nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒08‒17
34 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Consumption Insurance Against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation By Krueger, Dirk; Wu, Chunzan
  2. Macroeconomic effects of tariffs shocks: the role of the effective lower bound and the labour market By Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
  3. Search and Credit Frictions in the Housing Market By Miroslav Gabrovski; Victor Ortego-Marti
  4. A Structural Investigation of Quantitative Easing By Gregor Boehl; Gavin Goy; Felix Strobel
  5. TANK Models with Amplification and no Puzzles: the Magic of Output Stabilization and Capital By Maliar, Lilia; Naubert, Christopher
  6. Firm Dynamics with Labor Market Sorting By Andreas Gulyas
  7. Global Shocks Alert and Monetary Policy Responses By Shobande, Olatunji; Shodipe, Oladimeji; Simplice, Asongu
  8. Age-Specific Entrepreneurship and PAYG Public Pensions in Germany By Burkhard Heer; Mark Trede
  9. Entrepreneurship, outside options and constrained By Joao Galindo da Fonseca; Iain Snoddy
  10. Towards a Dynamic Disequilibrium Theory with Randomness By Martin M. Guzman; Joseph E. Stiglitz
  11. Interest Rate Uncertainty and Sovereign Default Risk By Alok Johri; Shahed Khan; Cesar Sosa-Padilla
  12. Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis By William Gbohoui
  13. Pollution and Labor Market Search Externalities Over the Business Cycle By John Gibson; Garth Heutel
  14. Corporate Tax Reform: From Income to Cash Flow Taxes By Benjamin Carton; Emilio Fernández Corugedo; Benjamin L Hunt
  15. Macroeconomic Effects of Capital Tax Rate Changes By Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
  16. The Wife's Protector: A Quantitative Theory Linking Contraceptive Technology with the Decline in Marriage By Greenwood, Jeremy; Guner, Nezih; Kopecky, Karen A.
  17. Sovereigns and Financial Intermediaries Spillovers By Hamid R Tabarraei; Abdelaziz Rouabah; Olivier Pierrard
  18. Asset Bubbles, Unemployment, and Financial Market Frictions By Ken-ichi Hashimoto; Ryonghun Im; Takuma Kunieda; Akihisa Shibata
  19. Inequality in the Welfare Costs of Disinflation By Benjamin Pugsley; Hannah Rubinton
  20. Epidemics in the Neoclassical and New Keynesian Models By Martin S. Eichenbaum; Sergio Rebelo; Mathias Trabandt
  21. Checking if the Straitjacket Fits By Pagan, Adrian; Wickens, Michael R.
  22. Young, Educated, Unemployed By Sena Coskun
  23. Searching Forever After By Antler, Yair; Bachi, Benjamin
  24. Equilibrium Indeterminacy and Extreme Outcomes: A Fat Sunspot Ta(i)l(e) By Dave, Chetan; Sorge, Marco
  25. An Econometric Analysis of a Calibrated Macroeconomic Model for the Dominican Republic: A Closer Look into Monetary Policy By Paola Mariell Brens Ortega
  26. Asset Bubbles, Unemployment, and Financial Market Frictions By Ken-ichi Hashimoto; Ryonghun Im; Takuma Kunieda; Akihisa Shibata
  27. Optimal Taxation with Homeownership and Wealth Inequality By Borri, Nicola; Reichlin, Pietro
  28. Consumer Debt and default: A Macro Perspective By Florian Exler; Michéle Tertilt
  29. The Portfolio Channel of Capital Flows and Foreign Exchange Intervention in A Small Open Economy By Carlos Montoro; Marco Ortiz
  30. Going the Extra Mile: Effort by Workers and Job-Seekers By Matthias S. Hertweck; Vivien Lewis; Stefania Villa
  31. Revisiting the Hypothesis of High Discounts and High Unemployment By Paolo Martellini; Guido Menzio; Ludo Visschers
  32. Turnover liquidity and the transmission of monetary policy By Lagos, Ricardo; Zhang, Shengxing
  33. Stock Market Participation, Inequality, and Monetary Policy By Davide Melcangi; Vincent Sterk
  34. Involuntary unemployment as a Nash equilibrium and fiscal policy By Tanaka, Yasuhito

  1. By: Krueger, Dirk; Wu, Chunzan
    Abstract: We show that a calibrated life-cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri and Saporta-Eksten (2016) in U.S. data. In the model, 35% of male and 18% of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32% and 19%. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intra-household income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half.
    Date: 2019–11
  2. By: Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
    Abstract: We simulate a version of the EAGLE, a New Keynesian multi-country model of the world economy, to assess the macroeconomic effects of US tariffs imposed on one country member of the euro area (EA), and the rest of the world (RW). The model is augmented with an endogenous effective lower bound (ELB) on the monetary policy rate of the EA and country-specific labour markets with search-and-matching frictions. Our main results are as follows. First, tariffs produce recessionary effects in each country. Second, if the ELB holds, then the tariff has recessionary effects on the whole EA, even if it is imposed on one EA country and the RW. Third, if the ELB holds and the real wage is flexible in the EA country subject to the tariff, or if there are segmented labour markets with directed search within each country, then the recessionary effects on the whole EA are amplified in the short run. Fourth, if the elasticity of substitution among tradables is low, then the tariff has recessionary effects on the whole EA also when the ELB does not hold. JEL Classification: F16, F41, F42, F45, F47
    Keywords: DSGE models, monetary policy, protectionism, unemployment
    Date: 2020–07
  3. By: Miroslav Gabrovski; Victor Ortego-Marti (Department of Economics, University of California Riverside)
    Abstract: This paper develops a model of the housing market with search and credit frictions. The interaction between the two sources of friction gives rise to a novel channel through which the financial sector affects prices and liquidity in the housing market and leads to multiple equilibria. In a numerical exercise, we gauge the relative contribution of credit market shocks to the observed patterns in housing prices, time-to-sell, and mortgage debt-to-price ratio in the U.S. data prior to the $2007$ housing market crash. Our results suggest that shocks associated with the credit frictions channel had a relatively larger impact on the observed build-up in mortgage debt and lack of change in time-to-sell than on the increase in prices.
    Keywords: Housing market; Credit Frictions; Search and Matching; Multiple Equilibria; Mortgages
    JEL: E2 E32 R21 R31
    Date: 2020–08
  4. 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 to 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 between 2009 to 2015, QE increased output by about 1.2 percent. This reflects a net increase in investment of nearly 9 percent, that was accompanied by a 0.7 percent drop in aggregate consumption. Both, government bond and capital asset purchases were effective in improving financing conditions. Especially capital asset purchases significantly facilitated new investment and increased the production capacity. Against the backdrop of a fall in consumption, supply side effects dominated which led to a mild disinflationary effect of about 0.25 percent annually.
    Keywords: Quantitative Easing, Liquidity Facilities, Zero Lower Bound, Nonlinear Bayesian Estimation
    JEL: E63 C63 E58 E32
    Date: 2020–07
  5. By: Maliar, Lilia; Naubert, Christopher
    Abstract: We show that the standard two-agent new Keynesian (TANK) model without capital is able to produce monetary policy amplification and no forward guidance puzzle. This finding contrasts with the previous literature that argued that both results cannot be achieved simultaneously. Our key ingredient is output stabilization in the Taylor rule, and we do not rely on the presence of idiosyncratic uncertainty. For both deterministic and stochastic versions, we derive novel closed form solutions for all conceivable cases of eigenvalues and analyze the effects of redistribution between participants and non-participants in asset markets. A stochastic version of the model predicts that positive productivity shocks always worsens consumption inequality, which is counterfactual. Finally, we built a version of the model with capital which realistically predicts that consumption inequality can either increase or decrease in response to shocks. Moreover, the forward guidance puzzle is resolved even without output stabilization in the Taylor rule.
    Keywords: forward guidance; New Keynesian Model; redistribution; TANK
    JEL: C61 C63 C68 E31 E52
    Date: 2019–11
  6. By: Andreas Gulyas
    Abstract: I develop a multi-worker firm model with search frictions, job-to-job transitions, firm dynamics and worker-firm complementarities to study the employment dynamics at the establishment level. Due to the complementarities in production, the ideal worker type changes after productivity shocks, which leads firms to adjust the skill composition of their workforce. Hence, the relationship between changes in workforce quality and firm growth rates in the data informs the strength of complementarities. Using German social security data, I document how firms reorganize the skill composition of their workforce. The estimated model matches many salient facts of establishment level employment dynamics by firm growth rates such as poaching rates, firm size distributions, and the characteristic hockey-stick patterns of the establishment level hire and separation rates by firm growth rates. I decompose the output costs of search frictions and show that the misallocation of jobs and workers across firms generate significant output losses. I conclude that assortative labor market matching is key to understand establishment level employment dynamics.
    Keywords: Firm Dynamics, Labor Market Sorting, Worker Flows
    JEL: J63 J64 J30
    Date: 2020–06
  7. By: Shobande, Olatunji; Shodipe, Oladimeji; Simplice, Asongu
    Abstract: The study examines the role of global predictors on national monetary policy formation for Kenya and Ghana within the New Keynesian DSGE framework. We developed and automatically calibrated our DSGE model using the Bayesian estimator, which made our model robust to rigorous stochastic number of subjective choices. Our simulation result indicates that global factors account for the inability of national Central Banks to predict the behaviour of macroeconomic and financial variables among these developing nations.
    Keywords: Business Cycle, Macroeconomic policy, Financial crises
    JEL: E32 E60
    Date: 2019–01
  8. 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 generations, social security, fiscal sustainability
    JEL: H55 D31 D91 J11 L26 C68
    Date: 2020
  9. By: Joao Galindo da Fonseca (Université de Montréal); Iain Snoddy (Vancouver School of Economics, University of British Columbia)
    Abstract: The literature on search frictions has often adopted the assumption of free entry. In this paper we forgo of this restriction by proposing a more realistic framework in which individuals are constantly making the decision whether or not to open a firm. Namely, firms are created through endogenous choices and business-owners and workers are drawn from the same pool. We show that in this framework, the Nash bargaining parameter is crucial for internal dynamics. In particular, workers and business owners share the same outside-options. As a result, the wage is no longer unambiguously positively related to the value of unemployment. The constrained efficient solution to this model takes the same form as the standard search model implying the same form for the Hosios condition. However, at this efficient solution changes in the rate of unemployment are either exacerbated or muted conditional on the value of the match elasticity parameter.
    Keywords: Search and matching, Entrepreneurship, Outside options, Constrained efficiency
    JEL: E24 J63 J64 D61
    Date: 2019–05
  10. By: Martin M. Guzman; Joseph E. Stiglitz
    Abstract: Most macroeconomic crises, such as the 2008 Global Financial Crisis, are associated with endogenous large changes in beliefs and understandings about the workings of the economy. Such downturns and crises are not consistent with the standard paradigm of a well-functioning competitive economy, and macroeconomic equilibrium models based on that paradigm have failed to predict the possibility of those downturns, to explain them, or even to design appropriate policy responses. The framework assumes there are no macroeconomic inconsistencies—all plans are realized, all budget constraints honored. In this paper, we present a dynamic disequilibrium theory with randomness that is based on the premise that a better way to understand deep downturns is to think of the economy experiencing a constant evolution, marked by uncertainty, in which there is continual learning about the economic system. Our framework explains why macroeconomic inconsistencies may arise and investigates their consequences. We explain why decentralized market forces may be disequilibrating. We identify the crucial departures from the Arrow-Debreu assumptions and those underlying DSGE models, emphasizing the limitations in the assumption of equilibrium and the absence of a coherent theory of how it is attained, the incompleteness of markets and the non-stationarity of the stochastic processes describing the economy. We analyze the policy implications of this alternative theory, which typically differ markedly from those of the standard model: In particular, the consequences for the effectiveness of different monetary and fiscal policies, and the eventual need of debt restructuring policies to restore macroeconomic consistency.
    JEL: E0
    Date: 2020–06
  11. By: Alok Johri; Shahed Khan; Cesar Sosa-Padilla
    Abstract: International data suggests that fluctuations in the level and volatility of the world interest rate (as measured by the US treasury bill rate) are positively correlated with both the level and volatility of sovereign spreads in emerging economies. We incorporate an estimated time-varying process for the world interest rate into a model of sovereign default calibrated to a panel of emerging economies. Time variation in the world interest rate interacts with default incentives in the model and leads to state contingent effects on borrowing and sovereign spreads which resemble those found in the data. The model delivers up to one-half of the positive comovement between the level and volatility of world interest rate and the level of sovereign spreads seen in emerging economies. Moreover, the model also delivers significant positive co-movements between the volatility of the spread and the process for the world interest rate which is also consistent with the data. Our model provides one potential source for the observed bunching in default probabilities observed across nations, namely the world interest rate process. Our model generates a positive and significant correlation (0.51) between the spreads of two nations with uncorrelated income processes. This is close to the observed mean correlation in the data (0.61).
    Keywords: Sovereign Debt; Sovereign Default; Interest Rate Spread; Time-varying Volatility; Uncertainty Shocks
    JEL: F34 F41 E43 E32
    Date: 2020–07
  12. By: William Gbohoui
    Abstract: This paper develops a dynamic general equilibrium model to assess the effects of temporary business tax cuts. First, the analysis extends the Ricardian equivalence result to an environment with production and establishes that a temporary tax cut financed by a future tax-increase has no real effect if the tax is lump-sum and capital markets are perfect. Second, it shows that in the presence of financing frictions which raise the cost of investment, the policy temporarily relaxes the financing constraint thereby reducing the marginal cost of investment. This direct effect implies positive marginal propensities to invest out of tax cuts. Third, when the tax is distortionary, the expectation of high future tax rates reduces the expected marginal return on investment mitigating the direct stimulative effects.
    Keywords: Tax revenue;Tax incentives;Tax increases;Return on investment;Tax changes;Ricardian Equivalence,Corporate Tax Policy,Financing Friction,General Equilibrium.,lump-sum,new equity,external finance,marginal cost,proportional tax
    Date: 2019–02–15
  13. By: John Gibson; Garth Heutel
    Abstract: We study the relationship between unemployment, environmental policy, and business cycles. We develop a dynamic stochastic general equilibrium real business cycle model that includes both a pollution externality and congestion externalities from labor market search frictions, which generate unemployment. We consider two policies to address the market failures: an emissions tax and a tax or subsidy on job creation. With both policies present, the efficient outcome can be achieved. When one policy is constrained or absent, we solve for the second best. The absence of a vacancy policy to address the congestion externalities substantially affects the value of the emissions tax, both in steady state and over the business cycle.
    JEL: E24 E32 Q58
    Date: 2020–06
  14. By: Benjamin Carton; Emilio Fernández Corugedo; Benjamin L Hunt
    Abstract: This paper uses a multi-region, forward-looking, DSGE model to estimate the macroeconomic impact of a tax reform that replaces a corporate income tax (CIT) with a destination-based cash-flow tax (DBCFT). Two key channels are at play. The first channel is the shift from an income tax to a cash-flow tax. This channel induces the corporate sector to invest more, boosting long-run potential output, GDP and consumption, but crowding out consumption in the short run as households save to build up the capital stock. The second channel is the shift from a taxable base that comprises domestic and foreign revenues, to one where only domestic revenues enter. This leads to an appreciation of the currency to offset the competitiveness boost afforded by the tax and maintain domestic investment-saving equilibrium. The paper demonstrates that spillover effects from the tax reform are positive in the long run as other countries’ exports benefit from additional investment in the country undertaking the reform and other countries’ domestic demand benefits from improved terms of trade. The paper also shows that there are substantial benefits when all countries undertake the reform. Finally, the paper demonstrates that in the presence of financial frictions, corporate debt declines under the tax reform as firms are no longer able to deduct interest expenses from their profits. In this case, the tax shifting results in an increase in the corporate risk premia, a near-term decline in output, and a smaller long-run increase in GDP.
    Keywords: Corporate income taxes;Tax reforms;Tax policy;Cash-flow taxes;General equilibrium models;External sector;Fiscal policy;Tax revenue;Tax incentives;business taxation,corporate leverage,dynamic stochastic general equilibrium models,macroeconomic interdependence,Forecasting and Simulation,Monetary Policy (Targets,Instruments,and Effects),Open Economy Macroeconomics,CFT,deductibility,distortionary,export price,tax reform
    Date: 2019–01–16
  15. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
    Abstract: We study aggregate, distributional and welfare effects of a permanent reduction in the capital tax rate in a quantitative equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in wage and income inequality. Moreover, the expansionary aggregate effects are smaller when distortionary labor or consumption tax rates have to increase to finance the capital tax rate cut, driven by effects on labor supply decisions. An extension to a model with heterogeneous households shows that consumption inequality also increases in the long run, which leads to a further rise in wage inequality. We study transition dynamics and show that joint modeling of monetary and fiscal policy response is important for analyzing short-run effects. Finally, we contrast the long-term aggregate welfare gains with short-term losses, regardless of how the tax cut is financed. In the model with heterogeneous households, we additionally show that welfare gains for the skilled go together with welfare losses for the unskilled.
    Keywords: Capital tax rate; Capital-skill complementarity; Inequality; Transition dynamics; Welfare implications
    JEL: E62 E63 E52 E58 E31
    Date: 2020–06–26
  16. By: Greenwood, Jeremy; Guner, Nezih; Kopecky, Karen A.
    Abstract: The 19th and 20th centuries saw a transformation in contraceptive technologies and their take up. This led to a sexual revolution, which witnessed a rise in premarital sex and out-of-wedlock births, and a decline in marriage. The impact of contraception on married and single life is analyzed here both theoretically and quantitatively. The analysis is conducted using a model where people search for partners. Upon finding one, they can choose between abstinence, marriage, and a premarital sexual relationship. The model is confronted with some stylized facts about premarital sex and marriage over the course of the 20th century. Some economic history is also presented.
    Date: 2019–11
  17. By: Hamid R Tabarraei; Abdelaziz Rouabah; Olivier Pierrard
    Abstract: We examine the spillover effects between sovereigns and banks in a model with a heterogeneous banking system. An increase in sovereign’s default risk affects financial intermediaries through two channels in this model. First, banks’ funding costs might increase, inducing higher interest rates on loans and bonds and a cut back in these assets. Second, financial regulator’s risk-weighted asset framework would assign higher weights to lower quality assets, implying a portfolio rebalancing and more deleveraging. While capital adequacy requirements weaken the impact of shocks emerging from the real economy, they amplify the effect of shocks on banks’ balance sheets.
    Keywords: Central banks;Interest rates on loans;Bank capital;Market interest rates;Bank liquidity;Sovereign risk,Contagion,Interbank market,interbank,deposit rate,leverage ratio,order condition,bank 's balance
    Date: 2019–02–27
  18. By: Ken-ichi Hashimoto (Graduate School of Economics, Kobe University); Ryonghun Im (Institute of Economic Research,Kyoto University); Takuma Kunieda (School of Economics, Kwansei Gakuin University); Akihisa Shibata (Institute of Economic Research,Kyoto University)
    Abstract: A tractable model with infinitely lived agents is constructed for the examination of bubbles and unemployment. It is demonstrated that the presence of bubbles stimulates capital accumulation and reduces unemployment. The presence of bubbles also changes the effects of government policies that target unemployment and welfare conditions in the labor market. The main findings are as follows: (i)the presence of bubbles is more beneficial to an economy with severe credit constraints; (ii)the presence of bubbles mitigates the negative effects of taxation and unemployment benefits on unemployment and welfare;and (iii)these mitigation effects decrease as credit constraints are relaxed.
    Date: 2020–07
  19. By: Benjamin Pugsley; Hannah Rubinton
    Abstract: We use an incomplete markets economy to quantify the distribution of welfare gains and losses of the US "Volcker" disinflation. In the long run households prefer low inflation, but disinflation requires a transition period and a redistribution from net nominal borrowers to net nominal savers. Even with perfectly flexible prices, welfare costs may be significant for households with nominal liabilities. When calibrated to match the micro and macro moments of the early 1980s high inflation environment, almost half of all borrowers (14 percent of all households) would prefer to avoid the redistribution and equilibrium effects of the disinflation. This share depends negatively on the liquidity value of money and positively on the average duration of nominal borrowing.
    Keywords: Monetary Policy; Inequality; Redistribution
    JEL: E31 E52
    Date: 2019–12–04
  20. By: Martin S. Eichenbaum; Sergio Rebelo; Mathias Trabandt
    Abstract: We analyze the effects of an epidemic in three standard macroeconomic models. We find that the neoclassical model does not rationalize the positive comovement of consumption and investment observed in recessions associated with an epidemic. Introducing monopolistic competition into the neoclassical model remedies this shortcoming even when prices are completely flexible. Finally, sticky prices lead to a larger recession but do not fundamentally alter the predictions of the monopolistic competition model.
    JEL: E1 H0 I1
    Date: 2020–06
  21. By: Pagan, Adrian; Wickens, Michael R.
    Abstract: This paper discusses, and provides new evidence on, the view that "theory, while essential, should be regarded as a flexible framework rather than a straightjacket, because features that the theory abstracts from may be important in practice". It considers how best to assess the empirical performance of tightly specified models such as DSGE models, and loosely specified models such as SVARs. These issues are illustrated using various New Keynesian models. We conclude that the challenge is to incorporate flexibility into the theory in such a way as to be compatible with both the theory and the data.
    Keywords: DSGE models; Model testing; SVARs
    JEL: C52 E3
    Date: 2019–11
  22. By: Sena Coskun
    Abstract: In a number of European countries, unemployment rates for young college graduates are higher than for young high school graduates. This presents a challenge for canonical models of unemployment that suggest that unemployment should decrease with education. I disentangle two potential explanations for the pattern: “labor market frictions” versus “relative productivity.” Here, labor market frictions are obstacles to labor market flows (such as employment protection regulation), whereas relative productivity refers to features that lower the output of educated workers already matched to firms (such as an education system that does not provide the right skills or a lack of jobs that make good use of workers’ skills). The analysis builds on a search and matching model with endogeneous productivity differences and the possibility of mismatch (educated workers working in low skilled jobs). I show that when young educated workers have productivity levels close to uneducated workers, they have higher unemployment rates, because firms create fewer skilled jobs. My counterfactual analysis shows that the relative productivity channel explains a substantial part in accounting for unemployment of young educated workers. The results suggest that improving education policy and fostering firms’ demand for skills may have important roles to play in addressing high unemployment among young workers.
    Keywords: unemployment, labor market frictions, European labor markets, education, productivity, skill premium
    JEL: E24 J21 J24 J31 J64
    Date: 2020–07
  23. By: Antler, Yair; Bachi, Benjamin
    Abstract: We study a model of two-sided search in which agents' reasoning is coarse. In equilibrium, the most desirable agents behave as if they were fully rational, while, for all other agents, coarse reasoning results in overoptimism with regard to their prospects in the market. Consequently, they search longer than optimal. Moreover, agents with intermediate match values may search indefinitely while all other agents eventually marry. We show that the share of eternal singles converges monotonically to 1 as search frictions vanish. Thus, improvements in the search technology may backfire and even lead to market failure.
    Keywords: Boundedly rational expectations; Coarse reasoning; Dating; Marriage Market; Matching; Two-sided search
    Date: 2019–11
  24. By: Dave, Chetan (University of Alberta, Department of Economics); Sorge, Marco (University of Salerno)
    Abstract: Competing explanations for the fat-tailed empirical distribution of aggregate time series range from exogenous stochastic volatility, boundedly rational agents reflecting a lot of structural change or that exogenous structural shocks are themselves extreme. We build on this literature and show that sunspots in dynamic models can accumulate as linear recursions with multiplicative noise. Thus, using known results from the large deviations literature allows us to conclude that even small sunspot shocks can lead to large movements in endogenous variables. We apply these results to models that admit indeterminacies to investigate the empirical relevance of sunspots in accounting for observed fat-tails in output.
    Keywords: Fat tails; Indeterminacy; Sunspots
    JEL: E30 E40
    Date: 2020–07–19
  25. By: Paola Mariell Brens Ortega
    Abstract: The aim of this paper is to quantify the effects of an unanticipated monetary policy shock in key macroeconomic variables for the Dominican Republic. The modelling framework in the paper is based on Del Negro and Schorfheide (2004) DSGE-VAR procedure. The procedure allows the addition of theory to empirical models, characterized by a high degree of data fit. Given that the Dominican Republic’s key economic variables time series have a relative short span; this procedure represents a more suitable framework for monetary policy macroeconomic modelling as it incorporates policymaker's initial belief to the observed data. The results are aligned with macroeconomic theory and with previous empirical papers for the Dominican Republic that measure the impact of a monetary policy shock in output growth and in inflation.
    Keywords: DSGE-VAR, Monetary Policy, New Keynesian Models
    JEL: C32 C51 C53 C54 C61 E52
    Date: 2020–07–23
  26. By: Ken-ichi Hashimoto (Graduate School of Economics, Kobe University); Ryonghun Im (Institute of Economic Research, Kyoto University); Takuma Kunieda (School of Economics, Kwansei Gakuin University); Akihisa Shibata (Institute of Economic Research, Kyoto University)
    Abstract: A tractable model with infinitely lived agents is constructed for the exam- ination of bubbles and unemployment. It is demonstrated that the presence of bubbles stimulates capital accumulation and reduces unemployment. The presence of bubbles also changes the e ects of government policies that target unemployment and welfare conditions in the labor market. The main findings are as follows: (i) the presence of bubbles is more beneficial to an economy with severe credit constraints; (ii) the presence of bubbles mitigates the negative effects of taxation and unemployment benefits on unemployment and welfare; and (iii) these mitigation effects decrease as credit constraints are relaxed.
    Keywords: Asset bubbles, Unemployment, Labor-market matching frictions, Financial frictions.
    JEL: J64 O41 O42
    Date: 2020–07
  27. By: Borri, Nicola; Reichlin, Pietro
    Abstract: We consider optimal taxation in a model with wealth-poor and wealth-rich households, where wealth derives from business capital and homeownership, and investigate the consequences on these tax rates of a rising wealth inequality at steady state. The optimal tax structure includes some taxation of labor, zero taxation of financial and business capital, a housing wealth tax on the wealth-rich households and a housing subsidy on the wealth-poor households. When wealth inequality increases, the optimal balance between labor and housing wealth taxes depends on the source of the increasing wealth.
    Keywords: Housing; taxation; Wealth
    JEL: E21 E62 G1 H2 H21
    Date: 2019–11
  28. By: Florian Exler; Michéle Tertilt
    Abstract: In this survey, we review the quantitative macroeconomic literature analyzing consumer debt and default. We start by providing an overview of consumer bankruptcy law in the US and document the relevant institutional changes over time. We proceed with a comprehensive empirical section, describing key facts about consumer debt, defaults and delinquencies, as well as charge-off and interest rates for the United States. In addition to the evolution of these variables over time, we construct life-cycle profiles using data from the Survey of Consumer Finances and show that debt and defaults display a clear hump-shaped profile by age. Third, we show how credit card debt has evolved along the income distribution. Finally, we document a large amount of heterogeneity in credit card interest rates across consumers. In the second part of the survey, we describe what has by now become the workhorse model of consumer credit and default. We discuss a quantitative version of the model and use it to decompose the main reasons for default. We also use the model to illustrate how the details of default costs matter. The remainder of the survey then discusses the literature centered around two questions. First, what are the welfare implications of various bankruptcy laws? And second, what caused the rise in filings over time? We end with a discussion of open questions and fruitful avenues for future research.
    Keywords: Consumer Debt, Default, Bankruptcy, Chapter 7, Bankruptcy Law, Delinquency, Credit Cards, Unsecured Debt, Charge-Offs, Interest Rates
    JEL: C60 E20 G20 O30
    Date: 2020–06
  29. By: Carlos Montoro (Banco Central de Reserva del Perú); Marco Ortiz (Universidad del Pacífico)
    Abstract: In this paper we extend a new Keynesian small open economy model to include risk-averse FX dealers and FX intervention by the monetary authority. The former ingredients generate deviations from the uncovered interest parity (UIP) condition. More precisely, in this setup portfolio decisions of the dealers add endogenously a time variant risk-premium element to the traditional UIP that depends on FX intervention by the central bank and FX orders by foreign investors. We analyse the effectiveness of different strategies of FX intervention (e.g., unanticipated operations or via a pre-announced rule) to affect the volatility of the exchange rate and the transmission mechanism of the interest rate. Our findings are as follows: (i) FX intervention has a strong interaction with monetary policy in general equilibrium; (ii) FX intervention rules can have stronger stabilisation power than discretion in response to shocks because they exploit the expectations channel; (iii) there are some trade-offs in the use of FX intervention, since it can help to isolate the economy from external financial shocks, but it prevents some necessary adjustments on the exchange rate as a response to nominal and real external shocks; and (iv) the interaction between the portfolio balance channel and current account dynamics reduces the presence of a explosive response of exchange rate volatility, generating more stable equilibria.
    JEL: E4 E5 F3 G15
    Date: 2020–08
  30. By: Matthias S. Hertweck (Deutsche Bundesbank); Vivien Lewis (Deutsche Bundesbank); Stefania Villa (Bank of Italy)
    Abstract: We introduce two types of effort into an otherwise standard labor search model to examine equilibrium determinacy. Indeterminacy occurs when wages rise sharply in response to a labor market tightening. Variable labor effort gives rise to short-run increasing returns to hours in production. This raises workers’ marginal product and wages, expanding the region of indeterminacy. Variable search effort makes workers search more intensively in a tighter labor market, which limits the rise in wages and shrinks the region of indeterminacy. Indeterminacy disappears completely when vacancy posting costs are replaced with hiring costs.
    Keywords: Determinacy, Effort, Hours, Labor, Search intensity
    JEL: E23 E24 E32 E64
    Date: 2020–06
  31. By: Paolo Martellini; Guido Menzio; Ludo Visschers
    Abstract: We revisit the hypothesis that cyclical fluctuations in unemployment are caused by shocks to the discount rate. We use a rich search-theoretic model of the labor market in which the UE, EU and EE rates are all endogenous. Analytically, we show that an increase in the discount rate lowers the UE rate and, under some natural conditions, it lowers the EU rate. Quantitatively, we show that an increase in the discount rate from 4 to 10% generates a 3.5% decline in the UE rate and a 6% decline in the EU rate. The response of the unemployment rate is minuscule. These findings are at odds with the actual behavior of the US labor market over the business cycle, which features a negative comovement between the UE and EU rates and large unemployment fluctuations. We show that aggregate productivity shocks generate the correct comovement between the UE and EU rates, as well as large unemployment fluctuations.
    JEL: E24
    Date: 2020–06
  32. By: Lagos, Ricardo; Zhang, Shengxing
    Abstract: We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
    JEL: E44 E52 G12 G14 G35
    Date: 2020–06–01
  33. By: Davide Melcangi; Vincent Sterk
    Abstract: What role does stock investment play in the transmission of monetary policy to the real economy? We study this question using a New Keynesian model with heterogeneous households. Following a monetary tightening, stock market participants rebalance their investments away from stocks, in line with empirical evidence on mutual fund flows. This response depresses aggregate investment and hence aggregate output and income, which feeds back into an even larger decline in stock investment. The strength of this channel is, however, highly sensitive to household heterogeneity. Therefore, we design the model to account endogenously for the observed population share of stockholders, their income characteristics, and their saving behavior. We find that, quantitatively, the stock investment channel of monetary policy dominates the consumption channels often emphasized in the literature, and also that it has become more powerful since the 1980s, as stock market participation increased.
    Keywords: monetary policy; stock investment; heterogeneity
    JEL: E21 E30 E50 E58
    Date: 2020–07–01
  34. By: Tanaka, Yasuhito
    Abstract: Using two types of overlapping generations (OLG) model, we show that involuntary unemployment is in a Nash equilibrium of a game with a firm and consumers, and we can achieve full-employment by fiscal policy financed by seignorage not tax. Once we achieve it, it is maintained without government expenditure. Also we show that a fall in the nominal wage rate may not decrease involuntary unemployment.
    Keywords: Involuntary unemployment, Nash equilibrium, Fiscal policy
    JEL: E12 E24
    Date: 2020–07–26

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