constraints
    JEL: C11 E3 F41 G01
    Date: 2020–03–30
  4. By: Benchimol, Jonathan; Ivashchenko, Sergey
    Abstract: Uncertainty about a regime’s economy can change drastically around a crisis. An imported crisis such as the global financial crisis in the Euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the Euro area and United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with in calm periods. We describe how US shocks from both the real economy and financial markets affected the Euro area economy and how bond reallocation occurred between short- and long-term maturities during the global financial crisis. Importantly, the estimated nonlinearities when domestic and foreign financial markets influence the economy should not be neglected. The nonlinear behavior of market-related variables highlights the importance of higher-order estimation for providing additional interpretations to policymakers.
    Keywords: DSGE; Volatility Shocks; Markov Switching; Open Economy; Financial Crisis; Nonlinearities
    JEL: C61 E32 F21 F41
    Date: 2020–04
  5. By: Stéphane AURAY (CREST-Ensai and Université du Littoral Côte d'Opale. ENSAI, Campus de Ker-Lann, Rue Blaise Pascal, BP37203, 35172 BRUZ Cedex, France); Michel B. DEVEREUX (Vancouver School of Economics, University of British Columbia 6000, Iona Drive, Vancouver B.C. CANADA V6T 1L4, CEPR and NBER); Aurélien EYQUEM (Univ Lyon, Université Lumière Lyon 2, GATE L-SE UMR 5824, and Institut Universitaire de France. 93 Chemin des Mouilles, BP167, 69131 Ecully Cedex, France)
    Abstract: We build measures of the demand for trade protection, and relate it to permanent productivity and transitory monetary policy shocks identified from the U.S. monthly and quarterly data. The demand for protection is counter-cyclical conditional on productivity shocks and pro-cyclical conditional on monetary policy shocks. We then layout a two-country dynamic general equilibrium model with trade in intermediate and final goods, sticky prices, incomplete financial markets and endogenous monetary policy rules, and propose a repeated non-cooperative policy game that determines tariffs endogenously. These tradepolicies (i) are consistent with small but positive tariffs, as in the data, and (ii) fit empirical evidence about the cyclical pattern of the demand for trade protection under a wide range of plausible model calibrations. We then use the model to quantify the macroeconomic and welfare effects of a change in tariff setters' preferences that induces tariffs to rise in both countries.
    Keywords: Protectionism, Tariffs, Business Cycle.
    JEL: F30 F40 F41
    Date: 2018–07–01
  6. By: Tyler Atkinson; Michael D. Plante; Alexander W. Richter; Nathaniel Throckmorton
    Abstract: Macroeconomic uncertainty—the conditional volatility of the unforecastable component of a future value of a time series—shows considerable variation in the data. A typical assumption in business cycle models is that production is Cobb-Douglas. Under that assumption, this paper shows there is usually little, if any, endogenous variation in output uncertainty, and first moment shocks have similar effects in all states of the economy. When the model departs from Cobb-Douglas production and assumes capital and labor are gross complements, first-moment shocks have state-dependent effects and can cause meaningful variation in uncertainty compared to the data. Estimating several variants of a nonlinear real business cycle model reveals the data strongly prefers a model with high complementarity between capital and labor inputs.
    Keywords: State-Dependent; Time-Varying Volatility; CES Production; Nonlinear Estimation
    JEL: C15 D81 E32 E37
    Date: 2020–03–31
  7. By: Barrero, Jose Maria (Instituto Tecnologico Autonomo de Mexico)
    Abstract: This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not over-optimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise (overconfident): they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications of these facts, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1 percent of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5 to 2.3 percent relative to the rational expectations equilibrium. These findings suggest overreaction may amplify asset-price and business cycle fluctuations.
    Date: 2020–04–09
  8. By: Stéphane AURAY (CREST-ENSAI and ULCO); David L. FULLER (University of Wisconsin-Oshkosh); Guillaume VANDENBROUCKE (Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166, USA)
    Abstract: The prevalence of multiple job holders in the U.S. data is trending down since the mid 1990s, and cross-sectional data reveal two seemingly contradictory patterns regarding multiple job holders: (i) conditional on education the most productive workers are the least likely to hold multiple jobs; (ii) the most educated workers are the most likely to hold multiple jobs, even though they are the most productive. We develop an equilibrium model of the labor market to understand these facts. A dominating income effect explains both the negative correlation with productivity and the downward trend overtime, while a higher part-to-fulltime pay differential for skilled workers (a comparative advantage) explains the positive correlation with education. We provide empirical evidence of the comparative advantage using CPS data. We calibrate the model to 1994 and assess its ability to reproduce the 2017 data. There are three exogenous driving forces: productivity, number of children and the proportion of skilled workers. The model accounts for 64.1% of the moonlighting trend for college-educated workers, and 96.7% for high school-educated workers.
    Keywords: Macroeconomics, labor supply, multiple job holders, productivity, full-time job, part-time job, comparative advantage, income effect.
    JEL: E1 J2 J22 J24 O4
    Date: 2020–03–01
  9. By: Aso, Hiroki
    Abstract: This paper analyzes the effects of endogenous lifetime on the relationship between intergenerational mobility and economic development in an overlapping generations framework. We assume that an individual’s lifetime depends on health status, which improves with economic development. Increase in lifetime encourages incentives of education investment while decreasing transfer, which is the funding source for education. The dynamics of intergenerational mobility and income inequality depend crucially on lifetime. If an increase in lifetime with economic development is sufficiently small, the mobility monotonically increases while income inequality decreases. However, if lifetime increases rapidly with economic development, the mobility and income inequality exhibit cyclical, and even chaotic behavior. In fact, these various patterns of intergenerational mobility have been observed in developed countries.
    Keywords: Endogenous lifetime, Intergenerational mobility, Economic development, Income inequality
    JEL: I15 I24 J62
    Date: 2020–03–25
  10. By: Aso, Hiroki
    Abstract: This paper analyzes the effects of population dynamics with differential fertility between the educated and the uneducated on intergenerational mobility, income inequality and economic development in an overlapping generations framework. Population dynamics has two effects on the economy: the direct effect on the educated share through changing in population size of the economy as whole, and the indirect effect on the educated share through decreasing/increasing transfer per child. When population growth increases sufficiently, the mobility and income inequality exhibit cyclical behavior due to rapidly decreasing transfer per child and population size. In contrast, when population growth decreases sufficiently, the mobility and income inequality monotonically approach steady state and the economy has low steady state with high population growth and income inequality, and high steady state with low population growth and income inequality. As a result, population dynamics with economic development plays crucial role in the transitional dynamics of mobility.
    Keywords: Differential the fertility, Intergenerational mobility, Economic development, Income inequality
    JEL: I24 I25 J13 J62
    Date: 2020–03–23
  11. By: Leonor Modesto (UCP, Catolica Lisbon School of Business and Economics, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics); Carine Nourry (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); 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); Alain Venditti (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, EDHEC - EDHEC Business School)
    Abstract: The relationship between public debt, growth and volatility is investigated in a Barro-type (1990) endogenous growth model, with three main features: we consider a small open economy, international borrowing is constrained and households have taste for domestic public debt. Therefore, capital, public debt and the international asset are not perfect substitutes and the economy is characterized by an investment multiplier. Whatever the level of the debt-output ratio, the existing BGP features expectation-driven fluctuations. If the debt-output ratio is low enough, there is also a second BGP with a lower growth rate. Hence, lower debt does not stabilize the economy with credit market imperfections. However, a high enough taste for domestic public debt may rule out the BGP with lower growth. This means that if the share of public debt hold by domestic households is high enough, global indeterminacy does not occur.
    Keywords: small open economy,public debt,credit constraint,indeterminacy
    Date: 2020–04
  12. By: Lise Clain-Chamosset-Yvrard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xavier Raurich (University of Barcelona, Department of Economics); 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: Several recent papers introduce different mechanisms to explain why asset bubbles are observed in periods of larger growth. These papers share common assumptions, heterogeneity among traders and credit market imperfection , but differ in the role of the bubble, used to provide liquidities or as collateral in a borrowing constraint. In this paper, we introduce heterogeneous traders by considering an overlapping generations model with households living three periods. Young households cannot invest in capital, while adults have access to investment and face a borrowing constraint. Introducing bubbles in a quite general way, encompassing the different roles they have in the existing literature, we show that the bubble may enhance growth when the borrowing constraint is binding. More significantly, our results do not depend on the-liquidity or collateral-role attributed to the bubble. We finally extend our analysis to a stochas-tic bubble, which may burst with a positive probability. Because credit and bubble are no more perfectly substitutable assets, the liquidity and collateral roles of the bubble are not equivalent. Growth is larger when bubbles play the liquidity role, because the burst of a bubble used for liquidity is less damaging to agents who invest in capital.
    Keywords: Liquidity,Bubble,Collateral,Crowding-in effect,Growth
    Date: 2020–04–07
  13. By: Ryo Horii; Yoshiyasu Ono
    Abstract: In a simple continuous-time model where the learning process affects the willingness to hold liquidity, we provide an intuitive explanation of business cycle asymmetry and post-crisis slow recovery. When observing a liquidity shock, individuals rationally increase their subjective probability of re-encountering it. It leads to an upward jump in liquidity preference and a discrete fall in consumption. Conversely, as a period without shocks continues, they gradually decrease the subjective probability, reduce liquidity preference, and increase consumption. The recovery process is particularly slow after many shocks are observed within a short period because people do not easily change their pessimistic view.
    Date: 2020–03
  14. By: Kasir, Nitsa Kaliner (Haredi Institute for Policy Studies); Yashiv, Eran (Tel Aviv University)
    Abstract: The Arab population in Israel constitutes an ethnic minority, at around 20% of the population. The economy of this minority is characterized by inferior outcomes relative to the Jewish majority by all indicators, including employment, wages, occupational status, social welfare, education, and housing. This paper reviews key data facts and presents a model of barriers to integration facing Arabs in Israel, taking it to the data. The empirical analysis, based on a general equilibrium model of occupational choice with optimizing agents and barriers, points to an increase over time in barriers to the acquisition of human capital in highly skilled occupations, and, concurrently, a reduction in labor market barriers in all occupations. The analysis offers insights relevant to other developed economies with large ethnic minorities.
    Keywords: ethnic minority, economic outcomes, human capital barriers, labor market barriers, occupational choice
    JEL: J15 J24
    Date: 2020–04
  15. By: Andrew Glover (Federal Reserve Bank of Kansas City); Jonathan Heathcote (Federal Reserve Bank of Minneapolis and CEPR); Dirk Krueger (University of Pennsylvania and CEPR); Jose-Victor Rios-Rull (University of Pennsylvania, UCL, CAERP, CEPR and NBER)
    Abstract: To slow the spread of COVID-19, many countries are shutting down non-essential sectors of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have the most to lose. In this paper, we build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young and retired), by sector (basic and luxury), and by health status. Disease transmission occurs in the workplace, in consumption activities, at home, and in hospitals. We study the optimal economic mitigation policy of a utilitarian government that can redistribute across individuals, but where such redistribution is costly. We show that optimal redistribution and mitigation policies interact, and reflect a compromise between the strongly diverging preferred policy paths of different subgroups of the population. We find that the shutdown in place on April 12 is too extensive, but that a partial shutdown should remain in place through July.Length: 81 pages
    Keywords: COVID-19; Economic Policy; Redistribution
    Date: 2020–04–18
  16. By: Alloza, Mario; Ferdinandusse, Marien; Jacquinot, Pascal; Schmidt, Katja
    Abstract: The paper describes the main transmission channels of the spillovers of national fiscal policies to other countries within the euro area and investigates their magnitude using different models. In the context of Economic and Monetary Union (EMU), fiscal spillovers are relevant for the accurate assessment of the cyclical outlook in euro area countries, as well as in the debates on a coordinated change in the euro area fiscal stance and on a euro area fiscal capacity. The paper focuses on spillovers from expenditure-based expansions by presenting two complementary exercises. The first is an empirical investigation of spillovers based on a new, long quarterly dataset for the largest euro area countries and on new estimates based on annual data for a panel of 11 euro area countries. The second uses a multi-country general equilibrium model with a rich fiscal specification and the capacity to analyse trade spillovers. Fiscal spillovers are found to be heterogeneous but generally positive among euro area countries. The reaction of interest rates to fiscal expansions is an important determinant of the magnitude of spillovers.
    Keywords: DSGE., fiscal policy, fiscal spillovers, monetary policy, VAR
    Date: 2020–04
  17. By: Igor V. Evstigneev (University of Manchester - Economics, School of Social Sciences); Thorsten Hens (University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute); Valeriya Potapova (University of Manchester - Economics, School of Social Sciences); Klaus Reiner Schenk-Hoppé (University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance)
    Abstract: This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral and evolutionary principles. The core of the model is a non-traditional game-theoretic framework combining elements of stochastic dynamic games and evolutionary game theory. Its key characteristic feature is that it relies only on objectively observable market data and does not use hidden individual agents' characteristics (such as their utilities and beliefs). A central goal of the study is to identify an investment strategy that allows an investor to survive in the market selection process, i.e., to keep with probability one a strictly positive, bounded away from zero share of market wealth over an infinite time horizon, irrespective of the strategies used by the other players. The main results show that under very general assumptions, such a strategy exists, is asymptotically unique and easily computable.
    Keywords: Evolutionary finance, Behavioral finance, Stochastic dynamic games, DSGE, survival portfolio rules.
    JEL: C73 D53 D58 G11 G02
    Date: 2020–04
  18. By: Baksa, Daniel; Munkacsi, Zsuzsa; Nerlich, Carolin
    Abstract: Several European countries are currently considering reversing parts of their pension reforms that were adopted previously to improve sustainability. In this paper we present a framework that allows us to quantify the macroeconomic and fiscal costs of such reversals. We thereby integrate the country-specific information from the latest Ageing Report into a dynamic general equilibrium model with overlapping generations. Focusing on Germany and Slovakia as country cases, our model replicates the Ageing Report's pension expenditure projections very well. We calculate the macroeconomic impact of first the additional pension reforms needed to contain the public debt pressures arising from population ageing and second the costs of reform reversals. Our model results show that undoing past pension reforms would generate substantial adverse macroeconomic costs and could pose challenges for fiscal sustainability. JEL Classification: H55, J11, J26
    Keywords: Ageing Report, overlapping generations model, population ageing, public pension, reform reversals
    Date: 2020–04
  19. By: Garth Baughman; Stanislav Rabinovich
    Abstract: Firms often make production decisions before meeting a buyer. We incorporate this often-overlooked fact into an otherwise standard monetary search model and show that it has important implications for the set of equilibria, efficiency, and the cost of inflation. Our model features a strategic complementarity between the buyers' ex ante choice of money balances and sellers' ex ante choice of productive capacity. When resale value of unsold inventories is high, sellers carry excess capacity and the equilibrium is unique. But, when resale value is low, there is a continuum of equilibria, all of which are inefficient and welfare-ranked. Effects of inflation are highly nonlinear. When inflation is high, the buyer's money holdings bind, and inflation therefore reduces trade through a standard real-balance channel. When inflation is low, the seller's capacity constraint binds, real balances have no effect at the margin, and inflation has no effect on output or welfare.
    Keywords: Search; Money; New monetarism; Inflation
    JEL: D43 E31 E40
    Date: 2020–02–24
  20. By: Alexander Dietrich; Keith Kuester; Gernot J. Muller; Raphael Schoenle
    Abstract: We survey households about their expectations of the economic fallout of the COVID-19 pandemic, in real time and at daily frequency. Our baseline question asks about the expected impact on output and inflation over a one-year horizon. Starting on March 10, the median response suggests that the expected output loss is still moderate. This changes over the course of three weeks: At the end of March, the expected loss amounts to some 15 percent. Meanwhile, the pandemic is expected to raise inflation considerably. The uncertainty about these effects is very large. In the second part of the paper we feed the survey data into a New Keynesian business cycle model. Because the economic costs of the pandemic have not fully materialized yet but are nonetheless (a) anticipated and (b) uncertain, private expenditure collapses, thereby amplifying and bringing forward in time the economic costs of the pandemic. The short-run economic impact of the pandemic depends critically on whether monetary policy accommodates the drop in the natural rate of interest or not.
    Keywords: corona; zero lower bound; uncertainty; news shocks; COVID-19; monetary policy; household expectations; natural rate; survey
    JEL: C83 E43 E52
    Date: 2020–04–09
  21. By: Grégory LEVIEUGE; Jean-Guillaume SAHUC
    Date: 2020
  22. By: Hashmat Khan (Department of Economics, Carleton University); Louis Phaneuf (Université du Québec à Montréal); Jean-Gardy Victor (Université du Québec à Montréal)
    Abstract: We offer a tale of two major postwar business cycle episodes: the pre-1980s and the post-1982s prior to the Great Recession. We revisit the sources of business cycles and the reasons for the large variations in aggregate volatility from the first to the second episode. Using a medium-scale DSGE model where monetary policy potentially has cost-channel effects, we first show the Fed most likely targeted deviations of output growth from trend growth, not the output gap, for measure of economic activity. When estimating our model with a policy rule reacting to output growth with Bayesian techniques, we find the US economy was in a state of determinacy prior to 1980 and after 1982. Thus, aggregate instability before 1980 did not result from self-fulfilling changes in inflation expectations. Our evidence shows the Fed reacted more strongly to inflation after 1982. Based on sub-period estimates, we find that shocks to the marginal efficiency of investment largely drove the cyclical variance of output growth prior to 1980 (61%), while they have seen their importance falls dramatically after 1982 (19%). When looking at the sources of greater macroeconomic stability during the second episode, we find no strong support for the “good-luck hypothesis†. Change in nominal wage flexibility largely drove the decline in output growth volatility, while change in monetary policy was a key factor driving lower inflation variability.
    Keywords: Conventional Monetary Policy; Determinacy; Bayesian Estimation; Sources of Business Cycle; Changes in Aggregate Volatility
    JEL: E31 E32 E37
    Date: 2020–04–15

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