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on Dynamic General Equilibrium |
| By: | Pauline Gandré |
| Abstract: | In the US, the linkages between the housing market, the credit market and the real sector have been striking in the past decades. To explain these linkages, I develop a small-scale DSGE model in which agents update non-rational beliefs about future house price growth, in accord with recent survey data evidence. Conditional on subjective house price beliefs, expectations are model-consistent. In the model with non-rational expectations, both standard productivity shocks and shocks in the credit sector generate endogenously persistent booms in house prices. Long-lasting excess volatility in house prices, in turn, affects the financial sector (because housing assets serve as collateral for household and entrepreneurial debt), and propagates to the real sector. This amplification and propagation mechanism improves the ability of the model to explain empirical puzzles in the US housing market and to explain the macro-financial linkages during 1985-2019. The learning model can also replicate the predictability of forecast errors evidenced in survey data. |
| Keywords: | Housing booms, Financial Accelerator, Business Cycles, Non-rational Expectations, Learning. |
| JEL: | D83 D84 E32 E44 G12 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2020-10&r=all |
| By: | Normann Rion (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) |
| Abstract: | I build a New-Keynesian dynamic stochastic general-equilibrium model with a dual labor market. Firms and workers meet through a matching technology à-la Diamond-Mortensen-Pissarides and face a trade-off between productivity and flexibility at the hiring stage. All else equal, open-ended contracts are more productive than fixed-term contracts, but they embed a firing cost. The share of fixed-term contracts in job creation fluctuates endogenously, which enables to assess the resort to temporary contracts along the cycle and its response to different shocks. I estimate the model using a first-order perturbation method and classic Bayesian procedures with macroeconomic data from the Euro area. I find that the share of fixed-term contracts in job creation is counter-cyclical. The agents react to shocks essentially through the job creation margin and the contractual composition of the hires. Moreover, a general-equilibrium effect arises ; the substitution between fixed-term and open-ended contracts at the hiring stage influences the job seekers' stock, which in turn impacts job creation. Using my previous estimates and solving the model with a third-order perturbation method, I find that fixed-term employment reacts to negative aggregate demand shocks and uncertainty shocks oppositely. This result suggests that fixed-term employment could be used to identify uncertainty shocks in future research. As for inflation, changes in firing costs do not alter its dynamics as long as open-ended and fixed-term matches do not differ much in productivity all else equal. |
| Keywords: | Fixed-term contracts,Employment protection,New Keynesian model,Inflation dynamics,Uncertainty |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-02570540&r=all |
| By: | Stéphane Dupraz; Emi Nakamura; Jón Steinsson |
| Abstract: | In standard models, economic activity fluctuates symmetrically around a ``natural rate'' and stabilization policies can dampen these fluctuations but do not affect the average level of activity. An alternative view–labeled the ``plucking model'' by Milton Friedman–is that economic fluctuations are drops below the economy's full potential ceiling. If this view is correct, stabilization policy, by dampening these fluctuations, can raise the average level of activity. We show that the dynamics of the unemployment rate in the US display a striking asymmetry that strongly favors the plucking model: increases in unemployment are followed by decreases of similar amplitude, while the amplitude of the increase is not related to the amplitude of the previous decrease. We develop a microfounded plucking model of the business cycle. The source of asymmetry in our model is downward nominal wage rigidity, which we embed in an explicit search model of the labor market. Our search framework implies that downward nominal wage rigidity is consistent with optimizing behavior and equilibrium. In our plucking model, stabilization policy lowers average unemployment and thereby yields sizable welfare gains. |
| Keywords: | : Downward Nominal Rigidity, Stabilization Policy, Labor Search. |
| JEL: | E24 E30 E52 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:748&r=all |
| By: | Jeremy Greenwood (University of Pennsylvania); Nezih Guner (CEMFI); Karen Kopecky |
| Abstract: | The 19th and 20th centuries saw a transformation in contraceptive technologies and their take up. This led to a sexual revolution, which witnessed a rise in premarital sex and out-of-wedlock births, and a decline in marriage. The impact of contraception on married and single life is analyzed here both theoretically and quantitatively. The analysis is conducted using a model where people search for partners. Upon finding one, they can choose between abstinence, a premarital sexual relationship, and marriage. The model is confronted with some stylized facts about premarital sex and marriage over the course of the 20th century. Some economic history is also presented. |
| Keywords: | age of marriage, contraceptive technology, history, never-married population, number of partners, out-of-wedlock births, premarital sex, singles |
| JEL: | J12 J13 N32 N31 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2020-032&r=all |
| By: | Xing Guo |
| Abstract: | This paper identifies the aggregate financial shocks and quantifies their effects on business investment based on an estimated DSGE model with firm-level heterogeneity. On average, financial shocks contribute only 1.1% of the variation in U.S. public firms' aggregate investment. The negligible aggregate relevance of financial shocks mainly results from the interaction between firm-level heterogeneity and general equilibrium effects. Following a contractionary financial shock, financially constrained firms are directly forced to cut investment, which dampens the aggregate investment demand and lowers the capital good price. The lower capital good price motivates the financially unconstrained firms to invest more, which largely cancels out the financial shock's direct effect in aggregation. If the firm-level heterogeneity is removed, the implied relevance of financial shocks to aggregate investment will be 50 times larger. This sharp difference indicates that representative firm models could overstate the relevance of financial shocks in driving the business cycle fluctuation and highlights the importance of micro-level heterogeneity in identifying the aggregate shocks. |
| Keywords: | Business fluctuation and cycles; Firm dynamics |
| JEL: | E22 G32 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:20-17&r=all |
| By: | Fanghui Li (Center for Economic Research, Shandong University); Gaowang Wang (Center for Economic Research, Shandong University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics) |
| Abstract: | The paper reexamines the famous Chamley-Judd zero capital tax theorem in model economies where the agents are endowed with the spirit of capitalism. It is shown that the limiting capital income tax is not zero in general and depends on the utility speciffications rather than the production technology. The similar formulas of optimal capital taxes are derived in more general settings with multiple physical capitals or heterogeneous agents (capitalists and workers). |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:614&r=all |
| By: | Saki Bigio; Mengbo Zhang; Eduardo Zilberman |
| Abstract: | The Covid-19 crisis has lead to a reduction in the demand and supply of sectors that produce goods that need social interaction to be produced or consumed. We interpret the Covid-19 shock as a shock that reduces utility stemming from “social” goods in a two-sector economy with incomplete markets. We compare the advantages of lump-sum transfers versus a credit policy. For the same path of government debt, transfers are preferable when debt limits are tight, whereas credit policy is preferable when they are slack. A credit policy has the advantage of targeting fiscal resources toward agents that matter most for stabilizing demand. We illustrate this result with a calibrated model. We discuss various shortcomings and possible extensions to the model. |
| JEL: | E32 E44 E62 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27118&r=all |
| By: | Guillaume MOREL |
| Abstract: | Within the present paper, we build a model from epidemiology and economics to study the impact of infectious diseases on the steady states and dynamic of an exogenous growth model. More precisely, we embed a SIS model within a Ramsey growth model in a close framework with a tax where pollution comes from consumption. Firstly, we show that a consumption tax allocated to a depollution policy possesses an ambiguous effect on consumption and welfare, depending on the disease infectivity factor. Secondly, we point out that an increase in the spread of an infectious disease can’t make a limit cycle (Hopf bifurcation) emerge near the endemic steady state as previous research proved. |
| Keywords: | Hopf bifurcation, Pollution, Ramsey model, SIS model. |
| JEL: | C62 O44 Q5 I1 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2020-22&r=all |
| By: | Stephie Fried; David Lagakos |
| Abstract: | The lack of reliable electricity in the developing world is widely viewed by policymakers as a major constraint on firm productivity. Yet most empirical studies find modest short-run effects of power outages on firm performance. This paper builds a dynamic macroeconomic model to study the long-run general equilibrium effects of power outages on productivity. The model captures the key features of how firms acquire electricity in the developing world, in particular the rationing of grid electricity and the possibility of self-generated electricity at higher cost. Power outages lower productivity in the model by creating idle resources, by depressing the scale of incumbent firms and by reducing entry of new firms. Consistent with the empirical literature, the model predicts that the short-run partial-equilibrium effects of eliminating outages are small. However, the long-run general-equilibrium effects are many times larger, supporting the view that eliminating outages is an important development objective. |
| JEL: | E13 E23 O11 O41 Q43 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27081&r=all |
| By: | Victoria Gregory; Guido Menzio; David G. Wiczer |
| Abstract: | We develop and calibrate a search-theoretic model of the labor market in order to forecast the evolution of the aggregate US 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. |
| JEL: | E0 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27105&r=all |
| By: | Hashimoto, Ken-ichi; Ono, Yoshiyasu; Schlegl, Matthias |
| Abstract: | We introduce a preference for wealth into the standard search and matching model to analyze the labor market when there is persistent demand shortage. We show that, under some conditions, a secular stagnation steady state exists in which the economy permanently operates below capacity due to both structural unemployment and underemployment. The latter is a direct consequence of the lack of aggregate demand. Our findings are as follows. In the absence of demand shortage, the preference for wealth creates a new transmission channel for shocks and policy measures due to induced changes in the real interest rate, in addition to the job creation channel of the standard matching model. Turning to the stagnation equilibrium, the effects of demand and supply shocks are opposite to those of the standard case and result in a co-movement of unemployment and underemployment. In contrast, the effects of wage and cost shocks depend on the degree of aggregate demand shortage, but they can explain movements of unemployment and underemployment in opposite directions. Finally, we show that fluctuations in the total employment gap under stagnation are primarily driven by fluctuations in underemployment instead of structural unemployment. Our analysis helps to understand why the unemployment rate in Japan has been surprisingly low during its lost decades and highlights the need for further policy interventions in support of aggregate demand despite a seemingly decent employment record. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1088&r=all |
| By: | Christopher Heiberger (University of Augsburg, Department of Economics); Daniel Fehrle (University of Augsburg, Department of Economics) |
| Abstract: | A The risk premium puzzle is even worse than previously reported if housing is also taken into consideration next to equity. While housing premia are only moderately smaller than equity premia, they are significantly less volatile and the Sharpe ratio of housing is significantly larger. Hence, three question arise: i) are existing approaches to explain the equity premium puzzle also capable of explaining even larger Sharpe ratios than previously required, ii) can return rates and volatilities of various assets be differentiated, and iii) can different Sharpe ratios between the two risky assets be matched. We analyze these questions, next to business cycle statistics, by including housing into seminal approaches to solve the risk premium puzzle in production economies. Non-disaster economies with habit formation, capital adjustment costs and limited factor mobility fail to generate a Sharpe ratio of housing of the empirically observed size and do not explain co-moving economic activity. A basic model with time-varying disaster risk can reproduce the large Sharpe ratio of housing. Moreover, the model can explain different means and volatilities of the risky assets, economic activity comoves and the model explains the volatility ratio of business investments, residential investments and house prices. However, the model does not allow to disentangle the Sharpe ratios of the risky assets and premia on equity remain too involatile. |
| Keywords: | equity premium puzzle, housing, rare disasters, production CAPM, real business cycle literature |
| JEL: | C63 E32 E44 G12 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:aug:augsbe:0338&r=all |
| By: | Lustenhouwer, Joep |
| Abstract: | I study liquidity traps in a model where agents have heterogeneous expectations and finite planning horizons. Backward-looking agents base their expectations on past observations, while forward-looking agents have fully rational expectations. Liquidity traps that are fully or partly driven by expectations can arise due to pessimism of backward-looking agents. Only when planning horizons are finite, these liquidity traps can be of longer duration without ending up in a deflationary spiral. I further find that fiscal stimulus in the form of an increase in government spending or a cut in consumption taxes can be very effective in mitigating the liquidity trap. A feedback mechanism of heterogeneous expectations causes fiscal multipliers to be the largest when the majority of agents is backward-looking but there also is a considerable fraction of agents that are forward-looking. Labor tax cuts are always deflationary and are not an effective tool in a liquidity trap. |
| Keywords: | bounded rationality; fiscal policy; liquidity trap; heterogeneous expectations |
| Date: | 2020–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0683&r=all |
| By: | Dotti, Valerio |
| Abstract: | Abstract We investigate the effects of (i) population ageing and (ii) rising income inequality on immigration policies using an overlapping-generations model of elections with endogenous political parties. In each period, young people work and pay taxes while old people receive social security payments. Immigrants are generally young, meaning they contribute significantly to financing the cost of public services and social security. Among natives, the elderly and the poor benefit the most from public spending. However, because these two types of voters do not fully internalize the positive fiscal effects of immigration, they have a common interest in coalescing around a populist party (or multiple) seeking to curb immigration and increase the tax burden on high-income individuals. Population ageing and rising income inequality increase the size and, in turn, the political power of such parties, resulting in more restrictive immigration policies, a larger public sector, higher tax rates, and lower societal well-being. Calibrating the model to UK data suggests that the magnitude of these effects is large. The implications of this model are shown to be consistent with patterns observed in UK attitudinal data. |
| Keywords: | Immigration, Ageing, Policy, Voting. |
| JEL: | C71 D72 H55 J61 |
| Date: | 2020–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:100226&r=all |
| By: | Jakob Grazzini; Lorenza Rossi |
| Abstract: | This paper considers a two sectors heterogeneous firms model where firms’ specific production technology and capital intensity are endogenously determined through business dynamics. It shows that a shock to the relative price of investment goods is followed by the entrance of new firms characterized by higher capital intensity of production and lower labor income share. Using ORBIS firm-level data of the US economy, the paper finds strong and robust evidence confirming that new firms enter the market with higher capital intensity. Furthermore, firms-level data are used to show that the labor share is significantly affected by capital intensity, as well as by firms’ size and firms’ mark-up. |
| Keywords: | firms dynamics, firms heterogeneity, labor income share, capital intensity, capital technological change, ORBIS microdata |
| JEL: | E21 E22 E25 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8255&r=all |