nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒04‒05
24 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Occasionally Binding Constraints in Large Models: A Review of Solution Methods By Jonathan Swarbrick
  2. Stochastic Earnings Growth and Equilibrium Wealth Distributions By Thomas J. Sargent; Neng Wang; Jinqiang Yang
  3. Structural Changes in Investment and the Waning Power of Monetary Policy By Bloesch, Justin; Weber, Jacob P.
  4. Intergenerational redistributive effects of monetary policy By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  5. Multiple credit constraints and timevarying macroeconomic dynamics By Ingholt, Marcus Mølbak
  6. Technical progress and involuntary unemployment under deflation with real balance effect and fiscal policy for full-employment By Tanaka, Yasuhito
  7. Globalization, Trade Imbalances, and Labor Market Adjustment. By Rafael Dix-Carneiro; João Paulo Pessoa; Ricardo Reyes-Heroles; Sharon Traiberman
  8. Uncertainty and Monetary Policy during the Great Recession By Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano
  9. Imperfect Exchange Rate Pass-through: Empirical Evidence and Monetary Policy Implications By Maryam Mirfatah; Vasco J. Gabriel; Paul Levine
  10. Hiring Stimulus and Precautionary Savings in a Liquidity Trap By Rubén Domínguez Díaz
  11. Cross-Country Unemployment Insurance, Transfers, and Trade-Offs in International Risk Sharing By Zeno Enders; David A. Vespermann
  12. The interaction of forward guidance in a two-country new Keynesian model By Ida, Daisuke; Iiboshi, Hirokuni
  13. Ambiguous business cycles: a quantitative assessment By Sumru Altug; Fabrice Collard; Cem Çakmaklı; Sujoy Mukerji; Han Özsöylev
  14. Equilibrium Foreign Currency Mortgages By Marcin Kolasa
  15. Credit Cycles, Fiscal Policy, and Global Imbalances By Callum Jones; Pau Rabanal
  16. Labor share and income distribution: Size of the cake or the cake portion? By Anelí Bongers; Benedetto Molinari; José L. Torres
  17. Why Are Fiscal Multipliers Moderate Even Under Monetary Accommodation? By Christian Bredemeier; Falko Juessen; Andreas Schabert
  18. Solving Heterogeneous General Equilibrium Economic Models with Deep Reinforcement Learning By Edward Hill; Marco Bardoscia; Arthur Turrell
  19. Optimal Lockdown in an Epidemiological-Macroeconomic Model By Paul Levine; Neil Rickman
  20. SIR Economic Epidemiological Models with Disease Induced Mortality By Aditya Goenka; Lin Liu; Manh-Hung Nguyen
  21. Financial and Total Wealth Inequality with Declining Interest Rates By Daniel L. Greenwald; Matteo Leombroni; Hanno Lustig; Stijn Van Nieuwerburgh
  22. Barriers to Black Entrepreneurship: Implications for Welfare and Aggregate Output over Time By Pedro Bento; Sunju Hwang
  23. Macroeconomic Dynamics and Reallocation in an Epidemic: Evaluating the "Swedish Solution" By Dirk Krueger; Harald Uhlig; Taojun Xie
  24. Optimal Renewable Resource Harvesting model using price and biomass stochastic variations: A Utility Based Approach By Gaston Clément Nyassoke Titi; Jules Sadefo Kamdem; Louis Aimé Fono; Nyassoke Titi; Gaston Clément; Sadefo Kamdem; Louis Fono

  1. By: Jonathan Swarbrick
    Abstract: This practical review assesses several approaches to solving medium- and large-scale dynamic stochastic general equilibrium (DSGE) models featuring occasionally binding constraints. In such models, global solution methods are not possible because of the curse of dimensionality. This causes the modeller to look elsewhere for methods that can handle the significant non-linearities and non-differentiable functions that inequality constraints represent. The paper discusses methods—including Newton-type solvers under perfect foresight, the piecewise linear algorithm (OccBin), regime-switching models (RISE) and the news shocks approach (DynareOBC)—and compares the results from a simple borrowing constraints model obtained using projection methods, providing example MATLAB code. The study focuses on the news shocks method, which I find produces higher accuracy than other methods and allows the modeller to study multiple equilibria and determinacy issues.
    Keywords: Business fluctuations and cycles; Economic models
    JEL: C6
  2. By: Thomas J. Sargent; Neng Wang; Jinqiang Yang
    Abstract: The cross-section distribution of U.S. wealth is more skewed than the distribution of labor earnings. Stachurski and Toda (2019) explain how plain vanilla Bewley-Aiyagari-Huggett (BAH) models with infinitely lived agents can't generate that pattern because an equilibrium risk-free rate is lower than the time rate of preference and each person's wealth process is stationary. We provide two modifications of a BAH model that generate this pattern: (1) overlapping generations of agents who have low wealth at birth and pass through N life-stage transitions of stochastic lengths, and (2) labor-earnings processes that exhibit stochastic growth. With only a few parameters such a model can well approximate mappings from the Lorenz curve and Gini coefficient for cross-sections of labor earnings to their counterparts for cross sections of wealth. Three forces amplify inequality in wealth relative to inequality in labor-earnings: stochastic life-stage transitions; a precautionary savings motive for high wage earners that is especially strong after they receive positive permanent earnings shocks; and an energetic life-cycle saving motive for agents who have low wealth at birth. An equilibrium risk-free interest rate that exceeds a time preference rate fosters a fat-tailed wealth distribution.
    JEL: D14 D31 E21
    Date: 2021–03
  3. By: Bloesch, Justin; Weber, Jacob P.
    Abstract: We argue that secular change in both the production and composition of investment goods has weakened private investment's role in the transmission of monetary policy to labor earnings and consumption. We show analytically that fluctuations in the production of investment goods amplify the response of consumption to monetary policy shocks by varying labor income for hand-to-mouth agents. We document three secular changes that weaken this channel: (i) labor's share of value added in investment goods production has declined, (ii) the import share of investment goods has risen, and (iii) the composition of investment has shifted towards components that are less responsive to monetary policy. A small open economy, two agent New Keynesian model calibrated to match these facts implies a 38% and 26% weaker response of labor income and aggregate consumption, respectively, to real interest rate shocks in a 2010's economy relative to a 1960's economy.
    Date: 2021–03–22
  4. By: Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw; Narodowy Bank Polski); Michał Brzoza-Brzezina (SGH Warsaw School of Economics; Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics)
    Abstract: This paper investigates the distributional consequences of monetary policy across generations. We use a life-cycle model with a rich asset structure as well as nominal and real rigidities calibrated to the euro area using both macroeconomic aggregates and microeconomic evidence from the Household Finance and Consumption Survey. We show that the life-cycle profiles of income and asset accumulation decisions are important determinants of redistributive effects of monetary shocks and ignoring them can lead to highly misleading conclusions. The redistribution is mainly driven by nominal assets and labor income, less by real and housing assets. Overall, we find that a typical monetary policy easing redistributes welfare from older to younger generations.
    Keywords: monetary policy, life-cycle models, wealth redistribution
    JEL: E31 E52 J11
    Date: 2021
  5. By: Ingholt, Marcus Mølbak
    Abstract: I explore the macroeconomic implications of borrowers facing both loan-to-value (LTV) and debt-service-to-income (DTI) limits, using an estimated DSGE model. I identify when each constraint dominated over the period 1984-2019: LTV constraints dominate in contractions, when house prices are relatively low – and DTI constraints dominate in expansions, when interest rates are relatively high. I also find that DTI standards were relaxed during the mid-2000s’ boom, and that lower DTI limits or higher interest rates, but not lower LTV limits, would have prevented the boom. Finally, county panel data attest to multiple credit constraints as a source of nonlinear dynamics.
    Keywords: multiple credit constraints, nonlinear estimation of DSGE models, state-dependent credit origination
    JEL: C33 D58 E32 E44
    Date: 2020–08–28
  6. By: Tanaka, Yasuhito
    Abstract: We study the steady state with involuntary unemployment and fiscal policy to realize full-employment in a situation with technical progress. Under involuntary unemployment the nominal wage rate may decline. Then, the prices of the goods also decline, and the real balance effects work. In a three-generations OLG model of this paper consumptions in the childhood period are financed by borrowing money from the previous generation consumers, and these debts must be repaid in the next period. In such a model there may exist positive or negative real balance effect of decline of the nominal wage rate and the prices. Among others we show the following results. If the deflation (nominal wage rate decline) rate is equal to the technical progress rate, in order to maintain a steady state with constant employment a balanced budget is required. If the deflation rate is smaller than the technical progress rate and there exists a positive (or negative) real balance effect, in order to maintain a steady state with constant employment a budget deficit (surplus) is required. Also we show that fiscal policy to realize full-employment usually requires larger budget deficit. These budget deficits, including those for maintaining full-employment, should be financed by seigniorage not by public debt. If they are financed by public debts, they do not have to be repaid. Conversely, the budget surplus in some cases should not be returned to consumers as tax reduction.
    Keywords: Involuntary unemployment, Three-periods overlapping generations model, Technical progress, Deflation, Real balance effect.
    JEL: E14 E24
    Date: 2021–03–19
  7. By: Rafael Dix-Carneiro (Duke University and NBER); João Paulo Pessoa (São Paulo School of Economics); Ricardo Reyes-Heroles (Federal Reserve Board); Sharon Traiberman (New York University)
    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, multicountry, multisector model of trade with two key ingredients: 1) consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances, and 2) 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 intertemporal 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 U.S. enjoys a 2.2 percent gain in response to globalization shocks. These gains would have been 73 percent larger in the absence of the global savings glut, but they would have been 40 percent smaller in a balanced-trade world.
    Keywords: Globalization, Trade Imbalances, Labor Markets, Unemployment
    JEL: F16
    Date: 2021–03
  8. By: Giovanni Pellegrino (Department of Economics and Business Economics, Aarhus University); Efrem Castelnuovo (University of Padova); Giovanni Caggiano (Monash University and University of Padova)
    Abstract: We employ a nonlinear VAR framework and a state-of-the-art identification strategy to document the large response of real activity to a financial uncertainty shock during and in the aftermath of the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We then use the estimated framework to quantify the output loss due to the large uncertainty shock that materialized in 2008Q3. We find such a shock to be able to explain about 60% of the output loss in the 2008-2014 period. The same estimated model unveils the role successfully played by the Federal Reserve in limiting the output loss that would otherwise have occurred had monetary policy been conducted as in normal times. Finally, we show that the rule estimated during the great recession is able to deliver an economic outcome closer to the flexible price one than the rule describing the Federal Reserve’s conduct in normal times.
    Keywords: Uncertainty shock, nonlinear IVAR, nonlinear DSGE framework, minimum-distance estimation, great recession
    JEL: C22 E32 E52
    Date: 2021–03–26
  9. By: Maryam Mirfatah (University of Surrey and CIMS); Vasco J. Gabriel (University of Surrey and NIPE-UM); Paul Levine (University of Surrey and CIMS)
    Abstract: We construct a small open economy (SOE) DSGE model interacting with the rest of the world (ROW). We depart from the standard SOE model along several dimensions. Firstly, we nest two different pricing paradigms: local currency pricing (LCP) alongside producer currency pricing (PCP). Second, the production function incorporates capital and intermediate inputs produced domestically and abroad. Finally, international asset markets are incomplete. Using US and Canadian data, we explore the empirical evidence for PCP vs LCP pricing paradigms through a Bayesian estimation likelihood race and a comparison with the second moments of the data. We then examine the implications of these two paradigms for the conduct of monetary policy using optimized Taylor-type inertial interest rate rules with a zero lower bound constraint. The main results are: first, in a likelihood race LCP easily beats PCP and fits reasonably the second moments of the data; second, whereas for the closed economy ROW the price-level rule closely mimics the optimized general inflation-output rule, for the SOE the corresponding result requires a nominal income rule.
    Date: 2021–03
  10. By: Rubén Domínguez Díaz (University of Bonn, Institute for Macroeconomics and Econometrics)
    Abstract: This paper assesses the ability of hiring subsidies to stimulate employment. I build a New Keynesian model with equilibrium unemployment and incomplete markets. Quantitatively, I find that an increase in hiring subsidies reduces unemployment more at the zero lower bound than it does during normal times. Central to this result is a precautionary savings channel. By stimulating labor demand, hiring subsidies reduce unemployment risk and precautionary savings. This increases the demand for consumption goods and generates inflationary pressures. At the zero lower bound, higher inflation expectations reduce the real interest rate, further stimulating consumption and hence amplifying the hiring stimulus.
    Keywords: Unemployment risk, precautionary savings, hiring subsidies, zero lower bound
    JEL: E62 E21 E52
    Date: 2021–03
  11. By: Zeno Enders; David A. Vespermann
    Abstract: We assess to which degree an international transfer mechanism can enhance consumption risk sharing as well as allocative efficiency and apply our results to the implicit transfers generated by a potential European unemployment benefit scheme (EUBS). Specifically, we first develop a simple model with nominal rigidities to build intuition by deriving analytical results. We then use a rich DSGE model, calibrated to the Core and the Periphery of the euro area, to quantitatively analyze the changing dynamics that a EUBS brings about. We find that a EUBS can provide risk sharing by stabilizing relative consumption as well as unemployment differentials. Following supply shocks, however, the cross-country transfer embodied in the unemployment benefits is spent to a large degree on relatively inefficiently produced goods in the receiving countries. This renders the allocation even more inefficient by opening country-specific labor wedges further, also after government-spending shocks. Yet, since this trade-off between allocative efficiency and consumption risk sharing does not exist after certain demand shocks, the welfare effects of a EUBS depend on the cause for international unemployment differentials. A EUBS that is only active after specific shocks would therefore maximize overall welfare. Even without this feature, a EUBS would raise Core’s welfare in the quantitative model, leaving Periphery’s welfare almost unchanged.
    Keywords: cross-country transfers, international unemployment insurance, EMU European business cycles, optimum currency area, structural reforms
    JEL: F45 F44 E32
    Date: 2021
  12. By: Ida, Daisuke; Iiboshi, Hirokuni
    Abstract: Using the method of Haberis and Lipinska (2020), this paper explores the effect of forward guidance (FG) in a two-country New Keynesian (NK) economy under the zero lower bound (ZLB). We simulate the effect of different lengths of FG or the zero interest rate policy under the circumstance of the global liquidity trap. We show that the size of the intertemporal elasticity of substitution plays an important role in determining the beggar-thy-neighbor effect or the prosper-thy-neighbor effect of home FG policy on the foreign economy. And in the former case, by targeting a minimum welfare loss of the individual country alone but not global welfare loss, two central banks can perform interesting FG bargaining in which they cooperatively adopt the same length of FG or strategically deviate from cooperation.
    Keywords: Forward guidance; Zero lower bound on nominal interest rates; Two-country new-Keynesian model; Taylor rule
    JEL: E52 E58 F41
    Date: 2021–03–22
  13. By: Sumru Altug (AUB - American University of Beirut [Beyrouth]); Fabrice Collard; Cem Çakmaklı (Koç University); Sujoy Mukerji (QMUL - Queen Mary University of London); Han Özsöylev (Koç University, University of Oxford [Oxford])
    Abstract: In this paper, we examine the cyclical dynamics of a Real Business Cycle model with ambiguity averse consumers and investment irreversibility using the smooth ambiguity model of Klibanoff et al. (2005, 2009). Ambiguity of belief about the productivity process arises as agents do not know the process driving variation in aggregate TFP, and they must make inferences regarding the true process at the same time as they infer the behavior of the unobserved temporary component using a Kalman filtering algorithm. Our findings may be summarized as follows. First, the standard business cycle facts hold in our framework, which are not altered significantly by changes in the degree of ambiguity aversion. Second, we demonstrate a role for information and learning effects, and show that lower initial ambiguity or greater confidence coupled with learning dynamics lowers the volatility and increases the persistence in all of the key macroeconomic variables. Third, comparing the performance of our model to the New Keynesian business cycle model of Ilut and Schneider (2014) with maxmin expected utility, we find that the version of their model without nominal and real frictions turns out to have limited success at matching the moments for the quantity variables. In the maxmin expected utility framework, the worst case scenario instills too much caution on the part of agents who, in the absence of a key set of nominal and real frictions, end up excessively reducing their responses to TFP shocks.
    Keywords: information and learning,ambiguity aversion,Ambiguity,investment irreversibility,Real Business Cycles,New Keynesian model.
    Date: 2020
  14. By: Marcin Kolasa
    Abstract: This paper proposes a novel explanation for why foreign currency denominated loans to households have become so popular in some emerging economies. Our argument is based on what we call the debt limit channel, which arises when multi-period contracts are offered to financially constrained borrowers against collateral that is established on newly acquired assets. Whenever the difference between domestic and foreign interest rates is positive, this effect biases borrowers’ choices towards foreign currency, even if the exchange rate is known to depreciate as implied by the interest parity condition. We demonstrate in a structural macroeconomic framework that the debt limit channel is quantitatively important and can result in dollarization of debt also in the presence of realistic exchange rate risk. Comparing this outcome to allocations under constrained-optimal time-consistent policy reveals that a substantial part of the identified bias towards foreign currency is due to a pecuniary externality, i.e. borrowers’ failure to internalize how their currency choice affects collateral prices.
    Date: 2021–03–19
  15. By: Callum Jones; Pau Rabanal
    Abstract: We study the role that changes in credit and fiscal positions play in explaining current account fluctuations. Empirically, the current account declines when credit increases, and when the fiscal balance declines. We use a two-country model with financial frictions and fiscal policy to study these facts. We estimate the model using annual data for the U.S. and “a rest of the world” aggregate that includes main advanced economies. We find that about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent. We evaluate simple macroprudential policy rules and show that they help reduce global imbalances. By taming the financial cycle, macroprudential rules that react to domestic credit conditions or to domestic house prices would have led to a smaller and less volatile U.S. current account deficit. We also show that a countercylical fiscal policy rule that stabilizes output growth reduces the level and volatility of the U.S. current account deficit.
    Date: 2021–02–19
  16. By: Anelí Bongers (Department of Economics, University of Málaga, Spain); Benedetto Molinari (Department of Economics, University of Málaga, Spain; Rimini Centre for Economic Analysis); José L. Torres (Department of Economics, University of Málaga, Spain)
    Abstract: This paper analyzes the macroeconomic and distributional effects of declining labor share as observed during the last decades. We use a neoclassical general equilibrium model with two types of households, workers and capitalists, endowed with a CES production function, in which the distributional parameter matches labor share. This implies the existence of a technological nexus between the observed labor share and the distributional parameter of the CES function. We explore that technological nexus and show that both capitalists' and workers' income increase as labor income declines depending on the elasticity of substitution between capital and labor. The effect of labor share changes on income distribution does not depend on the elasticity of substitution, and hence, relative income and relative consumption decrease for workers, increasing inequality. When capital depreciation rate is taken into account, the decline in labor share has a limited impact on the functional distribution of net income.
    Keywords: Functional distribution of income, Labor share, Workers, Capitalists
    JEL: E25 J30
    Date: 2021–03
  17. By: Christian Bredemeier; Falko Juessen; Andreas Schabert (UniversityofCologne,CenterforMacroeconomicResearch,Albertus-Magnus-Platz,50931Cologne, Germany)
    Abstract: Estimated fiscal multipliers for the US are typically moderate, despite evidence for the Fed lowering, rather than raising, interest rates after government spending hikes. We rationalize these puzzling observations building on imperfect substitutability of assets. We document empirically that interest rates important for private borrowing/saving do not follow the response of the monetary policy rate, which is reflected by rising liquidity premia after spending hikes. A model with a structural specification of asset liquidity can replicate these findings and predicts moderate output effects fiscal expansions even when monetary policy rates fall or are fixed at the zero lower bound.
    Keywords: Fiscal multiplier, monetary policy, real interest rates, liquidity premium, zero lower bound
    JEL: E32 E42 E63
    Date: 2021–03
  18. By: Edward Hill; Marco Bardoscia; Arthur Turrell
    Abstract: General equilibrium macroeconomic models are a core tool used by policymakers to understand a nation's economy. They represent the economy as a collection of forward-looking actors whose behaviours combine, possibly with stochastic effects, to determine global variables (such as prices) in a dynamic equilibrium. However, standard semi-analytical techniques for solving these models make it difficult to include the important effects of heterogeneous economic actors. The COVID-19 pandemic has further highlighted the importance of heterogeneity, for example in age and sector of employment, in macroeconomic outcomes and the need for models that can more easily incorporate it. We use techniques from reinforcement learning to solve such models incorporating heterogeneous agents in a way that is simple, extensible, and computationally efficient. We demonstrate the method's accuracy and stability on a toy problem for which there is a known analytical solution, its versatility by solving a general equilibrium problem that includes global stochasticity, and its flexibility by solving a combined macroeconomic and epidemiological model to explore the economic and health implications of a pandemic. The latter successfully captures plausible economic behaviours induced by differential health risks by age.
    Date: 2021–03
  19. By: Paul Levine (University of Surrey and CIMS); Neil Rickman (University of Surrey)
    Abstract: This paper sets out a coherent framework for studying the economic effects of the Covid-19 pandemic, and policies aimed at controlling both the health and economic trade-offs that it poses. It does this by combining two key epidemiological and macroeconomic models: the SIR model and the RBC model. We argue that much of the present literature can be understood using this framework. The SIR-type epidemiology model in the paper has the novel feature of both no-disease and endemic steady states, two possible outcomes of Covid-19. The stability properties of these equilibria are examined and are shown to depend on the reproduction number and also, possibly, on the complex dynamics introduced by `predator-prey' behaviour of the virus. In addition, we show how endogenous social interaction fits within the model. Lockdown - reducing the size of the susceptible population - is then introduced into the RBC model as a social planner's problem. By linking this epidemiolgy model with a simple RBC model, we provide an integrated framework for examining the economic effects of Covid-related policies and the economic cost of lockdown policies of particular scope and duration. In principle an empirical implementation of this framework can be used to deduce the price of a life implied by a particular lockdown policy. Looking forward, extensions of our framework offer the chance to study economic challenges in areas such as debt financing, human capital shocks, or vaccine production and roll-out, all of which are inevitably emerging.
    JEL: C63 D58 E24 E27 E32 E37
    Date: 2021–03
  20. By: Aditya Goenka (Unknown); Lin Liu (Unknown); Manh-Hung Nguyen (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper studies an optimal growth model where there is an infectious disease with SIR dynamics which can lead to mortality. Health expenditures (alternatively intensity of lockdowns) can be made to reduce infectivity of the disease. We study implications of two different ways to model the disease related mortality - early and late in infection mortality - on the equilibrium health and economic outcomes. In the former, increasing mortality reduces infections by decreasing the fraction of infectives in the population, while in the latter the fraction of infectives increases. We characterize the steady states and the outcomes depend in the way mortality is modeled. With early mortality, increasing mortality leads to higher equilibrium per capita output and consumption while in the late mortality model these decrease. We establish sufficiency conditions and provide the first results in economic models with SIR dynamics with and without disease related mortality - a class of models which are non-convex and have endogenous discounting so that no existing results are applicable.
    Keywords: Prevention,Lockdown,Economic growth,Sufficiency conditions,Mortality,SIR model,Covid-19,Infectious diseases,Health expenditure
    Date: 2021–03
  21. By: Daniel L. Greenwald; Matteo Leombroni; Hanno Lustig; Stijn Van Nieuwerburgh
    Abstract: Financial wealth inequality and long-term real interest rates track each other closely over the post-war period. Faced with lower returns on financial wealth, households with high levels of financial wealth must increase savings to afford the consumption that they planned before the decline in rates. Lower rates beget higher financial wealth inequality. Inequality in total wealth, the sum of financial and human wealth and the relevant concept for household welfare, rises much less than financial wealth inequality and even declines at the top of the wealth distribution. A standard incomplete markets model reproduces the observed increase in financial wealth inequality in response to a decline in real interest rates because high financial-wealth households have a financial portfolio with high duration.
    JEL: E01 E1 E21 E24 E25 E44 G11 G5
    Date: 2021–03
  22. By: Pedro Bento (Texas A&M University, Department of Economics); Sunju Hwang (Texas A&M University, Department of Economics)
    Abstract: The number of black-owned businesses in the U.S. has increased dramatically since the 1980s, even compared to the number of non-black-owned businesses and the rise in black labor-market participation. In 1982 less than 4 percent of black labor-market participants owned businesses, compared to over 14 percent of other participants. By 2012 more than 16 percent of black participants owned businesses while the analogous rate for non-black participants increased to only 19 percent. This and other evidence suggest black entrepreneurs have faced significant barriers to starting and running businesses and these barriers have declined over time. We examine the impact of these trends on aggregate output and welfare. Interpreted through a model of entrepreneurship, declining barriers led to a 2 percent increase in black welfare, a 0.7 increase in output per worker, and a 0.7 decrease in the welfare of other labor-market participants. These impacts are in addition to any gains from declining labor-market barriers.
    Keywords: black, minority, distortions, entrepreneurship, business dynamism, misallocation, aggregate productivity, economic growth.
    JEL: E02 E1 J7 J15 O1 O4
    Date: 2021–03–24
  23. By: Dirk Krueger (University of Pennsylvania, CEPR and NBER); Harald Uhlig (University of Chicago, NBER, CEPR); Taojun Xie (Research Fellow, Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy, National University of Singapore)
    Abstract: In this paper, we argue that endogenous shifts in private consumption behavior across sectors of the economy can act as a potent mitigation mechanism during an epidemic or when the economy is re-opened after a temporary lockdown. We introduce a SIR epidemiological model into a neoclassical production economy in which goods are distinguished by the degree to which they can be consumed at home rather than in a social, possibly contagious context. We demonstrate within the model, that the "Swedish solution" of letting the epidemic play out without much government intervention and allowing agents to reduce their overall consumption as well as shift their consumption behavior towards relatively safe sectors can lead to substantial mitigation of the economic and human costs of the COVID-19 crisis. We argue that significant seasonal variation in the infection risk is needed to account for the two-wave nature of the pandemic. We estimate the model on Swedish health data and show that it predicts the dynamics of weekly deaths, aggregate as well as sectoral consumption, that accord well with the empirical record and the two-waves for Sweden for 2020 and early 2021. We also characterize the allocation a social planner would choose and how it would dictate sectoral consumption patterns. In so doing, we demonstrate that the laissez-faire outcome with sectoral reallocation mitigates the economic and health crisis but possibly at the expense of unnecessary deaths and too massive a decline in economic activity.
    Keywords: Epidemic, Coronavirus, Macroeconomics, Sectoral Substitution
    JEL: E52 E30
    Date: 2021–03
  24. By: Gaston Clément Nyassoke Titi (Université de Douala); Jules Sadefo Kamdem (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier); Louis Aimé Fono (Université de Douala); Nyassoke Titi; Gaston Clément; Sadefo Kamdem; Louis Fono (Université de Douala)
    Abstract: In this article, we provide a general framework for analyzing the optimal harvest of a renewable resource(i.e. fish, shrimp) assuming that the price and biomass evolve stochastically and harvesters have a constantrelative risk aversion (CRRA) . In order to take into account the impact of a sudden change in the environ-ment linked to the ecosystem, we assume that the biomass are governed by a stochastic differential equationof the ‘Gilpin-Ayala' type, with regime change in the parameters of the drift and variance. Under the aboveassumptions, we find the optimal effort to be deployed by the collector (fishery for example) in order tomaximize the expected utility of its profit function. To do this, we give the proof of the existence anduniqueness of the value function, which is derived from the Hamilton-Jacobi-Bellman equations associatedwith this problem, by resorting to a definition of the viscosity solution.
    Keywords: Stochastic Gilpin-Ayala,CRRA utility,Viscosity solutions,Renewable Resources,Optimal Effort
    Date: 2021

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