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on Dynamic General Equilibrium |
| By: | Corbo, Vesna (Monetary Policy Department, Central Bank of Sweden); Strid, Ingvar (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | The Swedish economy is strongly dependent on global economic developments, which is reflected in generally strong empirical relationships between Swedish and foreign macroeconomic variables. It is, however, difficult for standard open-economy dynamic stochastic general equilibrium (DSGE) models to generate substantial cross-country spillovers; see e.g. the seminal paper of Justiniano and Preston (2010). We present a two-region DSGE model that better captures the dependence on global economic developments than previous models. It is estimated on data for Sweden and an aggregate of its main trading partners, the euro area and the United States, for the period 1995Q2.2018Q4. To capture the strong empirical relationships between Sweden and the foreign economy, we assume that global shocks to e.g. technology, real interest rates, financial risk, and firm and consumer sentiment directly affect both economies, while their impact on each economy may differ. We also allow for a flexible specification of the demand for Swedish exports to better account for the fluctuations in Swedish trade. Finally, headline and core inflation are distinguished by the introduction of consumption of energy goods, which allows for a more detailed and realistic analysis of inflation developments. This new model, named MAJA (Modell för Allmän JämviktsAnalys), is used by the Riksbank for interpretation of economic developments, forecasting, scenarios, and policy analysis. It builds on the work of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) and the Riksbank.s previous models, Ramses I and Ramses II (see Adolfson et al. (2007) and Adolfson et al. (2013), respectively). |
| Keywords: | DSGE model; Monetary Policy; Open economy; International spillovers; Bayesian estimation. |
| JEL: | C11 C32 C52 E30 E37 E40 E52 F41 F44 |
| Date: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0391&r=all |
| By: | Ayse Kabukcuoglu; Enrique Martínez-García |
| Abstract: | We study a generalized version of Coleman (1990)’s time iteration method (GTI) for solving dynamic optimization problems. Our benchmark framework is an irreversible investment model with labor-leisure choice. The GTI algorithm is simple to implement and provides advantages in terms of speed relative to Howard (1960)’s improvement algorithm. A second application on a heterogeneous-agents incomplete-markets model further explores the performance of GTI. |
| Keywords: | General equilibrium models; Occasionally binding constraints; Computational methods; Time iteration; Policy function iteration; Endogenous grid |
| JEL: | C6 C61 C63 C68 |
| Date: | 2020–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:88641&r=all |
| By: | Matteo Cacciatore; Fabio Ghironi |
| Abstract: | We study how trade linkages affect the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. We show that the ability of the model to replicate key empirical regularities following trade integration---synchronization of business cycles across trading partners and reallocation of market shares toward more productive firms---is central to understanding how trade costs affect monetary policy trade-offs. First, productivity gains through firm selection reduce the need of positive inflation to correct long-run distortions. As a result, lower trade costs reduce the optimal average inflation rate. Second, as stronger trade linkages increase business cycle synchronization, country-specific shocks have more global consequences. Thus, the optimal stabilization policy remains inward looking. By contrast, sub-optimal, inward-looking stabilization---for instance too narrow a focus on price stability---results in larger welfare costs when trade linkages are strong due to inefficient fluctuations in cross-country aggregate demand. |
| JEL: | E24 E32 E52 F16 F41 J64 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27474&r=all |
| By: | Binning, Andrew; Bjørnland, Hilde C.; Maih, Junior |
| Abstract: | We estimate a regime-switching DSGE model with a banking sector to explain incomplete and asymmetric interest rate pass-through, especially in the presence of a binding zero lower bound (ZLB) constraint. The model is estimated using Bayesian techniques on US data between 1985 and 2016. The framework allows us to explain the time-varying interest rate spreads and pass-through observed in the data. We find that pass-through tends to be delayed in the short run, and incomplete in the long run. All this impacts the dynamics of the other macroeconomic variables in the model. In particular, we find monetary policy to be less effective under incomplete pass-through. Furthermore, the behavior of pass-through in the loan rate is different from that of the deposit rate shocks. This creates asymmetric dynamics at the zero lower bound, and incomplete pass-through exacerbates that asymmetry. |
| Keywords: | Banking sector, incomplete or asymmetric interest rate pass-through, DSGE |
| JEL: | C68 E52 F41 |
| Date: | 2019–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2019_22&r=all |
| By: | Alban Moura |
| Abstract: | This paper outlines a new estimated dynamic stochastic general equilibrium (DSGE) model of the Luxembourg economy named LED, for Luxembourg Estimated DSGE. The paper provides a thorough discussion of the model structure, explains how LED is solved and estimated, and shows how it can be used to study important properties of the Luxembourg economy. The empirical results are encouraging: parameter estimates take reasonable values, the model fits the data well, and its implications regarding the determinants of economic growth and cyclical fluctuations in Luxembourg are plausible. |
| Keywords: | DSGE models, open-economy macroeconomics, Bayesian inference, policy analysis, Luxembourg. |
| JEL: | C11 C32 E32 E37 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp147&r=all |
| By: | John Y. Campbell; Nuno Clara; João F. Cocco |
| Abstract: | We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of mortgage borrowers and an infinitely lived risk-averse representative mortgage lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. We consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this maturity extension option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and is welfare enhancing. The cyclical properties of the maturity extension ARM are attractive to a risk-averse lender so the mortgage can be provided at a relatively low cost. |
| JEL: | E32 E52 G21 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27676&r=all |
| By: | Giovanni Pellegrino (Department of Economics and Business Economics, Aarhus University); Efrem Castelnuovo (University of Padova and University of Melbourne); Giovanni Caggiano (Monash University and University of Padova) |
| Abstract: | How damaging are uncertainty shocks during extreme events such as the great recession and the Covid-19 outbreak? Can monetary policy limit output losses in such situations? We use a nonlinear VAR framework to document the large response of real activity to a financial uncertainty shock during the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We employ the DSGE model to quantify the impact on real activity of an uncertainty shock under different Taylor rules estimated with normal times vs. great recession data (the latter associated with a stronger response to output). We find that the uncertainty shock-induced output loss experienced during the 2007-09 recession could have been twice as large if policymakers had not responded aggressively to the abrupt drop in output in 2008Q3. Finally, we use our estimated DSGE framework to simulate different paths of uncertainty associated to different hypothesis on the evolution of the coronavirus pandemic. We find that: i) Covid-19-induced uncertainty could lead to an output loss twice as large as that of the great recession, ii) aggressive monetary policy moves could reduce such loss by about 50%. |
| Keywords: | Uncertainty shock, nonlinear IVAR, nonlinear DSGE framework, minimum-distance estimation, great recession, Covid-19 |
| JEL: | C22 E32 E52 |
| Date: | 2020–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2020-11&r=all |
| By: | Robert Kollmann |
| Abstract: | The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest of the union. The results here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery (e.g., Blanchard et al. (2016)). |
| Keywords: | Zero lower bound; liquidity trap; monetary union; terms of trade; international fiscal spillovers; Euro Area |
| JEL: | E3 E4 F2 F3 F4 |
| Date: | 2020–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:88643&r=all |
| By: | Anthony M. Diercks; Alex Hsu; Andrea Tamoni |
| Abstract: | We empirically document that serial uncertainty shocks are (1) common in the data and (2) have an increasingly stronger impact on the macroeconomy. In other words, a series of bad (positive) uncertainty shocks exacerbates the economic decline significantly. From a theoretical perspective, these findings are puzzling: existing benchmark models do not deliver the observed amplification. We show analytically that a state dependent precautionary motive with respect to uncertainty shocks is required. Our derivations suggest that the state dependent precautionary motive only shows up at fourth order approximations or higher. Fundamentally, in DSGE models solved with perturbations, agents have always possessed a state dependent precautionary motive but typical solution methods were hiding this fact. Future studies need to consider solving the model via fourth (or higher) order perturbation in order to avoid understating the effect of uncertainty shocks that occur in succession. |
| Keywords: | Dynamic Equilibrium Economies; Stochastic Volatility; Perturbation |
| JEL: | C63 C68 E37 |
| Date: | 2020–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-64&r=all |
| By: | Farkas, Mátyás; Tatar, Balint |
| Abstract: | In this paper we adopt the Hamiltonian Monte Carlo (HMC) estimator for DSGE models by implementing it into a state-of-the-art, freely available high-performance software package. We estimate a small scale textbook New-Keynesian model and the Smets-Wouters model on US data. Our results and sampling diagnostics con firm the parameter estimates available in existing literature. In addition we combine the HMC framework with the Sequential Monte Carlo (SMC) algorithm which permits the estimation of DSGE models with ill-behaved posterior densities. |
| Keywords: | DSGE Estimation,Bayesian Analysis,Hamiltonian Monte Carlo |
| JEL: | C11 C15 E10 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:144&r=all |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL); Sami Alpanda (University of Central Florida, Orlando, FL) |
| Abstract: | This paper shows that national bank regulation can ensure nancial and economy stability only if business cycles are driven by domestic and non- nancial global shocks. If global nancial shocks are more important, by contrast, national regulatory policies can be destabilizing. These inferences are drawn from a two-country DSGE model with global banking, nancial regulation and the nancial accelerator mechanism. The results indicate that bank regulation suppresses the ampli cation e¤ects of the nancial accelerator mechanism when countries face domestic and non- nancial global shocks. When there is a global nancial shock, however, highly-regulated countries are more vulnerable to the ebbs and ows of global bank lending since their rms are more leveraged and externally funded. More generally, the results imply that the nancial trilemma is not binding in economies where domestic and non- nancial global shocks drive the business cycle. |
| Keywords: | bank regulation, DSGE, nancial accelerator, global banks, nancial trilemma. |
| JEL: | E32 E44 F33 F44 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2020-02ua&r=all |
| By: | Alon, Titan (University of California, San Diego); Doepke, Matthias (Northwestern University); Olmstead-Rumsey, Jane (Northwestern University); Tertilt, Michèle (University of Mannheim) |
| Abstract: | In recent US recessions, employment losses have been much larger for men than for women. Yet, in the current recession caused by the Covid-19 pandemic, the opposite is true: unemployment is higher among women. In this paper, we analyze the causes and consequences of this phenomenon. We argue that women have experienced sharp employment losses both because their employment is concentrated in heavily affected sectors such as restaurants, and due to increased childcare needs caused by school and daycare closures, preventing many women from working. We analyze the repercussions of this trend using a quantitative macroeconomic model featuring heterogeneity in gender, marital status, childcare needs, and human capital. Our quantitative analysis suggests that a pandemic recession will i) feature a strong transmission from employment to aggregate demand due to diminished within-household insurance; ii) result in a widening of the gender wage gap throughout the recovery; and iii) contribute to a weakening of the gender norms that currently produce a lopsided distribution of the division of labor in home work and childcare. |
| Keywords: | COVID-19, pandemics, recessions, business cycle, gender equality, school closures, childcare, gender wage gap |
| JEL: | D13 E32 J16 J20 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13562&r=all |
| By: | Yoosoon Chang (Department of Economics, Indiana University); Junior Maih (Norges Bank and BI Norwegian Business School); Fei Tan (Department of Economics, Chaifetz School of Business, Saint Louis University and Center for Economic Behavior and Decision-Making, Zhejiang University of Finance and Economics) |
| Abstract: | This article studies the estimation of state space models whose parameters are switching endogenously between two regimes, depending on whether an autoregressive latent factor crosses some threshold level. Endogeneity stems from the sustained impacts of transition innovations on the latent factor, absent from which our model reduces to one with exogenous Markov switching. Due to the exible form of state space representation, this class of models is vastly broad, including classical regression models and the popular dynamic stochastic general equilibrium (DSGE) models as special cases. We develop a computationally efficient filtering algorithm to estimate the nonlinear model. Calculations are greatly simpli ed by appropriate augmentation of the transition equation and exploiting the conditionally linear and Gaussian structure. The algorithm is shown to be accurate in approximating both the likelihood function and filtered state variables. We also apply thr filter to estimate a small-scale DSGE model with threshold-type switching in monetary policy rule, and find apparent empirical evidence of endogeneity in the U.S. monetary policy shifts. Overall, our approach provides a greater scope for understanding the complex interaction between regime switching and measured economic behavior. |
| Keywords: | state space model, regime switching, endogenous feedback, filtering, DSGE model |
| JEL: | C13 C32 E52 |
| Date: | 2018–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2018_12&r=all |
| By: | Roberta Cardani (European Commission, Joint Research Centre (JRC), Ispra, Italy); Stefan Hohberger (European Commission, Joint Research Centre (JRC), Ispra, Italy); Philipp Pfeiffer (European Commission, Directorate General for Economic and Financial Affairs, Brussels, Belgium); Lukas Vogel (IRES, UCLouvain and European Commission, Directorate General for Economic and Financial Affairs, Brussels, Belgium) |
| Abstract: | Estimated DSGE models tend to ascribe a significant and often predominant part of a country's trade balance (TB) dynamics to domestic drivers ("shocks"), suggesting foreign factors to be only of secondary importance. This paper revisits the result based on more agnostic approaches to shock transmission and using "agnostic structural disturbances". We estimate multi-region models for Germany and Spain as countries with very distinct TB patterns since 1999. Results suggest that domestic drivers remain dominant when theory-based restrictions on shock transmission are relaxed, although the transmission of foreign shocks is strengthened. |
| Keywords: | Agnostic structural disturbances, open economy DSGE model, trade balance, Germany, Spain |
| JEL: | F30 F32 F41 F45 |
| Date: | 2020–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2020025&r=all |
| By: | Kotb, Naira; Proaño Acosta, Christian |
| Abstract: | In this paper we incorporate a stock market and a banking sector in a behavioral macro-finance model with heterogenous and boundedly rational expectations. Households' savings are diversified among bank deposits and stock purchases, and banks' lending to firms is subject to capital-related costs. We find that households' participation in the stock market, coupled to the existence of a capital-constrained banking sector affects the transmission of monetary policy to the economy significantly, and that households' deposits act as a critical spill-over channel between the real and the financial sectors. In other words, we relate the regulatory stance in the banking sector with the degree of pass-through of monetary policy shocks. Further, we investigate the performance of a leaning-against-the-wind (LATW) monetary policy which targets asset prices concerning macroeconomic and financial stability. |
| Keywords: | Behavioral Macroeconomics,Banking,Stock Markets,Monetary Policy |
| JEL: | E44 E52 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:158&r=all |
| By: | Gareis, Johannes; Mayer, Eric |
| Abstract: | We develop an extended real business cycle (RBC) model with financially con-strained firms and non-pledgeable intangible capital. Based on a model-consistentseries for firms' borrowing conditions, we find, within a structural vector autoregres-sion (SVAR) framework, that, in response to an adverse financial shock, tangible in-vestment falls more than intangible investment. This positive co-movement betweentangible and intangible investment as well as the relative resilience of intangibleinvestment pose a challenge for the theoretical model. We show that investment-specific adjustment costs help in reconciling the model with the observed empiricalevidence. The estimation of the theoretical model using a Bayesian limited infor-mation approach yields support for the presence of much larger adjustment costsfor intangible investment than for tangible investment. |
| Keywords: | tangible investment,intangible investment,financial shocks,euro area |
| JEL: | C32 E32 E44 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:392020&r=all |
| By: | Tapan Mitra (Cornell University); Santanu Roy (Southern Methodist University) |
| Abstract: | In a general one-sector optimal stochastic growth model where the production technology may be globally unproductive or may allow for unbounded growth, a policy function satisfying the Ramsey-Euler condition may not be optimal even if consumption and investment are continuous and increasing in output. We outline verifiable sufficient conditions for optimality that do not require checking the transversality condition. In addition to continuity (or monotonicity), these conditions impose lower bounds on the propensity to consume. In the case of production functions with multiplicative shocks, the consumption propensity needs to be bounded away from zero; a similar condition is sufficient for more general production functions if the utility function belongs to a restricted class. |
| Keywords: | Stochastic growth, optimal economic growth, uncertainty, unbounded growth, unproductive technology, transversality condition, optimality conditions, Euler equation. |
| JEL: | C6 D9 O41 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:smu:ecowpa:2007&r=all |
| By: | Demiessie, Habtamu |
| Abstract: | This study investigated the impact of COVID-19 pandemic uncertainty shock on the macroeconomic stability in Ethiopia in the short run period. The World Pandemic Uncertainty Index (WPUI) was used a proxy variable to measure COVID-19 Uncertainty shock effect. The pandemic effect on core macroeconomic variables like investment, employment, prices (both food & non-food prices), import, export and fiscal policy indicators was estimated and forecasted using Dynamic Stochastic General Equilibrium (DSGE) Model. The role of fiscal policy in mitigating the shock effect of coronavirus pandemic on macroeconomic stability is also investigated. The finding of the study reveals that the COVID-19 impact lasts at least three years to shake the economy of Ethiopia. Given that the Ethiopian economy heavily relies on import to supply the bulk of its consumption and investment goods, COVID-19 uncertainty effect starts as supply chain shock, whose effect transmitted into the domestic economy via international trade channel. The pandemic uncertainty shock effect is also expected to quickly transcend to destabilize the economy via aggregate demand, food & non-food prices, investment, employment and export shocks. The overall impact of COVID-19 pandemic uncertainty shock impact is interpreted into the economy by resulting under consumption at least in the next three years since 2020. Therefore, the government is expected to enact incentives/policy directions which can boost business confidence. A managed expansionary fiscal policy is found to be key to promote investment, employment and to stabilize food & non-food prices. A particular role of fiscal policy was identified to stabilizing food, transport and communication prices. More importantly, price stabilization policies of the government can have spillover effects in boosting aggregate demand by spurring investments (and widening employment opportunities) in transport/logistics, hotel & restaurant, culture & tourism and export sectors in particular. |
| Keywords: | Ethiopia, COVID-19, Macroeconomic Stability, Fiscal Policy |
| JEL: | E6 E62 E64 |
| Date: | 2020–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102625&r=all |
| By: | SeHyoun Ahn (Norges Bank) |
| Abstract: | Solving economic models with heterogeneous agents requires computing aggregate dynamics consistent with individual behaviours. This paper introduces the ?nite volume method from the mathe-matics literature to enlarge the set of numerical methods available to compute dynamics in continuous time. Finite volume discretization methods allow theoretically consistent dimensional and local adaptivity that guarantee the mass conservation and positivity of the distribution function of the discretized system. This paper shows examples of 1) the Ornstein-Uhlenbeck process 2) the Aiyagari-Bewley-Huggett (wealth+income heterogeneity) model and 3) the lifecycle (wealth+income+age heterogeneity) model. The numerical exercises show that for the current dimensionality of the problems in economics, the ?nite volume method (with or without adaptivity) outperforms pre-existing methods. This paper further provides a companion open-source implementation of the ?nite volume method at github.com/sehyoun/adaptive_finite_volume to reduce the testing time of the ?nite volume method. |
| Date: | 2019–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2019_10&r=all |
| By: | Ruppert, Kilian; Stähler, Nikolai |
| Abstract: | In this article, we present a model that can account for the changes in the Germancurrent account balance since the 2000s. Our results suggest that an array of struc-tural tax and labor market reforms (Agenda 2010), population aging and pensionreforms led to an increase in the household savings rate in Germany until about2010. As domestic investment opportunities could not absorb these additional sav-ings, they were partly invested abroad. The German current account-to-GDP ratiorose. After 2010, private savings remained rather stable, but opportunities to investin Germany declined further. Our simulations suggest that a tight fiscal stance inGermany (combined with an expansionary stance in the rest of the world), under-investment in the corporate sector and productivity gains in emerging economiesafter 2010 significantly contributed to this. |
| Keywords: | Global Imbalances,Population Aging,Labor Market Reforms,Fiscal Policy,DSGE Modelling |
| JEL: | H2 J1 E43 E62 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:412020&r=all |
| By: | Stéphane Auray; Michael B. Devereux; Aurélien Eyquem |
| Abstract: | For most of the post WWII period, until recently, trade protectionism followed a downward trend, and was formulated in multilateral or bilateral agreements between countries. Recently however, there hasbeen a sharp shift towards unilateral, discretionary trade policy focused on short term macroeconomic objectives, and as a consequence, the use of trade policy has become entangled with that of monetary policy. This paper explores the consequences of this shift within a standard DSGE open economy macroeconomic model. We find that a discretionary non-cooperative approach to trade policy can significantly worsen macroeconomic conditions. Moreover, the stance of monetary policy has major implications for the degree of protection in a non-cooperative equilibrium. In particular, cooperative determination of monetary policy implies an increase in both equilibrium tariffs and inflation, and a significant fall in welfare. By contrast, when the exchange rate is pegged by one country, equilibrium rates of protection are generally lower, but in this case, there are multiple asymmetric equilibria in tariff rates which benefit one country relative to another. We also explore the determination of non-cooperative tariffs in a situation where monetary policy is constrained by the zero lower bound on nominal interest rates. |
| JEL: | F30 F40 F41 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27460&r=all |
| By: | V. Filipe Martins-Da-Rocha (LEDa - Laboratoire d'Economie de Dauphine - CNRS - Centre National de la Recherche Scientifique - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL, EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro]); Rafael Mouallem Rosa (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro]) |
| Abstract: | For an infinite horizon economy with complete contingent markets and bankruptcy risk, like the one studied by Araujo and Sandroni (1999) and Araujo, da Silva and Faro (2016), we show that an equilibrium may fail to exist even if agents' beliefs are homogeneous. In order to discourage agents from making promises that they know in advance they will not be able to keep, default penalties must be harsh enough. The minimum level of penalty compatible with equilibrium depends on the agents' distribution of beliefs and utility functions. When beliefs are asymptotically homogeneous, it is possible to find a uniform lower bound for the severity of the penalty. When beliefs are asymptotically singular, it is still possible to find default penalties compatible with equilibrium but they must be stochastic and unbounded in the long run. We also show how these positive results depend crucially on the interpretation of default penalties. In particular, if we consider explicit economic punishments, similar to those in Kehoe and Levine (1993), then an equilibrium never exists, even if agents' beliefs are homogeneous. |
| Date: | 2020–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02921220&r=all |
| By: | Jennifer La'O; Alireza Tahbaz-Salehi |
| Abstract: | This paper studies the optimal conduct of monetary policy in a multi-sector economy in which firms buy and sell intermediate goods over a production network. We first provide a necessary and sufficient condition for the monetary policy’s ability to implement flexible-price equilibria in the presence of nominal rigidities and show that, generically, no monetary policy can implement the first-best allocation. We then characterize the constrained-efficient policy in terms of the economy’s production network and the extent and nature of nominal rigidities. Our characterization result yields general principles for the optimal conduct of monetary policy in the presence of input output linkages: it establishes that optimal policy stabilizes a price index with higher weights assigned to larger, stickier, and more upstream industries, as well as industries with less sticky upstream suppliers but stickier downstream customers. In a calibrated version of the model, we find that implementing the optimal policy can result in quantitatively meaningful welfare gains. |
| JEL: | C67 E5 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27464&r=all |
| By: | Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino |
| Abstract: | We develop a model of banking crises which Is consistent with two important features of the data: First, banking crises are usually preceded by credit booms. Second, credit booms often do not result in a crisis. That is, there are "good" booms as well as "bad" booms in the language of Gorton and Ordonez (2019). We then consider how the optimal macroprudential policy weighs the benefits of preventing a crisis against the costs of stopping a good boom. We show that countercyclical capital buffers are a critical feature of a successful macropudential policy. |
| JEL: | E00 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27481&r=all |
| By: | Thomas J. Carter; Rhys R. Mendes; Kim Huynh; Gradon Nicholls; Mitchell Nicholson |
| Abstract: | We analyze money financing of fiscal transfers (helicopter money) in two simple New Keynesian models: a “textbook†model in which all money is non-interest-bearing (e.g., all money is currency), and a more realistic model with interest-bearing reserves. In the textbook model with only non-interest-bearing money, we find the following: * A money-financed fiscal expansion can be more stimulative than a debt-financed fiscal expansion of equal magnitude. However, the extra stimulus requires that the central bank abandon its usual feedback rule for an extended period, allowing interest rates to instead be determined by the rate of money creation. * Moreover, the extra stimulus associated with money financing stems solely from its implications for the path of short-term interest rates and cannot be attributed to an oft-cited Ricardian-equivalence argument that money financing avoids the adverse wealth effects associated with higher taxes under debt financing. * Because the stimulative effects of money financing are driven by its implications for interest rates, a combination of debt financing and sufficiently accommodative forward guidance can replicate all welfare-relevant outcomes while bypassing the potential political-economic complications associated with helicopter money. * Apart from these complications, money financing also has the drawback that it would allow money-demand shocks to generate volatility in output and inflation, much as was the case under the money-targeting regimes of the 1970s and 1980s. In the model with interest-bearing reserves, we find the following: * The rate of money creation determines the interest rate on reserves, but broader interest rates are invariant across debt- and money-financing regimes. * As a result, money financing delivers no extra stimulus relative to debt financing. Overall, results suggest that helicopter money cannot be justified on the grounds that it would allow policy-makers to get more stimulus out of a given fiscal expansion: either money financing has no extra stimulative benefits to offer, or all potential benefits could be pursued more effectively and robustly using alternative policies. |
| Abstract: | The role of cash in Canadians’ lives has evolved over the past decade. During this period, two diverging trends have emerged in Canada: the use of cash for transactions at the point of sale has declined, but overall demand for cash has increased. The 2019 Cash Alternative Survey was designed to study these trends and update the Bank of Canada’s understanding of Canadians’ use of cash. We asked Canadians about their cash holdings, planned future use of cash and views on how they would be affected if cash were to disappear. In addition to declining cash use, the emergence of privately issued digital currencies has motivated many central banks to conduct research into central bank digital currencies (CBDCs). We contribute to the Bank of Canada’s research on CBDC by monitoring Canadians’ use of cash and their adoption of digital payment methods. We find that Canadians’ cash holdings are stable and the adoption of cryptocurrencies remains limited and concentrated in a few sub-demographics. Moreover, we find that few Canadians plan to stop using cash entirely and that a considerable share of them would find the disappearance of cash problematic. |
| Keywords: | Credibility; Economic models; Fiscal Policy; Inflation targets; Interest rates; Monetary Policy; Monetary policy framework; Transmission of monetary policy; Uncertainty and monetary policy; Bank notes, Central bank research, Digital currencies and fintech, Econometric and statistical methods |
| JEL: | E12 E41 E43 E51 E52 E58 E61 E63 C1 C12 C9 E4 O5 O51 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:20-8&r=all |
| By: | Simon Fan; Yu Pang; Pierre Pestieau |
| Abstract: | This paper analyzes the roles of innate talent versus family background in shaping intergenerational mobility and social welfare under different education systems. We establish an overlapping-generations model in which the allocation of workforce between a high-paying skilled labor sector and a low-paying unskilled labor sector depends on talent, parental human capital, and educational resources, and the wage rate of skilled workers is governed by their average talent. Our model suggests that under the private education system, income inequality is inversely associated with social mobility, and the steady-state average talent of skilled workers declines as people make greater educational investments on their children. Under the public school system, the allocation of workforce depends more on talent and less on family background. Consequently, both intergenerational mobility and income inequality increase, and social welfare may improve under reasonable conditions. Moreover, if some parents are myopic, public education may yield the highest welfare. |
| Keywords: | innate ability, private education, public education, intergenerational mobility |
| JEL: | H20 H31 H50 O11 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8472&r=all |
| By: | Naoki Aizawa; Soojin Kim; Serena Rhee |
| Abstract: | This paper studies the optimal design of social insurance programs for disabled workers by developing and estimating an equilibrium labor search model with screening contracts. In the model, firms may strategically use employment contracts, consisting of wage and job amenities, to screen out the disabled. The optimal structure of disability policies depends on firms' screening incentives, which may distort employment rates and contracts. By exploiting policy changes on the labor demand side for the disabled in the United States, we identify and estimate our equilibrium model to explore the optimal joint design of disability policies, including disability insurance (DI) and subsidies to firms accommodating disabled workers. We find that firm subsidies mitigate screening distortions; at the same time, they interact with DI by reducing the labor supply disincentives it generates. The optimal policy structure leads to a considerable welfare gain by simultaneously making firm subsidies and DI benefits more generous. |
| JEL: | E61 H21 H51 I18 J32 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27478&r=all |
| By: | Chen, Jiaqian (IMF); Finocchiaro, Daria (Research Department, Central Bank of Sweden); Lindé, Jesper (IMF and CEPR); Walentin, Karl (Research Department, Central Bank of Sweden) |
| Abstract: | We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to a loan-to-income tightening when debt is high and monetary policy cannot accommodate. |
| Keywords: | Household debt; Zero lower bound; New Keynesian model; Collateral and borrowing constraints; Mortgage interest deductibility; Housing prices |
| JEL: | E52 E58 |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0389&r=all |
| By: | Damián Pierri (Universidad de San Andres & IIEP-BAIRES-UBA); Julián Martínez (FIUBA) |
| Abstract: | We identify a critical condition, based on some qualitative properties of the expected marginal utility of consumption, that insure the accurate performance of frequently used methods in recursive macroeconomics. This condition can be found in a large fraction of applied papers. Moreover, in a model which does not satisfy the mentioned condition, we measure the bias of solutions using a closed form continuous recursive equilibrium. We found 2 sources of inaccuracy in minimal state space methods: the lack of a convergent operator and the inexistence of a well defined (stochastic) steady state. We found that a canonical procedure may sub-estimate (over-estimate) concentration (dispersion) measures with respect to the ergodic distribution of the model. It is shown that even a numerically convergent minimal state space (MSS) algorithm may not match the ergodic distribution of the model as the MSS equilibrium might not have a well defined steady state. These facts imply in turn that the computed effects of economic policies are also inacurate. Moreover, we identify a connection between the lack of convergence in the MSS algorithm and the equilibrium budget constraint which implies that simulated paths are distorted in any time period. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:sad:wpaper:147&r=all |
| By: | Luiz Brotherhood; Philipp Kircher; Cezar Santos; Michéle Tertilt |
| Abstract: | This paper investigates the role of testing and age-composition in the Covid-19 epidemic. We augment a standard SIR epidemiological model with individual choices regarding how much time to spend working and consuming outside the house, both of which increase the risk of transmission. Individuals who have flu symptoms are unsure whether they caught Covid-19 or simply a common cold. Testing reduces the time of uncertainty. Individuals are heterogeneous with respect to age. Younger people are less likely to die, exacerbating their willingness to take risks and to impose externalities on the old. We explore heterogeneous policy responses in terms of testing, confinements, and selective mixing by age group. |
| Keywords: | Covid-19, testing, social distancing, age-specific policies |
| JEL: | E17 C63 D62 I10 I18 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_175v1&r=all |
| By: | Adrien Auclert; Bence Bardóczy; Matthew Rognlie |
| Abstract: | We establish an impossibility result for New Keynesian models with a frictionless labor market: these models cannot simultaneously match plausible estimates of marginal propensities to consume (MPCs), marginal propensities to earn (MPEs), and fiscal multipliers. A HANK model with sticky wages provides a solution to this trilemma. |
| JEL: | D52 E52 E62 H31 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27486&r=all |
| By: | Billi, Roberto M. (Research Department, Central Bank of Sweden); Söderström, Ulf (Research Department, Central Bank of Sweden); Walsh, Carl E. (University of California, Santa Cruz) |
| Abstract: | In light of the current low-interest-rate environment, we reconsider the merit of a money growth target (MGT) relative to a conventional ination targeting (IT) regime, and to the notion of price level targeting (PLT). Through the lens of a New Keynesian model, and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate, we show, not surprisingly, that PLT performs best in terms of social welfare. However, the ranking between IT and MGT is not a foregone conclusion. In particular, although MGT makes monetary policy vulnerable to money demand shocks, it contributes to achieving price level stability and reduces the incidence and severity of the ZLB relative to both IT and PLT. We also show that MGT lessens the need for the scal authority to engage alongside the central bank in ghting recessions. To illustrate this scal bene t of MGT, we introduce a simple rule for the scal authority to raise government purchases when GDP falls below potential. If the government fails to make up for a substantial share of the shortfalls in GDP, then IT performs worse than MGT from the perspective of society. |
| Keywords: | Friedmans k-percent rule; ZLB constraint; scal policy; automatic stabilizers |
| JEL: | E31 E42 E52 |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0390&r=all |
| By: | Hürtgen, Patrick |
| Abstract: | The "Great Lockdown" implemented in response to the COVID-19 pandemic has led to a severe world-wide economic crisis. In euro area countries, sovereign debt-to-GDP ratios are on the rise and reductions in expected fiscal surpluses raise sustainability concerns amongst investors. This paper provides novel estimates of non-linear state-dependent fiscal limits based on Bi (2012) for the five largest euro area countries. Within the DSGE model I build a COVID-19 scenario calibrated to match the decline in real GDP growth forecasts between April and February2020 and the fiscal stimulus packages announced up to the end of March 2020. On average, fiscal space contracts by 58.4 percent of national GDP. In a worst-case scenario fiscal space is 28.6 percent for Italy and 65.9 percent of national GDP for Germany. |
| Keywords: | state-dependent fiscal limits,fiscal space,sovereign debt,Laffer curve,COVID-19 |
| JEL: | E32 H30 H60 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:352020&r=all |