nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒08‒10
39 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Effects of Financing Rules in Pay-As-You-Go Pension Systems on the Life and the Business Cycle By Christian Scharrer
  2. Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia By Lie, Denny
  3. Fiscal Policy Multipliers in Small States By Ali Alichi; Ippei Shibata; Kadir Tanyeri
  4. The Impact of Rapid Aging and Pension Reform on Savings and the Labor Supply By Hui He; Lei Ning; Dongming Zhu
  5. Fiscal Implications of Interest Rate Normalization in the United States By Huixin Bi; Wenyi Shen; Shu-Chun Susan Yang
  6. Macroeconomic stabilisation properties of a euro area unemployment insurance scheme By Kaufmann, Christoph; Attinasi, Maria Grazia; Hauptmeier, Sebastian
  7. A Structural Investigation of Quantitative Easing By Gregor Boehl; Gavin Goy; Felix Strobel
  8. Age Diversity and Aggregate Productivity By Balazs Zelity
  9. Monetary policy, markup dispersion, and aggregate TFP By Reinelt, Timo; Meier, Matthias
  10. Inflation – Harrod-Balassa-Samuelson effect in a DSGE model setting By Lenarčič, Črt
  11. The Importance of Terms of Trade Shocks: Kazakhstan By Alisher Tolepbergen
  12. Economic consequences of high public debt: evidence from three large scale DSGE models By Burriel, Pablo; Checherita-Westphal, Cristina; Jacquinot, Pascal; Stähler, Nikolai; Schön, Matthias
  13. Policy Trade-Offs in Building Resilience to Natural Disasters: The Case of St. Lucia By Alessandro Cantelmo; Leo Bonato; Giovanni Melina; Gonzalo Salinas
  14. On the Relationship Between Domestic Saving and the Current Account: Evidence and Theory for Developing Countries By Brueckner, Markus; Paczos, Wojtek; Pappa, Evi
  15. Could Fiscal Policies Overcome a Deep Recession at the Zero Lower Bound? By Liu, Shih-fu; Huang, Wei-chi; Lai, Ching-chong
  16. Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics By Dean Corbae; Pablo D'Erasmo
  17. Jobs and Matches: Quits, Replacement Hiring, and Vacancy Chains By Mercan, Yusuf; Schoefer, Benjamin
  18. Asset bubble and endogenous labor supply: a clarification By Kathia Bahloul Zekkari; Thomas Seegmuller
  19. The importance of beliefs in shaping macroeconomic outcomes By Farmer, Roger E A
  20. Fire Sales in Frozen Markets By Ehsan Ebrahimy
  21. Horrible Trade-offs in a Pandemic: Lockdowns, Transfers, Fiscal Space, and Compliance By Ricardo Hausmann; Ulrich Schetter
  22. Towards an effective fiscal stimulus: evidence from Botswana By Timuno, Sayed O.M; Eita, Joel Hinaunye
  23. Disciplining expectations and the forward guidance puzzle By Christoffel, Kai; Mazelis, Falk; Montes-Galdón, Carlos; Müller, Tobias
  24. Asymmetric macroeconomic effects of QE-induced increases in excess reserves in a monetary union By Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel
  25. Nonlinear Occupations and Female Labor Supply Over Time By Youngsoo Jang; Minchul Yum
  26. Are marriage-related taxes and Social Security benefits holding back female labor supply? By Borella, Margherita; De Nardi, Mariacristina; Yang, Fang
  27. On the Essentiality of Credit and Banking at the Friedman Rule By Paola Boel; Christopher J. Waller
  28. Dollar shortages and central bank swap lines By Eguren-Martin, Fernando
  29. Bank capital regulation in a zero interest environment By Döttling, Robin
  30. The Welfare of Ramsey Optimal Policy Facing Auto-Regressive Shocks By Jean-Bernard, Chatelain; Kirsten, Ralf
  31. Inefficient Relative Price Fluctuations By Daeha Cho; Kwang Hwan Kim
  32. Crime and Output: Theory and Application to the Northern Triangle of Central America By Dmitry Plotnikov
  33. Seigniorage and Sovereign Default: The Response of Emerging Markets to COVID-19 By Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez
  34. Why are Average Hours Worked Lower in Richer Countries? By Bick, Alexander; Fuchs-Schündeln, Nicola; Lagakos, David; Tsujiyama, Hitoshi
  35. Routinization and Covid-19: a comparison between United States and Portugal By De Dominicis, Piero
  36. Hot Money for a Cold Economy By David Andolfatto
  37. Deterministic Debt Cycles in Open Economies with Flow Collateral Constraints By Schmitt-Grohé, Stephanie; Uribe, Martin
  38. Labor Market Frictions and Lowest Low Fertility By Guner, Nezih; Kaya, Ezgi; Sánchez-Marcos, Virginia
  39. The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform By Alok Johri; Md Mahbubur Rahman

  1. By: Christian Scharrer (University of Augsburg, Department of Economics)
    Abstract: I study the impacts of financing rules for financial surpluses in pay-as-you-go pension systems on the business cycle and the life cycle in a dynamic stochastic large-scale overlapping generations model, where households take the inter-temporal links between contributions and pension benefits explicitly into account. The results point out that sluggish adjustments of contribution rates that are implemented by adjusting a financial buffer stock both stabilize an economy and decrease the volatility of life-time utilities of retirees and workers close to retirement. Such a policy allows these households a better hedge against macroeconomic shocks over the business cycle. Moreover, I show that the impacts of higher fluctuations of aggregate variables on the volatility of individual lifetime utilities can rather be negligible.
    Keywords: overlapping generations, pay-as-you-go pension systems, financing rules, business cycle, life cycle, rbc-model
    JEL: H55 E21 E30
    Date: 2020–07
  2. By: Lie, Denny
    Abstract: This paper studies the implications of state-dependent pricing in a small open-economy dynamic stochastic general equilibrium (DSGE) model for Indonesia. I show that variations in the timing and frequency of price adjustment inherent in a state-dependent pricing assumption could have important implications for DSGE model-based policy analysis in Indonesia. This extensive margin effect produces disparities in the conditional variance decompositions and the impulse responses to various shocks responsible for business cycle fluctuations. An investigation into the impact of COVID-19 pandemic shocks indicates that such variations non-trivially affect the analysis on the appropriate degree of monetary policy response to the shocks. A state-dependent pricing model would call for a greater degree of monetary easing in response to the COVID-19 pandemic, than that prescribed by a traditional time-dependent pricing model. The broader implication is clear. For modelling and analyzing the Indonesian economy, in which the inflation rates have historically been moderate-to-high and highly variable, state-dependent pricing is an essential model feature.
    Keywords: state-dependent pricing; monetary policy; DSGE model for Indonesia; COVID-19 pandemic
    Date: 2020–07
  3. By: Ali Alichi; Ippei Shibata; Kadir Tanyeri
    Abstract: Government debt in many small states has risen beyond sustainable levels and some governments are considering fiscal consolidation. This paper estimates fiscal policy multipliers for small states using two distinct models: an empirical forecast error model with data from 23 small states across the world; and a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to a hypothetical small state’s economy. The results suggest that fiscal policy using government current primary spending is ineffective, but using government investment is very potent in small states in affecting the level of their GDP over the medium term. These results are robust to different model specifications and characteristics of small states. Inability to affect GDP using current primary spending could be frustrating for policymakers when an expansionary policy is needed, but encouraging at the current juncture when many governments are considering fiscal consolidation. For the short term, however, multipliers for government current primary spending are larger and affected by imports as share of GDP, level of government debt, and position of the economy in the business cycle, among other factors.
    Keywords: Business cycles;Real interest rates;Exchange rate depreciation;Government consumption;Public investments;Government Spending,Fiscal Policy,Fiscal Multipliers.,WEO,government investment,level of GDP,small state,percent of GDP
    Date: 2019–03–26
  4. By: Hui He; Lei Ning; Dongming Zhu
    Abstract: We study, both empirically and quantitatively, the role of savings and the labor supply in self-insurance channels over the life cycle when one faces not only idiosyncratic income risks, but also changes in longevity risk and pension benefits. We pick China as a case study since China has undergone a dramatic process of rapid aging and a tremendous reduction in social security benefits for the period 1995-2009. We find that both savings and the labor supply are quantitatively important self-insurance channels in responding to changes in longevity risk and pension benefits, and the responses via adjustment to savings and labor supply have significant macroeconomic implications. Applying the model to China, we find that the pension reform and rapid aging together contribute 55 percent of the increase in the household saving rate from 1995 to 2009, and they jointly capture about 64 percent of the drastic increase in the labor supply for the same period.
    Keywords: Pension reforms;Social security;Household survey data;Labor supply;Social welfare programs;Demographic Change,Pension Reform,Saving,Life Cycle,Heterogeneous Agent Model,household save rate,rapid age,pension benefit,save rate
    Date: 2019–03–18
  5. By: Huixin Bi; Wenyi Shen; Shu-Chun Susan Yang
    Abstract: This paper studies the main channels through which interest rate normalization has fiscal implications in the United States. While unexpected inflation reduces the real value of government liabilities, a rising policy rate increases government financing needs because of higher interest payments and lower real bond prices. After an initial decline, the real government debt burden rises even with higher tax revenues in an expansion. Given the current net debt-to-GDP ratio at around 80 percent, interest rate normalization leads to a negligible increase in the sovereign default risk of the U.S. federal government, despite a much higher federal debt-to-GDP ratio than the post-war historical average.
    Keywords: Economic growth;Business cycles;Capital income;Real interest rates;Interest rate increases;interest rate normalization,monetary and fiscal policy interaction,fiscal sustainability,non linear DSGE models,New Keynesian model,limit distribution,active rule,debt level,bond price,government debt
    Date: 2019–05–03
  6. By: Kaufmann, Christoph; Attinasi, Maria Grazia; Hauptmeier, Sebastian
    Abstract: In this paper we use a medium-scale DSGE model to quantitatively assess the macroeconomic stabilisation properties of a supranational unemployment insurance scheme. The model is calibrated to the euro area's core and periphery and features a rich fiscal sector, sovereign risk premia and labour market frictions. Adopting both simple policy rules and optimal policies, our simulations point to enhanced business cycle synchronisation and interregional consumption smoothing. Depending on the exact specification, the results suggest a reduction in the volatility of consumption by up to 49% at the region-level, while the cross-regional correlation of unemployment and inflation increases by up to 52% and 27%, respectively, compared to the decentralised setting. The higher degree of inter-regional risk-sharing comes at the cost of sizable fiscal transfers. Limiting such transfers via claw-back mechanisms implies a much weaker degree of stabilisation across countries. JEL Classification: F45, E63, E62, E24
    Keywords: fiscal union, monetary union, optimal policy, unemployment insurance
    Date: 2020–06
  7. By: Gregor Boehl; Gavin Goy; Felix Strobel
    Abstract: Did the Federal Reserves' Quantitative Easing (QE) in the aftermath of the financial crisis have macroeconomic effects? To answer this question, we estimate a large-scale DSGE model over the sample from 1998 until 2020, including data of the Fed's balance sheet. We allow for QE to affect the economy via multiple channels that arise from several financial frictions. Our nonlinear Bayesian likelihood approach fully accounts for the zero lower bound on nominal interest rates. We find that QE increased output by about 1.2 percent, reflecting a net increase in investment of nearly 9 percent accompanied by a 0.7 percent drop in aggregate consumption. Both government bond and capital asset purchases effectively improved financing conditions. Especially capital asset purchases significantly facilitated new investment and increased the production capacity. Against the backdrop of a fall in consumption, supply side effects dominated, leading to a disinflationary effect of about 0.25 percent annually.
    Keywords: Quantitative Easing; Liquidity Facilities; Zero Lower Bound; Nonlinear Bayesian Estimation
    JEL: E63 C63 E58 E32 C62
    Date: 2020–08
  8. By: Balazs Zelity (Department of Economics, Wesleyan University)
    Abstract: This research explores theoretically, empirically and quantitatively the role of age diversity in determining aggregate productivity and output. Age diversity has two conflicting effects on output. On the one hand, due to skill complementarity across different cohorts, age diversity may be beneficial. On the other hand, rapid skill-biased technological change makes age diversity costly as up-to-date education tends to be concentrated among younger cohorts. To study this trade-off, I first build an overlapping-generations (OLG) model which, in view of these two opposing forces, predicts a hump-shaped relationship between age diversity and GDP per capita. This prediction is established analytically, and also quantitatively using real-world population data in an extended computational version of the model. The prediction is then tested using country-level panel data with a novel instrument, and regional data from Europe. Moving one standard deviation closer to the optimal level of age diversity is associated with a 1.5% increase in GDP per capita. In addition, consistent with the predictions of the model, the optimal level of age diversity is lower in economies where skill-biased technological change is more prevalent.
    Keywords: age diversity, education, experience, human capital, demographics, skill-biased
    JEL: E24 O40 J24 O15
    Date: 2020–07
  9. By: Reinelt, Timo; Meier, Matthias
    Abstract: We document three new empirical facts: (i) monetary policy shocks increase the markup dispersion across firms, (ii) they increase the relative markup of firms with stickier prices, and (iii) firms with stickier prices have higher markups. This is consistent with a New Keynesian model in which price rigidity is heterogeneous across firms. In the model, firms with more rigid prices optimally set higher markups and their markups increase by more after monetary policy shocks. The consequent increase in markup dispersion explains a negative aggregate TFP response. In a calibrated model, monetary policy shocks generate substantial fluctuations in aggregate productivity. JEL Classification: E30, E50
    Keywords: aggregate productivity, heterogeneous price rigidity, markup dispersion, monetary policy
    Date: 2020–06
  10. By: Lenarčič, Črt
    Abstract: This paper sets up a two-country two-sector dynamic stochastic general equilibrium model that introduces sector specific productivity shocks with quality improvement mechanism of goods. It provides a model-based theoretical background for the Harrod-Balassa-Samuelson phenomenon that describes the relationship between productivity and price inflation within different sectors of a particular economy. Both, the calibrated and the estimated model are able to show that the induced tradable sector productivity shocks drive the non-tradable and tradable sector price inflation upwards. By doing this, we overcome the problem that the tradable productivity increase in a typical open economy specification reduces the relative price of domestic tradable goods relative to the foreign ones.
    Keywords: Harrod-Balassa-Samuelson effect, DSGE model, inflation, productivity, quality improvement
    JEL: C32 E31 E32
    Date: 2019
  11. By: Alisher Tolepbergen (NAC Analytica, Nazarbayev University)
    Abstract: The conventional wisdom assumes that terms of trade shocks are the main drivers of business cycle dynamics in emerging exporting economies. This paper studies the effect of terms of trade shocks on key macroeconomic variables for the Kazakhstani economy. Empirical SVAR model estimates suggest that the terms of trade shocks account for 12 % of output variation for the economy. Further, three sectoral DSGE model with estimated structural parameters predict the modest importance of the terms of trade shocks for small open economy.
    Keywords: Terms of Trade; DSGE; SVAR; Kazakhstan
    JEL: B22 C32 C61 E17 E32 F41
    Date: 2019–12
  12. By: Burriel, Pablo; Checherita-Westphal, Cristina; Jacquinot, Pascal; Stähler, Nikolai; Schön, Matthias
    Abstract: The paper reviews the economic risks associated with regimes of high public debt through DSGE model simulations. The large public debt build-up following the 2009 global financial and economic crisis acted as a shock absorber for output, while in the recent and more severe COVID19-crisis, an increase in public debt is even more justified given the nature of the crisis. Yet, once the crisis is over and the recovery firmly sets in, keeping debt at high levels over the medium term is a source of vulnerability in itself. Moreover, in the euro area, where monetary policy focuses on the area-wide aggregate, countries with high levels of indebtedness are poorly equipped to withstand future asymmetric shocks. Using three large scale DSGE models, the simulation results suggest that high-debt economies (1) can lose more output in a crisis, (2) may spend more time at the zero-lower bound, (3) are more heavily affected by spillover effects, (4) face a crowding out of private debt in the short and long run, (5) have less scope for counter-cyclical fiscal policy and (6) are adversely affected in terms of potential (long-term) output, with a significant impairment in case of large sovereign risk premia reaction and use of most distortionary type of taxation to finance the additional debt burden in the future. Going forward, reforms at national level, together with currently planned reforms at the EU level, need to be timely implemented to ensure both risk reduction and risk sharing and to enable high debt economies address their vulnerabilities. JEL Classification: E62, H63, O40, E43
    Keywords: economic growth, fiscal sustainability, government debt, interest rates
    Date: 2020–07
  13. By: Alessandro Cantelmo; Leo Bonato; Giovanni Melina; Gonzalo Salinas
    Abstract: Resilience to climate change and natural disasters hinges on two fundamental elements: financial protection —insurance and self-insurance— and structural protection —investment in adaptation. Using a dynamic general equilibrium model calibrated to the St. Lucia’s economy, this paper shows that both strategies considerably reduce the output loss from natural disasters and studies the conditions under which each of the two strategies provides the best protection. While structural protection normally delivers a larger payoff because of its direct dampening effect on the cost of disasters, financial protection is superior when liquidity constraints limit the ability of the government to rebuild public capital promptly. The estimated trade-off is very sensitive to the efficiency of public investment.
    Keywords: Real interest rates;Cost of capital;Total factor productivity;Capital;Private investments;Climate Change,Natural Disasters and Their Management,Government Policy,public capital,Papageorgiou,depreciation rate,natural disaster,public standard
    Date: 2019–03–08
  14. By: Brueckner, Markus; Paczos, Wojtek; Pappa, Evi
    Abstract: We examine the relationship between domestic saving and the current account in developing countries. Our three main findings are that domestic saving has: (i) a small effect on the current account; (ii) a significant positive and quantitatively sizable effect on the trade balance; (iii) a significant negative effect on net-current transfers. We use countries in the sub-Saharan African region as a laboratory for an instrumental variables approach. The IV approach enables to obtain estimates of causal effects. Underlying the IV approach is the significant positive first-stage response of domestic saving to plausibly exogenous annual rainfall: an unanticipated, transitory supply-side shock. We construct a small open-economy DSGE model with debt adjustment frictions and endogenous net-current transfers to match the empirical findings. The model enables to examine how other types of shocks - such as changes in interest rates or trend TFP for which it is hard to get exogenous variation in the data - affect the relationship between domestic saving and the current account. An important implication of our findings is that, for developing countries, estimates of the relationship between domestic saving and domestic investment are not informative for answering the question how domestic saving affects a country's accumulation of net foreign assets.
    Keywords: current account; Domestic Saving; Feldstein-Horioka Puzzle; Financial Frictions; Net Current Transfers; Small Open Economy Model
    JEL: F32 F35
    Date: 2019–11
  15. By: Liu, Shih-fu; Huang, Wei-chi; Lai, Ching-chong
    Abstract: This paper sets up a New Keynesian model in which the monetary authority implements a zero lower bound interest rate policy, and uses it to explore whether the supportive fiscal instruments (including expansionary government spending, a payroll tax cut, and a financial assets tax cut) are effective in overcoming a deep recession. The salient feature of this study is that it provides a new dynamic viewpoint of regime switching by evaluating each of several supportive fiscal policies in terms of their performance in alleviating a deep recession. Two main findings emerge from the analysis. First, when the monetary authority implements the zero lower bound interest rate policy to dampen the negative natural rate shock, the economy will sink into a deep recession with deflation. Second, to overcome the deep recession, of the three supportive fiscal tools (i.e., expansionary government spending, a payroll tax cut, and a financial assets tax cut), only expansionary government spending is effective in alleviating the deep recession. More specifically, the implementation of fiscal policy in the form of either the payroll tax cut or the financial assets tax cut will only further deepen the recession.
    Keywords: Zero lower bound, New Keynesian model, fiscal stimulus, regime switching
    JEL: E62 E63 H20
    Date: 2020–06–22
  16. By: Dean Corbae; Pablo D'Erasmo
    Abstract: In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a general equilibrium firm dynamics model with endogenous entry and exit to include both bankruptcy options. Finally, we evaluate a bankruptcy policy change similar to one recommended by the American Bankruptcy Institute that amounts to a "fresh start" for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity, as well as long run welfare.
    Keywords: Corporate bankruptcy; Capital structure; Firm dynamics; Capital misallocation
    JEL: G30 G33 E22
    Date: 2020–07–28
  17. By: Mercan, Yusuf; Schoefer, Benjamin
    Abstract: In the canonical DMP model of job openings, all job openings stem from new job creation. Jobs denote worker-firm matches, which are destroyed following worker quits. Yet, employers classify 56% of vacancy postings as quit-driven replacement hiring into old jobs, which evidently outlived their previous matches. Accordingly, aggregate and firm-level hiring tightly tracks quits. We augment the DMP model with longer-lived jobs arising from sunk job creation costs and replacement hiring. Quits trigger vacancies, which beget vacancies through replacement hiring. This vacancy chain can raise total job openings and net employment. The procyclicality of quits can thereby amplify business cycles.
    Date: 2019–12
  18. By: Kathia Bahloul Zekkari (Aix-Marseille Univ, CNRS, AMSE, Marseille, France); Thomas Seegmuller (Aix-Marseille Univ, CNRS, AMSE, Marseille, France)
    Abstract: This paper analyzes the link between asset bubbles, endogenous labor and capital. The question is whether endogenous labor, per se, can explain a crowding-in effect of the bubble, i.e. higher levels of capital and labor. With respect to the existing literature, our contribution is twofold. First, we explicitly and theoretically derive the conditions to have a crowding-in effect of the bubble. Second, the utility function we consider allows us to show that this result does not require an arbitrarily high elasticity of intertemporal substitution in consumption. Our result still holds for a unit value of this elascticity (Cobb-Douglas utility).
    Keywords: asset bubbles, crowding-in effect, endogenous labor, overlapping generations
    JEL: E22 E44 J22
    Date: 2020–07
  19. By: Farmer, Roger E A
    Abstract: For the past thirty years of the history of macroeconomic thought, the Indeterminacy School of Macroeconomics has used general equilibrium models with indeterminate equilibria to understand the independent role of beliefs in shaping macroeconomic outcomes. In this paper I describe the most recent advances in the indeterminacy agenda, Keynesian Search Theory, in which the steady-state unemployment rate is indeterminate as a consequence of labour-market frictions. In Keynesian Search Theory, the belief of market participants is an independent exogenous variable that selects a steady-state equilibrium. I study two assumptions about beliefs, one where investment is exogenous and one where the belief about the stock market is exogenous and I examine their implications for fiscal policy.
    Keywords: Fiscal policy; Keynesian economics; unemployment
    JEL: D50 E12 E24 E32
    Date: 2019–12
  20. By: Ehsan Ebrahimy
    Abstract: It is challenging to explain the collapse in the price of subprime mortgage-backed securities (MBS) during the Financial Crisis of 2008, using the existing models of fire-sale. I present a model to demonstrate that fire-sales may happen even when there is a relatively sizable pool of natural buyers and in the absence of asymmetric information, due to a coordination failure among buyers: buyers’ waiting to trade at a lower price tomorrow, can lead to a collapse in the price and trade volume today. In particular, I show that when trade is decentralized and participation is endogenous, a medium level of asset demand and liquidity needs that are ex-pected to increase over time create complementarity among buyers’ decisions to wait. This complementarity makes competitive markets prone to coordination failures and fire-sales accompanied by a collapse in the trade volume. Fire-sales may also be inefficient. I also discuss various policy options to eliminate the risk of fire-sales in such a setup.
    Keywords: Supply and demand;Asset prices;Financial assets;Balance sheets;Asset markets;fire-sales,coordination failure,decentralized markets,competitive search,fire-sale,run equilibrium,multiple equilibrium,asset market,asset price
    Date: 2019–05–06
  21. By: Ricardo Hausmann (Center for International Development at Harvard University); Ulrich Schetter (Center for International Development at Harvard University)
    Abstract: In this paper, we develop a heterogeneous agent general equilibrium framework to analyze optimal joint policies of a lockdown and transfer payments in times of a pandemic. In our model, the effectiveness of a lockdown in mitigating the pandemic depends on endogenous compliance. A more stringent lockdown deepens the recession which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-offbetween saving lives from the pandemic and from deprivation. Lump-sum transfers help mitigate this trade-off. We identify and discuss key trade-offs involved and provide comparative statics for optimal policy. We show that, ceteris paribus, the optimal lockdown is stricter for more severe pandemics and in richer countries. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. We finally discuss distributional consequences and the political economy of fighting a pandemic.
    Keywords: COVID-19, lockdown, fiscal policy, government borrowing constraint, political economy, inequality, developing countries
    JEL: E62 F4 H12 I14 I18
    Date: 2020–07
  22. By: Timuno, Sayed O.M; Eita, Joel Hinaunye
    Abstract: While there is a general agreement on the effectiveness of fiscal stimulus, there is no consensus on which stimulus is better. To address this concern, this paper uses a Dynamic Stochastic General Equilibrium (DSGE) model to propose a fiscal stimulus that Botswana can adopt given the slowing mining productivity. The results suggest that short-run macroeconomic stabilisation can be achieved through a cut in labour taxes. This fiscal stimulus generates larger growth multipliers and contributes relatively more employment compared to a cut in consumption tax and increases in government spending. The findings also revealed that a cut in labour taxes improves trade balance, resulting in a greater accumulation of international reserves and has no Dutch disease effects. These results suggests the need for a labour tax policy reform. These results also offer some policy options for other developing countries which may face similar fiscal risks in future.
    Keywords: fiscal stimulus; fiscal policy, DSGE; Botswana
    JEL: C61 E62 H30
    Date: 2020–02–28
  23. By: Christoffel, Kai; Mazelis, Falk; Montes-Galdón, Carlos; Müller, Tobias
    Abstract: Forward guidance operates via the expectations formation process of the agents in the economy. In standard quantitative macroeconomic models, the expectations are unobserved state variables and little scrutiny is devoted to analysing the dynamic behaviour of these expectations. We show that the introduction of survey and financial market-based forecasts in the estimation of the model disciplines the expectations formation process in DSGE models. When the model-implied expectations are matched to observed expectations, the additional information of the forecasts restrains the agents’ expectations formation. We argue that the reduced volatility of the agents’ expectations dampens the model reactions to forward guidance shocks and improves the out-of-sample forecast accuracy of the model. Furthermore, we evaluate the case for introducing a discount factor as a reduced form proxy for a variety of microfounded approaches, proposed to mitigate the forward guidance puzzle. Once data on expectations is considered, the empirical support to introduce a discount factor dissipates. JEL Classification: C13, C52, E3, E47, E52
    Keywords: Bayesian estimation, DSGE models, expectations formation, forecasting, monetary policy
    Date: 2020–06
  24. By: Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel
    Abstract: The Eurosystem's large-scale asset purchases (quantitative easing, QE) induce a strong and persistent increase in excess reserves in the euro area banking sector. These excess reserves are heterogeneously distributed across euro area countries. This paper develops a two-country New Keynesian model { calibrated to represent a high- and a low-liquidity euro area member { to analyze the macroeconomic effects of (QE-induced) heterogeneous increases in excess reserves and deposits in a monetary union. QE triggers economic activity and increases the union-wide consumer price level after a negative preference shock. However, its efficacy is dampened by a reverse bank lending channel that weakens the interest rate channel of QE. These dampening effects are higher in the high-liquidity country. We find similar results in response to a monetary policy shock. Furthermore, we show that a shock in the form of a deposit shift between the two countries, interpreted as capital ight, has negative (positive) effects for the economy of the country receiving (losing) the deposits.
    Keywords: unconventional monetary policy,quantitative easing (QE),monetary policytransmission,excess liquidity,credit lending,heterogeneous monetary union,New Keynesianmodel
    JEL: E51 E52 E58 F41 F45
    Date: 2020
  25. By: Youngsoo Jang; Minchul Yum
    Abstract: High hours worked and higher returns to longer hours worked are common in many occupations, namely nonlinear occupations (Goldin 2014). Over the last four decades, both the share and relative wage premium of nonlinear occupations have been rising. Females have been facing rising experience premiums especially in nonlinear occupations. To quantitatively explore how these changes affected female labor supply over time, we build a quantitative, dynamic general equilibrium model of occupational choice and labor supply at both extensive and intensive margins. A decomposition analysis finds that the rising returns to experience, especially in nonlinear occupations, and technical change biased towards nonlinear occupations are important to explain the intensive margin of female labor supply that keeps rising even in the recent period during which female employment stagnates. Finally, a counterfactual experiment suggests that if the nonlinearities were to be gradually vanishing, female employment could have been higher at the expense of significantly lower intensive margin labor supply.
    Keywords: Female labor supply, occupational choice, Roy model, experience premium
    JEL: E2 J2 J1
    Date: 2020–07
  26. By: Borella, Margherita; De Nardi, Mariacristina; Yang, Fang
    Abstract: In the United States, both taxes and old age Social Security benefits depend on one's marital status and tend to discourage the labor supply of the secondary earner. To what extent are these provisions holding back female labor supply? We estimate a rich life cycle model of labor supply and savings for couples and singles using the method of simulated moments (MSM) on the 1945 and 1955 birth-year cohorts and use it to evaluate what would happen without these provisions. Our model matches well the life cycle profiles of labor market participation, hours, and savings for married and single people and generates plausible elasticities of labor supply. Eliminating marriage-related provisions drastically increases the participation of married women over their entire life cycle, reduces the participation of married men after age 60, and increases the savings of couples in both cohorts, including the later one, which has similar participation to that of more recent generations. If the resulting government surplus were used to lower income taxation, there would be large welfare gains for the vast majority of the population.
    Date: 2019–12
  27. By: Paola Boel; Christopher J. Waller
    Abstract: We investigate the essentiality of credit and banking in a microfounded monetary model in which agents face heterogeneous idiosyncratic time preference shocks. Three main results arise from our analysis. First, the constrained-efficient allocation is unattainable without banks. Second, financial intermediation can improve the equilibrium allocation even at the Friedman rule because it relaxes the liquidity constraints of impatient borrowers. Third, changes in credit conditions are not necessarily neutral in a monetary equilibrium at the Friedman rule. If the debt limit is sufficiently low, money and credit are perfect substitutes and tightening the debt limit is neutral. As the debt limit increases, however, patient agents always hold money but impatient agents prefer not to since it is costly for them to do so given they are facing a positive shadow rate. Borrowing instead is costless when interest rates are zero and increasing the debt limit improves the allocation.
    Keywords: Money; Credit; Banking; Heterogeneity; Friedman rule
    JEL: E40 E50
    Date: 2020–07
  28. By: Eguren-Martin, Fernando (Bank of England)
    Abstract: We explore the role of ‘dollar shortage’ shocks and central bank swap lines in a two-country New Keynesian model with financial frictions. Domestic banks issue both domestic and foreign currency debt and lend in domestic currency. Foreign currency-specific funding shocks, which are amplified via their effect on the exchange rate given balance sheet mismatches, lead to uncovered interest rate parity deviations, a contraction in lending and have a significant negative effect on macroeconomic variables. We show that central bank swap lines can attenuate these dynamics provided they are large enough.
    Keywords: Central bank swap lines; liquidity facilities; dollar shortages; uncovered interest rate parity condition; financial frictions
    JEL: E32 E44 E58 F33 F41 G15
    Date: 2020–07–10
  29. By: Döttling, Robin
    Abstract: How do near-zero interest rates affect optimal bank capital regulation and risk-taking? I study this question in a dynamic model, in which forward-looking banks compete imperfectly for deposit funding, but households do not accept negative deposit rates. When deposit rates are constrained by the zero lower bound (ZLB), tight capital requirements disproportionately hurt franchise values and become less effective in curbing excessive risk-taking. As a result, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Higher inflation and unconventional monetary policy can alleviate the problem, though their overall welfare effects are ambiguous. JEL Classification: G21, G28, E44, E58
    Keywords: capital regulation, franchise value, search for yield, unconventional monetary policy, zero lower bound
    Date: 2020–06
  30. By: Jean-Bernard, Chatelain; Kirsten, Ralf
    Abstract: With non-controllable auto-regressive shocks, the welfare of Ramsey optimal policy is the solution of a single Ricatti equation of a linear quadratic regulator. The existing theory by Hansen and Sargent (2007) refers to an additional Sylvester equation but miss another equation for computing the block matrix weighting the square of non-controllable variables in the welfare function. There is no need to simulate impulse response functions over a long period, to compute period loss functions and to sum their discounted value over this long period, as currently done so far. Welfare is computed for the case of the new-Keynesian Phillips curve with an auto-regressive cost-push shock.
    Keywords: Ramsey optimal policy, Stackelberg dynamic game, algorithm, forcing variables, augmented linear quadratic regulator, new-Keynesian Phillips curve.
    JEL: C61 C62 C73 E47 E52 E61 E63
    Date: 2020–06–24
  31. By: Daeha Cho (University of Mellbourne); Kwang Hwan Kim (Yonsei Univ)
    Abstract: We measure inefficient fluctuations in the relative price of investment in the US using an estimated two-sector New Keynesian model. In the presence of these fluctuations, we find that monetary policy faces a quantitatively significant trade-off among the sectoral output gaps and the sectoral price and wage inflation rates. While optimal monetary policy is effective in stabilizing the sectoral inflation rates, it has a limited effect on stabilizing the sectoral output gaps.
    Keywords: Relative price of investment; Policy trade-off;Optimal monetary policy
    JEL: E32 E58 E61
    Date: 2020–03
  32. By: Dmitry Plotnikov
    Abstract: This paper presents a structural model of crime and output. Individuals make an occupational choice between criminal and legal activities. The return to becoming a criminal is endogenously determined in a general equilibrium together with the level of crime and economic activity. I calibrate the model to the Northern Triangle countries and conduct several policy experiments. I find that for a country like Honduras crime reduces GDP by about 3 percent through its negative effect on employment indirectly, in addition to direct costs of crime associated with material losses, which are in line with literature estimates. Also, the model generates a non-linear effect of crime on output and vice versa. On average I find that a one percent increase in output per capita implies about ½ percent decline in crime, while a decrease of about 5 percent in crime leads to about one percent increase in output per capita. These positive effects are larger if the initial level of crime is larger.
    Keywords: Economic conditions;Supply and demand;Economic growth;Labor market policy;Unemployment;Crime,Employment,Growth,WP,crime level,indirect cost,criminal activity,homicide rate,tightness
    Date: 2020–01–16
  33. By: Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez
    Abstract: Monetary policy affects the tradeoffs faced by governments in sovereign default models. In the absence of lump-sum taxation, governments rely on both disortionary taxes and seigniorage to finance expenditure. Furthermore, monetary policy adds a time-consistency problem in debt choice, which may mitigate or exacerbate the incentives to accumulate debt. A deterioration of the terms-of-trade leads to an increase in sovereign-default risk and inflation, and a reduction in growth, which are consistent with the empirical evidence for emerging economies. An unanticipated shock resembling the COVID-19 pandemic generates a significant currency depreciation, increased inflation, and distress in government finances.
    Keywords: Crises; Default; Sovereign Debt; Exchange Rate; Country Risk; Inflation; Seigniorage; Fiscal Policy; Emerging Markets; Time-consistency; COVID-19
    JEL: E52 E62 F34 F41 G15
    Date: 2020–07–10
  34. By: Bick, Alexander; Fuchs-Schündeln, Nicola; Lagakos, David; Tsujiyama, Hitoshi
    Abstract: Why are average hours worked per adult lower in rich countries than in poor countries? Two natural candidates to consider are income effects in preferences, in which leisure becomes more valuable when income rises, and distortionary tax systems, which are more prevalent in richer countries. To assess the importance of these two forces, we build a simple model of labor supply by heterogeneous individuals and calibrate it to match international data on labor income taxation, government transfers relative to GDP, and hours worked per adult. The model predicts that income effects are the main driving force behind the decline of average hours worked with GDP per capita. We reach a similar conclusion in an extended model that matches cross-country patterns of labor supply along the extensive and intensive margins and of the prevalence of subsistence self-employment.
    JEL: E24 J21 J22 O11
    Date: 2019–12
  35. By: De Dominicis, Piero
    Abstract: The purpose of this paper is to identify what is the role of automatization in increasing wage inequality, making a comparison between the two countries. Using PSID and Quadros de Pessoal, we find that labor income dynamics are strongly determined by the variance of the individual fixed component. This effect is drastically reduced by adding information on workers' occupational tasks, confirming that decreasing price of capital and the consequent replacement of routine manual workers have deepened wage inequality. During the current crisis, we find that the ability to keep working is strongly related with the occupation type. As such, we simulate the impact of a permanent demand shock using an overlapping-generations model with incomplete markets and heterogeneous agents to quantitatively predict the impact of Covid-19 and lockdown measures on wage premium and earnings inequality. We find that wage premia and earnings dispersion increase, suggesting that earnings inequality will increase at the expenses of manual workers.
    Keywords: Routinization, Wage Inequality, Covid-19, Income processes, Teleworking
    JEL: E21 J23 J31
    Date: 2020–06
  36. By: David Andolfatto
    Abstract: What is the theoretical justification for taxing unspent money transfers in a recession? To examine this question, I study a model economy where fiat money is necessary as a medium of exchange and, incidentally, serves as a store of value. This latter property is shown to open the door to business cycles and depressions driven entirely by speculation. Unconditional money transfers do not guarantee escape from a psychologically-induced depression. I demonstrate how money transfers subject to a short expiration date do eliminate speculative equilibria. This hot money policy compares favorably to negative interest rate policy because the latter taxes all money savings whereas the former only threatens to tax gifted money.
    Keywords: Money; hoarding; depression; sunspot equilibria
    JEL: B1 B2 E3 E4 E5 E6
    Date: 2020–07
  37. By: Schmitt-Grohé, Stephanie; Uribe, Martin
    Abstract: This paper establishes the existence of deterministic cycles in infinite-horizon open economy models with a flow collateral constraint. It shows that for plausible parameter configurations, the economy has a unique equilibrium exhibiting deterministic cycles in which periods of debt growth are followed by periods of debt deleveraging. In particular, three-period cycles exist, which implies by the Li-Yorke Theorem the presence of cycles of any periodicity and chaos. The paper also shows that deterministic cycles are absent in the Ramsey optimal allocation providing a justification for macroprudential policies even in the absence of uncertainty.
    Keywords: capital controls; Chaos; Credit Booms; Deleveraging; Deterministic cycles; flow collateral constraints; Pecuniary externality
    JEL: E32 F38 F41 H23
    Date: 2019–12
  38. By: Guner, Nezih; Kaya, Ezgi; Sánchez-Marcos, Virginia
    Abstract: The total fertility rate is well below its replacement level of 2.1 children in high-income countries. Why do women choose such low fertility levels? We study how labor market frictions affect the fertility of college-educated women. We focus on two frictions: uncertainty created by dual labor markets (the coexistence of jobs with temporary and open-ended contracts) and inflexibility of work schedules. Using rich administrative data from the Spanish Social Security records, we show that women are less likely to be promoted to permanent jobs than men. Temporary contracts are also associated with a lower probability of first birth. With Time Use data, we also show that women with children are less likely to work in jobs with split-shift schedules, which come with a fixed time cost. We then build a life-cycle model in which married women decide whether to work or not, how many children to have, and when to have them. In the model, women face a trade-off between having children early and waiting and building their careers. We show that reforms that reduce the labor market duality and eliminate split-shift schedules increase the completed fertility of college-educated from 1.52 to 1.88. These reforms enable women to have more children and have them early in their life-cycle. They also increase the labor force participation of women and eliminate the employment gap between mothers and non-mothers.
    Keywords: Fertility; Labor market frictions; Split-Shift Schedules; Temporary contracts
    JEL: E24 J13 J21 J22
    Date: 2019–11
  39. By: Alok Johri; Md Mahbubur Rahman
    Abstract: India's relative price of investment rose 44% from 1981 to 1991 and fell 26% from 1991 to 2006. We build a simple DGE model calibrated to Indian data in order to explore the impact of capital import substitution policies and their reform post-1991, in accounting for this rise and fall. Our model delivers a 23% rise before reform and a 31% fall thereafter. GDP per effective labor was 3% lower in 1991 compared to 1981 due to import restrictions on capital goods. Their removal and a 71 percentage point reduction in tariff rates raised GDP per effective labor permanently by 20%.
    Keywords: Relative price of investment; Policy reform in India
    JEL: O11 E17 E2
    Date: 2020–07

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