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on Dynamic General Equilibrium |
| By: | Tobias König |
| Abstract: | This paper studies the effects of labor market outcomes on firms’ loan demand and on credit intermediation. In a first step, I investigate how wages in the production sector affect bank net worth and the process of financial intermediation in partial equilibrium. Second, the role of the identified channels are studied in general equilibrium using a new- Keynesian DSGE-model with financial frictions and an endogenous financial accelerator mechanism. Third, I investigate how perfect and imperfect labor markets, in a setting with interactions between production factor costs and the intermediation of credit, affect the transmission mechanism of monetary policy. The analysis reveals that financial frictions reduce the factor demand elasticity of capital to a change in wages. This finding is relevant for the determination of optimal monetary policy, both for financial shocks and supply shocks inflation stabilization imposes high welfare costs. At the same time, stabilizing nominal wages becomes welfare beneficial by reducing both the volatility of the credit spread and the output gap. |
| Keywords: | Financial accelerator, monetary policy, nominal rigidities, factor costs |
| JEL: | E31 E44 E52 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1860&r=all |
| By: | Feng Dong (Tsinghua University); Jianjun Miao (Boston University); Pengfei Wang (Peking University) |
| Abstract: | We provide a model of rational bubbles in a DNK framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade bubble assets to raise their net worth. The bubble assets command a liquidity premium and can have a positive value. Monetary policy affects the conditions for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The leaning-against-the-wind interest rate policy reduces bubble volatility, but could raise inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule and exogenous shocks. |
| Keywords: | asset bubble, monetary policy, Dynamic New Keynesian model, credit constraints, multiple equilibria, sentiment |
| JEL: | E32 E44 E52 G12 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-336&r=all |
| By: | Paul Gomme |
| Abstract: | What are the likely effects of coronavirus-related restrictions on the labor market and the macroeconomy? What are the likely effects of government policies on the unemployment rate and output? In a complete working paper published at CIRANO, I develop a model to answer these questions. Labor markets search frictions are captured as follows: Unemployed workers searching for a job, and firm vacancies come together in a matching function that determines the number of new firm-worker pairing. The remainder of the macroeconomy in the model is based on neoclassical foundations. I feed into this model ‘educated guesses’ for the impact effects of four exogenous shocks; the shocks then dissipate over the 18 months that the coronavirus is likely to directly affect the economy. First, relative to the pre-coronavirus U.S. economy, the job separation probability initially quadrupled. While this is a rather large increase, on impact the job separation probability is not much higher than it was during the Great Recession. These separations are intended to reflect the outcome of lost revenues and the inability of workers to get to work in light of widespread lockdowns. To match the U.S. experience – a immediate and large increase in unemployment – the model simply needs such a large increase in separations. Second, match efficiency falls by 40%, capturing the difficulties workers and firms have in meeting when many firms are closed, and workers are restricted to their homes. Third, vacancy posting costs double. These costs capture a combination of the aforementioned difficulties firms have in recruiting when they are closed, and the inability of firms to obtain financing, some of which is used to pay for the up-front costs of recruiting. Finally, total factor productivity falls by 10%, capturing the loss in productivity of working from home, as well as disruptions to supply chains. By way of comparison, over the Great Recession, total factor productivity fell by 6.5%. When all four shocks are in play, absent a policy response, the outlook is dire: The model predicts that unemployment will peak at over 22.5% and output will fall by over 20%. |
| Keywords: | Labor Market Search Frictions,Coronavirus,Labor Market Policy, |
| Date: | 2020–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:cir:circah:2020pe-10&r=all |
| By: | Alexander Mihailov (Department of Economics, University of Reading) |
| Abstract: | This paper considers 3 scenarios regarding the duration of the COVID-19 pandemic lockdown, staying for 1, 2 or 3 quarters, and 2 types of exceptionally rare and devastating disruptions in employment modeled as adverse labor supply shocks, a temporary one with negligible loss in the labor force due to deaths or a permanent one, with significant loss from deaths. The temporary labor supply shock simulations delimit a lower bound, designed to match about 1/4 of the labor force unable to work, and an upper bound, matching about 3/4 of the labor force made economically inactive, broadly consistent with estimates. The permanent labor supply shock is designed to match, in 3 scenarios again, up to 1% loss of the labor force due to mortality, twice milder than the Spanish flu 2% death rate. Estimated calibrations of the Galí-Smets-Wouters (2012) model with indivisible labor for 5 major and most affected by the COVID-19 pandemic economies are simulated: the US, France, Germany, Italy and Spain. The simulations suggest that even in the most optimistic scenario of a brief (lasting for 1 quarter) and mild (with 1/4 of the labor force unable to work) lockdown, the loss of per-capita consumption (6-7% in annualized terms down from the long-run trend in the impact quarter) and per-capita output (3-4% down) will be quite damaging, but recoverable relatively quickly, in 1-2 years. In the most pessimistic simulated scenario of temporary loss the effects will be 10-15 times more devastating, and the loss of output and consumption will persist beyond 10-15 years. Permanent loss of up to 1.5 percentage points of per-capita consumption and output characterizes the simulated permanent labor supply shock. |
| Keywords: | COVID-19 pandemic, simulated macroeconomic effects, medium-scale New Keynesian DSGE models, indivisible labor, shocks to the disutility of labor supply, calibration according to Bayesian estimates |
| JEL: | C63 D58 E24 E27 E32 E37 |
| Date: | 2020–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2020-07&r=all |
| By: | Yavuz Arslan; Bulent Guler; Burhan Kuruscu |
| Abstract: | Can shifts in the credit supply generate a boom-bust cycle similar to the one observed in the US around 2008? To answer this question, we develop a general equilibrium model that combines a rich heterogeneous agent overlapping-generations structure of households who make housing tenure decisions and borrow through long-term mortgages, firms that finance their working capital through short-term loans from banks, and banks whose ability to intermediate funds depends on their capital. Using a calibrated version of this framework, we find that shocks to banks’ leverage can generate sizable boom-bust cycles in the housing market, the banking sector, and the rest of the macroeconomy, which provides strong support for the credit supply channel. The deterioration of bank balance sheets during the bust, the existence of highly leveraged households, and the general equilibrium feedback from the credit supply to household labor income significantly amplify the bust. Moreover, mortgage credit growth across the income distribution is consistent with recent findings that were otherwise argued to be against the credit supply channel. A comparison of the model outcomes across credit supply, house price expectation, and productivity shocks suggests that housing busts accompanied by severe banking crises are more likely to be generated by credit supply shocks. |
| Keywords: | Credit Supply, House Prices, Financial Crises, Household and Bank Balance Sheets, Leverage, Foreclosures, Consumption, and Output. |
| JEL: | E21 E32 E44 E60 G20 |
| Date: | 2020–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-664&r=all |
| By: | Hassan Afrouzi |
| Abstract: | How does competition affect information acquisition of firms and thus the response of inflation and output to monetary policy shocks? This paper addresses these questions in a new dynamic general equilibrium model with both dynamic rational inattention and oligopolistic competition. In the model, rationally inattentive firms acquire information about the endogenous beliefs of their competitors. Moreover, firms with fewer competitors endogenously choose to acquire less information about aggregate shocks – a novel prediction of the model that is supported by empirical evidence from survey data. A quantitative exercise disciplined by firm-level survey data shows that firms’ strategic inattention to aggregate shocks associated with oligopolistic competition increases monetary non-neutrality by up to 77% and amplifies the half-life of output response to monetary shocks by up to 30%. Furthermore, the model matches the relationship between the number of firms’ competitors and their uncertainty about inflation as a non-targeted moment. |
| Keywords: | rational inattention, oligopolistic competition, inflation dynamics, inflation expectations, monetary non-neutrality |
| JEL: | E31 E32 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8218&r=all |
| By: | Javier Fernández-Blanco |
| Abstract: | A spouse's income provides consumption insurance, but also increases the risks job-seekers take on in labor markets. We use a tractable directed search model with households to study how much public insurance should be provided in addition to the private insurance arrangements, and how it varies with the spouse's income. Private insurance is provided within the household through the spouse's labor supply and sought in the labor markets by applying to less risky jobs. Both insurance channels are used excessively in the laissez-faire equilibrium. In line with the empirical evidence, and in sharp contrast to the social planner's allocation, the equilibrium exhibits falling job-finding rates over the spouse's income distribution. If spouse's productivity is observable, the planner's allocation can be decentralized by implementing falling unemployment benefits. |
| Keywords: | unemployment risks, intra-household risk-sharing, directed search, constrained, efficient insurance |
| JEL: | J08 J22 J64 J65 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1174&r=all |
| By: | Cantore, Cristiano (Bank of England, Centre for Macroeconomics and University of Surrey); Ferroni, Filippo (Federal Reserve Bank of Chicago); León-Ledesma, Miguel (University of Kent and CEPR) |
| Abstract: | The textbook New Keynesian (NK) model implies that the labor share is procyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages during the Great Moderation period in the US, the euro area, the UK, Australia and Canada. We show that this is inconsistent not only with the basic NK model, but with medium-scale NK models commonly used for monetary policy analysis and where it is possible to break the direct link between the labor share and the inverse mark-up. |
| Keywords: | Labor share; monetary policy shocks; DSGE models |
| JEL: | C52 E23 E32 |
| Date: | 2020–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0857&r=all |
| By: | David Cook; Nikhil Patel |
| Abstract: | Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies, and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the business cycle dynamics of international trade and its relationship with monetary policy and exchange rates. Using a three country dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both internal and external shocks. In particular, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand. We use granular data on GVC at the sector level to document empirical evidence in favor of this prediction. |
| Keywords: | dollar invoicing, exchange rates, monetary policy, global value chains |
| JEL: | E2 E5 E6 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:860&r=all |
| By: | Jean-Guillaume Sahuc; Grégory Levieuge |
| Abstract: | Empirical evidence suggests that the pass-through from policy to retail bank rates is asymmetric in the euro area. Bank lending rates adjust more slowly and less completely to Eonia decreases than to increases. We investigate how this downward interest rate rigidity affects the response of the economy to monetary policy shocks. To this end, we introduce asymmetric bank lending rate adjustment costs in a macrofinance dynamic stochastic general equilibrium model. We find that the initial response of GDP to a negative monetary policy shock is 25% lower than its response to a positive shock of similar amplitude. This implies that a central bank would have to decrease its policy rate by 50% to 75% more to obtain a medium-run impact on GDP that would be symmetric to the impact of the positive shock. We also show that downward interest rate rigidity is stronger when policy rates are stuck at their effective lower bound, further disrupting monetary policy transmission. These findings imply that neglecting asymmetry in retail interest rate adjustments may yield misguided monetary policy decisions. |
| Keywords: | Downward interest rate rigidity, asymmetric adjustment costs, banking sector, DSGE model, euro area. |
| JEL: | E32 E44 E52 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2020-6&r=all |
| By: | Cantore, Cristiano (Bank of England, Centre for Macroeconomics and University of Surrey); Freund, Lukas (University of Cambridge) |
| Abstract: | This paper develops a tractable capitalist-worker New Keynesian model to study the interaction of fiscal policy and household heterogeneity. Workers can save in bonds subject to portfolio adjustment costs; firm ownership is concentrated among capitalists who do not supply labor. The model matches empirical intertemporal marginal propensities to consume that shape the private sector’s dynamic response to policy interventions, it avoids implausible profit income effects on labor supply and the solution has robust stability properties. This setup delivers both more pronounced redistributive and more muted aggregate effects of fiscal stimulus relative to the traditional two-agent model. |
| Keywords: | Business cycles; determinacy; government spending shocks; fiscal policy; New Keynesian; labor share; redistribution. |
| JEL: | C52 E12 E25 E32 E62 |
| Date: | 2020–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0858&r=all |
| By: | Shu-Hua Chen (National Taipei University); Jang-Ting Guo (Department of Economics, University of California Riverside) |
| Abstract: | This paper systematically examines the interrelations between equilibrium indeterminacy, endogenous entry and exit of intermediate-input firms, and increasing returns to specialization within two versions of a parsimonious one-sector monopolistically competitive real business cycle model. The technology for producing an intermediate good is postulated to display internal increasing returns-to-scale in our benchmark framework, whereas positive productive externalities are considered in the alternative setting. We analytically show that either formulation will exhibit belief-driven cyclical fluctuations if and only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. We also find that ceteris paribus our alternative macroeconomy is more susceptible to indeterminacy and sunspots than the baseline counterpart. |
| Keywords: | Equilibrium Indeterminacy; Endogenous Entry and Exit; Increasing Returns to Specialization. |
| JEL: | E13 E32 O41 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:202006&r=all |
| By: | S. Boragan Aruoba; Pablo Cuba-Borda; Kenji Higa-Flores; Frank Schorfheide; Sergio Villalvazo |
| Abstract: | We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle filter, the COPF significantly reduces the persistence of the Markov chain, improves the accuracy of Monte Carlo approximations of posterior moments, and drastically speeds up computations. We use the techniques to estimate a small-scale DSGE model to assess the effects of the government spending portion of the American Recovery and Reinvestment Act in 2009 when interest rates reached the zero lower bound. |
| Keywords: | ZLB; Bayesian Estimation; Nonlinear Solution Methods; Nonlinear Filtering; Par-ticle MCMC |
| JEL: | C5 E5 E4 |
| Date: | 2020–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:87720&r=all |
| By: | Oliver de Groot; Ceyhun Bora Durdu; Enrique G. Mendoza |
| Abstract: | Global and local methods are widely used in international macroeconomics to analyze incomplete-markets models. We study solutions for an endowment economy, an RBC model and a Sudden Stops model with an occasionally binding credit constraint. First-order, second-order, risky steady state and DynareOBC solutions are compared v. fixed-point-iteration global solutions in the time and frequency domains. The solutions differ in key respects, including measures of precautionary savings, cyclical moments, impulse response functions, financial premia and macro responses to credit constraints, and periodograms of consumption, foreign assets and net exports. The global method is easy to implement and faster than local methods for the endowment model. Local methods are faster for the RBC model and the global and DynareOBC solutions are of comparable speed. These findings favor global methods except when prevented by the curse of dimensionality and urge caution when using local methods. Of the latter, first-order solutions are preferable because results are very similar to second-order methods. |
| Keywords: | Solution methods; Sudden stops; Incomplete markets; Precautionary savings; Occasionally binding constraints |
| JEL: | D82 E44 F41 |
| Date: | 2020–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-06&r=all |
| By: | Francisco Ilabaca; Fabio Milani |
| Abstract: | This paper estimates a New Keynesian model extended to include heterogeneous expectations, to revisit the evidence that postwar US macroeconomic data can be explained as the outcome of passive monetary policy, indeterminacy, and sunspot-driven fluctuations in the pre-1979 sample, with a switch to active monetary policy and a determinate equilibrium starting in the early 1980s. Different shares of consumers and firms form either rational expectations, or adaptive and extrapolative expectations. The inclusion of heterogeneous expectations alters the determinacy properties of the model compared to the corresponding case under exclusively rational expectations. The Taylor principle is neither necessary nor sufficient, as the details of expectations may matter more for equilibrium stability. The model is estimated with Bayesian techniques, using rolling windows and allowing the parameters to fall both in the determinacy and indeterminacy regions. The estimates reveal large shares of agents who depart from rational expectations; heterogeneous expectations are preferred by the data everywhere in the sample. The results confirm that macroeconomic data in the early windows are better explained by indeterminacy, while determinacy is favored over the latest two decades. We uncover, however, some subsamples that include the 1980s and 1990s in which the Taylor principle is satisfied, but expectations becoming extrapolative raise the probability of indeterminacy to 50% and more. |
| Keywords: | heterogeneous expectations in New Keynesian model, indeterminacy, sunspots, Taylor principle, deviations from rational expectations, time-varying parameters |
| JEL: | E32 E52 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8224&r=all |
| By: | Hauser, Luisa-Marie; Schlag, Carsten-Henning; Wolf, André |
| Abstract: | This paper analyses the macroeconomic implications of a future shift in the age structure of the Swiss population. It estimates the long-run effects for Swiss GDP growth and its components in an Overlapping Generations Model (OLG model). Recent population projections by the Federal Statistical Office (FSO) serve as a basis. To document the sensitivity of the results with respect to the demographic assumptions, simulations were undertaken for a range of alternative scenarios concerning fertility, migration and agespecific labor supply. Our projections over the time horizon 2018-2060 document a significant loss in terms of economic growth in both absolute and per capita terms. According to our simulations, this would primarily affect the income of the middle-aged age groups. Likewise, the process of ageing would have consequences for the composition of Swiss GDP: the share of government spending on domestic value added is simulated to increase, due to its demography-related components. A sensitivity analysis reveals that more favourable assumptions concerning future net immigration, fertility and labor market participation could mitigate, but not fully compensate these trends. |
| Keywords: | Ageing,OLG-models,Long-term GDP forecasts,Switzerland |
| JEL: | J11 C68 E37 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hwwirp:191&r=all |
| By: | David Andolfatto |
| Abstract: | This paper studies the optimal maturity structure for government debt when markets for liquidity insurance are incomplete or non-competitive. There is no fiscal risk. Government debt in the model solves a dynamic inefficiency. Issuing debt in short and long maturities solves a liquidity insurance problem, but optimal yield curve policy is only possible if long-duration debt is rendered illiquid. Optimal policy is implementable through treasury operations only--adjustments in the primary deficit are not necessary. |
| Keywords: | liquidity; yield curve; Maturity structure |
| JEL: | E4 E5 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:87863&r=all |
| By: | Atif Mian; Ludwig Straub; Amir Sufi |
| Abstract: | We propose a theory of indebted demand, capturing the idea that large debt burdens by households and governments lower aggregate demand, and thus natural interest rates. At the core of the theory is the simple yet under-appreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent overlapping-generations model, we find that recent trends in income inequality and financial liberalization lead to indebted household demand, pushing down natural interest rates. Moreover, popular expansionary policies—such as accommodative monetary policy and deficit spending—generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less standard macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality. |
| Keywords: | aggregate demand, debt, interest rates, inequality, secular stagnation |
| JEL: | E21 E32 E43 E44 E52 E62 D31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8210&r=all |
| By: | Marco Del Negro; Michele Lenza; Giorgio E. Primiceri; Andrea Tambalotti |
| Abstract: | The business cycle is alive and well, and real variables respond to it more or less as they always did. Witness the Great Recession. Inflation, in contrast, has gone quiescent. This paper studies the sources of this disconnect using VARs and an estimated DSGE model. It finds that the disconnect is due primarily to the muted reaction of inflation to cost pressures, regardless of how they are measured—a flat aggregate supply curve. A shift in policy towards more forceful inflation stabilization also appears to have played some role by reducing the impact of demand shocks on the real economy. The evidence rules out stories centered around changes in the structure of the labor market or in how we should measure its tightness. |
| JEL: | E31 E32 E37 E52 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27003&r=all |
| By: | Tervala, Juha |
| Abstract: | Lucas (1987, 2003) finds that the welfare costs of business cycles are trivial, 0.008-0.05% of consumption in each period. I analyze the implications of hysteresis for the welfare costs of business cycles by extending the basic New Keynesian model with hysteresis. Hysteresis is defined as the negative effect of the negative, one-percentage point output gap on potential output. The net present value of the welfare cost of a recession in which the deviation of output from the trend is 3% is 0.6% of consumption without hysteresis. If the degree of hysteresis is 0.4, an empirical estimate for OECD countries, the welfare cost increases – by a factor of 121 – to 70%. The study of stabilization policy using New Keynesian models without hysteresis is pointless; the potential benefits of stabilization policy are notable only in the presence of hysteresis. |
| Keywords: | Business Cycles, Costs of Recessions, Hysteresis, Stabilization Policy |
| JEL: | E00 E32 E63 |
| Date: | 2020–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99758&r=all |
| By: | Christopher J. Gust; Edward P. Herbst; J. David Lopez-Salido |
| Abstract: | This paper uses aggregate data to estimate and evaluate a behavioral New Keynesian (NK) model in which households and firms plan over a finite horizon. The finite-horizon (FH) model outperforms rational expectations versions of the NK model commonly used in empirical applications as well as other behavioral NK models. The better fit of the FH model reflects that it can induce slow-moving trends in key endogenous variables which deliver substantial persistence in output and inflation dynamics. In the FH model, households and firms are forward-looking in thinking about events over their planning horizon but are backward looking regarding events beyond that point. This gives rise to persistence without resorting to additional features such as habit persistence and price contracts indexed to lagged inflation. The parameter estimates imply that the planning horizons of most households and firms are less than two years which considerably dampens the effects of expected future changes of monetary policy on the macroeconomy. |
| Keywords: | Finite-horizon planning; Learning; Monetary policy; New keynesian model; Bayesian estimation |
| JEL: | C11 E52 |
| Date: | 2020–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-03&r=all |
| By: | Sergio De Ferra; Enrico Mallucci |
| Abstract: | Emerging market interest rate spreads display substantial time-varying volatility. We show that a baseline model with endogenous sovereign default risk can account for such volatility, even in the absence of shocks to the second moments of the exogenous stochastic variables. In particular, the model features a key non-linearity that allows it to replicate the volatility of interest rate spreads and its comovement with other economic variables. Volatility correlates positively with the level of the spreads and the trade balance and negatively with output and consumption. |
| Keywords: | Sovereign risk; Time-varying volatility; Interest rates |
| JEL: | E32 E43 F32 F34 |
| Date: | 2020–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1276&r=all |
| By: | Razzak, Weshah |
| Abstract: | We provide a general equilibrium model with optimizing agents to compute the natural rate of interest for the G7 countries over the period 2000 to 2017. The model is solved for the equilibrium natural rate of interest, which is determined by a parsimonious equation that is easily computed from raw observable data. The model predicts that the natural rate depends positively on the consumption – leisure growth rates gap, and negatively on the capital – labor growth rates gap. Given our computed natural rate, the short-term nominal interest rates in the G7 have been higher than the natural rate since 2000, except for Germany and the U.S. during the period 2009-2017. In addition, the data do not support the prediction of the Wicksellian theory that prices tend to increase when the short-term nominal rate is lower than the natural rate. Projections of the natural rate over the period 2018 to 2024 are positive in Germany, Italy, Japan, and the U.K. and negative in Canada, France, and the U.S. The model predicts that fiscal expansion is an expensive policy to achieve a 2 percent inflation target when the Zero Lower Bound (ZLB) constraint is binding. |
| Keywords: | natural rate of interest, monetary policy |
| JEL: | C68 E43 E52 |
| Date: | 2020–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99747&r=all |
| By: | Roque B. Fernández |
| Abstract: | A DSGE (Dynamic Stochastic General Equilibrium) model is used to report the empirical behavior of the Argentine economy during the administration of the Cambiemos government coalition. Two main aspects have been taken into account: on the one hand, the debate on the economic policy of the 2016-2019 period, and on the other hand the requirement of microeconomic foundations that support the debate and the empirical results. Two alternative macro models are estimated obtaining statistically significant parameters to illuminate confusing aspects of the policy debate, and to help future research on modeling Argentina macro dynamics. The empirical results obtained for Argentina indicate that the small open economy models used in the state-space specification can also be useful for modeling other small open economies that suffer from Fiscal Dominance. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:723&r=all |
| By: | Paul Gomme |
| Abstract: | What are the likely effects of coronavirus-related restrictions on the labor market and the macroeconomy? What are the likely effects of government policies on the unemployment rate and output? I develop a model to answer these questions. Labor markets search frictions are captured as follows: Unemployed workers searching for a job, and firm vacancies come together in a matching function that determines the number of new firm-worker pairing. The remainder of the macroeconomy in the model is based on neoclassical foundations. I feed into this model ‘educated guesses’ for the impact effects of four exogenous shocks; the shocks then dissipate over the 18 months that the coronavirus is likely to directly affect the economy. First, relative to the pre-coronavirus U.S. economy, the job separation probability initially quadruple. While this is a rather large increase, on impact the job separation probability is not much higher than it was during the Great Recession. These separations are intended to reflect the outcome of lost revenues and the inability of workers to get to work in light of widespread lockdowns. To match the U.S. experience – a immediate and large increase in unemployment – the model simply needs such a large increase in separations. Second, match efficiency falls by 40%, capturing the difficulties workers and firms have in meeting when many firms are closed, and workers are restricted to their homes. Third, vacancy posting costs double. These costs capture a combination of the aforementioned difficulties firms have in recruiting when they are closed, and the inability of firms to obtain financing, some of which is used to pay for the up-front costs of recruiting. Finally, total factor productivity falls by 10%, capturing the loss in productivity of working from home, as well as disruptions to supply chains. By way of comparison, over the Great Recession, total factor productivity fell by 6.5%. When all four shocks are in play, absent a policy response, the outlook is dire: The model predicts that unemployment will peak at over 22.5% and output will fall by over 20%. I consider four labor market policies. As with the shocks, these policies fade out over the 18 months of the coronavirus, reflecting the likelihood that these programs will be wound down, and that over time fewer firms and workers will quality for these programs. The first policy is a straight wage subsidy of 50%. While this policy reduces unemployment (by less than two percent) and cushions the fall in output (by 1.3 percentage points), it is not nearly as good as the second policy: a wage subsidy along with an employment guarantee (modeled as a return of the job separation probability to its pre-coronavirus value). This second policy is designed to get at policies in several countries, including Denmark and Canada, that tie the receipt of government help with firms’ wage bills to those firms limiting job losses. Under this second policy, the unemployment rate initially rises to just over 10%, before falling gradually to its original value of 3.5%. Despite the improved unemployment performance, the model predicts a 14% decline in output. The third policy is more generous unemployment insurance. This policy is not particularly efficacious in terms of labor market outcomes: the model predicts a small increase in unemployment, and a slightly larger dip in output. To be sure, there are other reasons to increase the generosity of transfer programs like unemployment insurance; lowering the unemployment rate is simply not one of them. The final policy is a 50% subsidy to vacancy posting costs. This is a reduced-form way of incorporating a variety of programs aimed directly at firms, including various loan programs. Such a reduction in the cost of a vacancy lowers the peak unemployment rate by as much as six percentage points. What if it takes a few months to actually implement these labor market policies? The model predicts that unemployment will be higher, and output lower, and for longer. A delay of one month implies a peak to the unemployment rate of 15.1% compared to just over 10.3% if there is no delay. |
| Date: | 2020–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2020s-27&r=all |
| By: | Figari, Francesco; Fiorio, Carlo V. |
| Abstract: | This paper analyses the extent to which the Italian welfare system provides monetary compensation for those who lost their earnings due to the lockdown imposed by the government in order to contain the COVID-19 pandemic in March 2020. In assessing first-order effects of the businesses temporarily shut down and the government’s policy measures on household income, counterfactual scenarios are simulated with EUROMOD, the EU-wide microsimulation model, integrated with information on the workers who the lockdown is more likely to affect. This paper provides timely evidence on the differing degrees of relative and absolute resilience of the household incomes of the individuals affected by the lockdown. These arise from the variations in the protection offered by the tax-benefit system, coupled with personal and household circumstances of the individuals at risk of income loss. |
| Date: | 2020–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:ese:emodwp:em6-20&r=all |
| By: | Ambrocio, Gene |
| Abstract: | I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks are not universally like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. These results lend support to a pricing bias mechanism as an important transmission channel. A comparison of results across countries suggest that demographics and factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation. I develop an Overlapping Generations New Keynesian model with Deep Habits to rationalize these results. |
| JEL: | D84 E20 E30 |
| Date: | 2020–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2020_005&r=all |
| By: | Paul R. Bergin; Giancarlo Corsetti |
| Abstract: | In the wake of Brexit and the Trump tariff war, central banks have had to reconsider the role of monetary policy in managing the economic effects of tariff shocks, which may induce a slowdown while raising inflation. This paper studies the optimal monetary policy responses using a New Keynesian model that includes elements from the trade literature, including global value chains in production, firm dynamics, and comparative advantage between two traded sectors. We find that, in response to a symmetric tariff war, the optimal policy response is generally expansionary: central banks stabilize the output gap at the expense of further aggravating short-run inflation---contrary to the prescription of the standard Taylor rule. In response to a tariff imposed unilaterally by a trading partner, it is optimal to engineer currency depreciation up to offsetting the effects of tariffs on relative prices, without completely redressing the effects of the tariff on the broader set of macroeconomic aggregates. |
| JEL: | F4 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26995&r=all |