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on Dynamic General Equilibrium |
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Issue of 2020‒09‒28
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Brenneisen, Jan-Niklas |
| Abstract: | Although it is generally accepted that consumer confidence measures are informative signals about the state of the economy, theoretical macroeconomic models designed for the analysis of monetary policy typically do not provide a role for them. I develop a framework with asymmetric information in which the efficacy of monetary policy can be improved, when the imperfectly informed central banks include confidence measures in their information set. The beneficial welfare effects are quantitatively substantial in both a stylized New Keynesian model with optimal monetary policy and an estimated medium-scale DSGE model. |
| Keywords: | Consumer confidence,Monetary policy,Asymmetric information,Imperfect Information,New Keynesian macroeconomics,DSGE models |
| JEL: | D82 D83 D84 E52 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:202004&r=all |
| By: | Mbara, Gilbert (University of Warsaw); Tyrowicz, Joanna (University of Warsaw); Kokoszczynski, Ryszard (University of Warsaw) |
| Abstract: | This paper develops a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers "secondary contracts". When calibrated using aggregate tax revenue data, the model delivers estimates of secondary "off the books" employment that are consistent with survey evidence for the EU14 and United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix. |
| Keywords: | Laffer Curve, tax evasion, labor market duality |
| JEL: | H2 H26 H3 E13 E26 J81 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13631&r=all |
| By: | Ortigueira, Salvador; Siassi, Nawid |
| Abstract: | Eligibility and benefits for anti-poverty income transfers in the U.S. are based on both the means and the household characteristics of applicants, such as their filing status, living arrangement, and marital status. In this paper we develop a dynamic structural model to study the effects of the U.S. tax-transfer system on the decisions of non-college-educated workers with children. In our model workers face uninsurable idiosyncratic risks and make decisions on savings, labor supply, living arrangement, and marital status. We find that the U.S. anti-poverty policy distorts the cohabitation/marriage decision of single mothers, providing incentives to cohabit. We also find quantitatively important effects on savings, and on the labor supply of husbands and wives. Namely, the model yields a U-shaped relationship between the earnings of one spouse and the labor supply of the other spouse, a result that we also find in the data. We show that these U-shaped relationships stem in part from the current design of anti-poverty income programs, and that the introduction of an EITC deduction on the earnings of secondary earners-as proposed in the 21st Century Worker Tax Cut Act-would increase the employment rate of the spouses of workers earning between $15K and $35K, especially of female spouses. |
| Keywords: | anti-poverty income transfers,household decisions,cohabitation and marriage |
| JEL: | E21 H24 H31 J12 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuweco:062020&r=all |
| By: | Daniel Haanwinckel (University of Chicago); Rodrigo R. Soares (Columbia University) |
| Abstract: | We develop a search model of informal labor markets with worker and firm heterogeneity, intra-firm bargaining with imperfect substitutability across types of workers, and a comprehensive set of labor regulations, including minimum wage. Stylized facts associated with the informal sector, such as smaller firms and lower wages, emerge endogenously as firms and workers decide whether to comply with regulations. Imperfect substitutability across types of workers, decreasing returns to scale, and convex vacancy-posting costs enable the model to reproduce empirical patterns incompatible with existing frameworks in the literature: the presence of skilled and unskilled workers in the formal and informal sectors, the rising share of skilled workers by firm size, the declining formal wage premium by skill, and the rising firm-size wage premium by skill. These features also allow us to analyze the equilibrium responses to changes in the demand and supply of different types of labor. We estimate the model using Brazilian data and show that it reproduces various margins of labor market changes observed between 2003 and 2012. The change in the composition of the labor force appears as the main driving force behind the reduction in informality. We illustrate the use of the model for policy analysis by assessing the effectiveness of a progressive payroll tax in reducing informality. |
| Keywords: | informality, labor market, search, minimum wage, compensating differentials, Brazil |
| JEL: | J24 J31 J46 J64 O17 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2020-45&r=all |
| By: | Cardani, Roberta; Hohberger, Stefan; Pfeiffer, Philipp; Vogel, Lukas |
| 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:pra:mprapa:102469&r=all |
| By: | Andrea Ajello; Isabel Cairó; Vasco Curdia; Thomas A. Lubik; Albert Queraltó |
| Abstract: | Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of hitting the effective lower bound during a downturn. This paper studies how these factors complicate the attainment of the objectives specified in the Federal Reserve’s dual mandate in the context of a DSGE (dynamic stochastic general equilibrium) model, taking into account risk-management considerations. We find that these challenges may warrant pursuing more accommodative policy than would be desirable otherwise. However, such accommodative policy could be associated with concerns about risks to financial markets. |
| Keywords: | U.S. monetary policy; Optimal policy; Discretion |
| JEL: | E32 E52 E58 E61 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-66&r=all |
| By: | Bloom, David E. (Harvard University); Kuhn, Michael (Vienna Institute of Demography); Prettner, Klaus (University of Hohenheim) |
| Abstract: | We discuss and review literature on the macroeconomic effects of epidemics and pandemics since the late 20th century. First, we cover the role of health in driving economic growth and well-being and discuss standard frameworks for assessing the economic burden of infectious diseases. Second, we sketch a general theoretical framework to evaluate the tradeoffs policymakers must consider when addressing infectious diseases and their macroeconomic repercussions. In so doing, we emphasize the dependence of economic consequences on (i) disease characteristics; (ii) inequalities among individuals in terms of susceptibility, preferences, and income; and (iii) cross-country heterogeneities in terms of their institutional and macroeconomic environments. Third, we study pharmaceutical and nonpharmaceutical policies aimed at mitigating and preventing infectious diseases and their macroeconomic repercussions. Fourth, we discuss the health toll and economic impacts of five infectious diseases: HIV/AIDS, malaria, tuberculosis, influenza, and COVID-19. Although major epidemics and pandemics can take an enormous human toll and impose a staggering economic burden, early and targeted health and economic policy interventions can often mitigate both to a substantial degree. |
| Keywords: | inequality, pandemics, epidemics, COVID-19, HIV/AIDS, malaria, tuberculosis, influenza, infectious disease, economic burden of disease, economic growth, health, economic epidemiology, SIR Model, general equilibrium macroeconomic models, welfare, human capital, health policy |
| JEL: | D58 E10 E20 I12 I15 I18 I31 O40 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13625&r=all |
| By: | Matthias Burgert; Werner Roeger; Janos Varga; Jan in 't Veld; Lukas Vogel |
| Abstract: | This paper presents the structure and simulation properties of a core version of QUEST, an open-economy New Keynesian DSGE model developed and maintained by the European Commission. The multi-region model version with tradable goods, non-tradable goods and housing includes the euro area (EA), the nonEA EU plus the UK, the United States, Japan, Emerging Asia, and the rest of the world. The paper presents simulation results for a series of goods, factor, financial market, and policy shocks to illustrate how the structure of the model and its theoretical underpinnings shape the transmission of shocks to real and financial variables of the domestic economy and international spillover. In particular, the paper shows impulse responses for monetary policy, consumption, risk premia, productivity, credit, government spending, unconventional monetary policy and tariff shocks, and characterises their impact on real GDP, domestic demand components, trade, external balances, wages, employment, price levels, relative prices, interest rates, and public finances. While the scenarios are illustrative, they reflect important elements of the Global recession and the EA crisis (global risk shocks, private sector demand shocks and deleveraging) and of policy responses (fiscal policy, unconventional monetary policy) and challenges (protectionism) in recent years. In view of the macroeconomic conditions during this period, the paper shows simulations for an environment in which the zero lower bound on monetary policy is binding in addition to simulations under standard monetary policy. |
| JEL: | E37 E62 F47 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:126&r=all |
| By: | Fiaschi, Davide (University of Pisa); Tealdi, Cristina (Heriot-Watt University, Edinburgh) |
| Abstract: | We aim to identify winners and losers of a sudden inflow of low-skilled immigrants using a general equilibrium search and matching model in which employees, either native or nonnative, are heterogeneous with respect to their skill level and produce different types of goods. We estimate the short-term impact of this shock for Italy in the period 2008-2017 to be sizeable and highly asymmetric. In 2017, the real wages of low-skilled and high-skilled employees were 8% lower and 4% higher, respectively, compared to a counter-factual scenario with no non-natives. Similarly, employers working in the low-skilled market experienced a drop in profits of comparable magnitude, while the opposite happened to employers operating in the high-skilled market. Finally, the presence of non-natives led to a 10% increase in GDP and to an increment of approximately 70 billions € in Government revenues and 18 billions € in social security contributions. We argue that these results help rationalise the recent surge of anti-immigrant sentiments among the low-income segment of the Italian population. |
| Keywords: | immigration, welfare, search and matching |
| JEL: | J61 J64 J21 J31 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13600&r=all |
| By: | Jesús Fernández-Villaverde; Pablo A. Guerrón-Quintana |
| Abstract: | We review the current state of the estimation of DSGE models. After introducing a general framework for dealing with DSGE models, the state-space representation, we discuss how to evaluate moments or the likelihood function implied by such a structure. We discuss, in varying degrees of detail, recent advances in the field, such as the tempered particle filter, approximated Bayesian computation, the Hamiltonian Monte Carlo, variational inference, and machine learning, methods that show much promise, but that have not been fully explored yet by the DSGE community. We conclude by outlining three future challenges for this line of research. |
| JEL: | C11 C13 E30 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27715&r=all |
| By: | Bruno Biais; Christophe Bisière; Matthieu Bouvard; Catherine Casamatta; Albert J. Menkveld |
| Abstract: | We offer an equilibrium model of cryptocurrency pricing and confront it to new data on bitcoin transactional benefits and costs. The model emphasises that the fundamental value of the cryptocurrency is the stream of net transactional benefits it will provide, which depend on its future prices. The link between future and present prices implies that returns can exhibit large volatility, unrelated to fundamentals. We construct an index measuring the ease with which bitcoins can be used to purchase goods and services, and we also measure costs incurred by bitcoin owners. Consistent with the model, estimated transactional net benefits explain a statistically signicant fraction of bitcoin returns. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econwp:_48&r=all |
| By: | Corina Boar; Simon Mongey |
| Abstract: | The CARES Act resulted in many unemployed workers receiving benefits that exceeded wages at their previous job. Given this, would an unemployed worker reject an offer to return to their former job at the same wage? Qualitatively, we provide a very simple dynamic model that incorporates four reasons the answer could be ‘no’: (i) the temporary nature of the CARES Act, (ii) uncertainty that their return-to-work offer might expire, (iii) search frictions, and (iv) wage losses out of unemployment in a recession. Quantitatively, when evaluated under empirically relevant parameters, we find it unlikely a worker would reject an offer to return to work at the same wage. We show special cases where this is not true and relate these to anecdotal evidence. |
| JEL: | E24 J64 J68 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27727&r=all |
| By: | Laura Feiveson; Nils Gornemann; Julie L. Hotchkiss; Karel Mertens; Jae W. Sim |
| Abstract: | We show that makeup strategies, such as average inflation targeting and price-level targeting, can be more effective than a flexible inflation targeting strategy in overcoming the obstacles created by the effective lower bound in a heterogeneous agent New Keynesian (HANK) model. We also show that the macroeconomic stabilization benefits from such alternative strategies can be substantially larger in a HANK environment than in a representative agent New Keynesian model. We argue that gains in employment outcomes from switching to an alternative strategy would generate disproportionate improvements for historically disadvantaged households and thus have potentially long-lasting effects on the economic well-being of these groups. |
| Keywords: | Heterogeneous agent New Keynesian model; Representative agent New Keynesian model; Effective lower bound; Inequality; Hand to mouth; Average inflation targeting; Price-level targeting |
| JEL: | D31 E30 E52 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-73&r=all |
| By: | Greg Kaplan; Benjamin Moll; Giovanni L. Violante |
| Abstract: | We provide a quantitative analysis of the trade-offs between health outcomes and the distribution of economic outcomes associated with alternative policy responses to the COVID-19 pandemic. We integrate an expanded SIR model of virus spread into a macroeconomic model with realistic income and wealth inequality, as well as occupational and sectoral heterogeneity. In the model, as in the data, economic exposure to the pandemic is strongly correlated with financial vulnerability, leading to very uneven economic losses across the population. We summarize our findings through a distributional pandemic possibility frontier, which shows the distribution of economic welfare costs associated with the different aggregate mortality rates arising under alternative containment and fiscal strategies. For all combinations of health and economic policies we consider, the economic welfare costs of the pandemic are large and heterogeneous. Thus, the choice governments face when designing policy is not just between lives and livelihoods, as is often emphasized, but also over who should bear the burden of the economic costs. We offer a quantitative framework to evaluate both trade-offs. |
| JEL: | E0 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27794&r=all |
| By: | Francisco J. Buera; Joseph P. Kaboski; Martí Mestieri; Daniel G. O'Connor |
| Abstract: | Standard dynamic models of structural transformation, without knife-edge and counterfactual parameter values, preclude balanced growth path (BGP) analysis. This paper develops a dynamic equilibrium concept for a more general class of models — an alternative to a BGP, which we coin a Stable Transformation Path (STraP). The STraP characterizes the medium-term dynamics of the economy in a turnpike sense; it is the path toward which the economy (quickly) converges from an arbitrary initial capital stock. Calibrated simulations demonstrate that the relaxed parameter values that the STraP allows have important quantitative implications for structural transformation, investment, and growth. Indeed, analyzing the dynamics along the STraP, we show that the modern dynamic model of structural transformation makes progress over the Neoclassical growth model in matching key growth and capital accumulation patterns in cross-country data, including slow convergence. |
| JEL: | O1 O11 O14 O4 O41 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27731&r=all |
| By: | Yuji Horioka, Charles |
| Abstract: | The selfish life-cycle model or hypothesis is, together with the dynasty or altruism model, the most widely used theoretical model of household behavior in economics, but does this model apply in the case of a country like Japan, which is said to have closer family ties than other countries? In this paper, we first provide a brief exposition of the simplest version of the selfish life-cycle model and then survey the literature on household saving and bequest behavior in Japan in order to answer this question. The paper finds that almost all of the available evidence suggests that the selfish life-cycle model applies to at least some extent in all countries but that there is more consistent support for this model in Japan than in the United States and other countries. It then explores possible explanations for why the life-cycle model is more consistently supported in Japan than in other countries, attributing this finding to government policies, institutional factors, economic factors, demographic factors, and cultural factors. Finally, it shows that the findings of the paper have many important implications for economic modeling and for government tax and expenditure policies. |
| Keywords: | Age structure, altruism, bequest motives, borrowing constraints, consumption, culture, dissaving, dynasty model, elderly, family ties, household saving, inheritances, intergenerational transfers, Japan, life-cycle model, religiosity, retirement, Ricardian equivalence, saving motives, selfishness, social norms, D11, D12, D14, D15, D64, E21, J14 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:agi:wpaper:00000182&r=all |
| By: | Pei-Ju Liao; Ping Wang; Yin-Chi Wang; Chong Kee Yip |
| Abstract: | Allowing migration activity as an integral part of demographic transition and economic development, we establish a locational quantity-quality trade-off of children and explore its macroeconomic consequences. We construct a dynamic competitive migration equilibrium framework with rural agents heterogeneous in skills and fertility preferences. We then establish and characterize a mixed migration equilibrium where high-skilled rural agents with low fertility preferences always migrate to cities, low-skilled with high fertility preferences always stay, and only an endogenously determined fraction of high-skilled/high fertility preferences or low-skilled/low fertility preferences ends up moving. By calibrating our model to fit the data from China, we find interesting interactions between fertility and migration decisions in various counterfactual experiments with respect to changes in migration, population control and rural land entitlement policies. We conclude that overlooking the locational quantity-quality trade-off of children may lead to nonnegligible biases in assessing the implications and effectiveness of government policies. |
| JEL: | O15 O53 R23 R28 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27767&r=all |
| By: | Jesús Fernández-Villaverde; Mark Koyama; Youhong Lin; Tuan-Hwee Sng |
| Abstract: | Patterns of political unification and fragmentation have crucial implications for comparative economic development. Diamond (1997) famously argued that “fractured land” was responsible for China's tendency toward political unification and Europe's protracted political fragmentation. We build a dynamic model with granular geographical information in terms of topographical features and the location of productive agricultural land to quantitatively gauge the effects of “fractured land” on state formation in Eurasia. We find that either topography or productive land alone is sufficient to account for China's recurring political unification and Europe's persistent political fragmentation. The existence of a core region of high land productivity in Northern China plays a central role in our simulations. We discuss how our results map into observed historical outcomes and assess how robust our findings are. |
| JEL: | H56 N40 P48 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27774&r=all |
| By: | Brotherhood, Luiz; Jerbashian, Vahagn |
| Abstract: | We derive a model in which firms operate in an epidemic environment and internalize infections among their employees in the workplace. The model is calibrated to fit the properties of the Covid-19 epidemic. We show that firms have incentives to fight against infections and can do so very effectively by increasing teleworking and rotating employees between on-site work, teleworking, and leave. Subsidies to sick leave reduce the cost of sick workers and raise workplace infections. Furlough policies are successful in reducing infections and saving lives. Firms delay and weaken the fight against infections during economic downturns. |
| Keywords: | Covid-19,epidemic,firm behavior,on-site work,policies,teleworking |
| JEL: | C63 D20 D21 I10 I18 L23 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:629&r=all |
| By: | Nicola Fuchs-Schündeln; Dirk Krueger; Alexander Ludwig; Irina Popova |
| Abstract: | Using a structural life-cycle model, we quantify the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. We quantitatively characterize both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role. |
| JEL: | D31 E24 I24 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27773&r=all |
| By: | Lydia Cox (Harvard University); Gernot J. MŸller (University of Tuebingen and CEPR); Ernesto Pasten (Central Bank of Chile and Toulouse School of Economics); Raphael Schoenle (Brandeis University, Cleveland Fed, and CEPR); Michael Weber (University of Chicago - Booth School of Business and NBER) |
| Abstract: | ÒBig G" typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the US government and establish five facts. First, government spending is granular, that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, procurement contracts are short-lived. Fourth, idiosyncratic variation dominates the fluctuation of spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark aligning the model with the empirical evidence. |
| Keywords: | government spending, federal procurement, granularity, sectoral heterogeneity, fiscal policy transmission, monetary policy |
| JEL: | E62 E32 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2020-36&r=all |