nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒02‒08
29 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Leaning against the bubble. Can theoretical models match the empirical evidence? By Ciccarone, Giuseppe; Giuli, Francesco; Marchetti, Enrico; Tancioni, Massimiliano
  2. Nominal Contracts and the Payment System By Hajime Tomura
  3. Estimating the Effects of Demographics on Interest Rates: A Robust Bayesian Perspective By Paul Ho
  4. Uncertainty and Monetary Policy During Extreme Events By Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano
  5. House Prices, Collateral Effects and Sectoral Output Dynamics in Emerging Market Economies By Berrak Bahadir; Inci Gumus
  6. The "Matthew Effect" and Market Concentration: Search Complementarities and Monopsony Power By Jesús Fernández-Villaverde; Federico S. Mandelman; Yang Yu; Francesco Zanetti
  7. Marital Sorting and Cross-Country Differences in Intergenerational Earnings Persistence By Vera Tolstova
  8. Liquidity Premium, Credit Costs, and Optimal Monetary Policy By Lee, Sukjoon
  9. OPTIMAL CARBON PRICING IN GENERAL EQUILIBRIUM: Temperature caps and stranded assets in an extended annual DSGE model By Frederick van der Ploeg; Armon Rezai
  10. Search and Multiple Jobholding By Etienne Lalé
  11. Bankruptcy Codes and Risk Sharing of Currency Unions By Xuan Wang
  12. Macroeconomic Outcomes in Disaster-Prone Countries By Alessandro Cantelmo; Giovanni Melina; Chris Papageorgiou
  13. Central bank credibility, long-term yields and the effects of monetary integration By Marcin Kolasa; Dominik Supera
  14. Voting on Education and Redistribution Policies in the U.S: Does Endogenous Fertility Matter? By Vera Tolstova
  15. A Requiem for the Fiscal Theory of the Price Level By Roger Farmer; Pawel Zabczyk
  16. A Quantitative Analysis of Female Employment in Senegal By Vivian Malta; Angelica Martinez; Marina Mendes Tavares
  17. Automation Technology, Economic Growth, and Income Distribution in an Economy with Dynasties and Overlapping Generations By Sasaki, Hiroaki
  18. Advancing Inclusive Growth in Cambodia By Niels-Jakob H Hansen; Albe Gjonbalaj
  19. Does It Matter Where You Invest? The Impact of FDI on Domestic Job Creation and Destruction By Ni, Bin; Kato, Hayato; Liu, Yang
  20. A Macroeconomic Model of Healthcare Saturation, Inequality and the Output-Pandemia Tradeoff By Enrique G. Mendoza; Eugenio I. Rojas; Linda L. Tesar; Jing Zhang
  21. Quality of life in a dynamic spatial model By Gabriel M. Ahlfeldt; Fabian Bald; Duncan Roth; Tobias Seidel
  22. Entry Costs and the Macroeconomy By Germán Gutiérrez; Callum Jones; Thomas Philippon
  23. Trade and Informality in the Presence of Labor Market Frictions and Regulations By Dix-Carneiro, Rafael; Goldberg, Pinelopi Koujianou; Meghir, Costas; Ulyssea, Gabriel
  24. Macroeconomic Effects of Reforms on Three Diverse Oil Exporters: Russia, Saudi Arabia, and the UK By Samya Beidas-Strom; Marco Lorusso
  25. Crisis Propagation in a Heterogeneous Self-Reflexive DSGE Model By Federico Guglielmo Morelli; Michael Benzaquen; Jean-Philippe Bouchaud; Marco Tarzia
  26. A Model of Bank-Note Runs By Hajime Tomura
  27. COVID-19 Misperception and Macroeconomy By Masashige Hamano; Munechika Katayama; So Kubota
  28. On the heterogeneous impacts of the COVID-19 lockdown on US unemployment By Malak Kandoussi; François Langot
  29. Secular Stagnation and Low Interest Rates under the Fear of a Government Debt Crisis By Keiichiro KOBAYASHI; Kozo Ueda

  1. By: Ciccarone, Giuseppe; Giuli, Francesco; Marchetti, Enrico; Tancioni, Massimiliano
    Abstract: By estimating a Markov-switching model, we provide new evidence on the nonlinear effects of monetary policy shocks on asset prices and on their bubble component. We show that regime-dependence is mainly driven by the states affecting the interest rate equation. We also show that, following a positive interest rate shock, an OLG model of asset price bubbles with credit frictions and sticky prices may predict an increase in the real rate, a recession/deflation and an increase in the bubble value. This result, which is new to the theoretical literature, matches both the previously existing and our empirical evidence.
    Keywords: Asset price bubbles; monetary policy; overlapping generations models.
    JEL: E13 E32 E44 E52 G12
    Date: 2020–12–08
  2. By: Hajime Tomura (Faculty of Political Science and Economics, Waseda University)
    Abstract: This paper introduces into an overlapping generations model the courts inability to distinguish different qualities of goods of the same kind. Given the recognizability of fiat money for the court, this friction leads to the use of nominal debt contracts as well as the use of fiat money as a means of payment in the goods market. This result holds without dynamic inefficiency or lack of double coincidence of wants. Instead, money is necessary because it is essential for credit. However, there can occur a shortage of real money balances for liability settlements, even if the money supply follows a Friedman rule. This problem can be resolved if the central bank can lend fiat money to agents elastically at a zero intraday interest rate within each period. Given the economy being dynamically efficient, this policy makes the money supply cease to be the nominal anchor for the price level. In this case, the monetary steady state becomes compatible with other nominal anchors than the money supply.
    Keywords: Nominal contract; Discount window; Trade credit; Cashless economy; Payment system; Legal tender
    JEL: E42 E51 E58
    Date: 2020–03
  3. By: Paul Ho
    Abstract: There are a vast range of estimates for the effect of demographics on interest rates. I show that these magnitudes are not well-identified without data on capital and life-cycle consumption. However, these data are often omitted. Using nonparametric prior sensitivity analysis for an overlapping generations model estimated through Bayesian methods, I show that without these data, small changes in the prior for the discount rate, intertemporal elasticity of substitution, and capital depreciation rate can shift the posterior quantiles for the effects of demographics by up to 1.5 percentage points. Data on the capital-output ratio and life-cycle consumption tighten identification.
    Keywords: Interest rates; Bayesian methods; Discount rates
    Date: 2020–10–07
  4. By: Giovanni Pellegrino (Aarhus University); Efrem Castelnuovo (University of Melbourne and University of Padova); Giovanni Caggiano (Monash University and University of Padova)
    Abstract: How damaging are uncertainty shocks during extreme events such as the great recession and the Covid-19 outbreak? Can monetary policy limit output losses in such situations? We use a nonlinear VAR framework to document the large response of real activity to a financial uncertainty shock during the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We employ the DSGE model to quantify the impact on real activity of an uncertainty shock under different Taylor rules estimated with normal times vs. great recession data (the latter associated with a stronger response to output). We find that the uncertainty shock-induced output loss experienced during the 2007-09 recession could have been twice as large if policymakers had not responded aggressively to the abrupt drop in output in 2008Q3. Finally, we use our estimated DSGE framework to simulate different paths of uncertainty associated to different hypothesis on the evolution of the coronavirus pandemic. We find that: i) Covid-19-induced uncertainty could lead to an output loss twice as large as that of the great recession; ii) aggressive monetary policy moves could reduce such loss by about 50%.
    Keywords: Uncertainty shock, nonlinear IVAR, nonlinear DSGE framework, minimum-distance estimation, great recession, Covid-19
    JEL: C22 E32 E52
    Date: 2020–08
  5. By: Berrak Bahadir (Department of Economics, Florida International University); Inci Gumus (Faculty of Arts and Social Sciences, Sabanci University)
    Abstract: This paper studies the channels through which house prices affect sectoral output in emerging market economies, focusing on the role of collateral and borrowing dynamics. We first show that relative to the tradable sector, nontradable sector output is more strongly correlated with house prices and its response to a house price shock in a Panel VAR is larger for a sample of emerging market economies. Then, we study the model dynamics generated by shocks to housing demand in a two-sector small open economy real business cycle model. The results show that housing demand shocks lead to a sectoral reallocation by inducing an expansion in the nontradable sector and a contraction in the tradable sector. The model successfully generates the comovement between the cycle and house prices, matching the strong positive correlation of house prices and nontradable output. We also study the importance of collateral effects for the model dynamics and show that the collateral channel is key to generating the correlations between house prices and sectoral output observed in the data.
    Keywords: House Prices, Collateral Effects, Housing Demand Shocks, Sectoral Output
    JEL: E32 E44 F34 F41
    Date: 2021–01
  6. By: Jesús Fernández-Villaverde; Federico S. Mandelman; Yang Yu; Francesco Zanetti
    Abstract: This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing the output share of high-productivity firms. The combination of search complementarities and monopsony power induce a strong "Matthew effect" that endogenously generates superstar firms out of uniform idiosyncratic productivity distributions. Reductions in search costs increase market concentration, lower the labor income share, and increase wage inequality. The model also transforms short-lived negative aggregate shocks into persistent recessions that heighten market concentration.
    Keywords: market concentration; superstar firms; search complementarities; monopsony power in the labor market
    JEL: C63 C68 E32 E37 E44 G12
    Date: 2021–01–15
  7. By: Vera Tolstova
    Abstract: In a real economy, decisions on investments in child human capital of children are made by families rather than by atomistic parents as is typically assumed in the literature. This paper incorporates family formation into an otherwise standard dynastic framework with human capital accumulation. The study finds that accounting for differences in taxation and education policies between the U.S. and 10 OECD countries is sufficient to replicate cross-country variations in the degree of assortative matching and its positive correlation with the persistence of intergenerational earnings. Positive assortative matching is crucial to a model’s ability to generate realistic levels of intergenerational earnings correlation observed in the data.
    Keywords: marital sorting; intergenerational earnings persistence; taxation; education subsidies;
    JEL: E62 H31 H52 I24 J12 J62
    Date: 2021–01
  8. By: Lee, Sukjoon
    Abstract: I study how monetary policy affects firms' external financing decisions. More precisely, I study the transmission mechanism of monetary policy to credit costs in a general equilibrium macroeconomic model where firms issue corporate bonds or obtain bank loans, and corporate bonds are not just stores of value but also serve a liquidity role. The model shows that an increase in the nominal policy rate can lower the borrowing cost in the corporate bond market, while increasing that in the bank loan market, and I provide empirical evidence that supports this result. The model also predicts that a higher nominal policy rate induces firms to substitute corporate bonds for bank loans, which is supported by the existing empirical evidence. In the model, the Friedman rule is suboptimal so that keeping the cost of holding liquidity at a positive level is socially optimal. The optimal policy rate is an increasing function of the degree of corporate bond liquidity.
    Keywords: Corporate Finance; Credit Cost; Bank Loan; Corporate Bond; Liquidity Premium; Monetary Policy
    JEL: E43 E44 E51 E52 G12 G21
    Date: 2020–11–15
  9. By: Frederick van der Ploeg; Armon Rezai
    Abstract: The general equilibrium model developed by Golosov et al. (2014), GHKT for short, is modified to allow for additional negative impacts of global warming on utility and productivity growth, mean reversion in the ratio of climate damages to production, labour-augmenting technical progress, and population growth. We also replace the GHKT assumption of full depreciation of capital each decade by annual logarithmic depreciation. Furthermore, we allow the government to use a lower discount rate than the private sector. We derive a tractable rule for the optimal carbon price for each of these extensions. We then simplify the GHKT model by modelling temperature as cumulative emissions and calibrating it to Burke et al. (2015) damages. Finally, we consider how the rule for the optimal carbon price must be modified to allow for a temperature cap, and what this implies for stranded oil and gas reserves. We illustrate our analytical results with a range of optimal policy simulations.
    Keywords: carbon price, tractable rule, general equilibrium, utility and growth damages, technical progress, population growth, logarithmic depreciation, differential discount rates, temperature cap, stranded oil and gas reserves
    JEL: H21 Q51 Q54
    Date: 2021–01–27
  10. By: Etienne Lalé (Universite du Quebec a Montreal)
    Abstract: A search-theoretic model of the labor market with idiosyncratic fluctuations in hours worked, search both off- and on-the-job, and multiple jobholding is developed. Taking on a second job entails a commitment to hold onto the primary employer, enabling the worker to use the primary job as her outside option to bargain with the secondary employer. The model performs well at explaining multiple jobholding inflows and outflows, and it is informative for understanding the secular decline in multiple jobholding. While some worry that this decline heralds a less-flexible labor market, the model reveals that it has contributed to reducing search frictions.
    Keywords: Multiple jobholding, Employment, Hours worked, Job search
    JEL: E24 J21 J62
    Date: 2019–04
  11. By: Xuan Wang (Vrije Universiteit Amsterdam)
    Abstract: Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative mechanism to improve the financial stability and welfare of a currency union. When domestic credit risks are present, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the financial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.
    Keywords: Equilibrium default, bankruptcy code, fiscal union, capital markets union, financial stability, bank credit and inside money, price-level and exchange rate determinacy, liquidity-intermediary asset pricing
    JEL: E42 F33 G15 G21
    Date: 2021–01–21
  12. By: Alessandro Cantelmo; Giovanni Melina; Chris Papageorgiou
    Abstract: Using a dynamic stochastic general equilibrium model, we study the channels through which natural disaster shocks affect macroeconomic outcomes and welfare in disaster-prone countries. We solve the model using Taylor projection, a solution method that is shown to deal effectively with high-impact weather shocks calibrated in accordance to empirical evidence. We find large and persistent effects of weather shocks that significantly impact the income convergence path of disaster-prone countries. Relative to non-disaster-prone countries, on average, these shocks cause a welfare loss equivalent to a permanent fall in consumption of 1.6 percent. Welfare gains to countries that self-finance investments in resilient public infrastructure are found to be negligible, and international aid has to be sizable to achieve significant welfare gains. In addition, it is more cost-effective for donors to contribute to the financing of resilience before the realization of disasters, rather than disbursing aid after their realization.
    Keywords: Natural disasters;Public debt;Climate change;Consumption;Private investment;WP,depreciation rate,math display
    Date: 2019–10–11
  13. By: Marcin Kolasa; Dominik Supera
    Abstract: Forming a monetary union implies equalization of short-term interest rates across the member states as monetary policy is delegated to a common central bank, but also leads to integration of risk-free bond markets. In this paper we develop a quantitative open economy model where long-term bond yields matter for real allocations. We next use the model to shed light on the macroeconomic effects of convergence in bond prices within a currency union. Our focus is on a small open economy, where the pre-accession level of interest rates is high due to floating exchange rate and relatively low central bank focus on stabilizing inflation. We find that, from the perspective of social welfare in the country adopting a common currency, the benefits associated with lower long-term yields can outweigh the costs related to a loss of monetary independence.
    Keywords: monetary integration, bond yields, central bank credibility
    JEL: E30 E43 E44 E52 F45
    Date: 2021–01
  14. By: Vera Tolstova
    Abstract: This paper studies a politico-economic dynamic general equilibrium model to quantify the importance of endogenous fertility in explaining the generosity of redistribution and education policies in the U.S. Policies are endogenised as outcomes of majority voting. I find that accounting for endogenous fertility is essential for strong performance of the model in matching the levels of both transfers and education subsidies in the U.S. economy. The predictions of the model regarding a cross-section of U.S. states are used to verify the plausibility of fertility decision responses to policies and, consequently, to support the credibility of this result.
    Keywords: voting; endogenous fertility; redistribution; education;
    JEL: D72 E62 H52 I24 I38 J13
    Date: 2021–01
  15. By: Roger Farmer; Pawel Zabczyk
    Abstract: The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
    Keywords: Real interest rates;Fiscal policy;Public debt;Overlapping generations models;Negative interest rates;WP,price level
    Date: 2019–10–11
  16. By: Vivian Malta; Angelica Martinez; Marina Mendes Tavares
    Abstract: Female-to-male employment in Senegal increased by 14 percentage points between 2006 and 2011. During the same period years of education of the working age population increased 27 percent for females and 13 percent for males, reducing gender gaps in education. In this paper, we quantitatively investigate the impact of this increase in education on female employment in Senegal. To that end, we build an overlapping generations model that captures barriers that women face over their life-cycle. Our main findings are: (i) the improvement in years of education can explain up to 44 percent of the observed increased in female-to-male employment ratio and (ii) the rest can be explained by a decline in the discrimination against women in the labor market.
    Keywords: Education;Women;Gender diversity;Labor markets;Labor;WP,production function
    Date: 2019–11–08
  17. By: Sasaki, Hiroaki
    Abstract: This study presents a growth model with automation technology that considers two classes (workers and capitalists) who conduct dynamic optimization in different manners. In addition to two production factors, labor and traditional capital, automation capital is included as the third production factor. Long-run dynamics of input ratios of production factors, income distribution, and per capita output growth are investigated. Regardless of the size of workers' discount factor, workers' own traditional capital has no transitional dynamics and stays constant. When capitalists' discount factor is large, in the long run, the growth rate of per capita output is positive and constant: endogenous growth is obtained. In this case, income gap between workers and capitalists continues to increase through time. When capitalists discount factor is small, two different cases appear. First, when the initial value of traditional capital is large, both capitalists' own traditional capital and automation capital converges to constant values. In this case, income gap between workers and capitalists converges to a constant value. Second, when the initial value of traditional capital is small, capitalists' own traditional capital converges to a constant value while capitalists' own automation capital approaches zero. In this case, income gap between workers and capitalists converges to a constant value. When automation capital becomes zero, after then, the dynamical system switches to a dynamical system without automation capital.
    Keywords: automation technology; endogenous growth; income distribution
    JEL: E25 O11 O33 O41
    Date: 2021–01–21
  18. By: Niels-Jakob H Hansen; Albe Gjonbalaj
    Abstract: We evaluate the impact of fiscal reforms on growth and inequality in Cambodia using a calibrated general equilibrium model with heterogeneous agents (Peralta-Alva et al., 2018). Over the last two decades, Cambodia’s consumption inequality and poverty have declined. However, income inequality is higher, and large gaps remain between urban and rural residents. At the same time, domestic revenue mobilization has improved substantially, but collection of tax revenue is biased towards non-progressive sources. We use the model to evaluate the growth and inequality impact of reforms that increase infrastructure spending by raising (i) VAT, (ii) property tax, or (iii) personal income tax. We find that using property taxes delivers the largest increase in GDP and reduction in inequality. Reaping the gains from property taxation will however require additional investments in tax administration.
    Keywords: Income;Personal income;Consumption;Income inequality;Income distribution;WP,GDP,Gini coefficient,property taxation
    Date: 2019–09–06
  19. By: Ni, Bin; Kato, Hayato; Liu, Yang
    Abstract: This study uses unique division-level data of Japanese firms to examine how foreign direct investment (FDI) affects domestic employment. Contrary to most previous studies focusing on the effect on net employment growth, we decompose it into gross job creation and gross job destruction. We find that FDI destination plays an important role: FDI to Asia increases job creation, while FDI to Europe or North America decreases it. A frictional search-and-matching model with heterogeneous jobs can explain the differential effects. The model provides additional predictions on job creation and destruction by job type, which are also empirically confirmed.
    Keywords: Outward FDI, firm-establishment-division-level data, multinational enterprises (MNEs), large-firm search model, high/low-skilled jobs
    JEL: F23 J21 J23
    Date: 2021–01–25
  20. By: Enrique G. Mendoza; Eugenio I. Rojas; Linda L. Tesar; Jing Zhang
    Abstract: COVID-19 became a global health emergency when it threatened the catastrophic collapse of health systems worldwide. Its particular mix of rapid spread and severity caused demand for health goods and services and their relative prices to surge, unlike other diseases that are deadlier (e.g. Ebola, MERS) or just as contagious but less severe (e.g. Influenza, H1N1). Governments responded with prolonged lockdowns that caused large drops in economic activity. Empirical evidence shows that lockdowns and healthcare saturation explain a sizable fraction of cross-country variation in observed GDP drops even after controlling for COVID cases and mortality. We explain this output-pandemia tradeoff as resulting from a shock to the Stone-Geary subsistence level of health that is larger at higher levels of capital utilization in a model with capitalists and workers. A health system’s degree of saturation is the gap between supply and subsistence levels. The tradeoff is non-linear, with sharply larger welfare costs as lockdowns or healthcare saturation tighten. An externality distorts utilization, because firms do not internalize that lower utilization relaxes healthcare saturation. Optimal lockdowns remove it, but small deviations leave health systems closer to saturation or impose large output costs. Inequality worsens markedly with pandemias, increases sharply their welfare costs, and makes large transfers to workers optimal.
    JEL: E3 E6 F44 I28
    Date: 2020–12
  21. By: Gabriel M. Ahlfeldt; Fabian Bald; Duncan Roth; Tobias Seidel
    Abstract: We develop a dynamic spatial model in which heterogeneous workers are imperfectly mobile and forward-looking and yet all structural fundamentals can be inverted without assuming that the economy is in a stationary spatial equilibrium. Exploiting this novel feature of the model, we show that the canonical spatial equilibrium framework understates spatial quality of-life differentials, the urban quality-of-life premium and the value of local non-marketed goods. Unlike the canonical spatial equilibrium framework, the model quantitatively accounts for local welfare effects that motivate many place-based policies seeking to improve quality of life.
    Keywords: Covid-19, dynamic, housing, migration, rents, pollution, productivity, spatial equilibrium, quality of life, wages, welfare, economic geography, productivity, wages, wellbeing
    JEL: J2 J3 R2 R3 R5
    Date: 2020–12
  22. By: Germán Gutiérrez; Callum Jones; Thomas Philippon
    Abstract: We combine a structural model with cross-sectional micro data to identify the causes and consequences of rising concentration in the US economy. Using asset prices and industry data, we estimate realized and anticipated shocks that drive entry and concentration. We validate our approach by showing that the model-implied entry shocks correlate with independently constructed measures of entry regulations and M&As. We conclude that entry costs have risen in the U.S. over the past 20 years and have depressed capital and consumption by about seven percent.
    Keywords: Zero lower bound;Consumption;Corporate sector;Competition;Stocks;WP,concentration ratio,fed funds rate,time series
    Date: 2019–11–01
  23. By: Dix-Carneiro, Rafael (Duke University); Goldberg, Pinelopi Koujianou (Yale University); Meghir, Costas (Yale University); Ulyssea, Gabriel (University College London)
    Abstract: We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an "unemployment," but not a "welfare buffer" in the event of negative economic shocks.
    Keywords: regulations, trade, informality, labor market frictions
    JEL: F14 F16 J46 O17
    Date: 2021–01
  24. By: Samya Beidas-Strom; Marco Lorusso
    Abstract: We build and estimate open economy two-bloc DSGE models to study the transmission and impact of shocks in Russia, Saudi Arabia and the United Kingdom. After accounting for country-specific fiscal and monetary sectors, we estimate their key policy and structural parameters. Our findings suggest that not only has output responded differently to shocks due to differing levels of diversification and structural and policy settings, but also the responses to fiscal consolidation differ: Russia would benefit from a smaller state foot-print, while in Saudi Arabia, unless this is accompanied by structural reforms that remove rigidities, output would fall. We also find that lower oil prices need not be bad news given more oil-intensive production structures. However, lower oil prices have hurt these oil producers as their public finances depend heavily on oil, among other factors. Productivity gains accompanied by ambitious structural reforms, along with fiscal and monetary reforms could support these economies to achieve better outcomes when oil prices fall, including via diversifying exports.
    Keywords: Oil prices;Labor;Oil;Consumption;Oil, gas and mining taxes;WP,exchange rate,monetary policy,trade balance,labour market
    Date: 2019–10–11
  25. By: Federico Guglielmo Morelli; Michael Benzaquen; Jean-Philippe Bouchaud; Marco Tarzia
    Abstract: We study a self-reflexive DSGE model with heterogeneous households, aimed at characterising the impact of economic recessions on the different strata of the society. Our framework allows to analyse the combined effect of income inequalities and confidence feedback mediated by heterogeneous social networks. By varying the parameters of the model, we find different crisis typologies: loss of confidence may propagate mostly within high income households, or mostly within low income households, with a rather sharp crossover between the two. We find that crises are more severe for segregated networks (where confidence feedback is essentially mediated between agents of the same social class), for which cascading contagion effects are stronger. For the same reason, larger income inequalities tend to reduce, in our model, the probability of global crises. Finally, we are able to reproduce a perhaps counter-intuitive empirical finding: in countries with higher Gini coefficients, the consumption of the lowest income households tends to drop less than that of the highest incomes in crisis times.
    Date: 2021–01
  26. By: Hajime Tomura (Faculty of Political Science and Economics, Waseda University)
    Abstract: This paper presents a three-period model to endogenize the need for bank notes given the availability of trade credit. The model shows that banks can improve risk sharing in the economy by discounting commercial bills to issue bank notes, because bank notes can serve as payment instruments backed by a diversified pool of commercial bills issued by payers. This characteristic of bank notes, however, can cause a self-fulfilling mass refusal of bank notes by payees due to endogenous default on commercial bills. This result holds even if bank notes are not redeemable on demand before maturity. The model shows that a capital requirement is not sufficient for preventing a self-fulfilling mass refusal of bank notes, while a reserve requirement is.
    Keywords: Bank notes; Trade credit; Commercial bills; Bank run; Reserves; Payment system
    JEL: E42 G21
    Date: 2020–03
  27. By: Masashige Hamano (Waseda University); Munechika Katayama (Waseda University); So Kubota (Waseda University)
    Abstract: Uncertainty about the true state of the COVID-19 pandemic has caused substantial difficulty in economic activities and policymaking. How does the uncertainty affect the macroeconomy and infections? What are the policy implications? To answer these questions, this paper presents a model that incorporates people's misperception about the current COVID-19 spread in the market. Our baseline model shows that underestimation about the number of infections reduces the social welfare due to worsening the externality of economic activities on virus transmissions while overestimation improves it to some extent. In an extended model with limited medical resources, we show that a slight breakdown of the medical system can mitigate the underestimation of the risk of being infected. We also consider the quarantine policy that limits both infections and the fall in economic activities for various degrees of misperception. Finally, affecting the extent of misperception about the spread is shown to be an effective policy tool that substitutes proposed containment policies in the literature.
    Keywords: COVID-19, imperfect information, SIR-macro
    JEL: E1 I1 H0
    Date: 2020–11
  28. By: Malak Kandoussi; François Langot
    Date: 2021
  29. By: Keiichiro KOBAYASHI; Kozo Ueda
    Abstract: In this study, we explain the driving forces behind the secular stagnation associated with a persistent decrease in interest rates by employing a model that incorporates a crisis risk triggered by government debt accumulation. The model shows that fear of large-scale capital taxation and capital misallocation in future debt crises accounts for almost half the economic slowdown in Japan over the past two decades. Over the same period, the government bond yield declines, because a decrease in the expected returns on capital makes investing in government bonds more attractive than investing in capital.
    Date: 2020–11

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