nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒07‒20
28 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Unemployment and Endogenous Reallocation over the Business Cycle By Carrillo-Tudela, Carlos; Visschers, Ludo
  2. Housing prices and credit constraints in competitive search By Rincón-Zapatero, Juan Pablo; Jerez Garcia-Vaquero, Maria Belen; Diaz Rodriguez, Antonia
  3. The Cost of Omitting the Credit Channel in DSGE Models: A Policy Mix Approach By Takeshi Yagihashi
  4. Family Planning and Development: Aggregate Effects of Contraceptive Use By Cavalcanti, Tiago; Kocharkov, Georgi; Santos, Cezar
  5. Firm and Technology Dynamics in the Short- and Long-Run: A Macroeconomic Model for Research and Innovation Policy Evaluation By BENEDETTI FASIL Cristiana; IMPULLITTI Giammario; LICANDRO Omar; SEDLACEK Petr
  6. Synergies Between Monetary and Macroprudential Policies in Thailand By Ichiro Fukunaga; Manrique Saenz
  7. Optimal Monetary Policy According to HANK By Acharya, Sushant; Challe, Edouard; Dogra, Keshav
  8. Robustly Optimal Monetary Policy in a New Keynesian Model with Housing By Adam, Klaus; Woodford, Michael
  9. Utilization-Adjusted TFP Across Countries: Measurement and Implications for International Comovement By Huo, Zhen; Levchenko, Andrei A.; Pandalai-Nayar, Nitya
  10. The Effect of Demographic Change on the Swiss Labor Market: The Role of Participation Rates By Buchmann, Manuel
  11. Monetary and Macroprudential Policy with Endogenous Risk By Adrian, Tobias; Duarte, Fernando; Liang, Nellie; Zabczyk, Pawel
  12. Uncertainty Shocks and Business Cycle Research By Fernández-Villaverde, Jesús
  13. Inflation and the Price of Real Assets By Leombroni, Matteo; Piazzesi, Monika; Rogers, Ciaran; Schneider, Martin
  14. Monetary Policy and Macroeconomic Stability Revisited By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  15. Marginal Propensity to Consume and the Housing Choice By Maiko Koga; Kohei Matsumura
  16. The Cost of Job Loss By Burdett, Kenneth; Carrillo-Tudela, Carlos; Coles, Melvyn G
  17. On the Distributional Effects of International Tariffs By Daniel R. Carroll; Sewon Hur
  18. Twin Default Crises By Mendicino, Caterina; Nikolov, Kalin; Rubio-Ramírez, Juan Francisco; Suarez, Javier; Supera, Dominik
  19. The Side Effects of Safe Asset Creation By Acharya, Sushant; Dogra, Keshav
  20. The Fiscal State-Dependent Effects of Capital Income Tax Cuts By Alexandra Fotiou; Wenyi Shen; Shu-Chun Susan Yang
  21. Investment Tax Incentives and Their Big Time-to-Build Fiscal Multiplier By Dimitrios Bermperoglou; Yota Deli; Sarantis Kalyvitis
  22. Taxation, Social Welfare, and Labor Market Frictions By Brendan Epstein; Ryan Nunn; Musa Orak; Elena Patel
  23. Tighter Credit and Consumer Bankruptcy Insurance By Antunes, António; Cavalcanti, Tiago; Mendicino, Caterina; Peruffo, Marcel; Villamil, Anne
  24. Macroeconomic implications of insolvency regimes By Benjamin Hemingway
  25. Model-Based Globally-Consistent Risk Assessment By Michal Andrle; Benjamin L Hunt
  26. Structural Unemployment, Underemployment, and Secular Stagnation By Ken-ichi Hashimoto; Yoshiyasu Ono; Matthias Schlegl
  27. Comparative Statics in Multicriteria Search Models By Veli Safak
  28. 25 Years of Austria's EU Membership. Quantifying the Economic Benefits With a DSGE Model By Fritz Breuss

  1. By: Carrillo-Tudela, Carlos (University of Essex); Visschers, Ludo (University of Edinburgh)
    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: 2020–05
  2. By: Rincón-Zapatero, Juan Pablo; Jerez Garcia-Vaquero, Maria Belen; Diaz Rodriguez, Antonia
    Abstract: We embed a competitive search model of the real estate market into a heterogeneous agentsetting where hoeholds face credit constraints and idiosyncratic turnover shocks. Householdscan accumulate a risk-free asset to build a down payment and to smooth non-housing consumption.There is an inelastic supply of identical homes. The model is "block recursive". Inequilibrium wealthier home buyers sort into submarkets with higher prices and shorter buyingtimes. We identify a novel amplification mechanism, arising from sorting, by which demandshocks can substantially affect housing prices. In particular, lowering down payment requirementsinduces entry of new buyers in the market and higher asset accumulation by currentsearchers, as these agents target more expensive (less congested) submarkets. This affects thedistribution of prices and trading probabilities, and thereby the wealth distribution. Our quantitativeresults suggest that the effects on the long-run level and dispersion of housing pricescan be significant.
    Keywords: Sorting; Wealth Inequality; Inelastic Housing Supply; Price Dispersion; Competitive Search; Credit Constraints; Housing Prices
    JEL: R30 R21 E21 D83 D31
    Date: 2020–06–19
  3. By: Takeshi Yagihashi (Senior Economist, Policy Research Institute)
    Abstract: This paper examines whether the omission of the credit channel from policy models used by both monetary and fiscal policymakers would lead to a noticeably gbad h policy outcome through model simulation. First, we simulate a financial crisis in which the financial market friction grows and the risk premium becomes more volatile. Next, both monetary and fiscal policymakers readjust their policy to stabilize the economy using an approximating DSGE model that does not feature the credit channel. We show that while the model misspecification does not affect much how policymakers perceive the crisis, the newly adopted policy based on the approximating model would cause further destabilization of the economy. We also show that the destabilization of the economy could be prevented if the fiscal policymaker is equipped with the correctly-specified credit channel model and chooses its new policy while taking into account the decision-making of the monetary policymaker. Finally, under the scenario that the correctlyspecified model is unknown, we show that the destabilization of the economy could still be prevented if both policymakers can apply judgement to unreasonable parameter estimates during the crisis period. In sum, prediction of policy outcomes and cautiousness in interpreting estimation results can help in mitigating the credit channel misspecification.
    Keywords: DSGE model, Lucas Critique, Bayesian estimation, Financial Accelerator model, monetary policy, fiscal policy, policy mix
    Date: 2020–03
  4. By: Cavalcanti, Tiago; Kocharkov, Georgi; Santos, Cezar
    Abstract: What is the role of family planning interventions on fertility, savings, human capital investment, and development? To examine this, endogenous unwanted fertility is embedded in an otherwise standard quantity-quality overlapping generations model of fertility and growth. The model features costly fertility control and families can (partially) insure against a fertility risk by using costly modern contraceptives. In the event of unexpected pregnancies, households can also opt to abort some pregnancies, at a cost. Given the number of children born, parents decide how much education to provide and how much to save out of their income. We fit the model to Kenyan data, implement several family planning policies and decompose their aggregate effects. Our results suggest that with a small government budget (say, up to 0.5 percent of GDP), family planning interventions might be more cost-effective in improving longrun living standards than policies that subsidise basic education.
    Keywords: Abortion; Contraception; education; Income per capita
    JEL: E24 I15 J13 O11
    Date: 2020–01
  5. By: BENEDETTI FASIL Cristiana (European Commission - JRC); IMPULLITTI Giammario; LICANDRO Omar; SEDLACEK Petr
    Abstract: We develop a dynamic stochastic general equilibrium model with firm and technology dynamics to assess the impact of a rich set of innovation policies. We explore the aggregate and cross-sectional effects of an R&D tax credit, corporate taxes, and policies affecting firms’ access to credit. Two main results emerge. First, the aggregate impact of these policies is driven by general equilibrium effects operating via the government budget, the labor market and via equilibrium entry of firms. In contrast, their stimulating effect on innovation and productivity growth has a negligible impact on aggregate income and employment. Second, we find that uniform policies have heterogeneous effects on firms and their size distribution which generate rich feedbacks to the aggregate economy.
    Keywords: Firm dynamics, innovation policy, endogenous growth, business cycles
    Date: 2020–06
  6. By: Ichiro Fukunaga; Manrique Saenz
    Abstract: A dynamic stochastic general equilibrium (DSGE) model tailored to the Thai economy is used to explore the performance of alternative monetary and macroprudential policy rules when faced with shocks that directly impact the financial cycle. In this context, the model shows that a monetary policy focused on its traditional inflation and output objectives accompanied by a well targeted counter-cyclical macroprudential policy yields better macroeconomic outcomes than a lean-against-the-wind monetary policy rule under a wide range of assumptions.
    Date: 2020–06–05
  7. By: Acharya, Sushant; Challe, Edouard; Dogra, Keshav
    Abstract: We study optimal monetary policy in a Heterogenous-Agent New-Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading-off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time-inconsistency of the Ramsey-plan - the temptation to exploit households' unhedged interest-rate exposure to lower inequality.
    Keywords: incomplete markets; New Keynesian Model; Optimal monetary policy
    JEL: E21 E30 E52 E62 E63
    Date: 2020–02
  8. By: Adam, Klaus; Woodford, Michael
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian model with a housing sector. With rational private sector expectations about housing prices and inflation, optimal monetary policy can be characterized by a standard 'target criterion' that refers to inflation and the output gap, without making reference to housing prices. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. For empirically realistic cases, the central bank should then 'lean against' housing prices, i.e., following unexpected housing price increases (decreases), policy should adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap. Robustly optimal policy does not require that the central bank distinguishes between `fundamental' and `non-fundamental' movements in housing prices.
    JEL: D81 D84 E52
    Date: 2020–02
  9. By: Huo, Zhen; Levchenko, Andrei A.; Pandalai-Nayar, Nitya
    Abstract: This paper develops estimates of TFP growth adjusted for movements in unobserved factor utilization for a panel of 29 countries and up to 37 years. When factor utilization changes are unobserved, the commonly used Solow residual mismeasures actual changes in TFP. We use a general equilibrium dynamic multi-country multi-sector model featuring variable factor utilization to derive a production function estimating equation that corrects for unobserved factor usage. We compare the properties of utilization-adjusted TFP series to the standard Solow residual, and discuss the implications for international business cycle comovement generated by technology shocks. Unlike the Solow residual, utilization-adjusted TFP is virtually uncorrelated across countries, and as a result its direct contribution to GDP comovement is negligible. A general equilibrium model calibrated to the observed levels of international trade cannot generate much comovement through propagation of these TFP shocks.
    Keywords: international comovement; Solow residual; TFP; Utilization
    JEL: F41 F44
    Date: 2020–02
  10. By: Buchmann, Manuel (University of Basel)
    Abstract: The ongoing demographic change is expected to negatively affect the effective labor supply of various developed countries. In order to counteract these developments, many suggested policy measures target the participation rate of women and old workers. In this paper, I develop a multi-sectoral CGE-OLG model where workers of different ages and skills are assumed to be imperfect substitutes and calibrate it to the Swiss economy. I use this model to evaluate the effects of the demographic change on the Swiss labor market and the potential of reforms targeting different participation rates. I find that a yearly decrease of old workers' preference towards leisure by 2% between 2022 and 2030 yields macroeconomic results that are comparable to an increase in the statutory retirement age by 2 years. While the increase of the retirement age succeeds in increasing net income by more than both participation rate increases, it also leads to an increase in wage levels and thereby labor shortages. This result highlights the importance of reducing scarcity on the labor markets for macroeconomic performance and shows the potential of reforms targeting labor market participation.
    Keywords: overlapping generations, demographic change, participation rates, switzerland
    JEL: D58 E24 E66 J11 J21 J26
    Date: 2020–06–22
  11. By: Adrian, Tobias; Duarte, Fernando; Liang, Nellie; Zabczyk, Pawel
    Abstract: We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via the impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel.
    Keywords: Macro-Finance; macroprudential policy; monetary policy
    JEL: E32 E44 E52 G28
    Date: 2020–02
  12. By: Fernández-Villaverde, Jesús
    Abstract: We review the literature on uncertainty shocks and business cycle research. First, we motivate the study of uncertainty shocks by documenting the presence of time-variation in the volatility of macroeconomic time series. Second, we enumerate the mechanisms that researchers have postulated to link uncertainty shocks and business cycles. Third, we outline how we can specify uncertainty shocks. Fourth, we postulate a real business cycle model augmented with financial frictions and uncertainty shocks. Fifth, we use the model to illustrate our previous discussions and to show how uncertainty shocks can be expansionary.
    Keywords: business cycles; Financial Frictions; Uncertainty shocks
    JEL: E30 E32 E50
    Date: 2020–02
  13. By: Leombroni, Matteo; Piazzesi, Monika; Rogers, Ciaran; Schneider, Martin
    Abstract: In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% portfolio shift out of equity into real estate. This study uses an overlapping generations model with uninsurable nominal risk to quantify the role of structural change in these events. We attribute the dip in wealth to the entry of baby boomers into asset markets, and to the erosion of bond portfolios by surprise inflation, both of which lowered the overall propensity to save. We also show that the Great Inflation led to a portfolio shift by making housing more attractive than equity. Disagreement about inflation across age groups matters for the size of tax effects, the volume of nominal credit, and the price of housing as collateral.
    Date: 2020–02
  14. By: Yasuo Hirose (Keio University); Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Cleveland)
    Abstract: A large literature has established the view that the Fed's change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for indeterminacy of equilibrium and adopts a sequential Monte Carlo algorithm. The estimated model empirically outperforms canonical New Keynesian models that confirm the literature's view. It also points to substantial uncertainty about whether the policy response to inflation was active or passive during the Great Inflation. More importantly, a more active policy response to inflation alone does not suffice for explaining the U.S. macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. This extends the literature by emphasizing the importance of the changes in other aspects of monetary policy in addition to its response to inflation.
    Keywords: Monetary policy; Great Inflation; Indeterminacy; Trend inflation; Sequential Monte Carlo
    JEL: C11 C52 C62 E31 E52
    Date: 2020–02–28
  15. By: Maiko Koga (School of Economics, Senshu University); Kohei Matsumura (Bank of Japan)
    Abstract: We study the MPC heterogeneity of households in Japan both theoretically and empirically. We build a heterogeneous-agent overlapping-generations general equilibrium model with an illiquid and indivisible housing asset. We show that mortgage debtor exhibits high MPC and households about to upgrade their house exhibit low MPC. Using Japanese household survey data, we empirically support our theoretical predictions.
    Keywords: Consumption; Heterogeneity; Housing choices; Liquidity constraints; Marginal propensity to consume
    JEL: E21 E50 R21
  16. By: Burdett, Kenneth; Carrillo-Tudela, Carlos; Coles, Melvyn G
    Abstract: This paper identifies an equilibrium theory of wage formation and endogenous quit turnover in a labour market with on-the-job search, where risk averse workers accumulate human capital through learning-by-doing and lose skills while unemployed. Optimal contracting implies the wage paid increases with experience and tenure. Indirect inference using German data determines the deep parameters of the model. The estimated model not only reproduces the large and persistent fall in wages and earnings following job loss, a new structural decomposition finds foregone human capital accumulation (while unemployed) is the worker's major cost of job loss.
    Keywords: Human Capital Accumulation; job loss; job search
    JEL: J41 J42 J63 J64
    Date: 2020–02
  17. By: Daniel R. Carroll; Sewon Hur
    Abstract: What are the distributional consequences of tariffs? We build a trade model with incomplete asset markets and households that are heterogeneous in their income, wealth, and labor skill. We increase tariffs by 5 percentage points and examine several budget-neutral fiscal policies for redistributing tariff revenue. Without redistribution, tariffs hurt all households, but higher tradables prices disproportionately harm the poor and the ensuing decline in the skill premium disproportionately harms the skilled. With redistribution, lowering the labor income tax leads to lower economic activity but higher average welfare relative to lowering the capital income tax; nevertheless, both policies reduce average welfare with retaliatory tariffs. Finally, when tariff revenue is rebated to households as lump-sum transfers, tariffs can be welfare improving even with full retaliation.
    Keywords: tariffs; consumption; taxation; inequality; welfare
    JEL: E21 F10 F62 H21
    Date: 2020–06–22
  18. By: Mendicino, Caterina; Nikolov, Kalin; Rubio-Ramírez, Juan Francisco; Suarez, Javier; Supera, Dominik
    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.
    Keywords: Bank Fragility; Capital requirements; Default Risk; loan returns; non-diversifiable risk
    JEL: E3 E44 G01 G21
    Date: 2020–02
  19. By: Acharya, Sushant; Dogra, Keshav
    Abstract: We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safety widens spreads, causing the ZLB to bind and increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. This entails permanently lower investment which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt is optimal if alternative instruments are unavailable. Alternative policies which permit negative real interest rates - higher inflation targets, negative nominal rates - achieve full employment without reducing investment.
    Keywords: Crowding out; liquidity traps; negative natural rate; Risk premium; safe assets
    JEL: E3 E4 E5 G1 H6
    Date: 2020–02
  20. By: Alexandra Fotiou; Wenyi Shen; Shu-Chun Susan Yang
    Abstract: Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.
    Date: 2020–05–29
  21. By: Dimitrios Bermperoglou; Yota Deli; Sarantis Kalyvitis
    Abstract: This paper studies how investment tax incentives stimulate output in a medium-scale DSGE model, which allows for a variety of fiscal funding mechanisms. We find that the horizon following a positive shock in investment tax incentives is crucial. The shock is highly expansionary in the long run with the relevant fiscal multiplier substantially exceeding 1, but this effect only becomes visible after two to three years. Our analysis indicates that a rise in the marginal product of labor and the demand for labor trigger this expansion, which is an effect that partial equilibrium studies ignore. Our analysis also contributes to the time-to-build profile of the fiscal multiplier. The results suggest that investment tax incentives are even more effective when nominal wages adjust faster.
    Keywords: Private investment incentives; Investment tax credit; Fiscal multiplier
    JEL: E32 E60 E62
    Date: 2019–11
  22. By: Brendan Epstein; Ryan Nunn; Musa Orak; Elena Patel
    Abstract: Taking inefficiencies from taxation as given, a well-known public finance literature shows that the elasticity of taxable income (ETI) is a sufficient statistic for assessing the deadweight loss (DWL) from taxing labor income in a static neoclassical framework. Using a theoretical approach, we revisit this result from the vantage point of a general equilibrium macroeconomic model with labor search frictions. We show that, in this context, and against the backdrop of inefficient taxation, DWL can be up to 38 percent higher than the ETI under a range of reasonable parametric assumptions. Externalities arising from market participants not taking into account the impact of changes in their search- and vacancy-posting activities on other market participants can amplify this divergence substantially. However, with theoretical precision, we show how the wedge between the ETI and DWL can be controlled for, using readily observable variables.
    Keywords: Social welfare; Deadweight loss from taxation; Search frictions; Elasticity of taxable income; Endogenous amenities
    JEL: H20 J32
    Date: 2020–06–17
  23. By: Antunes, António; Cavalcanti, Tiago; Mendicino, Caterina; Peruffo, Marcel; Villamil, Anne
    Abstract: How does bankruptcy protection affect household balance sheet adjustments and aggregate consumption when credit tightens? Using a tractable model of unsecured consumer credit we quantify the trade-off between the insurance and the creditworthiness effects of bankruptcy in response to tighter credit. We show that bankruptcy dampens the effect of tighter credit on aggregate consumption on impact. This is because it allows borrowers to sustain consumption against severe financial distress. However, by leading to consumers' exclusion from the credit market for a certain period, bankruptcy also reduces their ability to smooth consumption over time, implying a slower recovery. The bankruptcy code establishes how costly it is to default, and, thus, plays a crucial role in determining consumers' bankruptcy decisions and in shaping consumption dynamics. We quantify that the 2005 BAPCPA reform, by making filing for bankruptcy more costly, worsened the negative welfare effects of the subsequent credit tightening.
    Keywords: BAPCPA; Chapter 7; Deleveraging
    JEL: E44 E52 E58 G21 G32
    Date: 2020–01
  24. By: Benjamin Hemingway (Bank of Lithuania & Vilnius University)
    Abstract: The impact of creditor and debtor rights following firm insolvency are studied in a firm dynamics model where defaulting firms choose between restructuring or exit. The model accounts for differing effects of productivity shocks across economies that differ in the credit/debtor rights. Following a negative shock labour productivity falls sharply in a creditor-friendly regime such as the UK while in a debtor-friendly regime such as the US, there is a larger employment response. This paper suggests a possible explanation for the different employment and labour productivity response in the UK and US since the financial crisis.
    Keywords: Bankruptcy, Insolvency, Firm Financing
    JEL: D21 E22 G33
    Date: 2020–06–18
  25. By: Michal Andrle; Benjamin L Hunt
    Abstract: This paper outlines an approach to assess uncertainty around a forecast baseline as well as the impact of alternative policy rules on macro variability. The approach allows for non-Gaussian shock distributions and non-linear underlying macroeconomic models. Consequently, the resulting distributions for macroeconomic variables can exhibit skewness and fat tails. Several applications are presented that illustrate the practical implementation of the technique including confidence bands around a baseline forecast, the probabilities of global growth falling below a specified threshold, and the impact of alternative fiscal policy reactions functions on macro variability.
    Keywords: Economic models;Economic policy;Business cycles;Monetary policy;Fiscal policy;DSGE models,predictive density,nonlinear,non-Gaussian,skew,fat tails,WP,economic shock,policy space,ELB,nominal interest rate,risk assessment
    Date: 2020–05–22
  26. By: Ken-ichi Hashimoto; Yoshiyasu Ono; Matthias Schlegl
    Abstract: We introduce a preference for wealth into the standard search and matching model to analyze the labor market when there is persistent demand shortage. We show that, under some conditions, a secular stagnation steady state exists in which the economy permanently operates below capacity due to both structural unemployment and underemployment. The latter is a direct consequence of the lack of aggregate demand. Our findings are as follows. In the absence of demand shortage, the preference for wealth creates a new transmission channel for shocks and policy measures due to induced changes in the real interest rate, in addition to the job creation channel of the standard matching model. Turning to the stagnation equilibrium, the effects of demand and supply shocks are opposite to those of the standard case and result in a co-movement of unemployment and underemployment. In contrast, the effects of wage and cost shocks depend on the degree of aggregate demand shortage, but they can explain movements of unemployment and underemployment in opposite directions. Finally, we show that fluctuations in the total employment gap under stagnation are primarily driven by fluctuations in underemployment instead of structural unemployment. Our analysis helps to understand why the unemployment rate in Japan has been surprisingly low during its lost decades and highlights the need for further policy interventions in support of aggregate demand despite a seemingly decent employment record.
    Keywords: demand shortage, unemployment, underemployment, labor market frictions, secular stagnation
    JEL: E24 E31 E44 J20 J64
    Date: 2020
  27. By: Veli Safak
    Abstract: McCall (1970) examines the search behaviour of an infinitely-lived and risk-neutral job seeker maximizing her lifetime earnings by accepting or rejecting real-valued scalar wage offers. In practice, job offers have multiple attributes, and job seekers solve a multicriteria search problem. This paper presents a multicriteria search model and new comparative statics results.
    Date: 2020–06
  28. By: Fritz Breuss
    Abstract: Austria's EU accession 25 years ago, alongside Finland and Sweden, was preceded by an extended period of convergence toward the EU: via the free trade agreement concluded with the EC in 1973, and the participation in the European Economic Area (EEA) in 1994. Although the COVID-19 crisis in 2020 seems to overshadow the overall positive balance of 25 years of EU membership, on average the real GDP growth dividend amounted to 0.8 percentage points per year since 1995. To check the robustness of this result, obtained with an integration macro model, a DSGE model for Austria is used here. Usually other methods are applied to estimate integration effects: trade gravity models, CGE models, macro models. Following in't Veld's (2019) approach with a DSGE model for the EU, we adapt an earlier version of the two-country DSGE model for Austria and the Euro area (Breuss and Rabitsch, 2009) to evaluate the benefits of Austria's EU membership. It turns out that grosso modo the macro results can be confirmed with the DSGE model.
    Keywords: European Integration; Model simulations; country studies
    Date: 2020–06–26

This nep-dge issue is ©2020 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.