nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒06‒29
thirty-two papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Unemployment and Endogenous Reallocation over the Business Cycle By Carlos Carrillo-Tudela; Ludo Visschers
  2. Welfare Effects of Polarization: Occupational Mobility over the Life-cycle By KIKUCHI Shinnosuke; KITAO Sagiri
  3. Should Germany Have Built a New Wall? Macroeconomic Lessons from the 2015-18 Refugee Wave By Busch, Christopher; Iftikhar, Zainab; Krueger, Dirk; Ludwig, Alexander; Popova, Irina
  4. Consumption insurance over the business cycle By Broer, Tobias
  5. A structural investigation of quantitative easing By Böhl, Gregor; Goy, Gavin; Strobel, Felix
  6. The Cyclicality of Labor Force Participation Flows: The Role of Labor Supply Elasticities and Wage Rigidity By Isabel Cairo; Shigeru Fujita; Camilo Morales-Jimenez
  7. Endogenous Business Cycles with Bubbles By ASAOKA Shintaro
  8. Health Shocks and the Evolution of Earnings over the Life-Cycle By Michael Keane; Elena Capatina; Shiko Maruyama
  9. Spatial Misallocation in Chinese Housing and Land Markets By Yongheng Deng; Yang Tang; Ping Wang; Jing Wu
  10. The Murder-Suicide of the Rentier: Population Aging and the Risk Premium By Kopecky, Joseph V.; Taylor, Alan M.
  11. What's up with the Phillips Curve? By Del Negro, Marco; Lenza, Michele; Primiceri, Giorgio E; Tambalotti, Andrea
  12. Epidemics: A Tale of Two Workers By Rahul Nath
  13. Can the Covid Bailouts Save the Economy? By Vadim Elenev; Tim Landvoigt; Stijn Van Nieuwerburgh
  14. Pareto-improving transition to fully funded pensions under myopia By Andersen, Torben M; Bhattacharya, Joydeep; Gestsson, Marias H
  15. Big G By Lydia Cox; Gernot Muller; Ernesto Pasten; Raphael Schoenle; Michael Weber
  16. Health versus Wealth: On the Distributional Effects of Controlling a Pandemic By Glover, Andrew; Heathcote, Jonathan; Krueger, Dirk; Rios-Rull, Jose-Victor
  17. The Supply of Hours Worked and Endogenous Growth Cycles By Ka-Kit Iong; Andreas Irmen
  18. Financial Deepening, Credit Crises, Human Capital and Growth By Sergio Salas; Kathleen Odell
  19. The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response? By Bergin, Paul R; Corsetti, Giancarlo
  20. Modeling the Global Effects of the COVID-19 Sudden Stop in Capital Flows By Ozge Akinci; Gianluca Benigno; Albert Queraltó
  21. Monetary Policy and Asset Price Bubbles: A Laboratory Experiment By Jordi Galí; Giovanni Giusti
  22. Automation, Growth, an Factor Shares in the Era of Population Aging By Andreas Irmen
  23. How do the Tax Burden and the Fiscal Space in Latin America look like? Evidence through Laffer Curves By Ignacio Lozano-Espitia; Fernando Arias-Rodríguez
  24. Optimal Growth in Repeated Matching Platforms: Options versus Adoption By Irene Lo; Vahideh Manshadi; Scott Rodilitz; Ali Shameli
  25. Internal and External Effects of Social Distancing in a Pandemic By Farboodi, Maryam; Jarosch, Gregor; Shimer, Robert
  26. The Macroeconomic Stabilization Of Tariff Shocks: What Is The Optimal Monetary Response? By Bergin, P. R.; Corsetti, G.
  27. Unexpected Effects: Uncertainty, Unemployment, and Inflation By Freund, L. B; Rendahl, P.
  28. An Economic Model of the COVID-19 Epidemic: The Importance of Testing and Age-Specific Policies By Brotherhood, Luiz; Kircher, Philipp; Santos, Cezar; Tertilt, Michèle
  29. The costs of macroprudential deleveraging in a liquidity trap By Chen, Jiaqian; Finocchiaro, Daria; Lindé, Jesper; Walentin, Karl
  30. Accounting for U.S. post-war economic growth By del Río, Fernando; Lores, Francisco-Xavier
  31. The Vanishing Procyclicality of Labour Productivity By GalÌ, Jordi; van Rens, Thijs
  32. Optimal Unemployment Benefits in the Pandemic By Mitman, Kurt; Rabinovich, Stanislav

  1. By: Carlos Carrillo-Tudela; Ludo Visschers
    Abstract: This paper studies the extent to which the cyclicality of gross and net occupational mobility shapes that of aggregate unemployment and its duration distribution. Using the SIPP, we document the relation between workers’ (gross and net) occupational mobility and unemployment duration over the long run and business cycle. To interpret this evidence, we develop an analytically and computationally tractable stochastic equilibrium model with heterogenous agents and occupations as well as aggregate uncertainty. The model is quantitatively consistent with several important features of the US labor market: procyclical gross and countercyclical net occupational mobility, the large volatility of unemployment and the cyclical properties of the unemployment duration distribution, among others. Our analysis shows that “excess” occupational mobility due to workers’ changing career prospects interacts with aggregate conditions to drive fluctuations of aggregate unemployment and its duration distribution.
    Keywords: unemployment, business cycle, rest, search, occupational mobility
    JEL: E24 E30 J62 J63 J64
    Date: 2020
  2. By: KIKUCHI Shinnosuke; KITAO Sagiri
    Abstract: The U.S. labor market has experienced polarization over the past several decades, where employment and wages of middle-class individuals have declined relative to those of low- and high-skill groups. What are the welfare effects of such a structural change? We build an overlapping generations model of individuals who choose consumption, savings, labor supply, and occupations over their life-cycles, and accumulate human capital, as they face uncertainty about labor productivity and longevity as well as the probability of exogenous separation from their current occupations. The model is parameterized to account for life-cycle patterns of occupational distribution and mobility in the early 1980s. We simulate a wage shift as observed in the data during the following decades, investigate individuals' responses, and quantify welfare effects across heterogeneous groups of individuals. Polarization is shown to improve welfare of young individuals that are high-skilled, while it hurts low-skilled individuals across all working ages and especially younger ones. The high-skilled gain is larger for generations entering in later periods, who can fully exploit the rising skill premium. We also evaluate changes in inequality and show how polarization leads to a rise in skill premium, increasing inequality in life-cycle earnings and wealth across individuals.
    Date: 2020–05
  3. By: Busch, Christopher; Iftikhar, Zainab; Krueger, Dirk; Ludwig, Alexander; Popova, Irina
    Abstract: In 2015-2016 Germany experienced a wave of predominantly low-skilled refugee immigration. We evaluate its macroeconomic and distributional effects using a quantitative overlapping generations model calibrated using German micro data to replicate education and productivity differentials between foreign born and native workers. Workers are modelled as imperfect substitutes in aggregate production leading to endogenous wage differentials. We simulate the dynamic effects of this refugee wave, with specific focus on the welfare impact on low skilled natives. Our results indicate that the small losses this group suffers can be compensated by welfare gains of other parts of the native population.
    Keywords: Demographic Change; Immigration; Overlapping Generations; Refugees
    JEL: E20 F22 H55
    Date: 2020–04
  4. By: Broer, Tobias
    Abstract: How do business cycle fluctuations affect the ability of households to smooth consumption against idiosyncratic shocks? To answer this question, we first document that, in U.S.\ micro-data, individual consumption reacts more to income changes in booms. Standard incomplete markets models, in contrast, where individuals borrow and save to smooth consumption, predict a lower sensitivity of consumption to individual income changes during times of high output. This motivates us to consider an alternative environment where financial frictions are endogenous and arise from lack of contract enforcement, whose business cycle properties have so far not been studied. We show analytically that this model is consistent with a wide variety of cyclical patterns of insurance. In a quantitative application with unemployment risk, we show that the response of individual consumption to job losses differs strongly between times of high and low output, and identify the conditions under which it is procyclical, as in the data.
    Keywords: business cycles; Consumption Smoothing; Limited Enforcement; Risk Sharing
    JEL: E32 G22
    Date: 2020–04
  5. By: Böhl, Gregor; Goy, Gavin; Strobel, Felix
    Abstract: Did the Federal Reserves' Quantitative Easing (QE) in the aftermath of the financial crisis have macroeconomic effects? To answer this question, the authors estimate a large-scale DSGE model over the sample from 1998 to 2020, including data of the Fed's balance sheet. The authors allow for QE to affect the economy via multiple channels that arise from several financial frictions. Their nonlinear Bayesian likelihood approach fully accounts for the zero lower bound on nominal interest rates. They find that between 2009 to 2015, QE increased output by about 1.2 percent. This reflects a net increase in investment of nearly 9 percent, that was accompanied by a 0.7 percent drop in aggregate consumption. Both, government bond and capital asset purchases were effective in improving financing conditions. Especially capital asset purchases significantly facilitated new investment and increased the production capacity. Against the backdrop of a fall in consumption, supply side effects dominated which led to a mild disinflationary effect of about 0.25 percent annually.
    Keywords: Quantitative Easing,Liquidity Facilities,Zero Lower Bound,Nonlinear Bayesian Estimation
    JEL: E63 C63 E58 E32 C62
    Date: 2020
  6. By: Isabel Cairo; Shigeru Fujita; Camilo Morales-Jimenez
    Abstract: Using a representative-household search and matching model with endogenous labor force participation, we study the cyclicality of labor market transition rates between employment, unemployment, and nonparticipation. When interpreted through the lens of the model, the behavior of transition rates implies that the participation margin is strongly countercyclical: the household’s incentive to send more workers to the labor force falls in expansions. We identify two key channels through which the model delivers this result: (i) the procyclical values of non-market activities and (ii) wage rigidity. The smaller the value of the extensive-margin labor supply elasticity is, the stronger the first channel is. Wage rigidity helps because it mitigates increases in the return to market work during expansions. Our estimated model replicates remarkably well the behavior of transition rates between the three labor market states and thus the stocks, once these two features are in place.
    Keywords: Labor force participation; unemployment; labor supply elasticity
    JEL: E24 J64
    Date: 2020–06–04
  7. By: ASAOKA Shintaro
    Abstract: By using a simple macroeconomic model, this study demonstrates the possibility that a bubble exists whether the economy is in a boom or a recession. We use an overlapping-generations model with endogenous growth. The results demonstrate that in an economy where banks can lend to consumers, there exists a single equilibrium path in which the economic growth rate fluctuates with the bubble. On the contrary, in an economy where banks cannot lend to consumers, the equilibrium path does not exist.
    Date: 2020–05
  8. By: Michael Keane (School of Economics, UNSW Business School, UNSW Sydney); Elena Capatina (Research School of Economics, Australian National University); Shiko Maruyama (Economics Discipline Group, UTS Business School, University of Technology Sydney)
    Abstract: We study the contribution of health shocks to earnings inequality and uncertainty in labor market outcomes. We calibrate a life-cycle model of labor supply and savings that incorporates health and health shocks. Our model features endogenous wage formation via human capital accumulation, employer sponsored health insurance, and meanstested social insurance. We find a substantial part of the impact of health shocks on earnings arises via reduced human capital accumulation. Health shocks account for 15% of lifetime earnings inequality for U.S. males, with two-thirds of this due to behavioral responses. In particular, it is optimal for low-skill workers – who often lack employer sponsored insurance – to curtail labor supply to maintain eligibility for means-tested transfers that protect them from high health care costs. This causes low-skill workers to invest less in human capital. Provision of public health insurance can alleviate this problem and enhance labor supply and human capital accumulation.
    Keywords: Health, Health Shocks, Human Capital, Income Risk, Precautionary Saving, Earnings Inequality, Health Insurance, Welfare
    JEL: D91 E21 I14 I31
    Date: 2020–06
  9. By: Yongheng Deng; Yang Tang; Ping Wang; Jing Wu
    Abstract: Housing and land prices in China have experienced dramatic hikes over the past decade or two. Moreover, housing and land prices have also become more dispersed across Chinese cities. This paper intends to explore how housing and land market frictions may affect not only the aggregate but also the spatial distribution of housing and land prices and hence the extent of spatial misallocation. We first document the spatial variations of housing and land market frictions. In particular, larger tier-1 cities receive less housing and land subsidies, compared to tier-2 and tier-3 cities, whereas land frictions have been mitigated over time. We then embed both types of market frictions into a dynamic competitive spatial equilibrium framework featured with endogenous rural-urban migration. The calibrated model can reasonably mimic the price hikes in the data. Our counterfactual analysis reveals that, in a frictionless economy, the levels of housing and land prices would both be higher; while the housing price hike would slow down, the land price would grow more rapidly. Moreover, the housing price would not be slow down unless housing frictions can be largely mitigated.
    JEL: E20 R20
    Date: 2020–05
  10. By: Kopecky, Joseph V.; Taylor, Alan M.
    Abstract: Population aging has been linked to global declines in interest rates. A similar trend shows that equity risk premia are on the rise. An existing literature can explain part of the decline in the trend in safe rates using demographics, but has no mechanism to speak to trends in relative asset prices. We calibrate a heterogeneous agent life-cycle model with equity markets, showing that this demographic channel can simultaneously account for both the majority of a downward trend in the risk free rate, while also increasing premium attached to risky assets. This is because the life cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations we find declines in the safe rate that are considerably larger than most existing estimates between the years 1990 and 2017. We are also able to account for most of the rise in the equity risk premium. Projecting forward to 2050 we show that persistent demographic forces will continue push the risk free rate further into negative territory, while the equity risk premium remains elevated.
    Keywords: demographics; Life-Cycle Model; OLG model; Rates of return; risky assets; safe assets; secular stagnation
    JEL: E21 E43 G11 J11
    Date: 2020–04
  11. By: Del Negro, Marco; Lenza, Michele; Primiceri, Giorgio E; Tambalotti, Andrea
    Abstract: The business cycle is alive and well, and real variables respond to it more or less as they always did. Witness the Great Recession. Inflation, in contrast, has gone quiescent. This paper studies the sources of this disconnect using VARs and an estimated DSGE model. It finds that the disconnect is due primarily to the muted reaction of inflation to cost pressures, regardless of how they are measured-a flat aggregate supply curve. A shift in policy towards more forceful inflation stabilization also appears to have played some role by reducing the impact of demand shocks on the real economy. The evidence rules out stories centered around changes in the structure of the labor market or in how we should measure its tightness.
    JEL: E31 E32 E37 E52
    Date: 2020–04
  12. By: Rahul Nath (Ashoka University)
    Abstract: This paper shows that the labour market opportunities available to an agent has a significant bearing on how that agent experiences the outbreak of an epidemic. I consider two types of labour (i) market labour that can only produce output in close physical proximity, and (ii) remote labour that can produce output at a distance. This paper develops a Two Agent New Keynesian model extended to include an epidemic bloc and dual feedback between economic decisions and the evolution of the epidemic. I show that an agent restricted to only supply market labour experiences higher death rates vis-_a-vis their share of the population, and suffers larger declines in labour and consumption over the course of the epidemic. Post-epidemic, these agents are significantly worse off than their counterparts who have the opportunity to work from home and hence a more unequal society emerges. I then show that simple containment policies, while leading to larger losses in economic prosperity as measured by output loss, can significantly reduce death rates across the population, bring the death rates of the two groups closer together, and reduce the inequality that emerges post epidemic.
    Keywords: Macroeconomic Labour, Heterogeneous Agents, New Keynesian DSGE, Epidemics, Lockdown, Covid-19
    Date: 2020–06
  13. By: Vadim Elenev; Tim Landvoigt; Stijn Van Nieuwerburgh
    Abstract: The covid-19 crisis has led to a sharp deterioration in firm and bank balance sheets. The government has responded with a massive intervention in corporate credit markets. We study equilibrium dynamics of macroeconomic quantities and prices, and how they are affected by government policy. The interventions prevent a much deeper crisis by reducing corporate bankruptcies by about half and short-circuiting the doom loop between corporate and financial sector fragility. The additional fiscal cost is zero since program spending replaces what would otherwise have been spent on intermediary bailouts. The model predicts rising interest rates on government debt and slow debt pay-down. We analyze an alternative intervention that targets aid to firms at risk of bankruptcy. While this policy prevents more bankruptcies and has lower fiscal cost, it only enjoys marginally higher welfare. Finally, we study longer-run consequences for firm leverage and intermediary health when pandemics become the new normal.
    JEL: E3 E4 E44 E6 G1
    Date: 2020–05
  14. By: Andersen, Torben M; Bhattacharya, Joydeep; Gestsson, Marias H
    Abstract: Under dynamic efficiency, a pay-as-you-go (PAYG) pension scheme helps the current generation of retirees but hurts future generations because they are forced to save via a return-dominated scheme. Abandoning it is deemed welfare-improving but typically not for all generations. But what if agents are present-biased (hence, undersave for retirement) and the "paternalistically motivated forced savings" component of a PAYG scheme motivated its existence in the first place? This paper shows it is possible to transition from such a PAYG scheme on to a higher return, mandated fully-funded scheme; yet, no generation is hurt in the process. The results inform the debate on policy design of pension systems as more and more policy makers push for the transition to take place but are forced to recognize that current retirees may get hurt along the way.
    Keywords: mandatory pensions; Pareto criterion pension crowding out; Present-Biased Preferences; transition
    JEL: D3 D91 E6 H55
    Date: 2020–04
  15. By: Lydia Cox; Gernot Muller; Ernesto Pasten; Raphael Schoenle; Michael Weber
    Abstract: “Big G” typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the US government and establish five facts. First, government spending is granular, that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, procurement contracts are short-lived. Fourth, idiosyncratic variation dominates the fluctuation of spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark aligning the model with the empirical evidence.
    Date: 2020–05
  16. By: Glover, Andrew; Heathcote, Jonathan; Krueger, Dirk; Rios-Rull, Jose-Victor
    Abstract: Many countries are shutting non-essential sectors of the economy to slow the spread of COVID-19. The gains and losses from these policies are very unequally distributed. Older individuals have most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have the most to lose. In this paper we first extend a standard epidemiological model of disease progression to include heterogeneity by age, and multiple sources of disease transmission. We then incorporate the epidemiological block into a multi-sector economic model in which workers differ by sector (basic and luxury) as well as by health status. Individuals value consumption, life, and health. We study optimal mitigation policies of a utilitarian government that can redistribute resources across individuals, but where such redistribution is costly. We show that optimal redistribution- and mitigation policies interact and thus the utilitarian government chooses a very different mitigation policy path than would be suggested by a representative agent setting. This policy reflects a compromise between the strongly diverging preferred policy paths across the subgroups of the population.
    Keywords: COVID-19; Economic Policy; redistribution
    Date: 2020–04
  17. By: Ka-Kit Iong (Department of Economics and Management, Université du Luxembourg); Andreas Irmen (Department of Economics and Management, Université du Luxembourg)
    Abstract: We show that declining hours of work per worker in conjunction with a growing work force may give rise to growth cycles. This is accomplished in an overlapping generations model where individuals are endowed with Boppart-Krusell preferences (Boppart and Krusell (2020)), i. e., the wage elasticity of their supply of hours worked is negative. On the supply side, economic growth is due to the expansion of consumption-good varieties through endogenous research. We show that a sufficiently negative equilibrium elasticity of the individual supply of hours worked to an expansion in the set of consumption-good varieties opens up the possibility of growth cycles where the economy fluctuates between two regimes, one with and the other without an active research sector. We identify period-2 and period-3 cycles, conclude with Li and Yorke (1975) that cycles of any periodicity exists, and generalize our findings to period-n cycles. We show that the possibility of cycles occurs under empirically plausible conditions. Throughout, we emphasize that the economics of cycles is linked to the intergenerational trade of shares and their pricing in the asset market
    Keywords: Endogenous Cycles, Technological Change, Endogenous Labor Supply, OLG-Model.
    JEL: E32 J22 O33 O41
    Date: 2020
  18. By: Sergio Salas; Kathleen Odell
    Abstract: In spite of extensive research exploring the implications of financial matters for economic growth, a general equilibrium macroeconomic model of financial frictions with human capital as an engine of growth is lacking in the literature. This paper helps to fill this gap, proposing a model that includes endogenous growth, human capital, and financial constraints. We derive short-term and long-term predictions from the model. From a long run perspective, we explore the relationship between financial depth and growth, and predict that this relationship is non-monotonic. Higher financial depth is initially associated with higher growth, but at diminishing rates. Further increases in financial depth become growth detrimental. From a short-run perspective, we analyze the role of transitory financial disruptions in producing persistent economic changes, a phenomenon that arguably happened during the Great Recession and the years that followed. We propose an explanation for these persistent effects based on human capital.
    Keywords: endogenous growth, financial depth, credit crunch, human capital, heterogeneous agents, fiscal policy
    JEL: O4 E44
    Date: 2020–06
  19. By: Bergin, Paul R; Corsetti, Giancarlo
    Abstract: In the wake of Brexit and the Trump tariff war, central banks have had to reconsider the role of monetary policy in managing the economic effects of tariff shocks, which may induce a slowdown while raising inflation. This paper studies the optimal monetary policy responses using a New Keynesian model that includes elements from the trade literature, including global value chains in production, firm dynamics, and comparative advantage between two traded sectors. We find that, in response to a symmetric tariff war, the optimal policy response is generally expansionary: central banks stabilize the output gap at the expense of further aggravating short-run inflation---contrary to the prescription of the standard Taylor rule. In response to a tariff imposed unilaterally by a trading partner, it is optimal to engineer currency depreciation up to offsetting the effects of tariffs on relative prices, without completely redressing the effects of the tariff on the broader set of macroeconomic aggregates.
    Keywords: comparative advantage; Optimal monetary policy; production chains; tariff shock; tariff war
    JEL: F4
    Date: 2020–04
  20. By: Ozge Akinci; Gianluca Benigno; Albert Queraltó
    Abstract: The COVID-19 outbreak has triggered unusually fast outflows of dollar funding from emerging market economies (EMEs). These outflows are known as “sudden stop” episodes, and they are typically followed by economic contractions. In this post, we assess the macroeconomic effects of the COVID-induced sudden stop of capital flows to EMEs, using our open-economy DSGE model. Unlike existing frameworks, such as the Federal Reserve Board’s SIGMA model, our model features both domestic and international financial constraints, making it well-suited to capture the effects of an outflow of dollar funding. The model predicts output losses in EMEs due in part to the adverse effect of local currency depreciation on private-sector balance sheets with dollar debts. The financial stresses in EMEs, in turn, spill back to the U.S. economy, through both trade and financial channels. The model-predicted output losses are persistent (consistent with previous sudden stop episodes), with financial effects being a significant drag on the recovery. We stress that we are only tracing out the effects of one particular channel (the stop of capital flows and its associated effect on funding costs) and not the totality of COVID-related effects.
    Keywords: sudden stops; COVID-19; spillovers and spillbacks
    JEL: E2 F1
    Date: 2020–05–18
  21. By: Jordi Galí; Giovanni Giusti
    Abstract: Advocates of a Leaning-Against-the-Wind monetary policy have claimed that such a policy can moderate asset price bubbles. On the other hand, there are compelling theoretical arguments that the policy would have the opposite effect. We study the effect of monetary policy on asset prices in a laboratory experiment with an overlapping generations structure. Participants in the role of the young generation allocate their endowment between two investments: a risky asset and a one-period riskless bond. The risky asset pays no dividend and thus capital gains are its only source of value. Consequently, its price is a pure bubble. We study how variations in the interest rate affect the evolution of the bubble in an experiment with three treatments. One treatment has a fixed low interest rate, another a fixed high interest rate, and the third has a Leaning-Againstthe-Wind interest rate policy in effect. We observe that the bubble increases (decreases) when interest rates are lower (higher) in the period of a policy change. However, the opposite effect is observed in the following period, when higher (lower) interest rates are associated with greater (smaller) bubble growth. Direct measurement of expectations reveals a Trend-Following component.
    Date: 2020–05
  22. By: Andreas Irmen (Department of Economics and Management, Université du Luxembourg)
    Abstract: How does population aging affect economic growth and factor shares in times of increasingly automatable production processes? The present paper addresses this question in a new macroeconomic model of automation where competitive firms perform tasks to produce output. Tasks require labor and machines as inputs. New machines embody superior technological knowledge and substitute for labor in the performance of tasks. The incentive to automate is stronger if wages are higher. Automation is shown to boost the aggregate demand for labor if and only if the incentives to automate are strong enough and to reduce the labor share. These predictions obtain even though automation is labor-augmenting in the reduced-form production function. Population aging due to a higher longevity or a decline in fertility may strengthen or weaken the incentives to automate. Irrespective of its source, population aging is predicted to increase the growth rate of per-capita GDP in the short and in the long run. The short-run effect of higher longevity on the labor share is positive whereas the effect of a declining fertility is negative. In the long run, population aging reduces the labor share.
    Keywords: Population Aging, Automation, Factor Shares, Endogenous Technical Change, Endogenous Labor Supply.
    JEL: E22 J11 J22 J23 O33 O41
    Date: 2020
  23. By: Ignacio Lozano-Espitia (Banco de la República de Colombia); Fernando Arias-Rodríguez (Banco de la República de Colombia)
    Abstract: How much fiscal space do Latin American countries have to increase their tax burdens in the long term? This paper provides an answer through Laffer curves estimates for taxes on labor, capital, and consumption for the six largest emerging economies of the region: Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Estimates are made using a neoclassical growth model with second-generation human capital and employing data from the national accounts system for the period from 1994 to 2017. Our findings allow us to compare the recent effective tax rates on factor returns against those which would maximize the government's revenues, and therefore to derive the potential tax-related fiscal space. Results suggest that joint fiscal space on labor and capital taxes would reach 6.5% of GDP for the region, on average, and that there are important differences among the countries. **** RESUMEN: ¿Cuánto espacio fiscal tienen los países de América Latina para incrementar su carga tributaria en el largo plazo? Este documento ofrece una respuesta mediante la estimación de las Curvas de Laffer para los impuestos al trabajo, al capital y al consumo de las economías más grandes de la región: Argentina, Brasil, Chile, Colombia, México y Perú. Los cálculos se realizan empleando un modelo de crecimiento con capital humano de 2da generación, que es calibrado para cada país con información de las cuentas nacionales para el período 1994 a 2017. Los resultados nos permiten comparar las tarifas efectivas recientes con aquellas que maximizarían los recaudos del gobierno, para así derivar el espacio fiscal de largo plazo. Nuestros hallazgos sugieren que el espacio fiscal conjunto sobre los impuestos al trabajo y al capital alcanzaría el 6.5% del PIB de la región, en promedio, y que existen diferencias importantes entre los países.
    Keywords: Laffer curves; fiscal policy; taxes on consumption, taxes on labor and capital incomes.Curvas de Laffer, política fiscal, impuestos sobre el consumo, las rentas laborales y los rendimientos del capital.
    JEL: E13 E62 H20 H30 H60
    Date: 2020–05
  24. By: Irene Lo; Vahideh Manshadi; Scott Rodilitz; Ali Shameli
    Abstract: We study the design of a decentralized platform in which workers and jobs repeatedly match, and their future engagement with the platform depends on whether they successfully find a match. The platform offers two types of matches to workers: an "adopted match" which entails repeatedly matching with the same job or a one-time match. Due to randomness in match compatibility, adoption seems favorable as it reduces uncertainty in matching. However, high adoption levels reduce the number of available jobs, which in turn can suppress future worker engagement if the remaining workers cannot find a match. To optimally resolve the trade-off between adoption and maintaining available options, we develop a random market model that captures the heterogeneity in workers' future engagement based on match type. Our analysis reveals that the optimal policy for maximizing the matching in a single period is either full or no adoption. For sufficiently thick markets, we show that the optimal single-period policy is also optimal for maximizing the total discounted number of matches. In thinner markets, even though a static policy of full or no adoption can be suboptimal, it achieves a constant-factor approximation where the factor improves with market thickness.
    Date: 2020–05
  25. By: Farboodi, Maryam; Jarosch, Gregor; Shimer, Robert
    Abstract: We use a conventional dynamic economic model to integrate individual optimization, equilibrium interactions, and policy analysis into the canonical epidemiological model. Our tractable framework allows us to represent both equilibrium and optimal allocations as a set of differential equations that can jointly be solved with the epidemiological model in a unified fashion. Quantitatively, the laissez-faire equilibrium accounts for the decline in social activity we measure in US micro-data from SafeGraph. Relative to that, we highlight three key features of the optimal policy: it imposes immediate, discontinuous social distancing; it keeps social distancing in place for a long time or until treatment is found; and it is never extremely restrictive, keeping the effective reproduction number mildly above the share of the population susceptible to the disease.
    Keywords: COVID-19; Equilibrium Social Distancing; Optimal Social Distancing
    JEL: C61 I10
    Date: 2020–04
  26. By: Bergin, P. R.; Corsetti, G.
    Abstract: In the wake of Brexit and the Trump tariff war, central banks have had to reconsider the role of monetary policy in managing the economic effects of tariff shocks, which may induce a slowdown while raising inflation. This paper studies the optimal monetary policy responses using a New Keynesian model that includes elements from the trade literature, including global value chains in production, firm dynamics, and comparative advantage between two traded sectors. We find that, in response to a symmetric tariff war, the optimal policy response is generally expansionary: central banks stabilize the output gap at the expense of further aggravating short-run inflation---contrary to the prescription of the standard Taylor rule. In response to a tariff imposed unilaterally by a trading partner, it is optimal to engineer currency depreciation up to offsetting the effects of tariffs on relative prices, without completely redressing the effects of the tariff on the broader set of macroeconomic aggregates.
    Keywords: tariff shock, tariff war, optimal monetary policy, comparative advantage, production chains
    JEL: F40
    Date: 2020–04–06
  27. By: Freund, L. B; Rendahl, P.
    Abstract: This paper studies the role of uncertainty in a search-and-matching framework with risk-averse households. A mean-preserving spread to future productivity contracts current economic activity even in the absence of nominal rigidities, although the effect is reinforced by the presence of the latter. That is, uncertainty shocks carry both contractionary demand- and supply effects. The reason is that a more uncertain future increases the precautionary behavior of households, which reduces interest rates and contracts demand. At the same time, as future asset prices becomes more volatile and positively covary with aggregate consumption, households demand a larger risk premium, which puts negative pressure on current asset values and thereby contracts supply. Thus, in comparison to a pure negative demand shock, an uncertainty shock puts less deflationary pressure on the economy and, as a result, renders a flatter Phillips curve.
    Keywords: COVID-19, Uncertainty, unemployment, inflation, search frictions
    JEL: J64 E21 E32
    Date: 2020–05–04
  28. By: Brotherhood, Luiz (University of Barcelona); Kircher, Philipp (European University Institute); Santos, Cezar (Getulio Vargas Foundation, Brazil); Tertilt, Michèle (University of Mannheim)
    Abstract: This paper investigates the role of testing and age-composition in the Covid-19 epidemic. We augment a standard SIR epidemiological model with individual choices regarding how much time to spend working and consuming outside the house, both of which increase the risk of transmission. Individuals who have flu symptoms are unsure whether they caught Covid-19 or simply a common cold. Testing reduces the time of uncertainty. Individuals are heterogeneous with respect to age. Younger people are less likely to die, exacerbating their willingness to take risks and to impose externalities on the old. We explore heterogeneous policy responses in terms of testing, confinements, and selective mixing by age group.
    Keywords: COVID-19, testing, social distancing, age-specific policies
    JEL: E17 C63 D62 I10 I18
    Date: 2020–05
  29. By: Chen, Jiaqian; Finocchiaro, Daria; Lindé, Jesper; Walentin, Karl
    Abstract: We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to a loan-to-income tightening when debt is high and monetary policy cannot accommodate.
    Keywords: Collateral and borrowing constraints; Household Debt; housing prices; Mortgage interest deductibility; New Keynesian Model; zero lower bound
    JEL: E52 E58
    Date: 2020–04
  30. By: del Río, Fernando; Lores, Francisco-Xavier
    Abstract: We apply the Chari et al. (2002, 2007) methodology to develop a growth accounting exercise for the U.S. economy during 1954--2017. Unlike them, we focus on perfect foresight models. We obtain three primary findings. First, the efficiency wedges in the entire period accurately account for the evolution of U.S. productivity and labor share. Second, the labor wedge was the main force driving the recovery of output and worked hours per capita in the eighties and nineties as well as after the Great Recession. Finally, if we replace the Cobb-Douglas assumption with a production function, which allows the factor shares to adjust competitively, the forces driving the U.S. Great Recession might not be very different from those in other OECD economies, and the forces driving the 1982 recession in the United States.
    Keywords: Growth Accounting, Capital-Efficiency Wedge, Labor-Efficiency Wedge, Labor Wedge, Investment Wedge, Resource Constraint Wedge, Productivity, Labor Share, Worked Hours.
    JEL: E1 E3 O4
    Date: 2020–05–27
  31. By: GalÌ, Jordi (CREI, UPF and Barcelona GSE); van Rens, Thijs (University of Warwick)
    Abstract: We document two changes in postwar US macroeconomic dynamics: the procyclicality of labour productivity vanished, and the relative volatility of employment rose. We propose an explanation for these changes that is based on reduced hiring frictions due to improvements in information about the quality of job matches and the resulting decline in turnover. We develop a simple model with hiring frictions and variable e§ort to illustrate the mechanisms underlying our explanation. We show that our model qualitatively and quantitatively matches the observed changes in business cycle dynamics
    Keywords: labour hoarding, hiring frictions, e§ort choice JEL Classification: E24; E32
    Date: 2020
  32. By: Mitman, Kurt (Stockholm University); Rabinovich, Stanislav (University of North Carolina, Chapel Hill)
    Abstract: How should unemployment benefits vary in response to the economic crisis induced by the COVID-19 pandemic? We answer this question by computing the optimal unemployment insurance response to the COVID-induced recession.We compare the optimal policy to the provisions under the CARES Act—which substantially expanded unemployment insurance and sparked an ongoing debate over further increases—and several alternative scenarios. We find that it is optimal first to raise unemployment benefits but then to begin lowering them as the economy starts to reopen — despite unemployment remaining high. We also find that the $600 UI supplement payment implemented under CARES was close to the optimal policy. Extending this UI supplement for another six months would hamper the recovery and reduce welfare. On the other hand, a UI extension combined with a re-employment bonus would further increase welfare compared to CARES alone, with only minimal effects on unemployment.
    Keywords: COVID-19, epidemic, unemployment insurance, optimal policy
    JEL: J65 E6 H1
    Date: 2020–06

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