nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒02‒01
28 papers chosen by

  1. Informality, Frictions, and Macroprudential Policy By Moez Ben Hassine; Nooman Rebei
  2. (Optimal) Monetary Policy with and without Debt By Boris Chafwehé; Rigas Oikonomou; Romanos Priftis; Lukas Vogel
  3. The Welfare and Distributional Effects of Fiscal Volatility: A Quantitative Evaluation By Bachman, RÜdiger; Bai, Jinhui; Lee, Minjoon; Zhang, Fudong
  4. Fiscal Stimulus in Liquidity Traps: Conventional or Unconventional Policies? By Lemoine Matthieu; Lindé Jesper
  5. Optimal progressivity of personal income tax: a general equilibrium evaluation for Spain By Darío Serrano-Puente
  6. Globalization, Trade Imbalances and Labor Market Adjustment By Rafael Dix-Carneiro; João Paulo Pessoa; Ricardo M. Reyes-Heroles; Sharon Traiberman
  7. Monetary Policy and Redistribution in Open Economies By Xing Guo; Pablo Ottonello; Diego J. Perez
  8. Search Externalities in Firm-to-Firm Trade By Spray, J.
  9. World Interest Rates and Macroeconomic Adjustments in Developing Commodity Producing Countries By Vincent Bodart; François Courtoy; Erica Perego
  10. Forward Guidance in Small Open Economy By André, Marine-Charlotte; Traficante, Guido
  11. Exporting Through Intermediaries: Impact on Export Dynamics and Welfare By Parisa Kamali
  12. Involuntary unemployment in overlapping generations model due to instability of the economy By Yasuhito Tanaka
  13. Skill Loss during Unemployment and the Scarring Effects of the COVID-19 Pandemic By Paul Jackson; Victor Ortego-Marti
  14. Self-Fulfilling Risk Panics: An Expected Utility Framework By Jess Benhabib; Xuewen Liu; Pengfei Wang
  15. Computing time-consistent equilibria: A perturbation approach By Richard Dennis
  16. Informality and Aggregate Productivity: The Case of Mexico By Jorge Alvarez; Cian Ruane
  17. Buried in the vaults of central banks: Monetary gold hoarding and the slide into the Great Depression By Karau, Sören
  18. Monetary Policy Response to a Migration Shock: An Analysis for a Small Open Economy By Franz Hamann; Cesar Anzola; Oscar Avila-Montealegre; Juan Carlos Castro-Fernandez; Anderson Grajales-Olarte; Alexander Guarín; Juan C Mendez-Vizcaino; Juan J. Ospina-Tejeiro; Mario A. Ramos-Veloza
  19. The (ir)relevance of rule-of-thumb consumers for US business cycle fluctuations By Alice Albonico; Guido Ascari; Qazi Haque
  20. Unemployment Insurance during a Pandemic By Lei Fang; Jun Nie; Zoe Xie
  21. US business cycle dynamics at the zero lower bound By Böhl, Gregor; Strobel, Felix
  22. How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area By Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
  23. The Role of Nonemployers in Business Dynamism and Aggregate Productivity By Pedro Bento; Diego Restuccia
  24. Testing the effectiveness of unconventional monetary policy in Japan and the United States By Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
  25. Credit Frictions in the Great Recession By Patrick J. Kehoe; Pierlauro Lopez; Virgiliu Midrigan; Elena Pastorino
  26. Credibility Dynamics and Disinflation Plans By Rumen Kostadinov; Francisco Roldán
  27. The Fall in German Unemployment: A Flow Analysis By Carlos Carrillo-Tudela; Andrey Launov; Jean-Marc Robin
  28. MIT Shocks Imply Market Incompleteness By Toshihiko Mukoyama

  1. By: Moez Ben Hassine; Nooman Rebei
    Abstract: We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.
    Keywords: Macroprudential policy;Self-employment;Banking;Consumption;Housing;WP,interest rate,monetary policy
    Date: 2019–11–27
  2. By: Boris Chafwehé; Rigas Oikonomou; Romanos Priftis; Lukas Vogel
    Abstract: We propose a framework of optimal monetary policy where debt sustainability may, or may not, be a relevant constraint for the central bank. We show analytically that in each environment the optimal interest rate path consists of a Taylor rule augmented with forward guidance terms. These terms arise either i) from “twisting interest rates†when the central bank ensures debt sustainability, or ii) under no debt concerns, from committing to keep interest rates low at the exit of the liquidity trap. The optimal policy is isomorphic to Leeper’s (1991) “passive monetary/active fiscal policy†regime in the first instance, or “active monetary/passive fiscal policy†regime in the second. We insert our framework into a standard medium scale DSGE model calibrated to the US. Optimal passive monetary policy with debt concerns is ineffective in stabilizing inflation, whereas under no debt concerns, monetary policy is very effective in stabilizing the macroeconomy.
    Keywords: Economic models; Fiscal policy; Monetary policy; Monetary policy framework
    JEL: C11 E31 E52 E58 E62
    Date: 2021–01
  3. By: Bachman, RÜdiger (University of Notre Dame); Bai, Jinhui (Washington State University); Lee, Minjoon (Carleton University); Zhang, Fudong (University of Michigan)
    Abstract: This study explores the welfare and distributional effects of fiscal volatility using a neoclassical stochastic growth model with incomplete markets. In our model, households face uninsurable idiosyncratic risks in their labor income and discount factor processes, and we allow aggregate uncertainty to arise from both productivity and government purchases shocks. We calibrateour model to key features of the U.S. economy, before eliminating government purchases shocks. We then evaluate the distributional consequences of the elimination of fiscal volatility and find that, in our baseline case, welfare gains increase with private wealth holdings.
    Keywords: fiscal volatility; welfare costs; distributional effects; labor income risk; wealthinequality; transition path
    JEL: E30 E32 E60 E62 H30
    Date: 2020–03–14
  4. By: Lemoine Matthieu; Lindé Jesper
    Abstract: Recent influential work argue that a gradual increase in sales tax stimulates economic activity in a liquidity trap by boosting inflation expectations. Higher public infrastructure investment should also be more expansive in a liquidity trap than in normal times by raising the potential interest rate and increasing aggregate demand. We analyze the relative merits of these policies in New Keynesian models with and without endogenous private capital formation and heterogeneity when monetary policy does not respond by raising policy rates. Our key finding is that the effectiveness of sales tax hikes differs notably across various model specifications, whereas the benefits of higher public infrastructure investment are more robust in alternative model environments. We therefore conclude that fiscal policy should consider public investment opportunities and not merely rely on tax policies to stimulate growth during the COVID-19 crisis.
    Keywords: Monetary Policy, Sales Tax, Public Investment, Liquidity Trap, Zero Lower Bound Constraint, DSGE Morel
    JEL: E52 E58
    Date: 2021
  5. By: Darío Serrano-Puente (Banco de España)
    Abstract: Is the Spanish economy positioned at its optimal progressivity level in personal income tax? This article quantifies the aggregate, distributional, and welfare consequences of moving towards such an optimal level. A heterogeneous households general equilibrium model featuring both life cycle and dynastic elements is calibrated to replicate some characteristics of the Spanish economy and used to evaluate potential reforms of the tax system. The findings suggest that increasing progressivity would be optimal, even though it would involve an efficiency loss. The optimal reform of the tax schedule would reduce wealth and income inequality at the cost of negative effects on capital, labor, and output. Finally, these theoretical results are evaluated using tax micro data and describe a current scenario where the income-top households typically face suboptimal effective average tax rates.
    Keywords: income tax, progressivity, inequality, income and wealth distribution, general equilibrium, heterogeneous agents
    JEL: D31 C68 E62 H21
    Date: 2021–01
  6. By: Rafael Dix-Carneiro; João Paulo Pessoa; Ricardo M. Reyes-Heroles; Sharon Traiberman
    Abstract: We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) Consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances; (b) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and inter-temporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the “China Shock” through the lens of our model. We show that the US enjoys a 2.2% gain in response to globalization shocks. These gains would have been 73% larger in the absence of the global savings glut, but they would have been 40% smaller in a balanced-trade world.
    JEL: F1 F16
    Date: 2021–01
  7. By: Xing Guo; Pablo Ottonello; Diego J. Perez
    Abstract: We study how monetary policy affects the asymmetric effects of globalization. To this end, we build an open-economy heterogeneous-agent New Keynesian model (HANK), in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the international spillovers of policies and shocks, how do alternative exchange-rate regimes compare, and what are the implications for monetary policy of the international price system. Our results indicate the presence of a trade-off between aggregate stabilization and inequality in consumption responses to external shocks. The asymmetric effects of globalization can be smaller for economies with higher international integration.
    JEL: E21 E52 F3 F32 F41 F6
    Date: 2020–12
  8. By: Spray, J.
    Abstract: I develop a model of firm-to-firm search and matching to show that the impact of falling trade costs on firm sourcing decisions and consumer welfare depends on the relative size of search externalities in domestic and international markets. These externalities can be positive if firms share information about potential matches, or negative if the market is congested. Using unique firm-to-firm transaction-level data from Uganda, I show empirical evidence consistent with positive externalities in international markets and negative externalities in domestic markets. I then build a dynamic quantitative version for the model and show that, in Uganda, a 25% reduction in trade costs led to a 5.2% increase in consumer welfare, 15% of which was due to search externalities.
    Keywords: Firm-to-Firm Trade, VAT Data, Search-and-Matching, Importing
    JEL: F14 F15 O19
    Date: 2101–01–19
  9. By: Vincent Bodart; François Courtoy; Erica Perego
    Abstract: With commodities becoming international financial securities, commodity prices are affected by the international financial cycle. With this evidence in mind, this paper reconsiders the macroeconomic adjustment of developing commodity-exporting countries to changes in world interest rates. We proceed by building a model of a small open economy that produces a non-tradable good and a storable tradable commodity. The difference with standard models of small open economies lies in the endogenous response of commodity prices which -due to commodity storage- adjust to variations in international interest rates. We find that the endogenous response of commodity prices amplifies the reaction of commodity exporting countries to international monetary shocks. This suggests that commodity exporting countries are more vulnerable to unfavourable international monetary disturbances than other small open economies. In particular, because of the existence of the commodity price channel, even those small open commodity-exporting economies that are disconnected from international financial markets can be affected by the international financial cycle.
    Keywords: Storable Commodity;International Financial Shock;Developing Economies
    JEL: E32 F41 G15 O11 Q02
    Date: 2021–01
  10. By: André, Marine-Charlotte; Traficante, Guido
    Abstract: We examine forward guidance in a small open economy New Keynesian model. In a setup where forward guidance duration is known with certainty, we show that the elasticity of in ation with respect to the real exchange rate is a key variable in attenuating the forward guidance puzzle. Then we consider a credible forward guidance regime which is adopted stochastically, in normal times or under a liquidity trap. Compared to closed economy, forward guidance turns out to be more expansionary in open economy and the real exchange rate is a key variable driving this result. In particular, the response of output and inflation is amplifi�ed when aggregate supply is negatively related to the real exchange rate.
    Keywords: Monetary policy, small open economy, forward guidance.
    JEL: E31 E52
    Date: 2020–12–08
  11. By: Parisa Kamali
    Abstract: In many countries, a sizable share of international trade is carried out by intermediaries. While large firms tend to export to foreign markets directly, smaller firms typically export via intermediaries (indirect exporting). I document a set of facts that characterize the dynamic nature of indirect exporting using firm-level data from Vietnam and develop a dynamic trade model with both direct and indirect exporting modes and customer accumulation. The model is calibrated to match the dynamic moments of the data. The calibration yields fixed costs of indirect exporting that are less than a third of those of direct exporting, the variable costs of indirect exporting are twice higher, and demand for the indirectly exported products grows more slowly. Decomposing the gains from indirect and direct exporting, I find that 18 percent of the gains from trade in Vietnam are generated by indirect exporters. Finally, I demonstrate that a dynamic model that excludes the indirect exporting channel will overstate the welfare gains associated with trade liberalization by a factor of two.
    Keywords: Exports;Trade facilitation;Price indexes;Tariffs;Technology;WP,fixed cost,appendix E
    Date: 2019–12–27
  12. By: Yasuhito Tanaka
    Abstract: The existence of involuntary unemployment advocated by J. M. Keynes is a very important problem of the modern economic theory. Using a three-generations overlapping generations model, we show that the existence of involuntary unemployment is due to the instability of the economy. Instability of the economy is the instability of the difference equation about the equilibrium price around the full-employment equilibrium, which means that a fall in the nominal wage rate caused by the presence of involuntary unemployment further reduces employment. This instability is due to the negative real balance effect that occurs when consumers' net savings (the difference between savings and pensions) are smaller than their debt multiplied by the marginal propensity to consume from childhood consumption.
    Date: 2020–12
  13. By: Paul Jackson (National University of Singapore); Victor Ortego-Marti (Department of Economics, University of California Riverside)
    Abstract: We integrate the SIR epidemiology model into a search and matching framework with skill loss during unemployment. As infections spread, fewer jobs are created, skills deteriorate and TFP declines. The equilibrium is not efficient due to infection and skill composition externalities. Job creation increases infections due to increased interactions among workers. However, lower job creation decreases TFP due to skill loss. A three-month lockdown causes a 0.56% decline in TFP, i.e. nearly 50% of productivity losses in past recessions. We study the efficient allocation given the trade-off between both externalities and show that quantitatively the skill composition externality is sizable.
    Keywords: COVID-19; Skill loss; TFP; Search and matching; Unemployment; Pandemics
    JEL: E24
    Date: 2021–01
  14. By: Jess Benhabib; Xuewen Liu; Pengfei Wang
    Abstract: Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions within an OLG structure. Our paper further shows that the existence of sentiment-driven equilibria is robust in a standard infinite-period model as long as the pricing kernel is affected by the asset price.
    JEL: E44 G01 G11
    Date: 2020–12
  15. By: Richard Dennis
    Abstract: Time-consistency is a key feature of many important policy problems, such as those relating to optimal fiscal policy and optimal monetary policy. It is also important for private-sector decision-making through mechanisms such as quasi-hyperbolic discounting. These problems are generally solved using some form of projection method. The difficultly with projection methods is that their computational complexity increases rapidly with the number of state variables, limiting the sophistication of the models that can be solved. This paper develops a perturbation method for solving models with time-inconsistency that enables larger models to be more readily solved and analyzed. The method operates on a model’s (generalized) Euler equations; it does not require forming a quadratic approximation to household welfare and it does not require that the model’s steady state be efficient. We apply the method to several models featuring time-inconsistency and show that it exhibits good accuracy.
    Date: 2020–12
  16. By: Jorge Alvarez; Cian Ruane
    Abstract: We assess the aggregate productivity impact of distortions arising from labor regulations in Mexico and how they interact with informality. Using employment surveys and a firm-level economic census, we document a number of novel features about informal firms in Mexico. We then construct and estimate a model of heterogeneous firms and endogenous informality to study the micro and macro impacts from various policy reforms. Some reforms may have large impacts on informal employment but small impacts on aggregate productivity.
    Keywords: Informal employment;Productivity;Labor;Wages;Public expenditure review;WP,informal firm,size distribution,profit function,firm's idiosyncratic productivity,incumbent firm
    Date: 2019–11–27
  17. By: Karau, Sören
    Abstract: I study whether monetary gold hoarding was the main cause of the Great Depression in a structural VAR analysis. The notion that monetary forces played an important role in bringing about the depression is well established in the narrative literature, but has more recently met some skepticism by formal macroeconometric work. In deliberate contrast to the existing macroeconometric literature, the paper i) uses a newly-assembled monthly data set of the interwar world economy, and ii) models monetary disturbances as shocks to central bank gold demand. Based on a monetary DSGE model, the world gold reserve ratio (the ratio of central bank gold holdings to monetary liabilities) is used to describe monetary conditions. This permits the use of narrative information to sharpen shock identification in a structural VAR analysis based on sign restrictions. Monetary shocks are found to have real effects and to account for a substantial part of the collapse in prices and output during the initial slide into the Great Depression.
    Keywords: Great Depression,Gold Standard,Monetary Policy,Narrative Sign Restrictions
    JEL: E32 E42 E58 N12 N14
    Date: 2020
  18. By: Franz Hamann; Cesar Anzola; Oscar Avila-Montealegre; Juan Carlos Castro-Fernandez; Anderson Grajales-Olarte; Alexander Guarín; Juan C Mendez-Vizcaino; Juan J. Ospina-Tejeiro; Mario A. Ramos-Veloza
    Abstract: We develop a small open economy model with nominal rigidities and fragmented labor markets to study the response of the monetary policy to a migration shock. Migrants are characterized by their productivity levels, their restrictions to accumulate capital, as well as by the fl exibility of their labor income. Our results show that the monetary policy response depends on the characteristics of migrants and the local labor market. An infl ow of low(high)-productivity workers reduces(increases) marginal costs, lowers(raises) infl ation expectations and pushes the Central Bank to reduce(increase) the interest rate. The model is calibrated to the Colombian economy and used to analyze a migratory in flow of financially constraint workers from Venezuela into a sector with flexible and low wages. **** RESUMEN: En este artículo analizamos la respuesta de política monetaria ante un choque migratorio, mediante el desarrollo de modelo de economía pequeña y abierta con mercados de trabajo fragmentados. Los migrantes se caracterizan por sus bajos niveles de productividad, restricciones de acumulación de capital y la mayor flexibilidad de su ingreso laboral. Los resultados evidencian que la respuesta de política monetaria depende de las características de los migrantes y del mercado laboral. Una entrada de trabajadores de baja(alta) productividad reduce(aumenta) los costos marginales, disminuye(incrementa) las expectativas de in flación y lleva al Banco Central a reducir(aumentar) la tasa de interés. El modelo se calibra para la economía colombiana y se usa para analizar un in flujo migratorio de trabajadores venezolanos en un sector de salarios bajos y flexibles.
    Keywords: Neoclassical Model, Wage Differentials, Informal Labor Markets, Migration, Monetary Policymodelo, neoclásico, diferenciales salariales, mercados informales de trabajo, migración, política monetaria
    JEL: E13 J31 J46 J61 E50
    Date: 2021–01
  19. By: Alice Albonico; Guido Ascari; Qazi Haque
    Abstract: We estimate a medium-scale model with and without rule-of-thumb consumers over the pre- Volcker and the Great Moderation periods, allowing for indeterminacy. Passive monetary policy and sunspot fluctuations characterize the pre-Volcker period for both models. The estimated fraction of rule-of-thumb consumers is low, such that the models are empirically almost equivalent. In both subsamples, the two models yield very similar impulse response functions, variance and historical decompositions. We conclude that rule-of-thumb consumers are irrelevant to explain aggregate U.S. business cycle fluctuations
    Keywords: rule-of-thumb consumers, indeterminacy, business cycle fluctuations
    JEL: E32 E52 C11 C13
    Date: 2020–11
  20. By: Lei Fang; Jun Nie; Zoe Xie
    Abstract: The CARES Act implemented in response to the COVID-19 crisis dramatically increases the generosity of unemployment insurance (UI) benefits, triggering concerns about its substantial impact on unemployment. This paper combines a labor market search-matching model with the SIR-type infection dynamics to study the effects of CARES UI on both unemployment and infection. More generous UI policies create work disincentives and lead to higher unemployment, but they also reduce infection and save lives. Shutdown policies and infection risk further amplify these effects of UI policies. Quantitatively, the CARES UI policies raise average unemployment by 3.8 percentage points out of a total expected increase of 11 percentage points over April to December 2020 but also reduce cumulative deaths by 4.9 percent. Eligibility expansion and the extra $600 increase in benefit levels are both important for the effects.
    Keywords: COVID-19; CARES Act; unemployment insurance; search and matching
    JEL: J64 J65 E24
    Date: 2020–07–31
  21. By: Böhl, Gregor; Strobel, Felix
    Abstract: Using a nonlinear Bayesian likelihood approach that fully accounts for the lower bound on nominal interest rates, we analyze US post-crisis macroeconomic dynamics and provide reference parameter estimates. We find that despite the attention received in the literature, neither the inclusion of financial frictions nor that of household heterogeneity improves the empirical fit of the standard model or its ability to provide a joint explanation for the post-2007 dynamics. Associated financial shocks mis-predict an increase in consumption. We illustrate that the common practice of omitting the ZLB period in the estimation severely distorts the analysis of the latest economic dynamics.
    Keywords: Zero Lower Bound,Bayesian Estimation,Great Recession,Business Cycles
    JEL: C11 C63 E31 E32 E44
    Date: 2020
  22. By: Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
    Abstract: This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring also financial intermediaries and long-term government debt. The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left to be the “only game in town” after 2013. Individual countries’ DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance.
    Keywords: Fiscal policy;Fiscal stance;Expenditure;Dynamic stochastic general equilibrium models;Financial crises;WP
    Date: 2020–06–05
  23. By: Pedro Bento; Diego Restuccia
    Abstract: The well-documented decline in business dynamism, measured in the literature by the net entry rate of employer firms, has been proposed as an explanation for the productivity growth slowdown in the United States. We assess the role of nonemployers, firms without paid employees, in business dynamism and aggregate productivity. Including nonemployers, the total number of firms has instead increased since the early 1980s, which in the context of a standard model of firm dynamics implies an average annual growth of aggregate productivity of 0.26%, one-quarter of the productivity growth in the data. Accounting for changes in the share of nonemployers and the firm size distribution over time, the increase in the total number of businesses implies an even higher productivity growth of 0.52% annually. The productivity growth slowdown is not due to changes in business dynamism.
    Keywords: nonemployers, employer firms, business dynamism, productivity, TFP.
    JEL: O4 O51 E1
    Date: 2021–01–19
  24. By: Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
    Abstract: The effective lower bound on a short term interest rate may not constrain a central bank's capacity to achieve its objectives if unconventional monetary policy (UMP) is powerful enough. We formalize this `irrelevance hypothesis' using a dynamic stochastic general equilibrium model with UMP and test it empirically for the United States and Japan using a structural vector autoregressive model that includes variables subject to occasionally binding constraints. The hypothesis is strongly rejected for both countries. However, a comparison of the impulse responses to a monetary policy shock across regimes shows that UMP has had strong delayed effects in each country.
    Date: 2020–12
  25. By: Patrick J. Kehoe; Pierlauro Lopez; Virgiliu Midrigan; Elena Pastorino
    Abstract: Although a credit tightening is commonly recognized as a key determinant of the Great Recession, to date, it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Some studies have suggested that the household-side credit channel is quantitatively the most important one. Many others contend that the firm-side channel played a crucial role. We propose a model in which both channels are present and explicitly formalized. Our analysis indicates that the household-side credit channel is quantitatively more relevant than the firm-side credit channel. We then evaluate the relative benefits of a fixed-sized transfer to households and to firms that improves each group's access to credit. We find that the effects of such a transfer on employment are substantially larger when the transfer targets households rather than firms. Hence, we provide theoretical and quantitative support to the view that the employment decline during the Great Recession would have been less severe if instead of focusing on easing firms' access to credit, the government had expended an equal amount of resources to alleviate households' credit constraints.
    JEL: E24 E3 E32 E6 E62 G51 J2 J38 J6 J64
    Date: 2020–12
  26. By: Rumen Kostadinov; Francisco Roldán
    Abstract: We study the optimal design of a disinflation plan by a planner who lacks commitment. Having announced a plan, the Central banker faces a tradeoff between surprise inflation and building reputation, defined as the private sector's belief that the Central bank is committed to the plan. Some plans are harder to sustain: the planner recognizes that paving out future grounds with temptation leads the way for a negative drift of reputation in equilibrium. Plans that successfully create low inflationary expectations balance promises of lower inflation with dynamic incentives that make them more credible. When announcing the disinflation plan, the planner takes into account these anticipated interactions. We find that, even in the zero reputation limit, a gradual disinflation is preferred despite the absence of inflation inertia in the private economy.
    Keywords: Inflation;Inflation targeting;Tax incentives;Disinflation;WP,Phillips curve
    Date: 2020–06–05
  27. By: Carlos Carrillo-Tudela; Andrey Launov; Jean-Marc Robin
    Abstract: In this paper we investigate the recent fall in unemployment, and the rise in part-time work and labour market participation amongst prime-aged Germans. We show that unemployment fell because the Hartz reforms induced a large fraction of the long-term unemployed to deregister as jobseekers. However, labour force participation actually increased because many female non-participants accepted low-paid, part-time jobs. Counterfactual simulations using estimated transition probabilities show that observed changes in the stocks of registered and unregistered unemployment as well as marginal, contributed part-time and full-time employment after 2002 essentially resulted from changes in registered and unregistered unemployment outflows. Yet to obtain the full decrease in registered male unemployment, we need to account for the effect of wage moderation. A calibrated Diamond-Mortensen-Pissarides model suggests that wage moderation is at most half as strong as the unemployment reforms in explaining changes in unemployment, non-participation and part-time employment.
    Keywords: unemployment, part-time work, mini-jobs, non-participation, wage moderation, Hartz reforms
    JEL: J21 J31 J63 J64
    Date: 2020
  28. By: Toshihiko Mukoyama (Department of Economics, Georgetown University)
    Abstract: The allocation after an unanticipated event (often called an "MIT shock") is different from the allocation of a corresponding complete-market model that explicitly considers the possibility of the shock, even when the probability of the event approaches zero.
    Keywords: MIT shock; incomplete markets
    JEL: D52 E32 E60
    Date: 2020–11–16

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