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on Dynamic General Equilibrium |
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Issue of 2020‒05‒11
eighteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Victor Ortego-Marti (Department of Economics, University of California Riverside) |
| Abstract: | This paper builds a model of endogenous TFP with search and matching frictions in the labor market with two features: production units are subject to idiosynchratic shocks and workers suffer skill loss during unemployment. I show that aggregating firms' micro-production decision leads to an aggregate production that is Cobb-Douglas in labor and capital. The endogenous TFP depends on two equilibrium characteristics of the labor market: the productivity of matches formed and active, and the aggregate skill distribution. In particular, the job destruction decision and the job finding rate are sufficient statistics that uniquely determine TFP. The labor market affects TFP through two channels. First, an increase in the reservation productivity raises the average match productivity and TFP. Second, the job finding rate and the job destruction decision shape the skill distribution, as it determines how long workers remain unemployed and the amount of skill loss. The paper then studies the effect of labor market policies on TFP. In contrast with previous studies, the effect of unemployment insurance on TFP depends on the relative size of the two channels. More generous unemployment insurance programs improve TFP only if the effect on the average productivity is larger than the compositional effect through to the skill channel. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:202007&r=all |
| By: | Lise Clain-Chamosset-Yvrard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); 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: | In this paper, we are interested in the interplay between real estate bubble, aggregate capital accumulation and taxation in an overlapping generations economy with altruistic households. We consider a three-period overlapping generations model with three key elements: altruism, portfolio choice, and financial market imperfections. Households realise different investment decisions in terms of asset at different periods of life, face a binding borrowing constraint and leave bequests to their children. We show that altruism plays a key role on the existence of a productive real estate bubble, i.e. a bubble in real estate raising physical capital stock and aggregate output. The key mechanism relies on the fact that a real estate bubble raises income of retired households. Because of higher bequests, there children are able to invest more in productive capital. Introducing fiscal policy, we show that raising real estate taxation dampens capital accumulation. |
| Keywords: | altruism,bubble,credit,overlapping generations,real estate |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-02129883&r=all |
| By: | Jean Flemming |
| Abstract: | Even though workers in the UK spent just 1,000 pounds on commuting in 2017, the economic loss may be far higher because of the congestion externality arising from the way in which one worker's commute affects the commuting time of others. I provide empirical evidence that commuting time affects job acceptance, pointing to large indirect costs of congestion. To interpret the empirical facts and quantify the costs of congestion, I build a model featuring a frictional labor market within a metropolitan area. By endogenizing commuting congestion in a labor search model, the model connects labor market responses to urban policies. Workers evaluate job offers based on their productivity and commuting costs, taking congestion as given, but by accepting and commuting to distant jobs, affect other workers' labor market outcomes. Through this mechanism, equilibrium moving decisions, housing rent, and wages are tightly linked to congestion. Calibrating the model to the local labor market around London, I show that the effect of the congestion externality is to significantly decrease welfare and increase wage inequality. I quantify the effects of a congestion tax on labor market outcomes, and show that the welfare-maximizing tax has substantial negative effects on inequality, but comes at a cost of higher unemployment. |
| Keywords: | Job search; Wage distribution; Congestion externality; Commuting |
| JEL: | E24 J32 J62 R13 R41 |
| Date: | 2020–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-25&r=all |
| By: | Saroj Dhital (Economics and Business Department, Southwestern University); Pedro Gomis-Porqueras (Department of Economics, Deakin University, Geelong, Australia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia) |
| Abstract: | In this paper we examine the interactions between fiscal and monetary policy in an economy with financial frictions, where fiat money, bank deposits and short and long-term nominal bonds coex-ist. Because agents face information frictions and bankers have limited commitment, fiat money is always accepted and bank deposits can be used in some trades. Within this frictional environment, we study how consumption inequality varies when the central bank pursues an active monetary pol-icy and when the fiscal authority is active. Specifically, we find that consumption wedges across the different states of the world are more severe when an active central bank pursues expansionary monetary policy. Moreover, we find a unique stationary equilibrium when the monetary authority follows an active policy, while multiple stationary equilibria exist when the fiscal authority pursues an active regime. Consequently, such indeterminacy can result in greater volatility in economies in which the fiscal authority is active and the central bank is passive. |
| Keywords: | taxes; inflation; liquidity premium |
| JEL: | E40 E61 E62 H21 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:2002&r=all |
| By: | Liu, Shih-fu; Huang, Wei-chi; Lai, Ching-chong |
| Abstract: | This paper sets up a New Keynesian model in which the monetary authority implements a zero lower bound interest rate policy, and uses it to explore whether the supportive fiscal instruments (including expansionary government spending, a payroll tax cut, and a financial assets tax cut) are effective in overcoming a deep recession. The salient feature of this study is that it provides a new dynamic viewpoint of regime switching by evaluating each of several supportive fiscal policies in terms of their performance in alleviating a deep recession. Two main findings emerge from the analysis. First, when the monetary authority implements the zero lower bound interest rate policy to dampen the negative natural rate shock, the economy will sink into a deep recession with deflation. Second, to overcome the deep recession, of the three supportive fiscal tools (i.e., expansionary government spending, a payroll tax cut, and a financial assets tax cut), only expansionary government spending is effective in alleviating the deep recession. More specifically, the implementation of fiscal policy in the form of either the payroll tax cut or the financial assets tax cut will only further deepen the recession. |
| Keywords: | Zero lower bound, New Keynesian model, fiscal stimulus, regime switching |
| JEL: | E62 E63 H20 |
| Date: | 2020–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99842&r=all |
| By: | Schön, Matthias |
| Abstract: | This paper presents long term projections of the German pension system that are based on a general equilibrium model with overlapping generations (OLG). This framework takes into account the two way feedback of both micro and macroeconomic relationships, meaning that households, for example, react to changes in the statutory pension system, such as the retirement age or the replacement rate. Changes in households' behaviour, in turn, impact on macroeconomic developments and public finances. One approach to parametrically reform the pension system would be linking (indexing) the retirement age systematically to increasing life expectancy. The model shows that the resulting increase in employment would also bolster social security contributions and taxes. Moreover, with a rising retirement age and the associated longer periods of work, pension entitlements would increase. |
| Keywords: | Demographic Change,Pension System,OLG Models |
| JEL: | E27 E62 H55 J11 J26 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:222020&r=all |
| By: | Edouard Schaal; Mathieu Taschereau-Dumouchel |
| Abstract: | This paper explores whether rational herding can generate endogenous business cycle fluctuations. We embed a tractable model of rational herding into a business-cycle framework. In the model, technological innovations arrive with unknown quality. New innovations are not immediately productive and agents have dispersed information about how productive the technology will be. Investors decide whether to invest in the technology or not based on their private information and the investment behavior of others. Herd-driven boom-bust cycles may arise endogenously in this environment out of a single impulse shock when the technology is unproductive but investors' initial information is optimistic and highly correlated. When the technology appears, investors mistakenly attribute the high observed investment rates to high fundamentals, leading to a pattern of increasing optimism and investment until the economy reaches a peak, followed by a crash as agents ultimately realize their mistake. As such, the theory can shed light on bubble-like episodes in which excessive optimism about uncertain technology fueled general macroeconomic expansions that were followed by sudden recessions. We calibrate the model to the U.S. economy and show that the theory can explain boom-and-bust cycles in line with historical episodes like the Dot-Com Bubble of the late 1990s. Leaning-against-thewind policies can be beneficial in this environment as they improve the diffusion of information over the cycle. |
| Keywords: | endogenous business cycles, information cascade, social learning, imperfect information, boom-and-bust |
| JEL: | E32 D80 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1714&r=all |
| By: | Victoria Gregory; Guido Menzio; David Wiczer |
| Abstract: | We develop and calibrate a search-theoretic model of the labor market in order to forecast the evolution of the aggregate labor market during and after the coronavirus pandemic. The model is designed to capture the heterogeneity of the transitions of individual workers across states of unemployment, employment and across different employers. The model is also designed to capture the trade-offs in the choice between temporary and permanent layoffs. Under reasonable parametrizations of the model, the lockdown instituted to prevent the spread of the novel coronavirus is shown to have long-lasting negative effects on unemployment. This is so because the lockdown disproportionately disrupts the employment of workers who need years to find stable jobs. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:nys:sunysb:20-06&r=all |
| By: | Michael Cai; Marco Del Negro; Edward P. Herbst; Ethan Matlin; Reca Sarfati; Frank Schorfheide |
| Abstract: | This paper illustrates the usefulness of sequential Monte Carlo (SMC) methods in approximating DSGE model posterior distributions. We show how the tempering schedule can be chosen adaptively, document the accuracy and runtime benefits o fgeneralized data tempering for “online” estimation (that is, re-estimating a model asnew data become available), and provide examples of multimodal posteriors that are well captured by SMC methods. We then use the online estimation of the DSGE model to compute pseudo-out-of-sample density forecasts and study the sensitivity ofthe predictive performance to changes in the prior distribution. We find that making priors less informative (compared to the benchmark priors used in the literature) by increasing the prior variance does not lead to a deterioration of forecast accuracy. |
| Keywords: | Adaptive algorithms; Bayesian inference; Density forecasts; Online estimation; Sequential Monte Carlo methods |
| JEL: | C11 C32 C53 E32 E37 E52 |
| Date: | 2020–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-23&r=all |
| By: | Peter Andre (University of Bonn); Carlo Pizzinelli (IMF); Christopher Roth (Department of Economics, University of Warwick); Johannes Wohlfart (CEBI, Department of Economics, University of Copenhagen) |
| Abstract: | Using a sample of 2,200 households representative of the US population and a sample of more than 1,000 experts, we measure beliefs about how aggregate unemployment and in ation respond to different macroeconomic shocks. Expert predictions are quantitatively close to standard DSGE models and VAR evidence. While households' beliefs are directionally aligned with those of experts in the case of oil supply shocks and government spending shocks, they predict an opposite reaction of in ation to monetary policy and income tax shocks. A substantial fraction of deviations of household predictions can be explained by the use of a simple affective heuristic. |
| Keywords: | Expectation Formation, Subjective Models, Heuristics, Macroeconomic Shocks, Monetary Policy, Fiscal Policy |
| JEL: | D83 D84 E31 E52 |
| Date: | 2019–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kucebi:1911&r=all |
| By: | Hie Joo Ahn; Leland Crane |
| Abstract: | We develop a dynamic decomposition of the empirical Beveridge curve, i.e., the level of vacancies conditional on unemployment. Using a standard model, we show that three factors can shift the Beveridge curve: reduced-form matching efficiency, changes in the job separation rate, and out-of-steady-state dynamics. We find that the shift in the Beveridge curve during and after the Great Recession was due to all three factors, and each factor taken separately had a large effect. Comparing the pre-2010 period to the post-2010 period, a fall in matching efficiency and out-of-steady-state dynamics both pushed the curve upward, while the changes in the separations rate pushed the curve downward. The net effect was the observed upward shift in vacancies given unemployment. In previous recessions changes in matching efficiency were relatively unimportant, while dynamics and the separations rate had more impact. Thus, the unusual feature of the Great Recession was the deterioration in matching efficiency, while separations and dynamics have played significant, partially offsetting roles in most downturns. The importance of these latter two margins contrasts with much of the literature, which abstracts from one or both of them. We show that these factors affect the slope of the empirical Beveridge curve, an important quantity in recent welfare analyses estimating the natural rate of unemployment. |
| Keywords: | Beveridge curve; Job separation; Job openings; Natural rate of unemployment; Matching efficiency; Unemployment |
| JEL: | E24 E32 J60 |
| Date: | 2020–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-27&r=all |
| By: | Weshah Razzak (School of Economics and Finance, Massey University, Palmerston North) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:mas:dpaper:2006&r=all |
| By: | J. Ignacio Garcia-Perez; Sílvio Rendon |
| Abstract: | We propose and estimate a model of family job search and wealth accumula-tion with data from the Survey of Income and Program Participation (SIPP). This dataset reveals a very asymmetric labor market for household members who share that their job nding is stimulated by their partners job separa-tion. We uncover a job search-theoretic basis for this added worker effect, which occurs mainly during economic downturns, but also by increased non-employment transfers. Thus, our analysis shows that the policy goal of in-creasing non-employment transfers to support a workers job search is partially offset by the spouses cross e¤ect of decreased non-employment and wages. The added worker e¤ect is robust to having more children and more education in the household and does not just result as a composition of heterogeneous indi-viduals. We also show that the interdependency between household members is understated if wealth and savings are not considered. Finally, we show that gender equality in the labor market not only improves womens labor market performance, but it also increases mens accepted wages and non-employment rates. |
| Keywords: | non-employment; asset accumulation; estimation of dynamic structural models.; household economics; job search; consump-tion |
| JEL: | C33 E21 E24 J64 |
| Date: | 2020–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:87879&r=all |
| By: | Maryam Farboodi; Gregor Jarosch; Robert Shimer |
| Abstract: | We use a conventional dynamic economic model to integrate individual optimization, equilibrium interactions, and policy analysis into the canonical epidemiological model. Our tractable framework allows us to represent both equilibrium and optimal allocations as a set of differential equations that can jointly be solved with the epidemiological model in a unified fashion. Quantitatively, the laissez-faire equilibrium accounts for the decline in social activity we measure in US micro-data from SafeGraph. Relative to that, we highlight three key features of the optimal policy: it imposes immediate, discontinuous social distancing; it keeps social distancing in place for a long time or until treatment is found; and it is never extremely restrictive, keeping the effective reproduction number mildly above the share of the population susceptible to the disease. |
| JEL: | E1 H0 I1 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27059&r=all |
| By: | Andrew Glover; Jonathan Heathcote; Dirk Krueger; José-Víctor Ríos-Rull |
| 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. |
| JEL: | E20 E30 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27046&r=all |
| By: | Marek Antosiewicz; Jan Witajewski-Baltvilks |
| Abstract: | The timing of the response of CO2 emissions to a carbon tax depends crucially on the timing of response of energy demand of changes in energy prices. In this paper, we investigate the path of changing energy demand from the moment of a change in price until it reaches its new steady state. First, by applying the LeChatelier principle, we show that the response of energy demand in the short run must be smaller than in the long run if firms are only able to adjust their choices of technology in the long run. Then, using a putty-clay model with induced technological change, we show that the elasticity of demand approaches its long-run level exponentially at the rate that is determined by the capital depreciation rate and the growth rate of the economy. Thus, according to the model, it takes more than 8 years from the introduction of the carbon tax until half of the long-run effect of induced technological change on energy demand is realised in developed countries. We also examine the macroeconomic consequences of the long-run adjustment of energy demand. To this end, we incorporate the theoretical model into a large-scale multi-sector DSGE model. We find that the adjustment of energy demand reduces the negative impact of CO2 tax on GDP. |
| Keywords: | induced technological change, rebound effect, general equilibrium model, mitigation costs |
| JEL: | Q33 Q41 Q43 Q55 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:ibt:wpaper:wp112019&r=all |
| By: | Pratiti Chatterjee; David Gunawan; Robert Kohn |
| Abstract: | Can uncertainty about credit availability trigger a slowdown in real activity? This question is answered by using a novel method to identify shocks to uncertainty in access to credit. Time-variation in uncertainty about credit availability is estimated using particle Markov Chain Monte Carlo. We extract shocks to time-varying credit uncertainty and decompose it into two parts: the first captures the "pure" effect of a shock to the second moment; the second captures total effects of uncertainty including effects on the first moment. Using state-dependent local projections, we find that the "pure" effect by itself generates a sharp slowdown in real activity and the effects are largely countercyclical. We feed the estimated shocks into a flexible price real business cycle model with a collateral constraint and show that when the collateral constraint binds, an uncertainty shock about credit access is recessionary leading to a simultaneous decline in consumption, investment, and output. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2004.14719&r=all |
| By: | Lydia Cox; Gernot Müller; Ernesto Pasten; Raphael S. Schoenle; Michael Weber; Michael Weber |
| Abstract: | “Big G” typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the US government and establish five facts. First, government spending is granular, that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, procurement contracts are short-lived. Fourth, idiosyncratic variation dominates the fluctuation of spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark aligning the model with the empirical evidence. |
| Keywords: | government spending, federal procurement, granularity, sectoral heterogeneity, fiscal policy transmission, monetary policy |
| JEL: | E62 E32 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8229&r=all |