nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒06‒08
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Aino 3.0 model By Silvo, Aino; Verona, Fabio
  2. Monetary Policy Uncertainty and Firm Dynamics By Stefano Fasani; Haroon Mumtaz; Lorenza Rossi
  3. Shadow banking and the design of macroprudential policy in a monetary union By Philipp Kirchner; Benjamin Schwanebeck
  4. Higher-order income risk over the business cycle By Busch, Christopher; Ludwig, Alexander
  5. Unemployment insurance, Recalls and Experience Rating By Julien Albertini; Xavier Fairise; Anthony Terriau
  6. The Macroeconomics of Hedging Income Shares By Adriana Grasso; Juan Passadore; Facundo Piguillem
  7. Recruitment Policies, Job-Filling Rates and Matching Efficiency By Carrillo-Tudela, Carlos; Gartner, Hermann; Kaas, Leo
  8. Optimal contracts and supply-driven recessions By Giacomo Candian; Mikhail Dmitriev
  9. Saving Motives over the Life-Cycle By Pashchenko, Svetlana; Porapakkarm, Ponpoje
  10. Working Paper 320 - Hands Off Oil Revenues? Public Investment and Cash Transfers By Lacina Balma; Daniel Gurara; Mthuli Ncube
  11. Working Paper 318 - A DGE Model for Growth and Development Planning: Malawi By Chuku Chuku; Jacob Oduor; Anthony Simpasa; Peter Mwanakatwe
  12. Twin default crises By Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik; Ramirez, Juan-Rubio
  13. Recruitment Policies, Job-Filling Rates and Matching Efficiency By Carrillo-Tudela, Carlos; Gartner, Hermann; Leo, Kaas
  14. Analyzing the Effects of Saudi Arabia’s Economic Reforms Using a Dynamic Stochastic General Equilibrium Model By Jorge Blazquez; Marzio Galeotti; Baltasar Manzano; Axel Pierru; Shreekar Pradhan
  15. Loan supply and bank capital: A micro-macro linkage By Kick, Thomas; Malinkovich, Swetlana; Merkl, Christian
  16. The Welfare of Ramsey Optimal Policy Facing Auto-Regressive Shocks By Jean-Bernard Chatelain; Kirsten Ralf
  17. Entrepreneurship, Agency Frictions and Redistributive Capital Taxation By Corina Boar; Matthew Knowles
  18. Business Cycle Accounting: what have we learned so far? By Brinca, Pedro; Costa-Filho, João; Loria, Francesca
  19. Deadly Debt Crises: COVID-19 in Emerging Markets By Cristina Arellano; Yan Bai; Gabriel Mihalache
  20. Working Paper 324 - Public Investment, Time-to-Build, and Fiscal Stimulus By Lacina Balma; Daniel Gurara
  21. Big G By Lydia Cox; Gernot J. Muller; Ernesto Pasten; Raphael Schoenle
  22. Dynamic Analysis of Education, Automation, and Economic Growth By Kohei Okada
  23. Macroprudential capital requirements with non-bank finance By Dempsey, Kyle P.
  24. U.S. Monetary and Fiscal Policies - Conflict or Cooperation? By Xiaoshan Chen; Eric M. Leeper; Campbell Leith
  25. Investing in power grid infrastructure as a flexibility option: A DSGE assessment for Germany By Schreiner, Lena; Madlener, Reinhard
  26. Life Satisfaction of Employees, Labour Market Tightness and Matching Efficiency By Pablo de Pedraza; Martin Guzi; Kea Tijdens

  1. By: Silvo, Aino; Verona, Fabio
    Abstract: In this paper we present Aino 3.0, the latest vintage of the dynamic stochastic general equilibrium (DSGE) model used at the Bank of Finland for policy analysis. Aino 3.0 is a small-open economy DSGE model at the intersection of the recent literatures on so-called TANK (“Two-Agent New Keynesian”) and MONK (“Mortgages in New Keynesian”) models. It aims at capturing the most relevant macro-financial linkages in the Finnish economy and provides a rich laboratory for the analysis of various macroeconomic and macroprudential policies. We show how the availability of a durable consumption good (housing), on the one hand, and the presence of credit-constrained households, on the other hand, affect the transmission of key macroeconomic and financial shocks. We also illustrate how these new transmission channels affect model dynamics compared to the previous model vintage (the Aino 2.0 model of Kilponen et al., 2016).
    JEL: E21 E32 E44 F41 R31
    Date: 2020–05–26
  2. By: Stefano Fasani (Queen Mary University); Haroon Mumtaz (Queen Mary University); Lorenza Rossi (University of Pavia)
    Abstract: This paper uses a FAVAR model with external instruments to show that policy uncertainty shocks are recessionary and are associated with an increase in the exit of firms and a decrease in entry and in the stock price with total factor productivity rising in the medium run. To explain this result, we build a medium scale DSGE model featuring firm heterogeneity and endogenous firm entry and exit. These features are crucial in matching the empirical responses. Versions of the model with constant firms or constant firms' exit are unable to re-produce the FAVAR response of firms' entry and exit and suggest a much smaller effect of this shock on real activity.
    Keywords: Monetary policy uncertainty shocks, FAVAR, DSGE.
    JEL: C5 E1 E5 E6
    Date: 2020–05
  3. By: Philipp Kirchner (University of Kassel); Benjamin Schwanebeck (University of Hagen)
    Abstract: This paper studies the interaction of international shadow banking with monetary and macroprudential policy in a two-country currency union DSGE model. We fiÂ…nd evidence that cross-country fiÂ…nancial integration through the shadow banking system is a source of fiÂ…nancial contagion in response to idiosyncratic real and fiÂ…nancial shocks due to harmonization of fiÂ…nancial spheres. The resulting high degree of business cycle synchronization across countries, especially for Â…financial variables, makes union-wide policy tools more ffective. Nevertheless, optimal monetary policy at the union-level is too blunt an instrument to adequately stabilize business cycle downturns and needs to be accompanied by macroprudential regulation. Our welfare analysis reveals that the gains from the availability of country-speciÂ…c prudential tools vanish with the degree of fiÂ…nancial integration as union-wide macroprudential regulation is able to effectively reduce losses among the union members.
    Keywords: fiÂ…nancial frictions; shadow banking; currency union; Â…financial integration; macroprudential policy
    JEL: E32 E44 E58 F45
    Date: 2020
  4. By: Busch, Christopher; Ludwig, Alexander
    Abstract: We extend the canonical income process with persistent and transitory risk to shock distributions with left-skewness and excess kurtosis, to which we refer as higher-order risk. We estimate our extended income process by GMM for household data from the United States. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The existing tax and transfer system reduces dispersion and left-skewness of shocks. We then show that in a standard incomplete-markets life-cycle model, first, higher-order risk has sizable welfare implications, which depend crucially on risk attitudes of households; second, higher-order risk matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, higher-order risk has non-trivial implications for the degree of self-insurance against both transitory and persistent shocks.
    Keywords: Labor Income Risk,Business Cycle,GMM Estimation,Skewness,Persistent and Transitory Income Shocks,Risk Attitudes,Life-Cycle Model
    JEL: D31 E24 E32 H31 J31
    Date: 2020
  5. By: Julien Albertini (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xavier Fairise (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université); Anthony Terriau (GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université)
    Abstract: In the US, almost half of unemployment spells end through recall. In this paper, we show that the probability of being recalled is much higher among unemployment benefit recipients than nonrecipients. We argue that a large part of the observed difference in recall shares is accounted for by the design of the unemployment insurance financing scheme characterized by an experience rating system. We develop a search and matching model with different unemployment insurance status, endogenous separations, recalls and new hires. We quantify what would have been the labor market under alternative financing scheme. In the absence of the experience rating, the hiring and separations would have been higher in the long run and more volatile. Experience rating system contributes significantly to the difference in recalls between the recipients and the nonrecipients.
    Keywords: Search and matching,Layoffs,Recalls,Experience rating,Unemployment insurance
    Date: 2020
  6. By: Adriana Grasso (Bank of Italy); Juan Passadore (EIEF); Facundo Piguillem (EIEF and CEPR)
    Abstract: The recent debate about the falling labor share has brought the attention to the income shares’ trends, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is distorted by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by firms and risky assets by households emerges naturally as a tool to insure income shares’ risk. We calibrate the model to the U.S. economy and show that low rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.
    Date: 2020
  7. By: Carrillo-Tudela, Carlos (University of Essex); Gartner, Hermann (Institute for Employment Research (IAB), Nuremberg); Kaas, Leo (Goethe University Frankfurt)
    Abstract: Recruitment behavior is important for the matching process in the labor market. Using unique linked survey-administrative data, we explore the relationships between hiring and recruitment policies. Faster hiring goes along with higher search effort, lower hiring standards and more generous wages. To analyze the mechanisms behind these patterns, we develop a directed search model in which firms use different recruitment margins in response to productivity shocks. The calibrated model points to an important role of hiring standards for matching efficiency and for the impact of labor market policy, whereas search effort and wage policies play only a minor role.
    Keywords: vacancies, recruitment, labor market matching
    JEL: E24 J23 J63
    Date: 2020–05
  8. By: Giacomo Candian (Department of Applied Economics, HEC Montréal); Mikhail Dmitriev (Department of Economics, Florida State University)
    Abstract: In models with financial frictions, state-contingent contracts stabilize the business cycle relative to contracts with predetermined rates. We show that this finding depends on whether predetermined rates are set in real or nominal terms. State-contingent contracts can amplify supply-driven recessions compared to contracts set in nominal terms.
    Keywords: collateral constraints, financial accelerator, financial frictions, optimal contracts
    JEL: C68 E44 E61
    Date: 2020–05
  9. By: Pashchenko, Svetlana; Porapakkarm, Ponpoje
    Abstract: A major challenge in the study of saving behavior is how to disentangle different motives for saving. We approach this question in the context of an entire life-cycle model. Specifically, we identify the importance of different saving motives by simultaneously accounting for wealth accumulation during working period, wealth decumulation during retirement, and labor supply behavior. We show that exploiting all of these data features can sharpen our identification, thus complementing previous studies that focus only on wealth accumulation or decumulation. We calibrate our model using several micro datasets and use the estimated model to evaluate the contribution of life-cycle, bequest, and precautionary motives to total savings. We also emphasize the importance of accounting for state-contingent assets when analyzing the precautionary saving motive.
    Keywords: savings, self-insurance, bequest motives, life-cycle models, medical spending
    JEL: D52 D91 E21 H53 I13 I18
    Date: 2020–04
  10. By: Lacina Balma (Research Department, African Development Bank); Daniel Gurara (International Monetary Fund, United); Mthuli Ncube (Minister of Finance and Economic Development, Republic of Zimbabwe)
    Abstract: Many resource-rich countries fare little better than their resource-poor counterparts because windfall income is often associated with misuses. We develop a small open-economy DSGE model to explore the policy response to oil windfall in Kenya, focusing on a scenario of transferring the resource revenues entirely to households versus two alternative fiscal rules: all-investing and sustainable investing. Our results show that transfers to households are welfare-improving while containing the pressure on public investment efficiency. However, the overall impact on the economy is negligible. The all-investing approach leads to positive yet volatile economic outcomes and pronounced absorptive capacity constraints. The sustainable investing approach—which involves jointly saving and investing—minimizes macroeconomic volatility, absorptive capacity constraints, and raises future investment efficiency. We find that it is socially optimal to use 60–80 percent of the oil windfall for transfers and investment spending and to save 20–40 percent. JEL classification:H54, F43, Q32
    Keywords: Oil revenues; public investment; cash transfers; optimal policy rules
    Date: 2019–08–20
  11. By: Chuku Chuku (Research Department, African Development Bank); Jacob Oduor (Tanzania Country Office, African Development Bank); Anthony Simpasa (Nigeria Country Department, African Development Bank); Peter Mwanakatwe (Malawi Country Office, African Development Bank)
    Abstract: It was Margaret Thatcher who said, “plan your work for today and every day, then work your plan". Yet many national development plans in Africa have failed because they were either not well planned or the plans were not well worked out. We present a fully specified medium-scale dynamic general equilibrium model that can be used as the macroeconomic framework for development planning. Structural peculiarities of low-income developing economies are emphasized, including limited access to credit markets by households, a prominent natural resource sector, limited labour and capital mobility, absorptive capacity constraints, and corruption leakages, among others. The model is applied to Malawi and provides a systematic way to assess the implications of alternative policy options for a new national development plan. Key insights from the policy experiments conducted with the model are as follows: (i) there is a $1.2 billion public investment requirement to move per capita income up to about $1000; (ii) debt trajectories are sustainable because investment literally pays for itself by generating future growth and a broader tax base; (iii) the traded sector contracts temporarily in favour of an expansion of the nontraded sector; (iv) growth rates under commercial borrowing options are lower, mainly because of the crowding-out effect that commercial borrowing has on private investment and consumption; (v) mild and gradual fiscal adjustments significantly improves debt indicators; and, (vi) finally, persistent adverse precipitation shocks in the form of drought spells can lead to a contraction of growth rates by up to 2 percentage points. JEL Classification: E61,O21,H54
    Keywords: DGE, public investments, debt sustainability, weather shocks, growth forecasts, macroeconomic outcomes, Malawi
    Date: 2019–08–20
  12. By: Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik; Ramirez, Juan-Rubio
    Abstract: We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises – simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency. JEL Classification: G01, G28, E44
    Keywords: bank capital requirements, bank default, financial crises, firm default
    Date: 2020–05
  13. By: Carrillo-Tudela, Carlos; Gartner, Hermann (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Leo, Kaas
    Abstract: "Recruitment behavior is important for thematching process in the labormarket. Using unique linked survey-administrative data, we explore the relationships between hiring and recruitment policies. Faster hiring goes along with higher search effort, lower hiring standards and more generous wages. To analyze the mechanisms behind these patterns, we develop a directed search model in which firms use different recruitment margins in response to productivity shocks. The calibrated model points to an important role of hiring standards for matching efficiency and for the impact of labor market policy, whereas search effort and wage policies play only a minor role." (Author's abstract, IAB-Doku) ((en))
    JEL: E24 J23 J63
  14. By: Jorge Blazquez; Marzio Galeotti; Baltasar Manzano; Axel Pierru; Shreekar Pradhan (King Abdullah Petroleum Studies and Research Center)
    Abstract: Saudi Arabia is the world’s second-largest holder of proved oil reserves and the second-largest producer of petroleum liquids. The country is the largest exporter of crude oil, with a share of 16% of total crude oil exports in 2017. Saudi Arabia’s economy is heavily oil dependent.
    Keywords: Cointegration, Economic activity, GDP, Nighttime Satellite data, Production Function
    Date: 2020–05–21
  15. By: Kick, Thomas; Malinkovich, Swetlana; Merkl, Christian
    Abstract: In the presence of financial frictions, banks' capital position may constrain their ability to provide loans. The banking sector may thus have important feedback effects on the macroeconomy. To shed new light on this issue, we combine two approaches. First, we use microeconomic balance sheet data from Germany and estimate banks' loan supply response to capital changes. Second, we modify the model of Gertler and Karadi (2011) such that it can be calibrated to the estimated partial equilibrium elasticity of bank loan supply with respect to bank capital. Although the targeted elasticity is remarkably different from the one in the baseline model, banks continue to be an important originator and amplifier of macroeconomic shocks. Thus, combining microeconometric results with macroeconomic modeling provides evidence on the effects of the banking sector on the macroeconomy.
    Keywords: DSGE,Bank Capital,Loan Supply,Financial Frictions
    JEL: E24 E32 E44
    Date: 2020
  16. 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
  17. By: Corina Boar (New York University); Matthew Knowles (University of St Andrews)
    Abstract: We study optimal capital taxation in a model with financial frictions, where the distribution of wealth across heterogeneous entrepreneurs affects how efficiently capital is used in the economy. The government sets linear taxes on wealth, consumption, capital and labor income to maximize the steady state welfare of workers, who own no wealth. In our setting, capital income taxes are particularly costly, because these taxes lead to a more inefficient allocation of capital and, ultimately, lower aggregate total factor productivity. We model financial frictions as arising endogenously as a result of an asymmetric information problem and find that the tightness of financial frictions is affected by tax rates. In our setting, optimal tax rates can be written as simple closed-form functions of pre-tax prices and parameters. We find that the optimal total tax burden on entrepreneurs should be zero, even though the government cares only about workers’ welfare.
    Keywords: Optimal Taxation, Capital Taxation, Entrepreneurship, Financial Frictions
    JEL: E44 H21 D31 D82
    Date: 2020–05–27
  18. By: Brinca, Pedro; Costa-Filho, João; Loria, Francesca
    Abstract: What drives recessions and expansions? Since it was introduced in 2007, there have been hundreds of business cycle accounting (BCA) exercises, a procedure aimed at identifying classes of models that hold quantitative promise to explain a certain period of economic fluctuations. First, we exemplify the procedure by studying the U.S. recessions in 1973 and 1990 using and reflect upon the critiques BCA has been subject to. Second, we look into the many equivalence theorems that the literature has produced and that allow BCA practitioners to identify the theories that are quantitatively relevant for the economic period under study. Third, we describe the methodological extensions that have been brought forth since BCA’s original inception. We end by providing some broad conclusions regarding the relative contribution of each wedge: GDP and aggregate investment are usually driven by an efficiency wedge, hours of work are closely related to the labor wedge and, in an open economy, the investment wedge helps to explain country risk spreads on international bonds. Larger changes in interest rates and currency crises are usually associated with the investment and/or the labor wedge. Finally, we contribute with a graphical user interface that allows practitioners to perform business cycle accounting exercises with minimal effort.
    Keywords: Business Cycle Accounting, business cycles, wedges
    JEL: E27 E30 E32 E37
    Date: 2020–05–05
  19. By: Cristina Arellano; Yan Bai; Gabriel Mihalache
    Abstract: The COVID-19 epidemic in emerging markets risks a combined health, economic, and debt crisis. We integrate a standard epidemiology model into a sovereign default model and study how default risk impacts the ability of these countries to respond to the epidemic. Lockdown policies are useful for alleviating the health crisis but they carry large economic costs and can generate costly and prolonged debt crises. The possibility of lockdown induced debt crises in turn results in less aggressive lockdowns and a more severe health crisis. We find that the social value of debt relief can be substantial because it can prevent the debt crisis and can save lives.
    Date: 2020
  20. By: Lacina Balma (Research Department, African Development Bank); Daniel Gurara (International Monetary Fund, United)
    Abstract: We study the macroeconomic impacts of public investment surges and fiscal policy adjustments to debt-financed public investment using a neoclassical growth model. We focus on two important issues that are pervasive in publicly financed investment projects in low-income countries: gestation delays and public investment inefficiencies. The model is estimated for a typical low-income country. Three central messages emerge. First, assumptions about which fiscal instruments may adjust to stabilize debt are crucial for the ultimate impacts of changes in fiscal policy. Covering the cost of the investment program and stabilizing debt with tax increases or spending cuts can make government investment contractionary at longer horizons, by crowding out private investment and consumption. Second, government investment spending delivers small, positive, labor and output responses in the presence of time-to-build delays. Third, high-yielding public investment can substantially raise output and consumption, and be self-financing in the long run. JEL classification: E62, H63
    Keywords: Public investment, time-to-build, fiscal stimulus
    Date: 2019–08–21
  21. By: Lydia Cox; Gernot J. Muller; Ernesto Pasten; Raphael Schoenle
    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 in 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; Granularity; Sectoral Heterogeneity; Federal Procurement; Monetary Policy; Fiscal Policy Transmission
    JEL: E32 E62
    Date: 2020–05–27
  22. By: Kohei Okada (Graduate School of Economics, Osaka University)
    Abstract: Ever since the onset of the Industrial Revolution,automation has had signicant impacts on economic growth,labor,the education decision-making of individuals,and education policy. In this study,we aim to examine the complex relationship between education,automation,and economic growth. We employ an overlapping-generations model with endogenous education decision-making and automation. Our fndings show that an economy converges to a steady state where automation occurs and per capita output is high if productivity is high.On the other hand,we show that an economy converges to a steady state where automation does not occur and per capita output is low if productivity is low. In addition,we examine how education subsidy policy affects the economy when productivity is low. If the efficiency of education is high,the government can steer an economy away from a steady state without automation by investing more resources in education.If the efficiency of education is low,there can exist multiple steady states where automation occurs in one but not in the other.
    Keywords: Education,Automation,Economicgrowth
    JEL: E22 J24 O10 O30
  23. By: Dempsey, Kyle P.
    Abstract: I analyze the impact of raising capital requirements on the quantity, composition, and riskiness of aggregate investment in a model in which firms borrow from both bank and non-bank lenders. The bank funds loans with insured deposits and costly equity, monitors borrowers, and must maintain a minimum capital to asset ratio. Non-banks have deep pockets and competitively price loans. A tight capital requirement on the bank reduces risk-shifting and decreases bank leverage, reducing the risk of costly bank failure. In response, though, the bank can change both price and non-price contract terms. This may induce firms to substitute out of bank finance, leading to a theoretically ambiguous effect on the profile of aggregate investment. Quantitatively, I find that the bank's incentive to insure itself against issuing costly equity and competition from the non-bank sector mutes the long run impact of raising capital requirements. Increasing the capital requirement from 8% to 26% eliminates bank failures with effectively no change in the quantity or riskiness of aggregate investment. JEL Classification: G2, E5, E6, E32, E44
    Keywords: banking, business cycles, capital requirements
    Date: 2020–05
  24. By: Xiaoshan Chen; Eric M. Leeper; Campbell Leith
    Abstract: We estimate a model in which both fiscal and monetary policy behavior arise from the optimizing behavior of distinct monetary and fiscal authorities. Optimal time-consistent policy behavior fits U.S. time series at least as well as rules-based behavior. American policy makers have often been in conflict. After the Volcker disinflation, policies did not achieve the conventional mix of a conservative monetary policy paired with a debt-stabilizing fiscal policy. If credible, a conservative central bank that follows a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. Enhancing cooperation between policy makers without an ability to commit would be detrimental to welfare.
    Keywords: Bayesian Estimation, Monetary and Fiscal Policy Interactions, Optimal Policy, Markov Switching
    JEL: C11 E31 E63
    Date: 2019–05
  25. By: Schreiner, Lena (RWTH Aachen University); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))
    Abstract: This paper provides an approach to incorporate planned investments in power grid infrastructure in Germany, which intend to provide the necessary flexibility to integrate large shares of variable renewable energy sources into the power system, into a dynamic stochastic equilibrium model. Since the investments’ economic impact remains unclear, this paper sheds light on two questions: Do power grid infrastructure investments in Germany have the potential to positively impact economic performance, particularly GDP and employment? Is power grid infrastructure investment an efficient way to provide flexibility to the electricity system? We find the potential for negative effects of power grid infrastructure investments on economic outcomes, which can, however, be mitigated by an adequate design of the investments and its framework conditions.
    Keywords: DSGE analysis; infrastructure; Germany; electric grid; energy transition; flexibility
    JEL: C68 E61 O13 P18 Q43 Q48 Q56
    Date: 2019–08–01
  26. By: Pablo de Pedraza (AIAS, University of Amsterdam and JRC European Commission); Martin Guzi (Masaryk University, CELSI and IZA); Kea Tijdens (AIAS, University of Amsterdam)
    Abstract: Di Tella et al. (2001) show that temporary fluctuations in life satisfaction (LS) are correlated with macroeconomic circumstances such as gross domestic product, unemployment, and inflation. In this paper, we bring attention to labour market measures from search and matching models (Pissarides 2000). Our analysis follows the two-stage estimation strategy used in Di Tella et al. (2001) to explore sectoral unemployment levels, labour market tightness, and matching efficiency as LS determinants. In the first stage, we use a large sample of individual data collected from a continuous web survey during the 2007-2014 period in the Netherlands to obtain regression-adjusted measures of LS by quarter and economic sector. In the second-stage, we regress LS measures against the unemployment level, labour market tightness, and matching efficiency. Our results are threefold. First, the negative link between unemployment and an employee’s LS is confirmed at the sectoral level. Second, labour market tightness, measured as the number of vacancies per job-seeker rather than the number of vacancies per unemployed, is shown to be relevant to the LS of workers. Third, labour market matching efficiency affects the LS of workers differently when they are less satisfied with their job and in temporary employment. Our results give support to government interventions aimed at activating demand for labour, improving the matching of job-seekers to vacant jobs, and reducing information frictions by supporting match-making technologies.
    Keywords: life satisfaction; matching efficiency; tightness; unemployment
    JEL: E24 J21
    Date: 2020–05

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