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on Dynamic General Equilibrium |
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Issue of 2020‒10‒12
fourteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Roman Horvath (Charles University in Prague); Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Ales Marsal (Vienna University of Economics and Business) |
| Abstract: | We develop a dynamic stochastic general equilibrium model calibrated to US data to examine how monetary policy shocks affect income inequality and the equity premium. The model features Ricardian and non-Ricardian households and shows that a monetary policy tightening causes an endogenous redistribution of income from non-Ricardians to Ricardians. Ricardians' consumption comoves more strongly with asset returns, giving rise to high equity premia. We extend our model with several frictions and estimate it with generalized method of moments using US macroeconomic and financial data from 1960-2007. We find that the estimated model jointly matches the bond and equity premia. We complement our theoretical model with vector autoregression estimations and show that a tightening of US monetary policy increases equity premia. |
| Keywords: | Limited Asset Market Participation, Monetary Policy, DSGE, Equity Premium |
| JEL: | E32 E44 G12 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2020/3&r=all |
| By: | Yavuz Arslan; Bulent Guler; Burhan Kuruscu |
| Abstract: | Can shifts in the credit supply generate a boom-bust cycle similar to the one observed in the US around 2008? To answer this question, we develop a general equilibrium model that combines a rich heterogeneous agent overlapping-generations structure of households who make housing tenure decisions and borrow through long-term mortgages, firms that finance their working capital through short-term loans from banks, and banks whose ability to intermediate funds depends on their capital. Using a calibrated version of this framework, we find that shocks to banks' leverage can generate sizable boom-bust cycles in the housing market, the banking sector, and the rest of the macroeconomy, which provides strong support for the credit supply channel. The deterioration of bank balance sheets during the bust, the existence of highly leveraged households, and the general equilibrium feedback from the credit supply to household labor income significantly amplify the bust. Moreover, mortgage credit growth across the income distribution is consistent with recent findings that were otherwise argued to be against the credit supply channel. A comparison of the model outcomes across credit supply, house price expectation, and productivity shocks suggests that housing busts accompanied by severe banking crises are more likely to be generated by credit supply shocks. |
| Keywords: | credit supply, house prices, financial crises, household and bank balance sheets, leverage, foreclosures, mortgage valuations, consumption, and output |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:885&r=all |
| By: | Yavuz Arslan; Bulent Guler; Temel Taskin |
| Abstract: | In this paper, we differentiate consumption from expenditure by incorporating price search decision into an otherwise standard life-cycle model. With this extension, households can pay lower prices for the same consumption good if they allocate more time for price search. We first analytically show that under very general conditions, poorer (in both income and/or wealth) households search more and pay lower prices compared with wealthier ones. As a result, consumption inequality is smaller than expenditure inequality, and the gap between them increases over the life-cycle. Next, we quantify these mechanisms by calibrating our model to the US data. We find that the life-cycle increase in consumption inequality is about 30 percent lower than the increase in expenditure inequality. We also show that the availability of a price search option provides a large insurance mechanism against adverse income shocks and increases the welfare of a new born by 3.9 percent in consumption equivalent terms. |
| Keywords: | consumption inequality, price search, incomplete markets, life-cycle models, partial insurance |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:886&r=all |
| By: | Lechthaler, Wolfgang; Tesfaselassie, Mewael F. |
| Abstract: | We embed human capital-based endogenous growth into a New-Keynesian model with search and matching frictions in the labor market and skill obsolescence from long-term unemployment. The model can account for key features of the Great Recession: a decline in productivity growth, the relative stability of inflation despite a pronounced fall in output (the "missing disinflation puzzle"), and a permanent gap between output and the pre-crisis trend output. In the model, lower aggregate demand raises unemployment and the training costs associated with skill obsolescence. Lower employment hinders learning-by-doing, which slows down human capital accumulation, feeding back into even fewer vacancies than justified by the demand shock alone. These feedback channels mitigate the disinflationary effect of the demand shock while amplifying its contractionary effect on output. The temporary growth slowdown translates into output hysteresis (permanently lower output and labor productivity). |
| Keywords: | endogenous growth,search and matching,unemployment,nominal rigidity,monetary policy,output hysteresis |
| JEL: | E24 E31 E32 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2162&r=all |
| By: | Costa, Carlos Eugênio da; Santos, Marcelo Rodrigues dos |
| Abstract: | In a static setting, whether consumption or labor income is progressively taxed is irrelevant for household choices and welfare. In a dynamic setting, however, these two forms of progressivity have markedly di erent implications for how earnings vary along the life-cycle: in a stylized life-cycle model, progressive income tax act reducing Frisch elasticities of labor supply whereas progressive consumption taxes act reducing the elasticity of intertemporal substitution. After showing that the latter leads to less ine ciencies in the stylized model than the former, we explore the consequences of replacing the current U.S. tax system by one in which labor income are linear and consumption taxes are progressive. We nd welfare gains that exceed 10% in consumption equivalent variation terms for all possible speci cations in steady state comparisons. Welfare gains are attained in all our speci cations with either very small increases in the capital stock or even large declines. |
| Date: | 2020–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:819&r=all |
| By: | Claudio Campanale (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy) |
| Abstract: | Households appear to smooth consumption in the face of income shocks much more than implied by life-cycle versions of the standard incomplete market model under reference calibrations. In the current paper we uncover a related puzzle: households with different educational levels show similar insurance against permanent shocks in the model while in the data empirically estimated by Blundell et al. (2008) college educated households seem to smooth consumption much more than high school educated households. |
| Keywords: | Precautionary savings, Consumption insurance coefficients, Life-cycle, Education |
| JEL: | E21 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpapnw:069&r=all |
| By: | Yunmin Chen; YiLi Chien; Yi Wen; C.C. Yang |
| Abstract: | We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency. |
| Keywords: | Capital Taxation; Government Bonds; Heterogeneous Agents; Incomplete Markets; Modified Golden Rule; Ramsey Problem; Wealth Distribution. |
| JEL: | C61 E22 E62 H21 H30 |
| Date: | 2020–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:88813&r=all |
| By: | Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano |
| 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: | house price prediction, machine learning, genetic algorithm, spatial aggregation |
| JEL: | G22 Q54 R11 R31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8561&r=all |
| By: | Roccazzella, Francesco |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ajf:louvlf:2019004&r=all |
| By: | Cardani, Roberta (European Commission – JRC); Hohberger, Stefan (European Commission – JRC); Pfeiffer, Philipp (European Commission); Vogel, Lukas (European Commission) |
| 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: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:202005&r=all |
| By: | Paolo Martellini; Guido Menzio |
| Abstract: | Declining search frictions generate productivity growth by allowing workers to find jobs for which they are better suited. The return of declining search frictions on productivity varies across different types of workers. For workers who are "jacks of all trades" in the sense that their productivity is nearly independent from the distance between their skills and the requirements of their job—declining search frictions lead to minimal productivity growth. For workers who are "masters of one trade" in the sense that their productivity is very sensitive to the gap between their individual skills and the requirements of their job—declining search frictions lead to fast productivity growth. As predicted by this view, we find that workers in routine occupations have low wage dispersion and growth, while workers in non-routine occupations have high wage dispersion and growth. |
| Keywords: | Search frictions; Biased technical change; Growth; Inequality |
| JEL: | E24 J24 J31 J64 O47 |
| Date: | 2020–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:88800&r=all |
| By: | Pratiti Chatterjee (School of Economics, University of New South Wales Business School); Fabio Milani (Department of Economics, University of California-Irvine) |
| Abstract: | What are the effects of beliefs, sentiment, and uncertainty, over the business cycle? To answer this question, we develop a behavioral New Keynesian macroeconomic model, in which we relax the assumption of rational expectations. Agents are, instead, boundedly rational: they have a finite-planning horizon, and they learn about the economy over time. Moreover, we allow agents to have a potentially asymmetric loss function in forecasting, which creates a direct channel for expected variances to affect the economy. In forming expectations, agents may be subject to shifts in optimism and pessimism (sentiment) and their beliefs may be influenced by their perceptions about future uncertainty. We estimate the behavioral model using Bayesian methods and exploit a large number of subjective expectation series (both point and density forecasts) at different horizons from the Survey of Professional Forecasters. We find that sentiment shocks are the key source of business cycle fluctuations. Shifts in perceived uncertainty can also affect real activity and inflation through a confidence channel, as they play an important role in belief formation. Overall, the results shed light on the importance of behavioral forces over the business cycles, and on the contribution and interaction of first-moment - sentiment - shocks versus second-moment - perceived uncertainty - shocks. |
| Keywords: | Uncertainty Shocks; Sentiment; Animal Spirits; Learning; Behavioral New Keynesian Model; Sources of Business Cycle Fluctuations; Observed Survey Expectations; Optimism and Pessimism in Business Cycles; Probability Density Forecasts |
| JEL: | C32 E32 E50 E52 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:202101&r=all |
| By: | Luiz Brotherhood; Philipp Kircher; Cezar Santos; Michèle Tertilt |
| Abstract: | This paper investigates the importance of the age composition in the Covid-19 pandemic. We augment a standard SIR epidemiological model with individual choices on work and non-work social distancing. Infected individuals are initially uncertain unless they are tested. We find that older individuals socially distance themselves substantially in equilibrium. Confining the old even more reduces their welfare. Confining the young extends the duration of the epidemic, with negative consequences on the old if the epidemic cannot be controlled after confinement. Testing and quarantines save lives, even if conducted just on the young, as does separation of activities by age. Combining policies can increase the welfare of both the young and the old. |
| JEL: | C63 D62 E17 I10 I18 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202014&r=all |
| By: | Fuchs-Schündeln, Nicola; Krueger, Dirk; Ludwig, Alexander; Popova, Irina |
| 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. |
| Keywords: | Covid-19,school closures,inequality,intergenerational persistence |
| JEL: | D31 E24 I24 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:20045&r=all |