nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2020‒11‒30
thirty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Monetary Policy Rule and Taylor Principle by GMM and DSGE Approaches: The Case of Mongolia By Taguchi, Hiroyuki
  2. Aggregate and Intergenerational Implications of School Closures: A Quantitative Assessment By Youngsoo Jang; Minchul Yum
  3. Central bank digital currency in an open economy By Ferrari, Massimo Minesso; Mehl, Arnaud; Stracca, Livio
  4. Switching Volatility in a Nonlinear Open Economy By Jonathan Benchimol; Sergey Ivashchenko
  5. The macroeconomic effects of lockdown policies By Stéphane Auray; Aurélien Eyquem
  6. Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange By Jonathan Chiu; Miguel Molico
  7. Endogenous Longevity and Optimal Tax Progressivity By Burkhard Heer; Stefan Rohrbacher
  8. SHILNIKOV CHAOS, LOW INTEREST RATES, AND NEW KEYNESIAN MACROECONOMICS By Barnett, William A.; Bella, Giovanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice
  9. Macroeconomic forecasting in the euro area using predictive combinations of DSGE models By Capek, Jan; Crespo Cuaresma, Jesus; Hauzenberger, Niko; Reichel, Vlastimil
  11. Fiscal And Monetary Policy Interactions In A Liquidity Trap When Government Debt Matters By Charles de Beauffort
  12. Macroeconomic forecasting in the euro area using predictive combinations of DSGE models By Jan Capek; Jesus Crespo Cuaresma; Niko Hauzenberger; Vlastimil Reichel
  13. Political Constraints and Sovereign Default Premia By Mitra, Nirvana
  14. Sudden Stops and Optimal Foreign Exchange Intervention By J. Scott Davis; Michael B. Devereux; Changhua Yu
  15. Understanding the Determination of Severance Pay: Mandates, Bargaining, and Unions By Stéphane Auray; Samuel Danthine; Markus Poschke
  16. Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics By Dirk Niepelt
  17. Monetary policy inertia and the paradox of flexibility By Bonciani, Dario; Oh, Joonseok
  18. North and South: A Regional Model of the UK By Minford, Patrick; Gai, Yue; Meenagh, David
  19. Taxation of Consumption and Labor Income: a Quantitative Approach By Francesca Parodi
  20. Imperfect substitution in real estate markets and the effect of housing demand on corporate investment By J. Scott Davis; Kevin X. D. Huang; Ayse Sapci
  21. Federal unemployment reinsurance and local labor-market policies By Marek Ignaszak; Philip Jung; Keith Kuester
  22. Bank reserves and broad money in the global financial crisis: a quantitative evaluation By Jagjit S. Chadha; Luisa Corrado; Jack Meaning; Tobias Schuler
  23. Eligibility, experience rating, and unemployment insurance take‐up By Stéphane Auray; David Fuller
  24. Rural-Urban Migration and House Prices in China By Carlos Garriga; Aaron Hedlund; Yang Tang; Ping Wang
  25. Trade Integration, Global Value Chains and Capital Accumulation By Michael Sposi; Kei-Mu Yi; Jing Zhang
  26. Prevention and mitigation of epidemics:Biodiversity conservation and confinement policies By Augeraud-Véron, E.; Fabbri, G.; Schubert, K.
  27. A General Equilibrium Model of Earnings, Income, and Wealth By Glawion, Rene; Puche, Marc; Haller, Frédéric
  28. Pollution, children’s health and the evolution of human capital inequality By Karine Constant; Marion Davin
  29. Private Equity and Growth By Boyan Jovanovic; Sai Ma; Peter L. Rousseau
  30. Beyond Labor Market Polarization By Santiago Garcia-Couto

  1. By: Taguchi, Hiroyuki
    Abstract: This article aims to examine the monetary policy rule under inflation targeting in Mongolia with a focus on its conformity to the Taylor principle, through the two kinds of approaches: a monetary policy reaction function by the generalized-method-of-moments (GMM) estimation and the New Keynesian dynamic stochastic general equilibrium (DSGE) model with a small open economy version by the Bayesian estimation. The main findings are summarized as follows. First, the GMM estimation identified the inflation-responsive rule fulfilling the Taylor principle in the recent phase of the Mongolian inflation targeting. Second, the DSGE-model estimation endorsed the GMM estimation by producing a consistent outcome on the Mongolian monetary policy rule. Third, the Mongolian rule was estimated to have a weaker response to inflation than the rules of the other emerging Asian adopters of inflation targeting.
    Keywords: Monetary policy rule, Taylor Principle, Mongolia, Inflation targeting, monetary policy reaction function, GMM, the New Keynesian DSGE model
    JEL: E52 E58 O53
    Date: 2020–11
  2. By: Youngsoo Jang; Minchul Yum
    Abstract: A majority of governments around the world unprecedentedly closed schools in response to the COVID-19 pandemic. This paper quantitatively investigates the macroeconomic and distributional consequences of school closures through intergenerational channels in the medium- and long-term. The model economy is a dynastic overlapping generations general equilibrium model in which schools, in the form of public education investments, complement parental investments in producing children's human capital. We calibrate the stationary equilibrium of the model to the U.S. economy and compute the equilibrium responses following unexpected school closure shocks. We find that school closures have moderate long-lasting adverse effects on macroeconomic aggregates such as output. In addition, we find that school closures reduce intergenerational mobility, especially among older children. Finally, we find that lower substitutability between public and parental investments induces larger damages in the aggregate economy and overall lifetime incomes of the affected children, while mitigating negative impacts on intergenerational mobility. In all findings, heterogeneous parental responses to school closures play a key role. Our results provide a quantitatively relevant dimension to consider for policymakers assessing potential costs of school closures.
    Keywords: Intergenerational mobility, lifetime income, parental investments, aggregate loss, substitutability
    JEL: E24 I24 J22
    Date: 2020–11
  3. By: Ferrari, Massimo Minesso; Mehl, Arnaud; Stracca, Livio
    Abstract: We examine the open-economy implications of the introduction of a central bank digital currency (CBDC).We add a CBDC to the menu of monetary assets available in a standard two-country DSGE model with financial frictions and consider a broad set of alternative technical features in CBDC design. We analyse the international transmission of standard monetary policy and technology shocks in the presence and absence of a CDBC and the implications for optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks to a significant extent, thereby increasing international linkages. But the magnitude of these effects depends crucially on CBDC design and can be significantly dampened if the CBDC possesses specific technical features. We also show that domestic issuance of a CBDC increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies. JEL Classification: E50, F30
    Keywords: central bank digital currency, DSGE model, international monetary system, open-economy, optimal monetary policy
    Date: 2020–11
  4. By: Jonathan Benchimol (Bank of Israel, Jerusalem, Israel); Sergey Ivashchenko (Russian Academy of Sciences (IREP), Financial Research Institute, and Saint-Petersburg State University, Saint Petersburg, Russia)
    Abstract: Uncertainty about an economy's regime can change drastically around a crisis. An imported crisis such as the global financial crisis in the euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the euro area and the United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with periods of calm. We describe how US shocks from both the real economy and financial markets affected the euro area economy and how bond reallocation occurred between short- and long-term maturities during the global financial crisis. Importantly, the estimated nonlinearities when domestic and foreign financial markets influence the economy, should not be neglected. The nonlinear behavior of market-related variables highlights the importance of higher-order estimation for providing additional interpretations to policymakers.
    Keywords: DSGE, Volatility Shocks, Markov Switching, Open Economy, Financial Crisis, Nonlinearities
    JEL: C61 E32 F41
    Date: 2020–11
  5. By: Stéphane Auray (Observatoire français des conjonctures économiques); Aurélien Eyquem (Groupe d'analyse et de théorie économique)
    Abstract: A tractable incomplete-marketmodel with endogenous unemployment risk, sticky prices, real wage rigidity and a fiscal side is calibrated to Euro Area countries and used to analyze the macroeconomic effects of lockdown policies. Modeling them as a shock to the extensive margin of labor adjustment – a rise in separations – produces large and persistent negative effects on output, unemployment and welfare, raises precautionary savings and lowers inflation, in line with early evidence about inflation dynamics. Modeling lockdowns as a shock to the intensive margin – a fall in labor utilization – produces small and short-lived macroeconomic and welfare effects, and implies a counterfactual rise in inflation. Conditional on a lockdown(separation) shock, raising public spending or extending UI benefits by large amounts is much more effective in stimulating the economy than during normal times. Quantitatively however, the ability of such policies to flatten the output and unemployment curves remains limited, even though these policies can alleviate a reasonable share of the aggregate welfare losses from the lockdown.
    Keywords: Lockdown; Unemployment; Borrowing constraints; Incomplete markets; Government spending; Unemployment insurance
    JEL: D52 E21 E62 J64 J65
    Date: 2020–10
  6. By: Jonathan Chiu; Miguel Molico
    Abstract: We study the short-run effects of monetary policy in a search-theoretic monetary model in which agents are subject to idiosyncratic liquidity shocks as well as aggregate monetary shocks. Namely, we analyze the role of the endogenous non-degenerate distribution of liquidity, liquidity constraints, and decentralized trade in the transmission and propagation of monetary policy shocks. Money is injected through lump-sum transfers, which have redistributive and persistent effects on output and prices. We propose a new numerical algorithm in the spirit of Algan, Allais and Den Hann. (2008) to solve the model. We find that a one-time expansionary monetary policy shock has persistent positive effects on output, prices, and welfare, even in the absence of nominal rigidities. Furthermore, the effects of positive and negative monetary shocks are typically asymmetric. Negative (contractionary) shocks have bigger effects than positive (expansionary) shocks. In addition, in an economy with larger shocks, the responses tend to be disproportionately larger than those in an economy with smaller shocks. Finally, the effectiveness of monetary shocks depends on the steady-state level of inflation. The higher the average level of inflation (money growth), the bigger the impact effect of a shock of a given size but the smaller its cumulative effect. These results are consistent with existing empirical evidence.
    Keywords: Inflation and prices; Monetary policy; Monetary policy transmission
    JEL: E50
    Date: 2020–11
  7. By: Burkhard Heer; Stefan Rohrbacher
    Abstract: We study the impact of endogenous longevity on optimal tax progressivity and inequality in an overlapping generations model with skill heterogeneity. Higher tax progressivity decreases both the longevity gap and net income inequality, but at the expense of lower average lifetime and lower aggregate labor supply and income. We find that the welfare-maximizing income tax is less progressive than in the case of exogenous longevity and that the present US income tax should redistribute less. Our result is robust to the empirically observed range of labor supply elasticity and the assumptions of both missing annuity markets and tax deductibility of private health expenditures.
    Keywords: health and inequality, demography, second-best, optimal taxation, personal income distribution, overlapping generations
    JEL: I14 J10 H21 H51 D31
    Date: 2020
  8. By: Barnett, William A. (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Bella, Giovanni (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Ghosh, Taniya (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Mattana, Paolo (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Venturi, Beatrice (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: The paper shows that in a New Keynesian (NK) model, an active interest rate feedback monetary policy, when combined with a Ricardian passive fiscal policy, à la Leeper-Woodford, may induce the onset of a Shilnikov chaotic attractor in the region of the parameter space where uniqueness of the equilibrium prevails locally. Implications, ranging from long-term unpredictability to global indeterminacy, are discussed in the paper. We find that throughout the attractor, the economy lingers in particular regions, within which the emerging aperiodic dynamics tend to evolve for a long time around lower-than-targeted inflation and nominal interest rates. This can be interpreted as a liquidity trap phenomenon, produced by the existence of a chaotic attractor, and not by the influence of an unintended steady state or the Central Bank's intentional choice of a steady state nominal interest rate at its lower bound. In addition, our finding of Shilnikov chaos can provide an alternative explanation for the controversial “loanable funds” oversaving theory, which seeks to explain why interest rates and, to a lesser extent inflation rates, have declined to current low levels, such that the real rate of interest is below the marginal product of capital. Paradoxically, an active interest rate feedback policy can cause nominal interest rates, inflation rates, and real interest rates unintentionally to drift downwards within a Shilnikov attractor set. Policy options to eliminate or control the chaotic dynamics are developed.
    Keywords: Shilnikov chaos criterion; l global indeterminacy; long-term un-predictability; liquidity trap
    JEL: C61 C62 E12 E52 E63
    Date: 2019–12
  9. By: Capek, Jan; Crespo Cuaresma, Jesus; Hauzenberger, Niko; Reichel, Vlastimil
    Abstract: We provide a comprehensive assessment of the predictive ability of combinations of Dynamic Stochastic General Equilibrium (DSGE) models for GDP growth, inflation and the interest rate in the euro area. We employ a battery of static and dynamic pooling weights based on Bayesian model averaging principles, prediction pools and dynamic factor representations, and entertain eight different DSGE specifications and four prediction weighting schemes. Our results indicate that exploiting mixtures of DSGE models tends to achieve superior forecasting performance over individual specifications for both point and density forecasts. The largest improvements in the accuracy of GDP growth forecasts are achieved by the prediction pooling technique, while the results for the weighting method based on dynamic factors partly leads to improvements in the quality of inflation and interest rate predictions.
    Keywords: Forecasting, model averaging, prediction pooling, DSGE models
    Date: 2020–11
  10. By: Barnett, William A. (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Hu, Jingxian (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Will capital controls enhance macroeconomic stability? How will the results be influenced by the exchange rate regime and monetary policy reaction? Are the consequences of policy decisions involving capital controls easily predictable, or more complicated than may have been anticipated? We will answer the above questions by investigating the macroeconomic dynamics of a small open economy. In recent years, these matters have become particularly important to emerging market economies, which have often adopted capital controls. We especially investigate two dynamical characteristics: indeterminacy and bifurcation. Four cases are explored, based on different exchange rate regimes and monetary policy rules. With capital controls in place, we find that indeterminacy depends upon how the central bank’s response to inflation and its response to output gap coordinate with each other in the Taylor rule. When forward-looking, both passive and active monetary policy can lead to indeterminacy. Compared with flexible exchange rates, fixed exchange rate regimes produce more complex indeterminacy conditions, depending upon the stickiness of prices and the elasticity of substitution between labor and consumption. We show the existence of Hopf bifurcation under capital control with fixed exchange rates and current-looking monetary policy. To determine empirical relevance, we test indeterminacy empirically using Bayesian estimation. Fixed exchange rate regimes with capital controls produce larger posterior probability of the indeterminate region than a flexible exchange rate regime. Fixed exchange rate regimes with current-looking monetary policy lead to several kinds of bifurcation under capital controls. We provide monetary policy suggestions on achieving macroeconomic stability through financial regulation.
    Keywords: Capital controls; open economy monetary policy; exchange rate regimes; Bayesian methods; bifurcation; indeterminacy
    JEL: C11 C62 E52 F31 F38 F41
    Date: 2019–10
  11. By: Charles de Beauffort (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: What does central bank independence imply for the optimal conduct of time-consistent fiscal and monetary policy in a liquidity trap? To provide an answer, I consider a stochastic noncooperative game in which the lower bound on nominal rates is an occasionally binding constraint and in which government debt serves as a tool to influence future policy trade-offs. I show that a transitory consolidation of debt in the liquidity trap optimally reduces expected real rates and stimulates current consumption and inflation via an expectation channel. The reaction function of the independent central bank outside the lower bound is pivotal in obtaining this result - considering instead coordinated policy produces the opposite effect of an optimal increase in debt. Lengthening the debt maturity allows to mitigate issues related to lack of coordination.
    Keywords: Optimal Time-Consistent Policy, Distortionary Taxation, Liquidity Trap, Fiscal and Monetary Policy Interactions
    Date: 2020–11–10
  12. By: Jan Capek (Masaryk University); Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Niko Hauzenberger (University of Salzburg); Vlastimil Reichel (Masaryk University)
    Abstract: We provide a comprehensive assessment of the predictive ability of combinations of Dynamic Stochastic General Equilibrium (DSGE) models for GDP growth, inflation and the interest rate in the euro area. We employ a battery of static and dynamic pooling weights based on Bayesian model averaging principles, prediction pools and dynamic factor representations, and entertain eight different DSGE specifications and four prediction weighting schemes. Our results indicate that exploiting mixtures of DSGE models tends to achieve superior forecasting performance over individual specifications for both point and density forecasts. The largest improvements in the accuracy of GDP growth forecasts are achieved by the prediction pooling technique, while the results for the weighting method based on dynamic factors partly leads to improvements in the quality of inflation and interest rate predictions.
    Keywords: Forecasting, model averaging, prediction pooling, DSGE models
    JEL: E37 E47 C53
    Date: 2020–11
  13. By: Mitra, Nirvana
    Abstract: I study the relationship between political constraints and the probability of sovereign default on external debt using a dynamic stochastic model of fiscal policy augmented with legislative bargaining and default. I find that political constraints and default probability are inversely related if the output cost of default is not too high. The model government comprises legislators who bargain over policy instruments, including over a local public good that benefits only the regions they represent. Higher political constraints are equivalent to more legislators with veto power over fiscal policies. This implies that during a default, the released resources need to be distributed among more regions as local public goods, with a smaller benefit accruing to each region, discouraging default. However, if default is too costly, even governments with lower political constraints default less frequently. Empirical evidence from South American countries is consistent with this result. I calibrate the infinite horizon model to Argentina. It confirms the negative relationship. A counterfactual exercise with even higher political constraints shows that the default by Argentina in 2001 could not be avoided.
    Keywords: Sovereign debt, Default risk, Interest rates, Political economy, Minimum winning coalition, Endogenous borrowing constraints.
    JEL: D72 E43 E62 F34 F41
    Date: 2020–11–15
  14. By: J. Scott Davis; Michael B. Devereux; Changhua Yu
    Abstract: This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through foreign exchange intervention. Intervention is effective due to frictions in private international financial intermediation. Reserve accumulation has ex ante benefits by reducing the risk of a sudden stop, while intervention has ex-post benefits by limiting inefficient deleveraging. But intervention itself faces constraints. When the central bank's stock of reserves is low, even foreign exchange intervention cannot prevent a sudden stop.
    Keywords: Central bank; sudden stops; foreign exchange reserves; capital controls
    JEL: E50 E30 F40
    Date: 2020–11–10
  15. By: Stéphane Auray (LIEPP); Samuel Danthine; Markus Poschke
    Abstract: Asubstantial share of severance payments derives from private contracts or collective agreements. In this paper, we study the determination of these payments. We analyze joint bargaining over wages and severance payments in a search-and-matching model with risk-averse workers. Individual bargaining results in levels of severance pay that provide full insurance, but also depend on unemployment benefits and job-finding rates. Unions also choose full insurance. Because their higher wage demands reduce job creation, this requires higher severance pay. Severance pay observed in eight European countries, to which we calibrate the model, lies between predictions from the bargaining and union scenarios.
    Keywords: Bargaining; Severance pay; Unemployment insurance; Unions
    JEL: E24 J32 J33 J64 J65
    Date: 2020
  16. By: Dirk Niepelt (Study Center Gerzensee, University of Bern, CEPR, CESifo)
    Abstract: We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with "pseudo wedges" and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.
    Date: 2020–11
  17. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: This paper revisits the paradox of flexibility, ie, the result that, in a liquidity trap, greater price flexibility amplifies output volatility in response to negative demand shocks. We argue this paradox is the consequence of a failure of standard models to correctly characterise monetary policy and that allowing for a smooth adjustment of the shadow policy rate eliminates the paradox and produces output responses to a negative demand shock that are in line with those under optimal monetary policy. The reason is that, under an inertial policy, a decline in the shadow rate implies that the future actual policy rate will remain relatively low, which increases expectations about the economic outlook and inflation. The rise in inflation expectations reduces the real rate, thereby sustaining real activity. As we raise the degree of price flexibility, a negative demand shock causes a sharper fall in the shadow rate and increase in inflation expectations, which leads to a more significant drop in the real rate and, hence, a milder decline in the output gap.
    Keywords: Interest rate smoothing; liquidity trap; zero lower bound; paradox of flexibility
    JEL: E32 E52 E61
    Date: 2020–11–06
  18. By: Minford, Patrick (Cardiff Business School); Gai, Yue (Cardiff Business School); Meenagh, David (Cardiff Business School)
    Abstract: We set up a two-region model to study the policy challenge of bringing the NorthÕs income up to the level of the South in the UK. The model focuses on labour costs as the driver of output gains through the international competitiveness channel. The empirical results show that the regional model behaviour fits the regional UK data behaviour over the period of 1986Q1 and 2019Q4, using the demanding Indirect Inference method. We also carry out a Monte Carlo power test, which shows the empirical results we obtain are trustworthy and can provide us a reliable guide for policy reform.The results suggest that in response to tax cuts and labour market reforms GDP in the North increases almost twice as much as GDP in the South. Given that a broad programme of tax cuts and regulatory reform would more than pay for itself in the long run, it must be considered as a highly attractive political agenda.
    Keywords: Regional study; DSGE model; Policy implication; Indirect Inference
    JEL: E32 E60 P48
    Date: 2020–11
  19. By: Francesca Parodi
    Abstract: I quantitatively characterize optimal consumption and labor income taxes in a general framework that allows for partially irreversible durable goods, preference heterogeneity, and horizontal equity goals of the social planner. To do so, I develop and estimate a structural life-cycle model of household consumption, saving, and employment choices. I nd that durables should be subsidized in presence of adjustment costs and that heterogeneity in risk aversion leads to non-uniform consumption taxes. Allowing for government's equity concerns, I show that the model rationalizes the tax practice and that di erentiated consumption taxes serve a redistributive purpose jointly with progressive labor income taxes.
    Keywords: Intertemporal Household Choice, Consumption, Durable goods, Saving, Labor Supply, Efficiency, Optimal Taxation, Inequality, Welfare
    JEL: D10 D30 D63 E20 H20 H31 J22
    Date: 2020
  20. By: J. Scott Davis (Federal Reserve Bank of Dallas); Kevin X. D. Huang (Vanderbilt University); Ayse Sapci (Utah State University)
    Abstract: Changes in housing demand can affect firm investment through the collateral channel, where the change in residential real estate prices is associated with a change in commercial real estate prices, affecting firm collateral and thus firm investment. We argue that this channel is weaker when residential and commercial real estate are poor substitutes. Using cross-state heterogeneity in the strength of zoning regulations as a proxy for heterogeneity in the substitutability of residential and commercial real estate, we first show with firm level data that the strength of local zoning regulations has a negative effect on the estimated increase in firm investment following an increase in local residential real estate prices. We then construct a DSGE model where land has both residential and commercial uses and with it to match the observed correlation between residential and commercial real estate prices. We find the average elasticity of substitution between commercial and residential real estate in the U.S. to be around 0.35, but in states with strong zoning restrictions it can be as low as 0.16 and in states with weak zoning restrictions it can be as high as 0.66. Simulations of the model show how differences in substitutability affect the transmission of a housing demand shock.
    Keywords: Commercial real estate; residential real estate; housing demand shock; zoning
    JEL: R1 E3
    Date: 2020–11–17
  21. By: Marek Ignaszak (Goethe University Frankfurt, Theodor-W.-Adorno-Platz 3, 60323 Frankfurt, Germany,); Philip Jung (TechnicalUniversityofDortmund,FacultyofBusiness,EconomicsandSocialSciences,44221 Dortmund,Germany); Keith Kuester (University of Bonn Adenauerallee 24-42,53113 Bonn, Germany, and CEPR)
    Abstract: Consider a union of atomistic member states, each faced with idiosyncratic business-cycle shocks. Private cross-border risk-sharing is limited, giving a role to a federal unemployment-based transfer scheme. Member states control local labor-market policies, giving rise to a trade-off between moral hazard and insurance. Calibrating the economy to a stylized European Monetary Union, we find notable welfare gains if the federal scheme's payouts take the member states' past unemployment level as a reference point. Member states' control over policies other than unemployment benefits can limit generosity during the transition phase.
    Keywords: Unemployment reinsurance, labor-market policy, fiscal federalism, search and matching
    JEL: E32 E24 E62
    Date: 2020–11
  22. By: Jagjit S. Chadha; Luisa Corrado; Jack Meaning; Tobias Schuler
    Abstract: The Federal Reserve responded to the global financial crisis by initiating an unprecedented expansion of central bank money (bank reserves) once the policy rate had reached the lower bound. To capture the salient features of the crisis, we develop a model where the central bank can provide reserves on demand and also use reserves to buy government bonds. We show that the provision of reserves through either channel reduces the cost of providing loans as they act as a substitute for private sector collateral and costly monitoring activity. We illustrate this mechanism by examining the role of reserves in projecting stable growth in broad money after the financial crisis. We also run a counterfactual which suggests that, if the Federal Reserve had not provided bank reserves on such a large scale, broad money would have fallen, the economy might have experienced a deeper contraction, and the recovery would have been more protracted, taking perhaps twice as long to return to equilibrium.
    Keywords: non-conventional monetary policy, quantitative easing, liquidity provision
    JEL: E31 E40 E51
    Date: 2020–11
  23. By: Stéphane Auray (Observatoire français des conjonctures économiques); David Fuller
    Abstract: In this paper, we investigate the causes and consequences of “unclaimed” unemployment insurance (UI) benefits. A search model is developed where the costs to collecting UI benefits include both a traditional “fixed” administrative cost and an endogenous cost arising from worker and firm interactions. Experience rated taxes give firms an incentive to challenge a worker’s UI claim, and these challenges are costly for the worker. Exploiting data on improper denials of UI benefits across states in the U.S. system, a two-way fixed effects analysis shows a statistically significant negative relationship between the improper denials and the UI take-up rate, providing empirical support for our model. We calibrate the model to elasticities implied by the two-way fixed effects regression to quantify the relative size of these UI collection costs. The results imply that on average the costs associated with firm challenges of UI claims account for 41% of the total costs of collecting, with improper denials accounting for 8% of the total cost. The endogenous collection costs imply the unemployment rate responds much slower to changes in UI benefits relative to a model with fixed collection costs. Finally, removing all eligibility requirements and allowing workers to collect UI benefits without cost shows these costs to be 4,5% of expected output net of vacancy costs. Moreover, this change has minimal impact on the unemployment rate.
    Keywords: Unemployment insurance; Take-up rate; Experience rating; Matching frictions; Search
    JEL: E61 J32 J64 J65
    Date: 2020–07
  24. By: Carlos Garriga; Aaron Hedlund; Yang Tang; Ping Wang
    Abstract: This paper uses a dynamic competitive spatial equilibrium framework to evaluate the contribution of rural-urban migration induced by structural transformation to the behavior of Chinese housing markets. In the model, technological progress drives workers facing heterogeneous mobility costs to migrate from the rural agricultural sector to the higher paying urban manufacturing sector. Upon arrival to the city, workers purchase housing using long-term mortgages. Quantitatively, the model fits cross-sectional house price behavior across a representative sample of Chinese cities between 2003 and 2015. The model is then used to evaluate how changes to city migration policies and land supply regulations affect the speed of urbanization and house price appreciation. The analysis indicates that making migration policy more egalitarian or land policy more uniform would promote urbanization but also would contribute to larger house price dispersion.
    JEL: O11 R21 R23 R31
    Date: 2020–10
  25. By: Michael Sposi; Kei-Mu Yi; Jing Zhang
    Abstract: Motivated by increasing trade and fragmentation of production across countries since World War II, we build a dynamic two-country model featuring sequential, multistage production and capital accumulation. As trade costs decline over time, global-value-chain (GVC) trade expands across countries, particularly more in the faster growing country, consistent with the empirical pattern. The presence of GVC trade boosts capital accumulation and economic growth and magnifies dynamic gains from trade. At the same time, endogenous capital accumulation shapes comparative advantage across countries, impacting the dynamics of GVC trade: a country becoming more capital abundant concentrates more on the capital-intensive stage of the production.
    Keywords: Multistage production; International trade; Capital accumulation
    JEL: E22 F10 F43
    Date: 2020–11–10
  26. By: Augeraud-Véron, E.; Fabbri, G.; Schubert, K.
    Abstract: This paper presents a first model integrating the relation between biodiversity loss and zoonotic pandemic risks in a general equilibrium dynamic economic set-up. The occurrence of pandemics is modeled as Poissonian leaps in economic variables. The planner can intervene in the economic and epidemiological dynamics in two ways: first (prevention), by deciding to conserve a greater quantity of biodiversity to decrease the probability of a pandemic occurring, and second (mitigation), by reducing the death toll through a lockdown policy, with the collateral effect of affecting negatively labor productivity. The policy is evaluated using a social welfare function embodying society's risk aversion, aversion to fluctuations, degree of impatience and altruism towards future generations. The model is explicitly solved and the optimal policy described. The dependence of the optimal policy on natural, productivity and preference parameters is discussed. In particular the optimal lockdown is more severe in societies valuing more human life, and the optimal biodiversity conservation is larger for more ``forward looking'' societies, with a small discount rate and a high degree of altruism towards future generations. Moreover, societies accepting a large welfare loss to mitigate the pandemics are also societies doing a lot of prevention. After calibrating the model with COVID-19 pandemic data we compare the mitigation efforts predicted by the model with those of the recent literature and we study the optimal prevention- mitigation policy mix.
    JEL: Q56 Q57 Q58 O13 C61
    Date: 2020
  27. By: Glawion, Rene; Puche, Marc; Haller, Frédéric
    Abstract: We develop a general equilibrium model of earnings, income and wealth heterogeneity in continuous time. We extend existing analytical and numerical methods to solve the model. We calibrate the model to U.S. data and find that stochastic interest rates provide a mechanism to link earnings, income and wealth distributions. We use this connection to demonstrate that an increase in unemployment benefits leads to a rise in steady state wealth inequality measured by the Gini coefficient.
    Keywords: Incomplete Markets,Fokker-Planck Equations,Wealth Distributions,Computable General Equilibrium Models
    JEL: C68 D31 E21
    Date: 2020
  28. By: Karine Constant (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - UNIV GUSTAVE EIFFEL - Université Gustave Eiffel); Marion Davin (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This article examines how pollution and its health effects during childhood can affect the dynamics of inequalities among households. In a model in which children's health is endogenously determined by pollution and the health investments of parents, we show that the economy may exhibit inequality in the long run and be stuck in an inequality trap with steadily increasing disparities, because of pollution. We investigate if an environmental policy, consisting in taxing the polluting production to fund pollution abatement, can address this issue. We find that it can decrease inequality in the long run and enable to escape from the trap if the emission intensity is not too high and if initial disparities are not too wide. Otherwise, we reveal that a policy mix with an additional subsidy to health expenditure may be a better option, at least if parental investment on children's health is sufficiently efficient.
    Keywords: Pollution,Health,Human capital,Childhood,Overlapping generations,Inequality.
    Date: 2020–11–05
  29. By: Boyan Jovanovic; Sai Ma; Peter L. Rousseau
    Abstract: We study private equity in a dynamic general equilibrium model and ask two questions: (i) Why does the investment of venture funds respond more strongly to the business cycle than that of buyout funds? (ii) Why are venture funds returns higher than those of buyout? On (i), venture brings in new capital whereas buyout largely reorganizes existing capital; this can explain the stronger co-movement of venture with aggregate Tobin's Q. Regarding (ii), venture returns co-move more strongly with aggregate consumption and therefore pay a higher premium. Our model embodies this logic and fits the data on investment and returns well. At the estimated parameters, the two PE sectors together contribute between 14 and 21 percent of observed growth, relative to the extreme case where private equity is absent.
    JEL: E44
    Date: 2020–10
  30. By: Santiago Garcia-Couto
    Abstract: It is well documented that routine-biased technical change ("RBTC") led to labor market polarization during 1980-2000. In particular, the employment and wages of non-routine occupations, which include low-wage manual and high-wage cognitive ones, increased relative to routine occupations. I document that during 2000-2016, wage polarization stopped in that the wages of non-routine manual occupations fell in relative and absolute terms. I study the end of wage polarization through the lens of a dynamic general equilibrium model with RBTC, human capital accumulation, and occupational mobility. I find that during 2000-2016, RBTC continued to take place, but human capital accumulation and occupational mobility changed. In particular, compared to workers in routine occupations, workers in non-routine manual occupations had lower initial human capital and accumulated less human capital whereas workers in cognitive occupations had more initial human capital and accumulated more human capital than before. During 1980-2000 the changes in the human capital accumulation of the occupations were similar to those during 2000-2016, but during the second period mobility across occupations fell, which magnified the differences in human capital accumulation and led to the end of wage polarization.
    JEL: E24 J24 J31 J62
    Date: 2020–11–15

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