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on Dynamic General Equilibrium |
| By: | Gianluca Benigno; Andrew T. Foerster; Christopher Otrok; Alessandro Rebucci |
| Abstract: | We estimate a workhorse dynamic stochastic general equilibrium (DSGE) model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico’s business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early 1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late 2000s. These crisis episodes display sluggish and long-lasting build-up and recovery phases driven by plausible combinations of shocks. |
| Keywords: | financial crises; business cycles; endogenous regime-switching; Bayesian estimation; occasionally binding constraints; Mexico |
| JEL: | G01 E3 F41 C11 |
| Date: | 2020–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:88974&r=all |
| By: | Polbin, Andrey; Shumilov, Andrei |
| Abstract: | This paper presents a review of foreign studies analyzing the role of entrepreneurs in the accumulation and distribution of wealth and approaches to modeling entrepreneurship as an integral part of the economy for evaluating the consequences of alternative economic policies. According to the main results of the empirical literature, entrepreneurs, first, own a substantial share of total household wealth, and many of the wealthiest people are entrepreneurs. Second, entrepreneurs have higher saving rates than other households, and, third, entrepreneurs face restrictions on borrowing. We survey dynamic general equilibrium models based on stylized facts about the behavior of entrepreneurs, where agents can choose the type of activity between entrepreneurship and wage labor. Mechanisms of encouraging entrepreneurial savings due to borrowing constraints, financial intermediation costs, and uninsured entrepreneurial risk allow calibrated versions of these models to successfully replicate the observed distribution of household wealth. Results of counterfactual experiments to evaluate the effects of various types of tax reforms and financial shocks in models with entrepreneurs are reviewed. The possibility of constructing a similar model for the Russian economy is discussed. |
| Keywords: | entrepreneurship; borrowing constraints; wealth distribution; savings behavior; occupational choice |
| JEL: | D31 E21 J24 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:103675&r=all |
| By: | Victoria Gregory |
| Abstract: | This paper demonstrates that heterogeneity in firms’ promotion of human capital accumulation is an important determinant of life-cycle earnings inequality. I use administrative micro data from Germany to show that different establishments offer systematically different earnings growth rates for their workers. This observation suggests that that the increase in inequality over the life cycle reflects not only inherent worker variation, but also differences in the firms that workers happen to match with over their lifetimes. To quantify this channel, I develop a life-cycle search model with heterogeneous workers and firms. In the model, a worker’s earnings can grow through both human capital accumulation and labor market competition channels. Human capital growth depends on both the worker’s ability and the firm’s learning environment. I find that heterogeneity in firm learning environments account for 40% of the increase in cross-sectional earnings variance over the life cycle, and that this mechanism is especially important for young workers. I then show that differences in labor market histories partially shape the worker-specific income profiles estimated by reduced-form statistical earnings processes. Finally, because young workers do not fully internalize the benefits of matching to high-growth firms, changes to the structure of unemployment insurance policies can incentivize these workers to search for better matches. |
| Keywords: | human capital; earnings dynamics; firms; inequality; search; labor markets |
| JEL: | E24 J24 |
| Date: | 2020–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:88971&r=all |
| By: | Christoph Görtz; John D. Tsoukalas; Francesco Zanetti |
| Abstract: | We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods. First, a (positive) shock to future TFP generates a significant decline in various credit spread indicators considered in the macro-finance literature. The decline in the credit spread indicators is associated with a robust improvement in credit supply indicators, along with a broad based expansion in economic activity. Second, VAR methods also establish a tight link between TFP news shocks and shocks that explain the majority of un-forecastable movements in credit spread indicators. These two facts provide robust evidence on the importance of movements in credit spreads for the propagation of news shocks. A DSGE model enriched with a financial sector generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and excess premiums, which vary inversely with balance sheet conditions, are critical for the amplification of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional ‘news view’ of aggregate fluctuations. |
| Keywords: | News shocks, Business cycles, DSGE, VAR, Bayesian estimation |
| JEL: | E2 E3 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-94&r=all |
| By: | Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See |
| Abstract: | We study the positive and normative implications of labor market policies that counteract the economic fallout from containment measures during an epidemic. We incorporate a standard epidemiological model into an equilibrium search model of the labor market to compare unemployment insurance (UI) expansions and payroll subsidies. In isolation, payroll subsidies that preserve match capital and enable a swift economic recovery are preferred over a cost-equivalent UI expansion. When considered jointly, however, a cost-equivalent optimal mix allocates 20 percent of the budget to payroll subsidies and 80 percent to UI. The two policies are complementary, catering to different rungs of the productivity ladder. The small share of payroll subsidies is sufficient to preserve high-productivity jobs, but it leaves room for social assistance to workers who face inevitable job loss. |
| Keywords: | COVID-19; fiscal policy; labor productivity; unemployment; job search |
| JEL: | E24 E62 J64 |
| Date: | 2020–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:88957&r=all |
| By: | Mauricio Ulate |
| Abstract: | There is a growing empirical consensus that trade shocks can have important effects on unemployment and nonemployment across local-labor markets within an economy. This paper introduces downward nominal wage rigidity to an otherwise standard quantitative trade model and shows how this framework can generate changes in unemployment and nonemployment that match those uncovered by the empirical literature studying the “China shock.” We also compare the associated welfare effects predicted by this model with those in the model without unemployment. We find that the China shock leads to average welfare increases in most U.S. states, including many that experience unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains from the China shock between one and two thirds. In addition, there are ten states that experience welfare losses in the presence of downward nominal wage rigidity but would have experienced welfare gains without it. |
| Keywords: | Keynesian economics |
| Date: | 2020–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:88986&r=all |
| By: | Paul Ilhak Ko |
| Abstract: | International business cycles have become highly synchronized across countries in the past three decades, yet there is a lack of consensus on whether this is due to an increase in the correlation of country-specific shocks or due to increased economic integration. To understand this empirical phenomenon, I develop a multi-country real business cycle model with international trade that captures several potential explanations: shocks to productivity, demand, leisure, investment, sectoral expenditures, and trade- linkages. By matching the data exactly with the endogenous outcomes of the model, shocks fully account for the data such as GDP and trade shares. Calibrating the model to a panel of developed (G7) countries during 1992-2014, I find that trade-linkage shocks, which capture the increased economic integration and volatility of trade flows, are essential in synchronizing international business cycles. In contrast, other correlated country-specific shocks play relatively minor roles. This suggests that trade shocks through economic integration have been the primary driver of the co-movement of international business cycles. Furthermore, I use my model to address the trade co-movement puzzle, which states that international real business cycle models should be predicting a much stronger link between trade and cross-country GDP correlations. Once I account for the trade-linkage shocks, the model predicts a strong link between trade and business cycle co-movement. This finding suggests that incorporating the dynamics of trade shocks is crucial when studying international business cycles. |
| JEL: | E3 F1 F4 F6 |
| Date: | 2020–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2020:pko1026&r=all |
| By: | Alessandro Cantelmo; Giovanni Melina |
| Abstract: | How should central banks optimally aggregate sectoral inflation rates in the presence of imperfect labor mobility across sectors? We study this issue in a two-sector New-Keynesian model and show that a lower degree of sectoral labor mobility, ceteris paribus, increases the optimal weight on inflation in a sector that would otherwise receive a lower weight. We analytically and numerically find that, with limited labor mobility, adjustment to asymmetric shocks cannot fully occur through the reallocation of labor, thus putting more pressure on wages, causing inefficient movements in relative prices, and creating scope for central bank’s intervention. These findings challenge standard central banks’ practice of computing sectoral inflation weights based solely on sector size, and unveil a significant role for the degree of sectoral labor mobility to play in the optimal computation. In an extended estimated model of the U.S. economy, featuring customary frictions and shocks, the estimated inflation weights imply a decrease in welfare up to 10 percent relative to the case of optimal weights. |
| Keywords: | optimal monetary policy, durable goods, labor mobility |
| JEL: | E52 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8638&r=all |
| By: | Sena Coskun; Husnu Dalgic |
| Abstract: | Fertility in the US has exhibited a procyclical pattern since the 1970s. We argue that gender differences in employment risk leads to procyclical fertility: men tend to work in volatile and procyclical industries, while women are more likely to work in relatively stable and countercyclical industries. The relative gender employment gap is countercyclical as women become breadwinners in recessions, producing an insurance effect of female income. Our quantitative framework features a general equilibrium OLG model with endogenous fertility and human capital choice and shows that the current gender industry composition in the US data fully accounts for the procyclicality observed. We can also generate countercyclical fertility, as observed in the 1960s, either when the female income share is low or procyclical. Finally, we argue that the insurance effect of female income in bad times tilts the quality-quantity trade-off towards quality. |
| Keywords: | fertility, fertility cyclicality, industry cyclicality, gender asymmetric employment, gender income gap, quality-quantity trade-off |
| JEL: | E24 E32 J11 J13 J16 J21 J24 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_142v2&r=all |
| By: | Gregor Boehl |
| Abstract: | I study monetary policy in an estimated financial New-Keynesian model extended by behavioral expectation formation in the asset market. Credit frictions create a feedback between asset markets and the macroeconomy, and behaviorally motivated speculation can amplify fundamental swings in asset prices, potentially causing endogenous, nonfundamental bubbles. These features greatly improve the power of the model to replicate empirical-key moments. I find that monetary policy can indeed dampen financial cycles by carefully leaning against asset prices, but at the cost of amplifying their transmission to the macroeconomy, and of causing undesirable responses to movements in fundamentals. |
| Keywords: | Monetary policy, nonlinear dynamics, heterogeneous expectations, credit constraints, bifurcation analysis |
| JEL: | E44 E52 E03 C63 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_224&r=all |
| By: | S. Borağan Aruoba; Pablo Cuba-Borda; Kenji Higa-Flores; Frank Schorfheide; Sergio Villalvazo |
| Abstract: | We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle filter, the COPF significantly reduces the persistence of the Markov chain, improves the accuracy of Monte Carlo approximations of posterior moments, and drastically speeds up computations. We use the techniques to estimate a small-scale DSGE model to assess the effects of the government spending portion of the American Recovery and Reinvestment Act in 2009 when interest rates reached the zero lower bound. |
| JEL: | C5 E4 E5 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27991&r=all |
| By: | Enrique Martinez-Garcia |
| Abstract: | Much consideration has been given among scholars and policymakers to the decline in the U.S. natural rate of interest since the 2007 – 09 global financial crisis. In this paper, I investigate its determinants and drivers through the lens of the workhorse two-country New Keynesian model that captures the trade and technological interconnectedness of the U.S. with the rest of the world economy. Using Bayesian techniques, I bring the set of binding log-linearized equilibrium conditions from this model to the data, but augmented with survey-based forecasts in order to align the solution with observed expectations incorporating the macro effects of the zero-lower bound constraint. With this structural framework, I recover a novel open-economy estimate of the U.S. natural rate. The paper’s main results are: (a) the decline in the U.S. natural rate largely follows the slide of the long-run real interest rate in the forecast data, but is partly cushioned in the short run by the contribution of domestic and to a significant extent also foreign productivity shocks; (b) the fall of U.S. measured labor productivity during this time contributed to a concomitant fall in U.S. output potential; (c) the past decade is also characterized by the compression of markups (negative cost-push shocks) which accounts for much of the cyclical upswing in U.S. output in spite of the fall in its potential; and (d) monetary policy has shown its efficacy boosting U.S. output and sustaining U.S. inflation close to its 2 percent target against the drag on inflation from the negative cost-push shocks during this time. Finally, I also argue that ignoring the international linkages may result in biased estimates and can distort the empirical inferences on U.S. monetary policy in important ways. |
| Keywords: | Open Economy Model; New Keynesian; Monetary Policy; Wicksellian Natural Rate; Bayesian Estimation |
| JEL: | F41 F42 E12 E52 C11 |
| Date: | 2020–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:88968&r=all |
| By: | Özlem Kina; Ctirad Slavik; Hakki Yazici |
| Abstract: | This paper shows that capital-skill complementarity provides a quantitatively significant rationale to tax capital for redistributive governments. The optimal capital income tax rate is 60%, which is significantly higher than the optimal rate of 48% in an identically calibrated model without capital-skill complementarity. The skill premium falls from 1.9 to 1.67 along the transition following the optimal reform in the capital-skill complementarity model, implying substantial indirect redistribution from skilled to unskilled workers. These results show that a government that cares about redistribution should take into account capital-skill complementarity in production when setting the tax rate on capital income. |
| Keywords: | capital taxation, capital-skill complementarity, inequality, redistribution |
| JEL: | E25 J31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8627&r=all |
| By: | Bing Tong (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Guang Yang (School of Economics, Nankai University) |
| Abstract: | This paper proves in a New Keynesian model that interest rate pegging can explain the unusual business cycle fluctuations in China. It is traditional wisdom that when the nominal interest rate is inflexible, there is no unique equilibrium in macroeconomic models. We prove that a unique equilibrium exists if the nominal rate is pegged for a limited period, after which it switches to a flexible rate regime. The peg alters the propagation of external shocks, magnifies volatility of endogenous variables, and leads to instability of the economy. Besides, the model becomes more unstable when the peg duration extends, and when the pegged rate deviates from steady state. At the same time, fiscal multiplier increases under the peg, indicating fiscal policy may be more effective in mitigating economic fluctuations when monetary policy is restricted by interest rate pegging. |
| Keywords: | New Keynesian model, Chinese economy, Interest rate peg, Fiscal policy, Rational expectation |
| JEL: | E31 E32 E43 E62 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202003&r=all |
| By: | Szabolcs Deak (University of Exeter); Paul Levine (University of Surrey); Afrasiab Mirza (University of Birmingham); Joseph Pearlman (City University London) |
| Abstract: | We study the design of monetary policy rules robust to model uncertainty across a set of well-established DSGE models with varied financial frictions. In our novel forward-looking approach, policymakers weight models based on relative forecasting performance. We find that models with frictions between households and banks forecast best during periods of financial turmoil while those with frictions between banks and firms perform best during tranquil periods. However, a model without financial frictions outperforms all models on average. The optimal robust policy is close to a price-level rule which is key when facing uncertainty over the nature of financial frictions. |
| Keywords: | Bayesian estimation, DSGE models, Financial frictions, Forecasting, Prediction Pools, Optimal Simple Rules. |
| JEL: | D52 D53 E44 G18 G23 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:20-27&r=all |
| By: | Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante |
| Abstract: | We address this question in a heterogeneous-agent incomplete-markets model featuring exogenous idiosyncratic risk, endogenous skill investment, and flexible labor supply. The tax and transfer schedule is restricted to be log-linear in income, a good description of the US system. Rising inequality is modeled as a combination of skill-biased technical change and growth in residual wage dispersion. When facing shifts in the income distribution like those observed in the US, a utilitarian planner chooses higher progressivity in response to larger residual inequality but lower progressivity in response to widening skill price dispersion reflecting technical change. Overall, optimal progressivity is approximately unchanged between 1980 and 2016. We document that the progressivity of the actual US tax and transfer system has similarly changed little since 1980, in line with the model prescription. |
| Keywords: | Optimal taxation; Income distribution; Skill-biased technical change; Tax progressivity; Incomplete markets; Labor supply; Redistribution; Inequality |
| JEL: | J22 H20 E20 J24 I22 D30 |
| Date: | 2020–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:88945&r=all |
| By: | Diego A. Comin; Robert C. Johnson |
| Abstract: | Did trade integration suppress inflation in the United States? We say no, in contradiction to the conventional wisdom. Our answer leverages two basic facts about the rise of trade: offshoring accounts for a large share of it, and it was a long-lasting, phased-in shock. Incorporating these features into a New Keynesian model, we show trade integration was inflationary. This result continues to hold when we extend the model to account for US trade deficits, the pro-competitive effects of trade on domestic markups, and cross-sector heterogeneity in trade integration in a multisector model. Further, using the multisector model, we demonstrate that neither cross-sector evidence on trade and prices, nor aggregate time series price level decompositions are informative about the impact of trade on inflation. |
| JEL: | E5 F1 F15 F4 F6 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27957&r=all |
| By: | Sylvain Leduc; Kevin Moran; Robert J. Vigfusson |
| Abstract: | Using expectations embodied in oil futures prices, we examine how expectations are formed and how they affect the macroeconomic transmission of shocks. We show that an empirical framework in which investors form expectations by learning about the persistence of oil-price movements successfully replicates the fluctuations in oil-price futures since the late 1990s. We then embed this learning mechanism in a model with oil usage and storage. Estimating the model, we document that an increase in the persistence of TFP-driven fluctuations in oil demand largely account for investors' perceptions that oil-price movements became increasingly permanent during the 2000s before declining thereafter. We show that the presence of learning alters the macroeconomic impact of shocks, making the responses time-dependent and conditional on the views of economic agents about the shocks' likely persistence. |
| Keywords: | futures; macroeconomics |
| Date: | 2020–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:88970&r=all |
| By: | Hassan Afrouzi; Andres Drenik; Ryan Kim |
| Abstract: | How are a firm’s size and market power related to one another? Combining micro-data about producers and consumers, we document that while firms mainly grow by selling to more customers, their markups are only associated with their average sales per customer. To study the macroeconomic implications of these facts, we develop a model of firm dynamics with endogenous customer acquisition and variable markups. Relative to a model without customer acquisition, our model generates higher concentration at the top, but a lower aggregate markup. Our quantitative analysis reveals large welfare and efficiency losses due to (mis)allocation of customers across firms. By increasing market concentration among the most productive firms, the efficient allocation achieves 11% higher aggregate productivity and 15% higher output. |
| Keywords: | customer acquisition, misallocation, concentration, markups |
| JEL: | D24 D42 D61 E22 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8633&r=all |
| By: | Sena Coskun; Husnu Dalgic |
| Abstract: | Fertility in the US exhibits a procyclical pattern since 80s. We argue that gender differences in employment risk leads to procyclical fertility; men mostly work in volatile and procyclical industries whereas women are likely to work in relatively stable and countercyclical industries. Our quantitative framework features a general equlibrium OLG model with endogeneous fertility and human capital choice and it shows that current gender industry composition in the US data accounts for all of this procyclicality. Moreover, we argue that gender income ratio (female to male) is higher in bad times which tilts the quality-quantity trade-off towards quality. |
| Keywords: | fertility, industry cyclicality, industry gender segregation, gender income gap, quality-quantity trade-off |
| JEL: | E24 E32 J11 J13 J16 J21 J24 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_142v1&r=all |
| By: | Barnette, Justin |
| Abstract: | Income drops permanently after an involuntary job displacement, but it has never been clear what happens to long-run wealth in the United States. This paper concludes that involuntary job displacement has large effects on wealth throughout a worker's lifetime. Upon displacement, wealth falls 14% relative to workers of a similar age and education from the PSID. Their wealth is still 18% lower 12 years after the event. A standard life cycle model calibrated to US data with permanent decreases in income after displacement behaves differently than these findings. The agents in the model also experience a large drop in wealth but they recover. The biggest culprit for these differences is the changes to consumption being small and statistically insignificant in the PSID whereas agents in the model decrease their consumption considerably. |
| Keywords: | Job Loss, Unemployment, Wealth, Consumption, Debt |
| JEL: | D31 E21 J3 J33 J6 J63 |
| Date: | 2020–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:103642&r=all |
| By: | Xin Huang; Duan Li; Daniel Zhuoyu Long |
| Abstract: | When stochastic control problems do not possess separability and/or monotonicity, the dynamic programming pioneered by Bellman in 1950s fails to work as a time-decomposition solution method. Such cases have posted a great challenge to the control society in both theoretical foundation and solution methodologies for many years. With the help of the progressive hedging algorithm proposed by Rockafellar and Wets in 1991, we develop a novel scenario-decomposition solution framework for stochastic control problems which could be nonseparable and/or non-monotonic, thus extending the reach of stochastic optimal control. We discuss then some of its promising applications, including online quadratic programming problems and dynamic portfolio selection problems with smoothing properties. |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2010.08985&r=all |
| By: | Orazio Attanasio; Kieran P. Larkin; Morten O. Ravn; Mario Padula |
| Abstract: | US households’ consumption and car purchases collapsed during the Great Recession, for reasons that are still poorly understood. In this paper we use the Consumer Expenditure Survey to derive cohort and business cycle decompositions of consumption profiles. When decomposing the car expenditure data into its extensive and intensive margins, we find that the intensive margin contracted sharply in the Great Recession, a finding in stark contrast to conventional wisdom and to the experience of prior recessions. We interpret the evidence through the prism of a very rich life-cycle model where individuals are subject to idiosyncratic uninsurable income shocks, aggregate income shocks, wealth shocks, and credit shocks. We show that, because of their salience and the transaction costs, cars are particularly sensitive to changes in the perception of fu- ture expected income and its variability. We find that on top of a large aggregate income shock, life-cycle income profile shocks and wealth shocks are important determinants of consumption choices during the Great Recession. |
| JEL: | D12 D14 E21 E32 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27956&r=all |