nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒04‒12
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. How do credit market frictions affect carbon cycles? an estimated DSGE model approach By Chan, Ying Tung; Zhao, Hong
  2. A Search and Bargaining Model of Non-degenerate Distributions of Money Holdings By Kazuya Kamiya; So Kubota
  3. How long does a generation last? Assessing the relationship between infinite and finite horizon dynamic models By Guerrazzi, Marco
  4. Mortgage Borrowing and the Boom-Bust Cycle in Consumption and Residential Investment By Xiaoqing Zhou
  5. Fiscal Stimulus of Last Resort By Alessandro Piergallini
  6. Public Debt as Private Liquidity: Optimal Policy By Georges Marios Angeletos; Fabrice Collard; Harris Dellas
  7. Procyclical Leverage and Crisis Probability in a Macroeconomic Model of Bank Runs By Daisuke Ikeda; Hidehiko Matsumoto
  8. Pandemics, Incentives, and Economic Policy: A Dynamic Model By Roberto Chang; Humberto Martínez; Andrés Velasco
  9. Information About Vacancy Competition Redirects Job Search By Bhole, Monica; Fradkin, Andrey; Horton, John
  10. Inflation, endogenous quality increment, and economic growth By Zheng, Zhijie; Hu, Ruiyang; Yang, Yibai
  11. Dispersion in Financing Costs and Development By Tiago V. Cavalcanti; Joseph P. Kaboski; Bruno S. Martins; Cezar Santos
  12. Capital Tax Reforms With Policy Uncertainty By Arpad Abraham; Pavel Brendler; Eva Carceles
  13. Optimal Product Design: Implications for Competition and Growth under Declining Search Frictions By Guido Menzio

  1. By: Chan, Ying Tung; Zhao, Hong
    Abstract: Recessions associated with financial crises have become common in the US since 1990. This paper examines the importance of the financial frictions for US carbon emissions dynamics. Our empirical analysis reveals that financial market conditions have a substantial and nonlinear impact on carbon emissions dynamics. We build and estimate an environmental dynamic stochastic general equilibrium model that features financial frictions and a risk shock (a type of credit shock). The results show that: (i) the presence of financial frictions doubles the volatility of carbon emissions under positive TFP and government expenditure shocks; (ii) the risk shock generates counterfactual paths that can largely replicate the movements in emissions growth; (iii) the contribution share of the risk shock to emissions growth dynamics reaches a peak of around 50% after each recession; (iv) the optimal carbon tax rate response to shocks heavily depends on the Taylor rule specification.
    Keywords: Carbon tax; financial accelerator; business cycles
    JEL: E32 E44 Q51
    Date: 2019–08–16
  2. By: Kazuya Kamiya (Research Institute for Economics and Business Administration(RIEB), Kobe University, JAPAN); So Kubota (Faculty of Political Science and Economics, Waseda University)
    Abstract: We study a standard search and bargaining model of money, where goods are traded only in decentralized markets and distributions of money holdings are non-degenerate in equilibria. We assume fixed costs in each seller's production, which allows an analytical characterization of a tractable equilibrium. Each Nash bargaining solution satisfies pay-all property, where the buyer pays the whole amount of cash as a corner solution, and the seller produces goods as the interior solution. In the stationary equilibrium, the aggregate variables, such as total production and the number of matchings, are expressed by given parameters, i.e., determinate. On the other hand, individual-level variables are indeterminate. Distributional monetary policies are e ective in both the short-run and the long-run.
    Date: 2021–03
  3. By: Guerrazzi, Marco
    Abstract: This paper aims at assessing the temporal relationship that exists between the time reference of dynamic models with infinite and finite horizon. Specifically, comparing the optimal inter-temporal plans arising from an infinite-horizon model and a 2-period overlapping generations model in their stationary equilibria, I offer a straightforward way to determine the number of time periods of the former that may form a unit of time of the latter. In this way, I show that the theoretical length of a generation is an increasing function of the discount factor of the optimizing agent and I provide an economic rationale for such a relationship grounded on consumption smoothing.
    Keywords: Infinite horizon; Overlapping generations; Consumption smoothing; Discount rate
    JEL: C61 C68 E21 E30
    Date: 2021–01–29
  4. By: Xiaoqing Zhou
    Abstract: This paper studies the transmission of the major shocks in the U.S. housing market in the 2000s to consumption and residential investment. Using geographically disaggregated data, I show that residential investment is more responsive to these shocks than consumption, as measured by elasticities and the implied contributions to GDP growth. I develop a structural life-cycle model featuring multiple types of housing investment to understand the large responses of residential investment. Consistent with the microdata, the model generates lumpy debt accumulation, lumpy housing investment and a strong correlation between mortgage borrowing and housing investment at the early stage of the life cycle. In the model, households move up the property ladder by increasing their mortgage debt after they have accumulated enough home equity. Since liquidity constraints and fixed costs prevent especially young homeowners from acquiring their desired home, shocks to their borrowing capacity have a large impact on residential investment.
    Keywords: Mortgage borrowing; Consumption; Residential investment; House price; Mortgage rate; Credit supply; Business cycle
    JEL: D1 E2 E3
    Date: 2021–03–24
  5. By: Alessandro Piergallini
    Abstract: I examine global dynamics in a monetary model with overlapping generations of finite-horizon agents and a binding lower bound on nominal interest rates. Debt targeting rules exacerbate the possibility of self-fulfilling liquidity traps, for agents expect austerity following deflationary slumps. Conversely, activist but sustainable fiscal policy regimes - implementing intertemporally balanced tax cuts and/or transfer increases in response to disinflationary trajectories - are capable of escaping liquidity traps and embarking inflation into a globally stable path that converges to the target. Should fiscal stimulus of last resort be overly aggressive, however, spiral dynamics around the liquidity-trap steady state exist, causing global indeterminacy.
    Date: 2021–04
  6. By: Georges Marios Angeletos (MIT - Massachusetts Institute of Technology); Fabrice Collard (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); Harris Dellas (University of Bern)
    Abstract: We study optimal policy in an economy in which public debt is used as collateral or liquidity buffer. Issuing more public debt raises welfare by easing the underlying financial friction; but this easing lowers the liquidity premium and increases the government's cost of borrowing. These considerations, which are absent in the basic Ramsey paradigm, help pin down a unique, long-run level of public debt. They require a front-loaded tax response to government-spending shocks, instead of tax smoothing. And they explain why a financial recession, more than a traditional one, makes government borrowing cheaper, optimally supporting larger fiscal stimuli.
    Date: 2021–03–31
  7. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Assistant Professor, National Graduate Institute for Policy Studies, E-mail:
    Abstract: A macroprudential perspective posits a link between bank fundamentals and the likelihood of banking crises. We articulate this link by developing a dynamic general equilibrium model that features bank runs in a global game framework. The model endogenizes the probability of bank runs as a function of bank fundamentals, leverage in particular. The model generates procyclical leverage and shows that credit growth tends to precede banking crises, replicating the empirical finding of Schularick and Taylor (2012). Countercyclical leverage restrictions can improve social welfare by reducing the crisis probability despite dampening economic activities in normal times.
    Keywords: Banking crises, global games, macroprudential policy
    JEL: E32 E44 G21 G28
    Date: 2021–03
  8. By: Roberto Chang; Humberto Martínez; Andrés Velasco
    Abstract: The advent of a pandemic is an exogenous shock, but the dynamics of contagion are very much endogenous --and depend on choices that individuals make in response to incentives. In such an episode, economic policy can make a difference not just by alleviating economic losses but also via incentives that affect the trajectory of the pandemic itself. We develop this idea in a dynamic equilibrium model of an economy subject to a pandemic. Just as in conventional SIR models, infection rates depend on how much time people spend at home versus working outside the home. But in our model, whether to go out to work is a decision made by individuals who trade off higher pay from working outside the home today versus a higher risk of infection and expected future economic and health-related losses. As a result, pandemic dynamics depend on factors that have no relevance in conventional models. In particular, expectations and forward-looking behavior are crucial and can result in multiplicity of equilibria with different levels of economic activity, infection, and deaths. The analysis yields novel policy lessons. For example, incentives embedded in a fiscal package resembling the U.S. CARES Act can result in two waves of infection.
    JEL: E6 F4 H3 I3
    Date: 2021–04
  9. By: Bhole, Monica; Fradkin, Andrey; Horton, John
    Abstract: Job seekers typically do not know the degree of competition they face for a particular vacancy. As a result, they may unwittingly send applications to vacancies with a lot of competition and may overlook vacancies with little competition. We study how providing information about competition for a vacancy redirects applications. To do so, we conduct three field experiments on a large online job platform in which treated job searchers are shown information about the number of prior applicants to a vacancy. This information increases overall applications and redirects applications to vacancies with few prior applications. Applications are sent to vacancies that receive fewer cumulative applications but result in similar outcomes to control applications. We use a complementary treatment to show that job seekers also use the age of the vacancy to direct search towards newer vacancies with relatively little competition. Our results are consistent with a model in which searchers have imperfect information about competition for a vacancy and redirect their search towards less competitive vacancies when they receive an improved signal.
    Date: 2021–04–05
  10. By: Zheng, Zhijie; Hu, Ruiyang; Yang, Yibai
    Abstract: This study explores the effects of monetary policy in a Schumpeterian growth model with endogenous quality increment and distinct cash-in-advance (CIA) constraints on consumption, manufacturing and R&D investment. Our results are summarized as follows. When the CIA constraint is solely on consumption expenditure, an increase in the nominal interest rate may stifle economic growth by lowering the arrival rate of innovation and stimulate it at the same time by raising the size of quality increment. An additional CIA constraint on manufacturing weakens the growth-retarding effect and enhances the growth-promoting effect, whereas an additional CIA constraint on R&D investment strengthens only the negative growth effect. The quantitative analysis finds that the relationship between inflation and growth can be either monotonically decreasing or hump-shaped, but the welfare effect of inflation is always negative.
    Keywords: Monetary Policy, Economic Growth, R&D, Endogenous Quality Increment
    JEL: E41 O30 O40
    Date: 2021–03–15
  11. By: Tiago V. Cavalcanti; Joseph P. Kaboski; Bruno S. Martins; Cezar Santos
    Abstract: Most aggregate theories of financial frictions model credit available at a single cost of financing but rationed. However, using a comprehensive firm-level credit registry, we document both high levels and high dispersion in credit spreads to Brazilian firms. We develop a quantitative dynamic general equilibrium model in which dispersion in spreads arises from intermediation costs and market power. Calibrating to the Brazilian data, we show that, for equivalent levels of external financing, dispersion has more profound impacts on aggregate development than single-price credit rationing and yields firm dynamics that are more consistent with observed patterns.
    JEL: E44 O11 O16
    Date: 2021–04
  12. By: Arpad Abraham; Pavel Brendler; Eva Carceles
    Abstract: One important feature of capital tax reforms is uncertainty regarding their duration. We use the Bush Tax cuts as the leading example to illustrate how uncertainty about reform duration may affect the economy’s path and erode political support for the reform. We model policy uncertainty by assuming that the reform may be either repealed or made permanent with some probability at a predetermined date. We show that policy uncertainty is a critical ingredient that can explain why the Bush tax cuts had no economically significant effect on investment, as confirmed empirically by Yagan (2015). While the permanent reform leads to positive aggregate welfare gains on impact, policy uncertainty may reverse this result. These observations hold both in a model with a representative firm and heterogeneous firms, but adding firm heterogeneity generates an interesting implication. In contrast to the permanent reform, policy uncertainty increases the TPF since it dampens investment by mature, less productive firms.
    Date: 2021
  13. By: Guido Menzio
    Abstract: As search frictions become smaller in the market for a consumer product, buyers are able to locate and access more sellers per unit of time. In response, sellers choose to design varieties of the product that are more specialized in order to exploit differences in the buyers' preferences. I find mild conditions on the fundamentals under which the decline in search frictions and the increase in specialization have exactly offsetting effects on the extent of competition in the market. Under these conditions, price dispersion remains constant over time even though search frictions are vanishing. Buyer's surplus and seller's profit, however, grow at a constant endogenous rate, as the endogenous increase in specialization allows sellers to cater better and better to the heterogeneous desires of buyers.
    JEL: D43 E23 L13 O40
    Date: 2021–04

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