|
on Dynamic General Equilibrium |
|
Issue of 2020‒07‒27
thirty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Kollmann, Robert |
| Abstract: | This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term 'rational bubbles' refers to multiple equilibria arising from the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an overlapping generations structure. Rational bubbles reflect self-fulfilling fluctuations in agents' expectations about future investment. In contrast to explosive rational bubbles in linearized models (Blanchard (1979)), the rational bubbles in non-linear models here are stable and bounded. Bounded bubbles can generate persistent fluctuations of real activity, and capture key business cycle stylized facts. Both closed and open economies are analyzed. In a non-linear two-country model with integrated financial markets, bubbles must be perfectly correlated across countries. |
| Keywords: | Boom-bust cycles; business cycles in closed and open economies; Dellas model; Long-Plosser model; non-linear DSGE models; Rational bubbles |
| JEL: | C6 E1 E3 F3 F4 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14367&r=all |
| By: | Bilal, Adrien; Engbom, Niklas; Mongey, Simon; Violante, Giovanni L. |
| Abstract: | This paper develops a random-matching model of a frictional labor market with firm and worker dynamics. Multi-worker firms choose whether to shrink or expand their employment in response to shocks to their decreasing returns to scale technology. Growing entails posting costly vacancies, which are filled either by the unemployed or by employees poached from other firms. Firms also choose when to enter and exit the market. Tractability is obtained by proving that, under a parsimonious set of assumptions, all workers' and firm decisions are characterized by their joint marginal surplus, which in turn only depends on the firm's productivity and size. As frictions vanish, the model converges to a standard competitive model of firm dynamics which allows a quantification of the misallocation cost of labor market frictions. An estimated version of the model yields cross-sectional patterns of net poaching by firm characteristics (e.g., age and size) that are in line with the micro data. The model also generates a drop in job-to-job transitions as firm entry declines, offering an interpretation to U.S. labor market dynamics around the Great Recession. All these outcomes are a reflection of the job ladder in marginal surplus that emerges in equilibrium. |
| Keywords: | Decreasing Returns to Scale; Firm Dynamics; frictions; Job turnover; Marginal Surplus; Net Poaching; On the job search; unemployment; Vacancies; worker flows |
| JEL: | D22 E23 E24 E32 J23 J63 J64 J69 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14246&r=all |
| By: | Guangling Liu; Thabang Molisey |
| Abstract: | We investigate the optimal design and e ectiveness of monetary and macroprudential policies in promoting macroeconomic (price) and financial stability for the South African economy. We develop a New Keynesian dynamic stochastic general equilibrium model featuring a housing market, a banking sector and the role of macroprudential and monetary policies. Based on the parameter estimates from the estimation, we conduct an optimal rule analysis and an efficient policy frontier analysis, and compare the dynamics of the model under different policy regimes. We find that a policy regime that combines a standard monetary policy rule and a macroprudential policy rule delivers a more stable economic system with price and financial stability. A policy regime that combines an augmented monetary policy (policy rate reacts to nancial conditions) with macroprudential policy is better at attenuating the effects of financial shocks, but at a much higher cost of price instability. Our findings suggest that monetary policy should focus solely on its primary objective of price stability and let macroprudential policy facilitate financial stability on its own. |
| Keywords: | Monetary policy, Macroprudential policy, Financial Stability, Capital requirement, Financial shock, DSGE model. |
| JEL: | E32 E44 E52 E58 G28 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:811&r=all |
| By: | Johannes Hermanus Kemp; Hylton Hollander |
| Abstract: | Much of the research on fiscal multipliers has used reduced form modelling approaches. While these models have been extended to include richer controls and identification approaches, it remains unclear whether shocks identified capture the true structural shocks. An alternative way to identify these shocks is through dynamic stochastic general equilibrium models. This paper estimates an open-economy dynamic stochastic general equilibrium model for South Africa, but with a more detailed fiscal block, to measure the impact of fiscal policy shocks on macroeconomic outcomes. |
| Keywords: | dynamic stochastic general equilibrium model, Fiscal policy, Fiscal multipliers, Bayesian influence |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2020-92&r=all |
| By: | Jacek Rothert (United States Naval Academy) |
| Abstract: | This paper documents cyclical behavior of real exchange rates (RERs) in emerging and developed economies: RERs are pro-cyclical in emerging markets and mildly counter-cyclical in developed economies. RER pro-cyclicality coincides with excess volatility of consumption and counter-cyclicality of the trade balance. The paper then re-evaluates the role of trend shocks and interest rate shocks in emerging economies, by incorporating these features into a standard international business cycle model where domestic and foreign goods are imperfect substitutes. In the model, estimated to match the behavior of the RERs, trend shocks play no role in TFP or GDP fluctuations in Mexico. Conversely, exogenous country risk shocks, without any frictions that would create supply-side effects, account for 78% of GDP fluctuations. The key is that domestic and foreign goods are imperfect substitutes, which dampens the impact of trend shocks and accentuates the impact of interest rate shocks on output and consumption. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:usn:usnawp:63&r=all |
| By: | Ngai, Liwa Rachel; Sheedy, Kevin D. |
| Abstract: | This paper documents the cyclical properties of housing-market variables, which are shown to be volatile, persistent, and highly correlated with each other. Is the observed volatility in these variables due to changes in the speed at which houses are sold or changes in the number of houses that are put up for sale? An inflow-outflow decomposition shows that the inflow rate accounts for almost all of the fluctuations in sales volume. The paper then shows that a search-and-matching model with endogenous moving subject to housing demand shocks performs well in explaining fluctuations in housing-market variables. A housing demand shock induces more moving and increases the supply of houses on the market, thus one housing demand shock replicates three correlated reduced-form shocks that would be needed to match the relative volatilities and correlations among key housing-market variables. |
| Keywords: | Endogenous moving; Housing market volatility; inflow-outflow decomposition; search frictions |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14331&r=all |
| By: | de Groot, Oliver; Haas, Alexander |
| Abstract: | Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction new-Keynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly "interest margin" channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplied model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing. |
| Keywords: | forward guidance; liquidity trap; monetary policy; Taylor rule |
| JEL: | E44 E52 E61 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14268&r=all |
| By: | Diego Daruich; Raquel Fernández |
| Abstract: | The idea of universal basic income (UBI)—a set income that is given to all without any conditions— is making an important comeback but there is no real evidence regarding its long-term consequences. This paper provides a very inexpensive evaluation of such a policy by studying its dynamic consequences in a general equilibrium model with imperfect capital markets and labor market shocks, in which households make decisions about education, savings, labor supply, and with intergenerational linkages via skill formation. The steady state of the model is estimated to match US household data. We find that a UBI policy that gives all households a yearly income equivalent to the poverty line level has very different welfare implications for those alive when the policy is introduced relative to future generations. While a majority of adults (primarily older non-college workers) would vote in favor of introducing UBI, all future generations (operating behind the veil of ignorance) would prefer to live in an economy without UBI. The expense of the latter leads to lower skill formation and education, requiring even higher tax rates over time. Modeling automation as an increased probability of being hit by an “out-of-work” shock, the model is also used to provide insights on how the benefits of UBI change as the environment becomes riskier. The results suggest that UBI may be a useful transitional policy to help current individuals whose skills are more likely to become obsolete and are unprepared for the increased risk, while, simultaneously, education policies may be implemented to increase the likelihood that future cohorts remain productive and employed. |
| JEL: | H24 H31 I38 J24 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27351&r=all |
| By: | Stantcheva, Stefanie |
| Abstract: | This paper reviews recent advances in the study of dynamic taxation, considering three main approaches: the dynamic Mirrlees, the parametric Ramsey, and the sufficient statistics approaches. In the first approach, agents' heterogeneous abilities to earn income are private information and evolve stochastically over time. Dynamic taxes are not ex ante restricted and are set for redistribution and insurance considerations. Capital is taxed only in order to improve incentives to work. Human capital is optimally subsidized if it reduces post-tax inequality and risk on balance. The Ramsey approach specifies ex ante restricted tax instruments and adopts quantitative methods, which allows it to consider more complex and realistic economies. Capital taxes are optimal when age-dependent labor income taxes are not possible. The newer and tractable sufficient statistics approach derives robust tax formulas that depend on estimable elasticities and features of the income distributions. It simplifies the transitional dynamics thanks to a newly defined criterion, the ``utility-based steady state approach" that prevents the government from exploiting sluggish responses in the short-run. Capital taxes are here based on the standard equity-efficiency trade-off. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14347&r=all |
| By: | Bayer, Christian; Born, Benjamin; Luetticke, Ralph |
| Abstract: | How much does inequality matter for the business cycle and vice versa? Using a Bayesian likelihood approach, we estimate a heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice between liquid and illiquid assets. The model enlarges the set of shocks and frictions in Smets and Wouters (2007) by allowing for shocks to income risk and taxes. We find that adding data on inequality does not materially change the estimated shocks and frictions driving the US business cycle. The estimated shocks, however, have significantly contributed to the evolution of US wealth and income inequality. The systematic components of monetary and fiscal policy are important for inequality as well, while policy shocks have smaller effects on inequality. |
| Keywords: | Bayesian estimation; business cycles; Income inequality; incomplete markets; Monetary and Fiscal Policy; Wealth Inequality |
| JEL: | C11 E32 E63 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14364&r=all |
| By: | Juan Carlos Conesa; Yan Wang |
| Abstract: | China's real GDP has been growing by almost 10 percent a year for the last three decades. For how long should we expect this spectacularly high growth to continue? We evaluate in a quantitative two sector model with segmented labor markets and nancial frictions the prospects for China's future growth under different policy scenarios. In our model the high growth rate observed in China since the early 1990s is fueled by the large increase in urban labor supply, because of rural-urban migration, and the emergence of private enterprises that absorb those migrant workers. Our simulations suggest that the rapid aging of its population will signicantly decelerate urban labor force and economic growth starting around 2040. In a counterfactual exercise we show that substantial relaxation of labor market segmentation and nancial constraints faced by private enterprises cannot compensate for that deceleration. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:nys:sunysb:20-08&r=all |
| By: | Jonathan Benchimol (Bank of Israel); Sergey Ivashchenko (Russian Academy of Sciences (IREP), Financial Research Institute, and Saint-Petersburg State University, Saint Petersburg, Russia) |
| Abstract: | Uncertainty about a regime's economy can change drastically around a crisis. An imported crisis such as the global financial crisis in the euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the euro area and the United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with periods of calm. We describe how US shocks from both the real economy and financial markets affected the euro area economy and how bond reallocation occurred between short- and long-term maturities during the global financial crisis. Importantly, the estimated nonlinearities when domestic and foreign financial markets influence the economy, should not be neglected. The nonlinear behavior of market-related variables highlights the importance of higher-order estimation for providing additional interpretations to policymakers. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2020.04&r=all |
| By: | Slacalek, Jiri; Tristani, Oreste; Violante, Giovanni L. |
| Abstract: | This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels-intertemporal substitution and net interest rate exposure-and indirect, general equilibrium channels-net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition, the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses. |
| Keywords: | Consumption; Euro Area; Household Balance Sheets; marginal propensity to consume; monetary policy; wealth distribution |
| JEL: | D14 D31 E21 E52 E58 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14245&r=all |
| By: | Burkhard Heer; Mark Trede |
| Abstract: | We present new empirical evidence on the distribution of earnings, income and wealth among entrepreneurs in Germany. We document that both earnings and income are more concentrated among entrepreneurs than among workers and describe a large-scale overlapping-generations model that can replicate these findings. As an application, we compute the equilibrium effects of a reform of the German pay-as-you-go pension system in which entrepreneurs must also contribute and receive a pension. We show that in the presence of mobility between workers and entrepreneurs, the expected lifetime utility of all newborn households unanimously declines due to the general equilibrium effects of lower aggregate savings, and welfare losses amount to approximately 5% of total consumption. In addition, the integration of self-employed workers into the social security system in Germany does not help to improve its fiscal sustainability, and only an increase in the retirement age to 70 years will help to finance pensions at the present level beyond the year 2050. |
| Keywords: | Entrepreneurship, aging, income distribution, overlapping |
| JEL: | H55 D31 J11 L26 C68 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:9120&r=all |
| By: | Guido Ascari; Sophocles Mavroeidis |
| Abstract: | Structural models with no solution are incoherent, and those with multiple solutions are incomplete. We develop a method to study coherency and completeness conditions for linear dynamic forward-looking rational expectations models under an occasionally binding constraint. In the context of the simple New Keynesian model with a zero lower bound, this method shows that the coherency and completeness condition generally violates the Taylor principle. Rational expectations require time-varying and correlated support restrictions on the distribution of the structural shocks. With appropriate restrictions, a very large number of equilibria can be supported. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.12966&r=all |
| By: | Jonathan Heathcote; Fabrizio Perri; Giovanni L. Violante |
| Abstract: | We document that declining hours worked are the primary driver of widening inequality in the bottom half of the male labor earnings distribution in the United States over the past 52 years. This decline in hours is heavily concentrated in recessions: hours and earnings at the bottom fall sharply in recessions and do not fully recover in subsequent expansions. Motivated by this evidence, we build a structural model to explore the possibility that recessions cause persistent increases in inequality; that is, that the cycle drives the trend. The model features skill-biased technical change, which implies a trend decline in low-skill wages relative to the value of non-market activities. With this adverse trend in the background, recessions imply a potential double-whammy for low skilled men. This group is disproportionately likely to experience unemployment, which further reduces skills and potential earnings via a scarring effect. As unemployed low skilled men give up job search, recessions generate surges in non-participation. Because non-participation is highly persistent, earnings inequality remains elevated long after the recession ends. |
| JEL: | E24 E32 J24 J31 J64 J65 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27345&r=all |
| By: | Ruy Lama; Juan Pablo Medina |
| Abstract: | We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy rate that can largely reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXI takes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results highlight the importance of calibrating the use of multiple instruments according to the underlying shocks that induce shifts in capital flows. |
| Date: | 2020–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/97&r=all |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2020-049&r=all |
| By: | Auclert, Adrien; Rognlie, Matthew; Straub, Ludwig |
| Abstract: | We estimate a Heterogeneous-Agent New Keynesian model with sticky household expectations that matches existing microeconomic evidence on marginal propensities to consume *and* macroeconomic evidence on the impulse response to a monetary policy shock. Our estimated model uncovers a central role for investment in the transmission mechanism of monetary policy, as high MPCs amplify the investment response in the data. This force also generates a procyclical response of consumption to investment shocks, leading our model to infer a central role for these shocks as a source of business cycles. |
| Keywords: | estimation; HANK; investment |
| JEL: | E21 E22 E23 E32 E43 E52 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14279&r=all |
| By: | Monisankar Bishnu; Shresth Garg; Tishara Garg; Tridip Ray |
| Abstract: | In presence of imperfections in education loan market, the standard policy response of intervening solely on education front, funded through taxes and transfers, necessarily hurts the initial working population. The literature suggests compensating them via pay-as-you-go pensions as a possible solution. But for various reasons sustainability of PAYG pensions is under serious doubt. We carry out the optimal policy exercise of a utilitarian government in a dynamically efficient economy with pension and education support obeying the Pareto criterion. We find that expansion of one instrument along with the other emerges as the optimal response, however, once the complete market level of education is achieved, the optimal policy suggests phasing pensions out. Eventually, government leads the economy to an equilibrium with zero pension and the Golden Rule level of education. This is achieved by exploiting only market opportunities without relying on other factors including human capital externalities, general equilibrium effects or sociopolitical factors. |
| Keywords: | Public education, PAYG pension, intergenerational transfers, welfare state |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-58&r=all |
| By: | Titan Alon (University of California San Diego); Minki Kim (Boston University); David Lagakos (NBER and Boston University) |
| Abstract: | The COVID-19 pandemic has already led to dramatic policy responses in most advanced economies, and in particular sustained lockdowns matched with sizable transfers to much of the workforce. This paper provides a preliminary quantitative analysis of how aggregate policy responses should differ in developing countries. To do so we build an incomplete-markets macroeconomic model with epidemiological dynamics that features several of the main economic and demographic distinctions between advanced and developing economies relevant for the pandemic. We focus in particular on differences in population structure, fiscal capacity, healthcare capacity, the prevalence of “hand-to-mouth†households, and the size of the informal sector. The model predicts that blanket lockdowns are generally less effective in developing countries at reducing the welfare costs of the pandemic, saving fewer lives per unit of lost GDP. Age-specific lockdown policies, on the other hand, may be even more potent in developing countries, saving more lives per unit of lost output than in advanced economies. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bos:iedwpr:dp-350&r=all |
| By: | Ruoyun Mao; Shu-Chun Susan Yang |
| Abstract: | The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates. |
| Date: | 2020–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/91&r=all |
| By: | Raven S. Molloy; Charles G. Nathanson; Andrew D. Paciorek |
| Abstract: | We examine how housing supply constraints affect housing affordability, which we define as the quality-adjusted price of housing services. In our dynamic model, supply constraints increase the price of housing services by only half has much as the purchase price of a home, since the purchase price responds to expected future increases in rent as well as contemporaneous rent increases. Households respond to changes in the price of housing services by altering their housing consumption and location choices, but only by a small amount. We evaluate these predictions using common measures of housing supply constraints and data from US metropolitan areas from 1980 to 2016. We find sizeable effects of supply constraints on house prices, but modest-to-negligible effects on rent, lot size, structure consumption, location choice within metropolitan areas, sorting across metropolitan areas, and housing expenditures. We conclude that housing supply constraints distort housing affor dability, and therefore housing consumption and location decisions, by less than their estimated effects on house prices suggest. |
| Keywords: | Housing affordability; Housing supply; Land use regulations; Rent |
| JEL: | R23 R28 R31 R38 |
| Date: | 2020–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-44&r=all |
| By: | Christopher S Adam; Edward F Buffie |
| Abstract: | We show that a dynamic general equilibrium model with efficiency wages and endogenous capital accumulation in both the formal and (non-agricultural) informal sectors can explain the full range of confounding stylized facts associated with minimum wage laws in less developed countries. |
| Keywords: | Real sector;Price indexes;Employment;Labor market characteristics;Human capital;climate economics,disaster risk,macro feedbacks,multi-phase macro model,monetary and financial policies,environmental economics,WP,formal sector,cost share,employment loss,empirical estimate,LDCs |
| Date: | 2020–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/023&r=all |
| By: | Jaqueson Kingeski Galimberti (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | Adaptive learning under constant-gain allows persistent deviations of beliefs from equilibrium so as to more realistically reflect agents’ attempt of tracking the continuous evolution of the economy. A characterization of these beliefs is therefore paramount to a proper understanding of the role of expectations in the determination of macroeconomic outcomes. In this paper we propose a simple approximation of the first two moments (mean and variance) of the asymptotic distribution of learning estimates for a general class of dynamic macroeconomic models under constant-gain learning. Our approximation provides renewed convergence conditions that depend on the learning gain and the model’s structural parameters. We validate the accuracy of our approximation with numerical simulations of a Cobweb model, a standard New-Keynesian model, and a model including a lagged endogenous variable. The relevance of our results is further evidenced by an analysis of learning stability and the effects of alternative specifications of interest rate policy rules on the distribution of agents’ beliefs. |
| Keywords: | expectations, adaptive learning, constant-gain, policy stability |
| JEL: | D84 E03 E37 C62 C63 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:19-453&r=all |
| By: | Hugonnier, Julien; Lester, Benjamin; Weill, Pierre-Olivier |
| Abstract: | We study a search and bargaining model of asset markets in which investors' heterogeneous valuations for the asset are drawn from an arbitrary distribution. We present a solution technique that makes the model fully tractable, and allows us to provide a complete characterization of the unique equilibrium, in closed-form, both in and out of steady-state. Using this characterization, we derive several novel implications that highlight the important of heterogeneity. In particular, we show how some investors endogenously emerge as intermediaries, even though they have no advantage in contacting other agents or holding inventory; and we show how heterogeneity magnifies the impact of search frictions on asset prices, misallocation, and welfare. |
| Keywords: | Bargaining; Heterogeneity; price dispersion; search frictions |
| JEL: | G11 G12 G21 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14274&r=all |
| By: | Emmanuel Farhi; Ivan Werning |
| Abstract: | We provide explicit solutions for government spending multipliers during a liquidity trap and within a fixed exchange regime using standard closed and open-economy New Keynesian models. We confirm the potential for large multipliers during liquidity traps. For a currency union, we show that self-financed multipliers are small, always below unity, unless the accompanying tax adjustments involve substantial static redistribution from low to high marginal propensity to consume agents, or dynamic redistribu- tion from future to present non-Ricardian agents. But outside-financed multipliers which require no domestic tax adjustment can be large, especially when the average marginal propensity to consume on domestic goods is high or when government spending shocks are very persistent. Our solutions are relevant for local and national multipliers, providing insight into the economic mechanisms at work as well as the testable implications of these models. |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:78556&r=all |
| By: | Felipe Saffie; Liliana Varela; Kei-Mu Yi |
| Abstract: | We empirically and theoretically study the effects of capital flows on resource allocation within sectors and cross-sectors. Novel data on service firms – in addition to manufacturing firms – allows us to assess two channels of resource reallocation. Capital inflows lower the relative price of capital, which promotes capital-intensive industries – an input-cost channel. Second, capital inflows increase aggregate consumption, which tilts the demand towards goods with high income elasticities – a consumption channel. We provide evidence for these two channels using firm-level census data from the financial liberalization in Hungary, a policy reform that led to capital inflows. We show that firms in capital intensive industries expand, as do firms in industries producing goods with high income elasticities. In the short-term, the consumption channel dominates and resources reallocate towards high income elasticity activities, such as services. We build a dynamic, multi-sector, heterogeneous firm model with multiple sectors of an economy transitioning to its steady-state. We simulate a capital account liberalization and show that the model can rationalize our empirical findings. We then use the model to assess the permanent effects of capital flows and show that the long-term allocation of resources and, thus, aggregate productivity depend on degree of long-term financial openness of the economy. Larger liberalizations trigger long-run debt pushing the country to a permanent trade surplus. This tilts long-run production towards manufacturing exporters, which also increases aggregate productivity. |
| JEL: | F15 F41 F43 F63 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27371&r=all |
| By: | Nesterova, Kristina (Нестерова, Кристина) (The Russian Presidential Academy of National Economy and Public Administration) |
| Abstract: | The paper analyses a number of monetary rules helping to decrease the probability of the nominal interest rate hitting the zero lower bound. Such measures include integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. Discretion such as sharp preventive drop in the interest rate and LSAP to “lower for longer” are also considered. According to up-to-date New-Keynesian general equilibrium models, the major advantage of rules such as NGDP and price level targeting is their capacity to prevent zero lower bound episodes mainly by managing expectations of the public efficiently, which is a drawback of discretionary policy. |
| Keywords: | monetary policy, zero lower bound, inflation targeting, price level targeting, NGDP targeting. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:wpaper:032044&r=all |
| By: | Roberto M. Billi; Jordi Galí |
| Abstract: | We analyze the welfare impact of greater wage flexibility in the presence of an occasionally binding zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally amplifies the adverse effects of greater wage flexibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment. |
| JEL: | E24 E32 E52 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27386&r=all |
| By: | Matthias Doepke; Ruben Gaetani |
| Abstract: | Why has the college wage premium risen rapidly in the United States since the 1980s, but not in European economies such as Germany? We argue that differences in employment protection can account for much of the gap. We develop a model in which firms and workers make relationship-specific investments in skill accumulation. The incentive to invest is stronger when employment protection creates an expectation of long-lasting matches. We argue that changes in the economic environment have reduced relationship-specific investment for less-educated workers in the United States, but not for better-protected workers in Germany. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp1093&r=all |