nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒05‒18
thirty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Optimal age-dependent taxation in emerging markets: A quantitative assessment By Uribe-Tera\x{0301}n, Carlos; Gachet, Iva\x{0301}n; Grijalva, Diego F.
  2. Is housing collateral important to the business cycle? Evidence from China By Minford, Patrick; Gai, Yue; Ou, Zhirong
  3. Life Cycle, Financial Frictions and Informal Labor Markets: The Case of Chile By Enrique Kawamura; Damián Pierri
  4. Distributional consequences of conventional and unconventional monetary policy By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  5. Captive Power, Market Access, and Welfare Effects in the Bangladesh Electricity Sector By Amin, Sakib; Jamasb, Tooraj; Llorca, Manuel; Marsiliani, Laura; Renström, Thomas
  6. Are flexible working hours helpful in stabilizing unemployment? By Marcin Kolasa; Michał Rubaszek; Małgorzata Walerych
  7. Productivity News, Wages, and Labor Market Fluctuations By Chahrour, Ryan; Chugh, Sanjay K.; Potter, Tristan
  8. Hopf Bifurcation from new-Keynesian Taylor rule to Ramsey Optimal Policy By Jean-Bernard Chatelain; Kirsten Ralf
  9. The Inflation Target and the Equilibrium Real Rate By Christopher D. Cotton
  10. Endogenous TFP, business cycle persistence and the productivity slowdown in the euro area By Spitzer, Martin; Schmöller, Michaela
  11. A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables By Jean-Bernard Chatelain; Kirsten Ralf
  12. Demographic transition and Economic development : the role of child costs By Aso, Hiroki
  13. Education policy and R&D based growth in an overlapping generations model By Kohei Okada
  14. Labor Market Search, Informality, and On-The-Job Human Capital Accumulation By Matteo BOBBA
  15. On the Response of Inflation and Monetary Policy to an Immigration Shock By Benjamín García; Juan Guerra-Salas
  16. Can Pandemic-Induced Job Uncertainty Stimulate Automation? By Sylvain Leduc; Zheng Liu
  17. On the instability of banking and other financial intermediation By Chao Gu; Cyril Monnet; Ed Nosal; Randall Wright
  18. Monetary Policy, Self-Fulfilling Expectations and the U.S. Business Cycle By Giovanni Nicolo
  19. Household heterogeneity and the value of government spending multiplier By Paweł Kopiec
  20. Land Collateral and Rule-of-Thumb Households in a Franc Zone Country: A Bayesian Appraisal By NANA DAVIES, Charles
  21. Uncertainty and Growth Disasters By Boyan Jovanovic; Sai Ma
  22. Why Are Average Hours Worked Lower in Richer Countries? By Bick, Alexander; Fuchs-Schündeln, Nicola; Lagakos, David; Tsujiyama, Hitoshi
  23. The Welfare of Ramsey Optimal Policy Facing Auto-Regressive Shocks By Jean-Bernard Chatelain; Kirsten Ralf
  24. Sources of Macroeconomic Fluctuations in a Franc Zone Country: A Bayesian estimation By NANA DAVIES, Charles
  25. Is There News in Inventories? By Christoph Gortz; Christopher Gunn; Thomas A. Lubik
  26. Dynamic Trade, Education and Intergenerational Inequality By Yang, Han
  27. Dynamic stochastic general equilibrium inference using a score-driven approach By Licht, Adrian; Escribano Saez, Alvaro; Blazsek, Szabolcs Istvan
  28. Beyond Cobb-Douglas: Flexibly Estimating Matching Functions with Unobserved Matching Efficiency By Lange, Fabian; Papageorgiou, Theodore
  29. Apprenticeship and Youth Unemployment By Cahuc, Pierre; Hervelin, Jeremy
  30. Recursive Preferences, the Value of Life, and Household Finance By Antoine Bommier; Daniel Harenberg; François Le Grand; Cormac O'Dea
  31. The Macroeconomics of Automation: Data, Theory, and Policy Analysis By Nir Jaimovich; Itay Saporta-Eksten; Henry E. Siu; Yaniv Yedid-Levi

  1. By: Uribe-Tera\x{0301}n, Carlos; Gachet, Iva\x{0301}n; Grijalva, Diego F.
    Abstract: This paper studies the design and welfare implications of an optimal age-dependent taxation scheme for an emerging economy. The setting is an overlapping generations economy with uninsured productivity risk, partially insured occupational risk (unemployment and informality by exclusion), stochastic retirement, and stochastic access to the pension fund. We calibrate this model for Ecuador and find that the optimal tax scheme provides a payroll tax exemption up to age 35, thereafter becoming hump-shaped with a maximum tax rate of 50% at age 50. The progressive tax levied on labor income implies an initial marginal tax rate of 5% that increases linearly to a top marginal tax rate of 35%. This tax scheme produces a welfare gain of 2.9% measured in compensated equivalent units and reduces wealth inequality by 5.8%. For comparison, in a model built and calibrated for the US economy (no informality, higher productivity and longevity risk, and full coverage of the social security system), the optimal payroll tax implies a zero tax rate up to age 27, becoming hump-shaped thereafter with a maximum tax rate of 56.2% at age 46.
    Keywords: Economía, Finanzas, Impuestos,
    Date: 2019
  2. By: Minford, Patrick (Cardiff Business School); Gai, Yue (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: This paper investigates whether housing collateral is important to the business cycle in China. We develop two models, one without housing collateral as benchmark and one variant allowing for it. Indirect Inference procedure tests these two modelsÕ compatibility with the data. We find that the benchmark model passes the test, while the collateral model is strongly rejected. According to the benchmark model, shocks from the housing market have limited impact on the Chinese business cycle. By contrast, the exogenous spending shock from gov- ernment and net exports, the monetary policy shock and the goods-sector cost/productivity shock, all in turn most likely connected to world business cycle shocks (especially the global financial crisis), are found to be the main drivers.
    Keywords: Housing market; DSGE model; Housing collateral; Indirect Inference; China;
    JEL: E32 E44 E52 R31
    Date: 2020–05
  3. By: Enrique Kawamura (Universidad de San Andres); Damián Pierri (Universidad de San Andres & IIEP-BAIRES (UBA-CONICET))
    Abstract: In this paper we study the implications of economic policies that affect household’s income. We focus on Chile after the massive demonstrations against the existing standard of living observed in 2019. Using a search model with life-cycle features and survey data, we found that an equivalent change in labor tax rates and non-contributary pensions have opposite effects on labor markets, specifically on informality and unemployment duration. Non-contributary pensions offers a milder trade-off as it produces a second order increase in informality. However, due to the presence of informal labor markets and financial frictions, non-retired agents increase their current consumption only after a tax cut. That is, in this framework, a positive wealth shock can reduce consumption. Thus, when we take into account the impact on welfare, as households are assumed to value only consumption, cutting taxes seems to be preferred. We characterize labor market and consumption-savings decisions. We found 2 effects operating simultaneously and in opposite directions: substitution and wealth. Due to the presence of risk averse agents and incomplete capital markets, the latter prevails suggesting that the life cycle aspects of the labor market are critical to understand policy trade-offs.
    Keywords: search models, life-cycle, simulation-based estimation, social-security reform.
    JEL: E21 E24 E26 E64
    Date: 2020–05
  4. By: Marcin Bielecki (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski); Marcin Kolasa (Marcin Kolasa)
    Abstract: This paper uses a life-cycle model with a rich asset structure, and standard nominal and real rigidities, to investigate the distributional consequences of traditional monetary policy and communication about its future course (forward guidance). The model is calibrated to the euro area using both macroeconomic aggregates and microeconomic evidence from the Household Finance and Consumption Survey. We show that the lifecycle profiles of income and asset accumulation decisions are important determinants of redistributive effects of both anticipated and unanticipated monetary shocks. Even though house prices respond strongly to monetary policy easing, hurting young households, their distributional effects are dwarfed by changes in returns on nominal assets and labor market revival that work in the opposite direction. Both anticipated and unanticipated policy easing hence redistribute welfare from older to younger generations. The scale of this redistribution is larger for forward guidance if nominal interest rates are constrained by the effective lower bound.
    Keywords: monetary policy, forward guidance, life-cycle models, redistribution
    JEL: E31 E52 J11
    Date: 2020
  5. By: Amin, Sakib (North South University); Jamasb, Tooraj (Department of Economics, Copenhagen Business School); Llorca, Manuel (Department of Economics, Copenhagen Business School); Marsiliani, Laura (Durham University Business School); Renström, Thomas (Durham University Business School)
    Abstract: Electricity sectors in many emerging and developing countries are characterised by significant captive industrial generation capacity. This is mainly due to unreliable electricity supplies from state-owned utilities. Integrating the captive capacity with the on-grid supply can improve resource utilisation in the electricity market. We use a Dynamic Stochastic General Equilibrium (DSGE) model to examine the effects of allowing the Bangladeshi Captive Power Plants (CPPs) to sell their excess output to the national grid at regulated prices. We find that opening the grid to CPPs would reduce the industrial output and GDP due to energy price distortions. We also show that the Bangladeshi economy would become more vulnerable to oil price shocks when CPPs are connected to the national grid. These results support the second-best theory, which implies that granting grid access without removing other price distortions can lead to economically inefficient outcomes. We propose that the government should not open the grid to CPPs to minimise energy market distortions yet. Instead, it should first consider alternative reform measures such as taking steps to reduce price distortions and enabling a competitive market environment.
    Keywords: Bangladesh; CPPs; DSGE model; Electricity generation
    JEL: D58 L94 Q43 Q48
    Date: 2020–05–01
  6. By: Marcin Kolasa (Narodowy Bank Polski); Michał Rubaszek (SGH Warsaw School of Economics); Małgorzata Walerych (Narodowy Bank Polski)
    Abstract: In this paper we challenge the conventional view that increasing working time flexibility limits the amplitude of unemployment fluctuations. We start by showing that hours per worker in European countries are much less procyclical than in the US, and in some economies even co-move negatively with output. This is confirmed by the results from a structural VAR model for the euro area, in which working hours increase after a contractionary monetary shock, exacerbating the upward pressure on unemployment. To understand these counterintuitive results, we develop a structural search and matching macroeconomic model with endogenous job separation. We show that this feature is key to generate countercyclical adjustments in working hours. When we augment the model with frictions in working hours adjustment and estimate it using euro area time series, we find that increasing flexibility of working time amplifies cyclical movements in unemployment.
    Keywords: labor market, search and matching, job separation, working time, business cycle fluctuations
    JEL: E24 E32 J22 J64
    Date: 2019
  7. By: Chahrour, Ryan (Department of Economics); Chugh, Sanjay K. (Department of Economics); Potter, Tristan (Drexel University)
    Abstract: We identify the main shock driving the covariance of the labor market and output. The shock drives strong business cycle comovement among output, consumption, investment, hours, and stock prices but is essentially orthogonal to business cycle fluctuations in TFP. Yet, the shock is associated with future persistent TFP fluctuations, consistent with theories of technology news. A standard labor search model in which wages are determined by a cash flow sharing rule, rather than the net present value of match surplus, matches the observed responses to TFP news. The response of the wage implied by this rule is consistent with the empirical responses of a broad panel of wage series
    Keywords: News Shocks; Wages; Search and Matching; Business Cycles
    JEL: E24 E32
    Date: 2020–05–02
  8. By: Jean-Bernard Chatelain (PSE - Paris School of Economics); Kirsten Ralf (ESCE International Business School, INSEEC U. Research Center)
    Abstract: This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory.
    Keywords: Bifurcations,Commitment,Taylor Rule,Taylor Principle,New-Keynesian Model,Ramsey Optimal Policy
    Date: 2020–01–17
  9. By: Christopher D. Cotton
    Abstract: Many economists have proposed raising the inflation target to reduce the probability of hitting the zero lower bound (ZLB). It is both a common assumption and a feature of standard models that raising the inflation target does not impact the equilibrium real rate. I demonstrate that in the New Keynesian model, once heterogeneity is introduced, raising the inflation target causes the equilibrium real rate to fall. This implies that raising the inflation target will increase the nominal interest rate by less than expected and thus will be less effective in reducing the probability of hitting the ZLB. The channel involves a rise in the inflation target lowering the average markup by price rigidities and a fall in the average markup lowering the equilibrium real rate by household heterogeneity, which could come from overlapping generations or idiosyncratic labor shocks. I find that raising the inflation target from 2 percent to 4 percent lowers the equilibrium real rate between 3 and 28 basis points. Since raising inflation lowers the equilibrium real rate, it might seem optimal to raise inflation by more in response to the ZLB. However, this channel also implies that the marginal benefit of raising inflation is lower because a given increase in inflation raises the nominal interest rate by less and thus is less effective at preventing the ZLB. In a welfare simulation, these two effects approximately cancel out each other. Therefore, even though this channel implies that raising the inflation target is less effective in preventing the ZLB, the inflation target should still be raised by a similar amount in response to the problem of the ZLB.
    Keywords: inflation target; steady state real interest rate; equilibrium real rate; heterogeneity; zero lower bound
    JEL: E31 E52 E58
    Date: 2020–02–01
  10. By: Spitzer, Martin; Schmöller, Michaela
    Abstract: This paper analyses the endogeneity of euro area total factor productivity and its role in business cycle amplification by estimating a medium-scale DSGE model with endogenous productivity mechanism on euro area data. In this framework, total factor productivity evolves endogenously as a consequence of costly investment in R&D and adoption of new technologies. We find that the endogeneity of TFP induces a high degree of persistence in the euro area business cycle via a feedback mechanism between overall economic conditions and investment in productivity-enhancing technologies. As to the sources of the euro area productivity slowdown, we conclude that a decrease in the efficiency of R&D investment is among the key factors generating the pre-crisis productivity slowdown, while starting from the Great Recession a shock to liquidity demand is identified as the most important driving force. The endogenous technology mechanism further exerts a dampening effect on the inflation response following a recessionary shock and hence has important implications for both the negligible fall in inflation during the Great Recession, as well as the sluggish increase of inflation in the subsequent recovery. JEL Classification: E24, E32, O31
    Keywords: endogenous productivity, euro area business cycles, low inflation, weak growth
    Date: 2020–05
  11. By: Jean-Bernard Chatelain (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE, INSEEC U. Research Center - ESCE International Business School, INSEEC U. Research Center)
    Abstract: This article presents an algorithm that extends Ljungqvist and Sargent's (2012) dynamic Stackelberg game to the case of dynamic stochastic general equilibrium models including forcing variables. Its first step is the solution of the discounted augmented linear quadratic regulator as in Hansen and Sargent (2007). It then computes the optimal initial anchor of "jump" variables such as inflation. We demonstrate that it is of no use to compute non-observable Lagrange multipliers for all periods in order to obtain impulse response functions and welfare. The algorithm presented, however, enables the computation of a history-dependent representation of a Ramsey policy rule that can be implemented by policy makers and estimated within a vector auto-regressive model. The policy instruments depend on the lagged values of the policy instruments and of the private sector's predetermined and "jump" variables. The algorithm is applied on the new-Keynesian Phillips curve as a monetary policy transmission mechanism.
    Keywords: forcing variables,new-Keynesian Phillips curve,Stackelberg dynamic game,augmented linear quadratic regulator,Ramsey optimal policy,algorithm
    Date: 2019–10–25
  12. By: Aso, Hiroki
    Abstract: Abstract This paper analyzes the interactions between demographic transition and economic development, focusing on two child costs: time child-rearing cost and physical child-rearing cost. To analyze the interactions, we construct two overlapping generations model: human capital accumulation model and physical capital accumulation model. The two child costs, in particular, physical child cost plays crucial role in appearing non-monotonous fertility dynamics since it generates income effect. In both growth models, increase in physical child cost decreases the fertility, while it promotes economic development by dilution effect. Since increase in physical child cost encourages to start investing in human capital, it facilitates more rapid the timing of demographic transition in human capital accumulation model and therefore it gets the economy out of development trap. In contrast, it slows down the timing in physical capital accumulation model due to increase in income effect.
    Keywords: Demographic transition, Economic development, Child costs, Overlapping generations model.
    JEL: I25 J11 J13 O11
    Date: 2020–04–20
  13. By: Kohei Okada (Graduate School of Economics, Osaka University)
    Abstract: Employing an overlapping-generations model of R&D-based growth with endogenous education decision-making and government's education policy,we examine how government'seducation policy and human capital accumulation influence R&D activity. We show that an increase in government's public education expenditure has an inverted U-shaped effect on the growth rate at the steady state.We examine how increased public education expenditure affects welfare and show that an increase in the public education expenditure has an inverted U-shaped effect on the steady state level of welfare.
    Keywords: Educationexpenditure,Humancapitalaccumulation,R&D
    JEL: H52 I25 J24 O30
  14. By: Matteo BOBBA
    Abstract: We develop a search and matching model where firms and workers produce output that depends both on match-specific productivity and on worker-specific human capital. The human capital is accumulated while working but depreciates while searching for a job. Jobs can be formal or informal and firms post the formality status. The equilibrium is characterized by an endogenous steady state distribution of human capital and by an endogenous formality rate. The model is estimated on longitudinal labor market data for Mexico. Human capital accumulation on-the-job is responsible for more than half of the overall value of production and upgrades more quickly while working formally than informally. Policy experiments reveal that the dynamics of human capital accumulation magnifies the negative impact on productivity of the labor market institutions that give raise to informality.
    JEL: Q
    Date: 2019–02–08
  15. By: Benjamín García; Juan Guerra-Salas
    Abstract: An immigration shock has an ambiguous effect on inflation. On one hand, aggregate consumption increases with a suddenly larger population; this “demand channel” creates inflationary pressures. On the other hand, the labor market becomes more slack as immigrants search for jobs, containing wage growth; this “labor supply channel” creates disinflationary pressures. The response of an inflationtargeting central bank to an immigration shock is, therefore, not obvious. We study these competingchannels in a New Keynesian model of a small open economy with search frictions in the labor market. Our simulations are designed to characterize the possible response of inflation and monetary policy in Chile, a small open emerging country that has experienced a substantial immigration flow in recent years.
    Date: 2020–04
  16. By: Sylvain Leduc; Zheng Liu
    Abstract: The COVID-19 pandemic has raised concerns about the future of work. The pandemic may become recurrent, necessitating repeated adoptions of social distancing measures (voluntary or mandatory), creating substantial uncertainty about worker productivity. But robots are not susceptible to the virus. Thus, pandemic-induced job uncertainty may boost the incentive for automation. However, elevated uncertainty also reduces aggregate demand and reduces the value of new investment in automation. We assess the importance of automation in driving business cycle dynamics following an increase in job uncertainty in a quantitative New Keynesian DSGE framework. We find that, all else being equal, job uncertainty does stimulate automation, and increased automation helps mitigate the negative impact of uncertainty on aggregate demand.
    Keywords: Uncertainty; pandemic; robots; automation; productivity; unemployment; business cycles; monetary policy
    JEL: E24 E32 O33
    Date: 2020–05–07
  17. By: Chao Gu; Cyril Monnet; Ed Nosal; Randall Wright
    Abstract: Are financial intermediaries inherently unstable and, if so, why? To address this, we analyse whether model economies with financial intermediation are particularly prone to multiple, cyclic or stochastic equilibria. Several formalisations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with fixed costs and delegated investment as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with intermediaries as dealers in decentralised asset markets, similar to Duffie et al. Although the economics and mathematics differ across specifications, in each case financial intermediation engenders instability in a precise sense.
    Keywords: banking, financial intermediation, instability, volatility
    JEL: D02 E02 E44 G21
    Date: 2020–05
  18. By: Giovanni Nicolo
    Abstract: I estimate a medium-scale New-Keynesian model and relax the conventional assumption that the central bank adopted an active monetary policy by pursuing inflation and output stability over the entire post-war period. Even after accounting for a rich structure, I find that monetary policy was passive prior to the Volcker disinflation. Sunspot shocks did not represent quantitatively relevant sources of volatility. By contrast, such passive interest rate policy accommodated fundamental productivity and cost shocks that de-anchored inflation expectations, propagated via self-fulfilling inflation expectations and constituted the primary sources of the run-up in inflation from the 1960s through the late 1970s.
    Keywords: Monetary policy; Business cycle; Expectations; Indeterminacy; Bayesian methods
    JEL: C11 C52 C54 E31 E32 E52
    Date: 2020–05–05
  19. By: Paweł Kopiec (Narodowy Bank Polski)
    Abstract: This paper provides an analytical decomposition of the fiscal multiplier in economy populated with heterogeneous households, uninsured idiosyncratic income risk and frictional product market. Similarly to Auclert (2019), the derived expression consists of interpretable, model-based channels that describe the transmission of government spending shocks by private consumption. Calibrated model is used to estimate the magnitude of multipliers and their structure under alternative fiscal and monetary rules. Analytical and quantitative comparison to the multiplier’s formula in economy with identical agents indicates that household heterogeneity plays a crucial role in the propagation of fiscal expenditures shocks.
    Keywords: Heterogeneous Agents, Fiscal Stimulus
    JEL: D30 E62 H23 H30 H31
    Date: 2019
  20. By: NANA DAVIES, Charles
    Abstract: We model the supply side of the banking sector, two types of households, and a land asset collateral in a small open economy model that accounts for some of the most enduring features and provisions of the Franc Zone. The model is estimated using the Metropolis-Hasting algorithm and Cameroon's annual data from 1979 to 2016. Four findings stand out. First, sensible posteriors of some deep parameters are obtained when the proportion of rule-of-thumb households is set to forty-eight percent. Second, permanent technology, bank profit, consumption, and foreign inflation shocks are the main drivers of macroeconomic fluctuations. Third, among those shocks, only a bank profit shock, which is associated with a sharp drop of wholesale interest rates, leads to an output expansion. Fourth, fiscal policy matters but through its effects on banks' balance sheet.
    Keywords: Cameroon - Franc Zone - Land Collateral - Metropolis-Hasting - Rule-of-Thumb households
    JEL: C68 E32 F41 F45
    Date: 2020–04–23
  21. By: Boyan Jovanovic; Sai Ma
    Abstract: This paper documents several stylized facts on the real effects of economic uncertainty. First, higher uncertainty is associated with a more dispersed and negatively skewed distribution of output growth. Second, the response of economic growth to an increase in uncertainty is highly nonlinear and asymmetric. Third, higher asset volatility magnifies the negative impact of uncertainty on growth. We develop and estimate an analytically tractable model in which rapid adoption of new technology may raise economic uncertainty which causes measured productivity to decline. The equilibrium growth distribution is negatively skewed and higher uncertainty leads to a thicker left tail.
    Keywords: Uncertainty and growth; Volatility; Downside risk; Growth at risk
    JEL: D80 E44 O40 O47
    Date: 2020–05–07
  22. By: Bick, Alexander (Arizona State University); Fuchs-Schündeln, Nicola (Goethe University Frankfurt); Lagakos, David (National Bureau of Economic Research); Tsujiyama, Hitoshi (Goethe University Frankfurt)
    Abstract: Why are average hours worked per adult lower in rich countries than in poor countries? We consider two natural explanations: income effects in preferences, in which leisure becomes more valuable when income rises, and distortionary tax systems, which are more prevalent in richer countries. To assess the importance of these two forces, we build a simple model of labor supply by heterogeneous individuals and calibrate it to match international data on labor income taxation, government transfers relative to GDP, and hours worked per adult. The model predicts that income effects are the main driving force behind the decline of average hours worked with GDP per capita. We reach a similar conclusion in an extended model that matches cross-country patterns of labor supply along the extensive and intensive margins and of the prevalence of subsistence self-employment.
    Keywords: income effects, hours worked, taxation
    JEL: E24 J22 O11
    Date: 2020–04
  23. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: With non-controllable auto-regressive shocks, the welfare of Ramsey optimal policy is the solution of a Ricatti equation of a linear quadratic regulator. The existing theory refers to an additional Sylvester equation but miss another equation for computing the block matrix weighting the square of non-controllable variables in the welfare function. There is no need to simulate impulse response functions over a long period, to compute period loss functions and to sum their discounted value over this long period, as currently done so far. Welfare is computed for the case of the new-Keynesian Phillips curve with an auto-regressive cost-push shock.
    Keywords: Ramsey optimal policy,Stackelberg dynamic game,algorithm,forcing variables,augmented linear quadratic regulator,new-Keynesian Phillips curve
    Date: 2020–05
  24. By: NANA DAVIES, Charles
    Abstract: The Central African Economic and Monetary Community (CEMAC) is a constituent of the Franc Zone (FZ), whose roots may be traced back to 1901 when France created the West African Bank. Since its inception, FZ's monetary authorities' objective and monetary policy instruments have been evolving. Nevertheless, some FZ's features have endured, namely the fixed exchange rate between that monetary union's common currency (CFAF) and France's currency, the free capital mobility between Franc Zone countries (FZC) and France, the ceiling on the monetary budget financing and the obligation of FZC to entrust a share of their foreign exchange reserves to the French Treasury in exchange for the convertibility of CFAF into France's currency. Using Cameroon's data over 1979 and 2014, we estimate a DSGE model of a small open economy model that takes into account some of those features. We find that technology and fiscal shocks drive the bulk of economic fluctuations.
    Keywords: Franc Zone - Cameroon - DSGE model - Metropolis-Hasting
    JEL: C68 E32 F41 F45
    Date: 2018–09–10
  25. By: Christoph Gortz (University of Birmingham); Christopher Gunn (Carleton University); Thomas A. Lubik (Federal Reserve Bank of Richmond)
    Abstract: We identify total factor productivity (TFP) news shocks using standard VAR method- ology and document a new stylized fact: in response to news about future increases in TFP, inventories rise and comove positively with other major macroeconomic aggre- gates. We show that the standard theoretical model used to capture the effects of news shocks cannot replicate this fact when extended to include inventories. To explain the empirical inventory behavior, we therefore develop a framework that relies on the pres- ence of knowledge capital accumulated through a learning-by-doing process. The desire to take advantage of higher future TFP through knowledge capital drives output and hours choices on the arrival of news and leads to inventory accumulation alongside the other macroeconomic variables. The broad-based comovement we document supports the view that news shocks are an important driver of aggregate fluctuations.
    Keywords: News shocks, business cycles, inventories, knowledge capital, VAR.
    JEL: E2 E3
    Date: 2020–05
  26. By: Yang, Han
    Abstract: How does international trade affect transitional dynamics of the relative wage for unskilled workers when educational decisions and capital accumulation are considered? By including these channels in a dynamic quantitative trade model, I show that reduced trade costs increase the skill premium and educational attainment in the steady state. On the transitional path, capital accumulation and capital-skill complementarity cause a more drastic increase in the skill premium in the earlier transition. In the long run, education mitigates 65% of transitory trade-induced inequality on average. This result explains the observed transitional paths of the skill premium in recent trade liberalization episodes.
    Keywords: international trade, dynamic,education, inequality, skill premium
    JEL: F1 F4 F6
    Date: 2020–04
  27. By: Licht, Adrian; Escribano Saez, Alvaro; Blazsek, Szabolcs Istvan
    Abstract: In this paper, the benefits of statistical inference of score-driven state-spacemodels are incorporated into the inference of dynamic stochastic general equilibrium (DSGE)models. We focus on DSGE models, for which a Gaussian ABCD representation exists. Precisionof statistical estimation is improved, by using a score-driven multivariate t-distribution for theerrors. First, the updating term of the transition equation of the ABCD representation isreplaced by the conditional score of the log-likelihood (LL) with respect to location. Second,the time-constant scale parameters of the error terms in the measurement equation of the ABCDrepresentation are replaced by a dynamic parameter that is updated by the conditional score ofthe LL with respect to scale. Impulse response functions (IRFs) and conditions of the maximumlikelihood (ML) estimator are presented. In the empirical application, a benchmark DSGE modelis estimated for real data on US economic output, inflation and interest rate for the period of1954-2019. The score-driven ABCD representation improves the estimation precision of theGaussian ABCD representation. The score-driven ABCD representation with dynamic scaleprovides the best description of the time series data, by identifying a structural change in thesample period and providing the most precise IRF estimates.
    Keywords: Beta-T-Egarch; Generalized Autoregressive Score (Gas); Dynamic Conditional Score (Dcs); Dynamic Stochastic General Equilibrium (Dsge)
    Date: 2020–05–07
  28. By: Lange, Fabian (McGill University); Papageorgiou, Theodore (Boston College)
    Abstract: Exploiting results from the literature on non-parametric identification, we make three methodological contributions to the empirical literature estimating the matching function, commonly used to map unemployment and vacancies into hires. First, we show how to non-parametrically identify the matching function. Second, we estimate the matching function allowing for unobserved matching efficacy, without imposing the usual independence assumption between matching efficiency and search on either side of the labor market. Third, we allow for multiple types of jobseekers and consider an "augmented" Beveridge curve that includes them. Our estimated elasticity of hires with respect to vacancies is procyclical and varies between 0.15 and 0.3. This is substantially lower than common estimates suggesting that a significant bias stems from the commonly-used independence assumption. Moreover, variation in match efficiency accounts for much of the decline in hires during the Great Recession.
    Keywords: matching function, search, unemployment, hiring, vacancy
    JEL: E24 J6
    Date: 2020–04
  29. By: Cahuc, Pierre (Sciences Po, Paris); Hervelin, Jeremy (CREST (ENSAE))
    Abstract: In France, two years after school completion and getting the same diploma, the employment rate of apprentices is about 15 percentage points higher than that of vocational students. Despite this difference, this paper shows that there is almost no difference between the probability of getting a callback from employers for unemployed youth formerly either apprentices or vocational students. This result indicates that the higher employment rate of apprentices does not rely, in the French context, on better job access of those who do not remain in their training firms. The estimation of a job search and matching model shows that the expansion of apprenticeship has very limited effects on youth unemployment if this is not accompanied by an increase in the retention of apprentices in their training firm.
    Keywords: field experiment, school-to-work transitions, apprenticeship
    JEL: J24 M53 M51
    Date: 2020–04
  30. By: Antoine Bommier (ETH Zurich); Daniel Harenberg (ETH Zurich); François Le Grand (EMLyon Business School); Cormac O'Dea (Cowles Foundation, Yale University)
    Abstract: We analyze lifecycle saving strategies using a recursive utility model calibrated to match empirical estimates for the value of a statistical life. We show that, with a positive value of life, risk aversion reduces savings and annuity purchase. Risk averse agents are willing to make an early death a not-so-adverse outcome by enjoying greater consumption when young and bequeathing wealth in case of death. We also ï¬ nd that greater risk aversion lowers stock market participation. We show that this model can rationalize low annuity demand while also matching empirically documented levels of wealth and private investments in stocks. Our ï¬ ndings stand in contrast to studies that implicitly assume a negative value of life.
    Keywords: Recursive utility, Lifecycle model, Value of life, Risk aversion, Saving choices, Portfolio choices, Annuity puzzle
    JEL: D91 G11 J14 J17
    Date: 2020–05
  31. By: Nir Jaimovich; Itay Saporta-Eksten; Henry E. Siu; Yaniv Yedid-Levi
    Abstract: During the last four decades, the U.S. has experienced a fall in the employment in middle-wage, "routine-task-intensive," occupations. We analyze the characteristics of those who used to be employed in such occupations and show that this type of individual is nowadays more likely to be out of the labor force or working in low-paying occupations. Based on these findings, we develop a quantitative, general equilibrium model, with heterogeneous agents, labor force participation, occupational choice, and investment in physical and automation capital. We first use the model to evaluate the distributional consequences of automation. We find heterogeneity in its impact across different occupations, leading to a significant polarization in welfare. We then use this framework as a laboratory to evaluate various public policies such as retraining, and explicitly redistributive policies that transfer resources from those who benefit from automation to those who bear the brunt of its costs. We assess the tradeoffs between the aggregate impact and welfare distributional consequences of such policies.
    JEL: E24 E25 E61
    Date: 2020–05

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