nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒07‒13
twenty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach By Benigno, Gianluca; Foerster, Andrew; Otrok, Christopher; Rebucci, Alessandro
  2. Higher-Order Income Risk over the Business Cycle By Busch, Christopher; Ludwig, Alexander
  3. Monetary Policy Rule and Taylor Principle in Emerging ASEAN Economies: GMM and DSGE Approaches By Taguchi, Hiroyuki
  4. Tight and Loose, and Red and Blue: A 'Dance' of Macro Policies in the US By Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
  5. Unemployment insurance, Recalls and Experience Rating By Julien Albertini; Xavier Fairise; Anthony Terriau
  6. Recruitment Policies, Job-Filling Rates and Matching Efficiency By Carlos Carrillo-Tudela; Hermann Gartner; Leo Kaas
  7. Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk By Javier Bianchi; César Sosa-Padilla
  8. Immigration, Legal Status and Fiscal Impact By Andri Chassamboulli; Xiangbo Liu
  9. External shocks and economic activity in DR Congo: a dynamic stochastic general equilibrium (DSGE) analysis By Gilles Bertrand Umba
  10. Heterogenous Job Separations and the Balassa-Samuelson Effect By Noel GASTON; YOSHIMI Taiyo
  11. Business cycle implications of banking system heterogeneity and complexity By Oliver de Groot; Grzegorz Wesołowski
  12. Occupational Matching and Cities By Theodore Papageorgiou
  13. Soil pollution diffusion in a spatial agricultural economy By Carmen Camacho; Alexandre Cornet
  14. Is There News in Inventories? By Christoph Görtz; Christopher Gunn; Thomas A. Lubik
  15. Debt Crises, Fast and Slow By Corsetti, G.; Maeng, S. H.
  16. Optimal lockdown in altruistic economies By Stefano Bosi; Carmen Camacho; David Desmarchelier
  17. Emission-based Interest Rates and the Transition to a Low-carbon Economy By Florian Böser; Chiara Colesanti Senni
  18. Trade Relationships, Bargaining and Export Dynamics By Mirko Abbritti, Ivan Kim, Tommaso Trani
  19. The Evolution of the US Family Income-Schooling Relationship and Educational Selectivity By Christian Belzil; Jorgen Hansen
  20. Are the liquidity and collateral roles of asset bubbles different? By Lise Clain-Chamosset-Yvrard; Xavier Raurich; Thomas Seegmuller

  1. By: Benigno, Gianluca; Foerster, Andrew; Otrok, Christopher; Rebucci, Alessandro
    Abstract: We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between being the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt, Tequila, and Global Financial Crises. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by cocktails of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.
    Keywords: Bayesian estimation; business cycles; Endogenous Regime-Switching; financial crises; Mexico; occasionally binding constraints
    JEL: C11 E3 F41 G01
    Date: 2020–03
  2. 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: Business cycle; GMM estimation; labor income risk; Life-Cycle Model; Persistent and Transitory Income Shocks; Risk attitudes; Skewness
    JEL: D31 E24 E32 H31 J31
    Date: 2020–03
  3. By: Taguchi, Hiroyuki
    Abstract: This paper aims to reassess the performances of inflation targeting adopted by emerging ASEAN countries, Indonesia, the Philippines and Thailand, by examining their monetary policy rules, both through generalized-method-of-moments (GMM) estimations of policy reaction functions and through Bayesian estimations of the New Keynesian dynamic-stochastic-general-equilibrium (DSGE) model. The main findings are summarized as follows. First, the GMM estimations identified inflation-responsive rules fulfilling the Taylor principle, with a forward-looking manner in Indonesia and Thailand and with a contemporaneous way in the Philippines. Second, the Bayesian estimations of the New Keynesian DSGE could reassure the GMM estimation results, as the former estimations produced consistent outcomes with the latter ones on the policy rate reactions to inflation with the Taylor principle.
    Keywords: Taylor principle; Inflation targeting; Emerging ASEAN; Generalized method of moments (GMM); New Keynesian dynamic stochastic general equilibrium (DSGE)
    JEL: E52 E58 O53
    Date: 2020–06
  4. By: Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
    Abstract: Using optimising policy framework, we build and estimate a small-scale DSGE model of the US, and tell the story of monetary and fiscal policy interactions in 1955-2018. We find that fiscal policy is important to identify shifts in monetary policy preferences, and it is shaped by the political color. We use this model to analyse the episode of zero lower bound on interest rate in 2008-15. We find that the bound constrained monetary policy, explain some observed irregularities in macroeconomic data, and demonstrate that a change to price level targeting could have generated a powerful lift-off from the constraint.
    Keywords: Optimal Noncooperative Monetary and Fiscal Policy, Zero Lower Bound, Price Level Targeting, Political Color, Bayesian Estimation with Markov Switching
    JEL: E31 E52 E62 E63
    Date: 2020–06
  5. By: Julien Albertini (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Xavier Fairise (GAINS, University of Le Mans); Anthony Terriau (GAINS, University of Le Mans)
    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
    JEL: E23 E32 J63 J64 J65
    Date: 2020
  6. By: Carlos Carrillo-Tudela; Hermann Gartner; Leo Kaas
    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
  7. By: Javier Bianchi; César Sosa-Padilla
    Abstract: In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with fixed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand amplification generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that financing reserves with debt accumulation may not lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our findings suggest that a simple linear rule linked to spreads can achieve significant welfare gains, while those rules currently used in policy studies of reserve adequacy can be counterproductive.
    JEL: F32 F34 F41
    Date: 2020–06
  8. By: Andri Chassamboulli; Xiangbo Liu
    Abstract: How do legal and illegal immigrants affect the fiscal balance and welfare of natives in the host country? To answer this question we develop a general equilibrium model with search frictions in the labor market that accounts for both the direct net contribution of immigrants to the fiscal balance and their indirect fiscal effects through their labor market impact. We calibrate the model to the US economy and find that legal immigrants increase native welfare, mainly due to their positive direct net contribution to the fiscal balance. On the other hand, illegal immigrants' positive welfare impact stems mainly from their positive effect on job creation, which helps improve the fiscal balance, but also increases income to natives and in turn consumption. A legalization program leads to a fiscal gain and increases native welfare and it is more beneficial to the host country's citizens than a purely restrictive immigration policy that reduces the illegal immigrant population.
    Keywords: Immigration, Search Frictions, Fiscal Impact, Welfare, Job creation, Immigration Policies
    JEL: J61 J64 E20 F22
    Date: 2020–06
  9. By: Gilles Bertrand Umba (BCC - Banque Centrale du Congo)
    Abstract: The purpose of this work is to examine the impact of external shocks on economic activity in DR Congo. Using a dynamic and stochastic general equilibrium model, the author simulates four main types of external shocks, namely: (i) the shock on the risk premium; (i) the shock on world inflation; (iii) the global productivity shock; (iv) the global monetary policy shock. Quarterly frequency data was used for the period from January 2005 to December 2017. The results suggest that external shocks leading to a slowdown in global demand have a significant impact on economic activity at the local level. Furthermore, the shock to the world interest rate does not seem to influence domestic economic activity, at least directly. This could be justified by the country's limited financial openness, international trade being the main channel for transmitting external shocks.
    Abstract: Le présent travail a pour objectif d'examiner l'impact des chocs externes sur l'activité économique en RD Congo. En utilisant un modèle d'équilibre général dynamique et stochastique, l'auteur simule quatre principaux types de chocs externes à savoir : (i) le choc sur la prime de risque ;(i) le choc sur l'inflation mondiale ;(iii) le choc de productivité mondiale ; (iv) le choc de politique monétaire au niveau mondial. Les données de fréquence trimestrielle ont été utilisées pour la période allant de janvier 2005 à décembre 2017. Les résultats suggèrent que les chocs externes amenant à un ralentissement de la demande mondiale ont un impact sensible sur l'activité économique au niveau local. Par ailleurs, le choc sur le taux d'intérêt au niveau mondial ne semble pas influencer, au moins directement, l'activité économique intérieure. Ceci pourrait se justifier par une faible ouverture financière du pays, le commerce international étant le principal canal de transmission des chocs externes.
    Date: 2020–06–11
  10. By: Noel GASTON; YOSHIMI Taiyo
    Abstract: We incorporate different sectoral job separation rates into a two-sector small open economy model to investigate the Balassa-Samuelson (B-S) effect. While labour is mobile, unemployment occurs due to search frictions. In addition, unequal separation rates give rise to compensating wage differentials. When productivity grows in the tradeables sector, labour moves from the tradeables sector to the nontradeables sector if tradeables and nontradeables are complements in consumption. Nevertheless, unemployment always falls due to the positive income effect. We also find that the effect of productivity growth in the tradeables sector on the real exchange rate is reduced by almost 38 per cent when separation rates differ across sectors and tradeables and nontradeables are complements. Overall, an overvaluation of the real exchange rate in the basic B-S model can be explained by heterogeneous job separations.
    Date: 2020–04
  11. By: Oliver de Groot (University of Liverpool Management School & CEPR); Grzegorz Wesołowski (Narodowy Bank Polski)
    Abstract: We investigate business cycle implications of banking system complexity and bank heterogeneity in individual leverage. We show that a more complex banking network generates higher individual bank leverage and increases economic volatility. Then, we build a general equilibrium business cycle model with three types of banks: deposittaking, intermediary and lending. Keeping constant aggregate leverage in the banking system, we vary individual leverage and show that an increase in lending bank leverage increases costs of business cycle fluctuations. We argue that this can be mitigated by policymakers taxing the returns of lending banks.
    Keywords: Financial intermediation; Network theory; Leverage; Welfare
    JEL: E32 E44 E51
    Date: 2020
  12. By: Theodore Papageorgiou (Boston College)
    Abstract: In this paper, I document that workers in larger cities have significantly more occupational options than workers in smaller ones. They are able to form better occupational matches and earn higher wages. I also note differences in the occupational reallocation patterns across cities. I develop a dynamic model of occupational choice that microfounds agglomeration economies and captures the empirical patterns. The calibration of the model suggests that better occupational match quality accounts for approximately 35% of the observed wage premium and a third of the greater inequality in larger cities.
    Keywords: Occupations, Agglomeration Economies, Urban Wage Premium, Multi-armed Bandits, Geographical Mobility, Matching Theory, Wage Inequality, Job Vacancy Postings
    JEL: J24 J31 R23
    Date: 2020–06–14
  13. By: Carmen Camacho (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, PSE - La plante et son environnement - UP11 - Université Paris-Sud - Paris 11 - INA P-G - Institut National Agronomique Paris-Grignon - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Alexandre Cornet (UP1 - Université Panthéon-Sorbonne)
    Abstract: There exists a pressing need to analyze the impact of agriculture on soil fertility. This paper develops a spatial growth model for an agricultural economy, in which pollution diffuses across space. In order to produce, the economy needs fertile soil, naturally bounded by the amount of available land. When regions have not yet reached their maximal soil fertility, they can locally invest in abatement in order to reduce soil pollution. Once a location reaches this maximum of fertile land, the economy is split in two: a fertile region and a polluted region. We analytically show how the polluted region can either stagnate at low levels of fertility, or catch up with the fertile region. Our results are numerically illustrated, including the resiliency of the economy to recover from pollution shocks.
    Keywords: Spatial dynamics,Ramsey model,Soil Pollution,Partial differential equations,Dynamic programming,Optimal Control
    Date: 2020–05
  14. By: Christoph Görtz; Christopher Gunn; Thomas A. Lubik
    Abstract: We identify total factor productivity (TFP) news shocks using standard VAR methodology and document a new stylized fact: in response to news about future increases in TFP, inventories rise and comove positively with other major macroeconomic aggregates. We show that the standard theoretical model used to capture the effects of news shocks cannot replicate this fact when extended to include inventories. To explain the empirical inventory behavior, we therefore develop a framework that relies on the presence of knowledge capital accumulated through a learning-by-doing process. The desire to take advantage of higher future TFP through knowledge capital drives output and hours choices on the arrival of news and leads to inventory accumulation alongside the other macroeconomic variables. The broad-based comovement we document supports the view that news shocks are an important driver of aggregate fluctuations.
    Keywords: news shocks, business cycles, inventories, knowledge capital, VAR
    JEL: E20 E30
    Date: 2020
  15. By: Corsetti, G.; Maeng, S. H.
    Abstract: Drawing on the theory of sovereign risk, we show that, driven by self-fulfilling expectations of default, both slow-moving and rollover (fast) crises are generically possible in models with standard features, at intermediate and high levels of debt, respectively. This is without relying on the specification of debt auctions by Cole and Kehoe (2000). A necessary condition is that debt tolerance thresholds—the time- and state- contingent levels of debt above which default becomes the preferred action by the government—respond endogenously to shifts in investors' expectations. In a sunspot equilibrium, the threat of belief-driven crises may not be enough for the government to deleverage in a recession, and bring debt to default-free levels. Unless the initial debt is close enough to the critical threshold above which the country becomes vulnerable to such crises, the government will keep borrowing, gambling on economic recovery in the future.
    Date: 2020–02–28
  16. By: Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne); Carmen Camacho (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, PSE - Paris School of Economics); David Desmarchelier (BETA - Bureau d'Économie Théorique et Appliquée - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: The recent COVID-19 crisis has revealed the urgent need to study the impact of an infectious disease on market economies and provide adequate policy recommendations. In this regard, we consider here the SIS hypothesis in dynamic general equilibrium models with and without capital accumulation, and we compute the efficient lockdown of altruistic agents. We find that the zero lockdown is efficient if agents are selfish, while a positive lockdown is recommended beyond a critical level of altruism. Moreover, the lockdown intensity increases in the degree of altruism. Our robust analytical results are illustrated by numerical simulations, which show, in particular, that the optimal lockdown never trespasses 60% and that eradication is not always optimal.
    Keywords: optimal lockdown,SIS model,Ramsey model,Ramsey model Keywords: optimal lockdown
    Date: 2020–05
  17. By: Florian Böser (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland); Chiara Colesanti Senni (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland)
    Abstract: We use a dynamic general equilibrium model to study a climate-oriented monetary policy in the form of emission-based interest rates set by the central bank. Liquidity costs of banks increase with the emission intensity of their asset portfolio, leading banks to favor low-carbon assets and to improve the financing conditions for clean sectors. We show that such a monetary policy supports the decarbonization of the economy and reduces climate damage, as more resources are channeled to low-carbon sectors and incentives to adopt cleaner technologies increase across all sectors. We illustrate these effects by calibrating our model to data for the Euro Area.
    Keywords: climate change, monetary policy, banks, innovation, financial stability
    JEL: E42 E52 E58 O44
    Date: 2020–06
  18. By: Mirko Abbritti, Ivan Kim, Tommaso Trani
    Abstract: In the data, emerging market economies’ exports tend to grow after real devaluations, but even when these are large, the rise in export revenues is low and delayed. We examine this fact by in- troducing long-term trade relationships and bargaining into a standard small open economy model. Both domestic exporters and foreign importers need to spend time and resources to establish trade relationships. Once a relationship is formed, export prices and quantities are decided through bilat- eral bargaining. The presence of search frictions and bargaining alters the transmission mechanism of shocks. The long-term nature of trade relationships reduces the expenditure-switching effect re- sulting from exchange rate fluctuations and the allocative role of intermediate export prices. These elements improve the ability of the model to explain export growth following a large devaluation as well as other second moments. Moreover, our sensitivity analysis suggests that higher exporters’ bargaining power or lower trade adjustment costs would make an economy more resilient to interest rate shocks.
    Keywords: Search and Matching, Price Bargaining, Real Exchange Rate, Devaluation, Export Dynamics.
    JEL: E32 F41 F31
    Date: 2020–06
  19. By: Christian Belzil (crest, cnrs, paris polytechnique Institute, iza, cirano); Jorgen Hansen (Concordia University, CIRANO, CIREQ and IZA)
    Abstract: We estimate a dynamic model of schooling on two cohorts of the NLSY and find that, contrary to conventional wisdom, the effects of real (as opposed to relative) family income on education have practically vanished between the early 1980’s and the early 2000’s. After conditioning on a cognitive ability measure (AFQT), family background variables and unobserved heterogeneity (allowed to be correlated with observed characteristics), income effects vary substantially with age and have lost between 30% and 80% of their importance on age-specific grade progression probabilities. After conditioning on observed and unobserved characteristics, a $300,000 differential in family income generated more than 2 years of education in the early 1980’s, but only one year in the early 2000’s. Put differently, a $70,000 differential raised college participation by 10 percentage points in the early 1980’s. In the early 2000’s, a $330,000 income differential had the same impact. The effects of AFQT scores have lost about 50% of their magnitude but did not vanish. Over the same period, the relative importance of unobserved heterogeneityhas expanded signiffcantly, thereby pointing toward the emergence of a new form of educational selectivity reserving an increasing role to noncognitive abilities and/or preferences and a lesser role to cognitive ability and family income.
    Date: 2020–05
  20. By: Lise Clain-Chamosset-Yvrard (Univ. Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Xavier Raurich (University of Barcelona, Department of Economics, Av. Diagonal 696, 08034 Barcelona (Spain)); Thomas Seegmuller (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE. 5 Boulevard Maurice Bourdet CS 50498 F-13205 Marseille cedex 1, France)
    Abstract: Several recent papers introduce different mechanisms to explain why asset bubbles are observed in periods of larger growth. These papers share common assumptions, heterogeneity among traders and credit market imperfection, but differ in the role of the bubble, used to provide liquidities or as collateral in a borrowing constraint. In this paper, we introduce heterogeneous traders by considering an overlapping generations model with households living three periods. Young households cannot invest in capital, while adults have access to investment and face a borrowing constraint. Introducing bubbles in a quite general way, encompassing the different roles they have in the existing literature, we show that the bubble may enhance growth when the borrowing constraint is binding. More significantly, our results do not depend on the - liquidity or collateral role attributed to the bubble. We finally extend our analysis to a stochastic bubble, which may burst with a positive probability. Because credit and bubble are no more perfectly substitutable assets, the liquidity and collateral roles of the bubble are not equivalent. Growth is larger when bubbles play the liquidity role, because the burst of a bubble used for liquidity is less damaging to agents who invest in capital.
    Keywords: Bubble, Liquidity, Collateral, Crowding-in effect, Growth
    JEL: E44 G11
    Date: 2020

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