nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒05‒03
twenty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Product Cycles and Prices: a Search Foundation By Mei Dong; Toshiaki Shoji; Yuki Teranishi
  2. On the Optimal Reform of Income Support for Single Parents By Ortigueira, Salvador; Siassi, Nawid
  3. The Quantitative Importance of Technology and Demand Shocks for Unemployment Fluctuations in a Shopping Economy By Pawel Borys; Pawel Doligalski; Pawel Kopiec
  4. Behavioral New Keynesian Models: Learning vs. Cognitive Discounting By Greta Meggiorini; Fabio Milani
  5. Insurance, Redistribution, and the Inequality of Lifetime Income By Haan, Peter; Kemptner, Daniel; Prowse, Victoria
  6. Public financing with financial frictions and underground economy By Martinez, Tomás R.; Fuster Pérez, Luisa; Erosa Etchebehere, Andrés
  7. Public spending, currency mismatch and financial frictions By Marie-Pierre HORY; Grégory LEVIEUGE; Daria ONORI
  8. Trade and Informality in the Presence of Labor Market Frictions and Regulations By Rafael Dix-Carneiro; Pinelopi Koujianou Goldberg; Costas Meghir; Gabriel Ulyssea
  9. Optimal Social Assistance and Unemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings By Haan, Peter; Prowse, Victoria
  10. Low interest rates and the distribution of household debt By Marina Emiris; François Koulischer
  11. Contracts, Firm Dynamics, and Aggregate Productivity By Bernabe Lopez-Martin; David Perez-Reyna
  12. Quantifying Market Power and Business Dynamism in the Macroeconomy By Jan de Loecker; Jan Eeckhout; Simon Mongey
  13. Patience and Comparative Development By Uwe Sunde; Thomas Dohmen; Benjamin Enke; Armin Falk; David Huffman; Gerrit Meyerheim
  14. Financial Consolidation and the Cyclicality of Corporate Financing By Minetti, Raoul; Moreland, Timothy; Kokas, Sotirios
  15. Payments on Digital Platforms: Resiliency, Interoperability and Welfare By Jonathan Chiu; Tsz-Nga Wong
  16. The Economic Ripple Effects of COVID-19 By Francisco J. Buera; Roberto N. Fattal-Jaef; Hugo Hopenhayn; P. Andres Neumeyer; Yongseok Shin
  17. Career Paths with a Two-Body Problem: Occupational Specialization and Geographic Mobility By Valeria Rueda; Galeria Rueda
  18. Collateral Framework: Liquidity Premia and Multiple Equilibria By Lengwiler, Yvan; Orphanides, Athanasios
  19. A game-theoretic analysis of fiscal policy under economic growth from the perspective of MMT By Tanaka, Yasuhito
  20. Business cycle accounting for the German fiscal stimulus program during the Great Recession By Daniel Fehrle; Johannes Huber

  1. By: Mei Dong; Toshiaki Shoji; Yuki Teranishi
    Abstract: This paper develops a price model with product cycles characterized by product entries and exits. Through a frictional product market with search and matching frictions, an endogenous product cycle is accompanied by a price cycle. This model nests the New Keynesian Phillips curve as a special case and generates several new phenomena in business cycle moments with product cycles. Using product-level micro data in Japan, we show that our price model well captures the observed features among product entry, number of products, demand, and price. Our model with a frictional product market replicates correlations between product matching probability and other variables. In a general equilibrium model for the Japanese economy, an endogenous product entry increases a price variation by 23 percent. This number increases to 35 percent with a price discounting after a first price. All results suggest that product cycles and search frictions play fundamental roles in describing price dynamics.
    Date: 2021–04
  2. By: Ortigueira, Salvador; Siassi, Nawid
    Abstract: We characterize the optimal reform of U.S. income support for low-income single parents. We develop a heterogeneous agents model with idiosyncratic risk and incomplete asset markets where single parents evolve through three life stages defined by their children's care needs. Using the U.S. tax-transfer system as the benchmark policy and a sample of single mothers drawn from the CPS, we assess reforms that maximize the expected utility of entering mothers. When policy cannot be tagged by the single mothers' life stage, the optimal reform calls for an increase in out-of-work income support by 11 percent, from $6,320 to $7,080, and a decrease in the wage subsidy to low-wage workers from 34 to 22 percent. This reform delivers substantial welfare gains for single mothers-to-be, and has the support of a vast majority of incumbent mothers. Tagging policy by the life stage makes the government's trade-off between providing insurance to single mothers in stage one (child in pre-schooling age) and incentivizing them to work when they transit to stage two (child in school age) more favorable, thus increasing their scope for smoothing marginal utility throughout life stages. Single mothers in stage one receive $8,950 in out-of-work support, and no subsidies to low-wages. For single mothers in stage two the optimal reform prescribes a reduction in out-of-work income support and an increase in work subsidies. Tagging brings additional welfare gains.
    Keywords: Optimal income transfers,Single-parent households,Intertemporal savings and labor supply
    JEL: D15 E21 E61
    Date: 2021
  3. By: Pawel Borys; Pawel Doligalski; Pawel Kopiec
    Abstract: We construct and estimate a business cycle model with search and matching frictions in the labor market and in the product market. We show that the dynamic structure of the model and the endogenous job separation rate are important to accurately represent the empirical responses to the technology and the demand shocks. Our main finding is that the demand shock explains at least 58% of the unemployment fluctuations in the US, while the technology shock accounts for the residual.
    Date: 2021–04–26
  4. By: Greta Meggiorini (Department of Economics, University of California-Irvine); Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper estimates a New Keynesian model with new and old behavioral elements. Agents in the model exhibit cognitive discounting, or myopia: they discount variables far into the future at higher rates than typically implied in the benchmark model. We investigate the model under different expectational assumptions: rational expectations, subjective expectations with infinite-horizon learning, and subjective expectations with Euler-equation learning. Under rational expectations, the model necessitates of large, possibly unrealistically so, degrees of myopia. The same result persists under infinite-horizon learning, given that agents are still remarkably far-sighted. But, under Euler-equation learning, the model can fit the data with only minimal estimated degrees of myopia. The results indicate that the empirical evidence for cognitive discounting may be sensitive to the modeling of expectations, and they highlight learning as a key behavioral feature to understand macroeconomic fluctuations.
    Keywords: Behavioral Macroeconomics; Cognitive Discounting; Myopia; Inattention; Constant-Gain Learning; Behavioral New Keynesian Model
    JEL: C32 E32 E50 E52 E70
    Date: 2021–04
  5. By: Haan, Peter (DIW Berlin); Kemptner, Daniel (DIW Berlin); Prowse, Victoria (Purdue University)
    Abstract: Individuals vary considerably in how much they earn during their lifetimes. We study how the tax-and-transfer system offsets inequalities in lifetime earnings, which would otherwise translate into differences in living standards. Based on a life-cycle model, we find that redistribution by taxes and transfers offsets 54% of the inequality in lifetime earnings that is due to heterogeneous skill endowments. Meanwhile, taxes and transfers insure 45% of lifetime earnings risk. Taxes would provide more insurance if based on lifetime instead of annual earnings. Requiring wealthy individuals to repay social assistance received when younger would strengthen the insurance and redistributive functions of social assistance.
    Keywords: lifetime earnings; lifetime income; tax-and-transfer system; taxation; unemployment insurance; disability benefits; social assistance; inequality; redistribution; insurance; endowments; risk; dynamic life-cycle models;
    JEL: D63 H23 I24 I38 J22 J31
    Date: 2019–09–30
  6. By: Martinez, Tomás R.; Fuster Pérez, Luisa; Erosa Etchebehere, Andrés
    Abstract: What are the aggregate effects of informality in a financially constrained economy? We develop and calibrate an entrepreneurship model to data on matched employer-employee from both formal and informal sectors in Brazil. The model distinguishes between informality on the business side (extensive margin) and the informal hiring by formal firms (intensive margin). We find that when informality is eliminated along both margins, aggregate output increases 9.3%, capital 14.7%, TFP 5.4%, and tax revenue37%. The output and TFP increases would be much larger if informality were only eliminated on the extensive margin, a result that supports the view that the informal economy can play a positive role in an economy with financial frictions. Finally, we find that the output cost of financing social security in our baseline model is about twice as large as the one in an economy with no frictions.
    Keywords: Tax Revenue; Social Security; Financial Frictions; Informality; Occupational Choice
    JEL: O16 L26 H55 H20 E26 E22
    Date: 2021–04–27
  7. By: Marie-Pierre HORY; Grégory LEVIEUGE; Daria ONORI
    Keywords: , Fiscal multiplier, Terms of trade, Currency mismatch, DSGE model, Financial frictions
    Date: 2021
  8. By: Rafael Dix-Carneiro (Duke University and NBER); Pinelopi Koujianou Goldberg (Yale University); Costas Meghir (Yale University); Gabriel Ulyssea (University College of 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 the following: 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 buffer” but not a “welfare buffer” in the event of negative economic shocks.
    Keywords: Labor market effects of trade, Informality, Unemployment
    JEL: F14 F16 J46 O17
    Date: 2021–04
  9. By: Haan, Peter (DIW Berlin); Prowse, Victoria (Purdue University)
    Abstract: We empirically analyze the optimal mix and optimal generosity of unemployment insurance and social assistance programs. To do so, we specify a structural life-cycle model of the labor supply, savings, and social assistance claiming decisions of singles and married couples. Partial insurance against wage and employment shocks is provided by social programs, savings, and the labor supplies of all adult household members. We show that the optimal policy mix is dominated by moderately generous social assistance, which guarantees a permanent universal minimum household income, with only a minor role for temporary earnings-related unemployment insurance. The optimal amount of social assistance is heavily influenced by income pooling in married households. This pooling provides partial insurance against negative economic shocks, reducing the optimal generosity of social assistance.
    Keywords: unemployment insurance; social assistance; design of benefi t programs; life-cycle labor supply; family labor supply; intra-household insurance; household savings; employment risk; added worker e ffect;
    JEL: J18 J68 H21 I38
    Date: 2019–09–30
  10. By: Marina Emiris (Economics and Research Department, NBB); François Koulischer (University of Luxembourg, Department of Finance)
    Abstract: We study how changes in interest rates affect the borrowing of households and the distribution of debt within the population. In a model of household borrowing with credit constraints and endogenous house prices, we show that less constrained households with more pre-existing housing wealth increase their borrowing most when interest rates fall. We then use unique loan level data on the universe of household credit in Belgium to document a shift in the distribution of debt over age, with older households borrowing more as interest rates fell in the last decade. First-time borrowers, who are more likely to be constrained, do not contribute to the rise in household debt. To identify the elasticity of household debt to the interest rate, we use regulatory data on foreign exposures of banks and on the location of bank branches. We find that a 1 percentage point fall in the interest rate is associated with a 15% growth in household debt.
    Keywords: Interest Rates, Household Debt, Mortgages, Credit Constraints
    JEL: D14 E43 E58 G51
    Date: 2021–03
  11. By: Bernabe Lopez-Martin; David Perez-Reyna
    Abstract: We construct a firm-dynamics framework to evaluate the impact of the enforcement of contracts between final goods producers and intermediate goods suppliers on firm life-cycle growth, technology accumulation, and aggregate productivity. We show that contractual incompleteness implies a wedge on profits, which disincentives technology accumulation and is potentially correlated with technology, in addition to wedges on production decisions. We find that our model accounts for differences in output per worker of up to 33 percent across economies. The impact on firm life-cycle growth, the age and size distribution of firms is quantitatively significant.
    Date: 2021–04
  12. By: Jan de Loecker; Jan Eeckhout; Simon Mongey
    Abstract: We propose a general equilibrium model with oligopolistic output markets where two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of entry, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching data on markups, labor reallocation and costs, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure yield positive welfare effects through reallocation and selection, but off-setting negative effects from dead-weight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify explain and decompose cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation via reallocation toward larger, more productive firms.
    Keywords: business dynamism, market power in the aggregate economy, technological change, market structure, reallocation, Endogenous markups, wage stagnation, labor share, passthrough
    JEL: C6 D4 D5 L1
    Date: 2021–04
  13. By: Uwe Sunde; Thomas Dohmen; Benjamin Enke; Armin Falk; David Huffman; Gerrit Meyerheim
    Abstract: This paper studies the relationship between patience and comparative development through a combination of reduced-form analyses and model estimations. Based on a globally representative dataset on time preference in 76 countries, we document two sets of stylized facts. First, patience is strongly correlated with per capita income and the accumulation of physical capital, human capital and productivity. These correlations hold across countries, subnational regions, and individuals. Second, the magnitude of the patience elasticity strongly increases in the level of aggregation. To provide an interpretive lens for these patterns, we analyze an OLG model in which savings and education decisions are endogenous to patience, aggregate production is characterized by capital-skill complementarities, and productivity implicitly depends on patience through a human capital externality. In our model estimations, general equilibrium effects alone account for a non-trivial share of the observed amplification effects, yet meaningful externalities are needed to quantitatively match the empirical evidence.
    Keywords: Time Preference, Comparative Development, Factor Accumulation
    JEL: D03 D90 O10 O30 O40
    Date: 2021–04
  14. By: Minetti, Raoul (Michigan State University, Department of Economics); Moreland, Timothy (Michigan State University, Department of Economics); Kokas, Sotirios (Essex Business School, University of Essex)
    Abstract: We study the impact of the concentration and complexity of the banking sector on firms' financing and investment behavior over the business cycle. We find that, after the late 1990s, while debt issuance remained procyclical for U.S. firms of all sizes, equity issuance and liquidity accumulation switched from countercyclical to procyclical for small and medium-sized publicly-traded firms. Using matched firm-bank data, we provide evidence that bank consolidation contributed to this change. We rationalize these findings in a general equilibrium business cycle model. After bank consolidation, the weakening in firms' bargaining power and relational ties with banks enhances firms' precautionary demand for liquidity and equity issuance incentives following positive shocks. The change in financing behavior increases investment and employment sensitivity to aggregate productivity shocks.
    Keywords: Financial frictions; business cycles; nancial structure; credit shocks
    JEL: E22 E32 E44 G32
    Date: 2021–04–06
  15. By: Jonathan Chiu; Tsz-Nga Wong
    Abstract: Digital platforms, such as Alibaba and Amazon, operate an online marketplace to facilitate transactions. This paper studies a platform's business model choice between accepting cash and issuing tokens, as well as the implications for welfare, resiliency, and interoperability. A cash platform free rides on the existing payment infrastructure and profits from collecting transaction fees. A token platform earns seigniorage, albeit bearing the costs of setting up the system and holding reserves to mitigate the cyber risk. Tokens earn consumers a return, insulating transactions from the liquidity costs of using cash, but also expose them to the remaining cyber risk. The platform issues tokens if the interest rate is high, the platform scope is large, and the cyber risk is small. Unbacked floating tokens with zero transaction fees or interest-bearing stablecoins can implement the equilibrium business model, which is not necessarily socially optimal because the platform does not internalize its impacts on off-platform activities. The model explains why Amazon does not issue tokens but Alipay issues tokens circulatable outside its Alibaba platforms. Regulations such as a minimum reserve requirement can reduce welfare.
    Keywords: Digital currencies and fintech; Monetary policy; Payment clearing and settlement systems
    JEL: E5 L5
    Date: 2021–04
  16. By: Francisco J. Buera; Roberto N. Fattal-Jaef; Hugo Hopenhayn; P. Andres Neumeyer; Yongseok Shin
    Abstract: What are the effects of a temporary lockdown of the economy? Do firms' deteriorating balance sheets and labor market frictions propagate and prolong the effects? We answer these questions in a model with financial and labor market frictions. The model makes quantitative predictions about the effect of lockdowns of varying magnitude and duration on output, employment and firm dynamics. We find that the effects are not persistent if (i) workers on temporary layoff can be recalled by their previous employers without having to go through the frictional labor market and (ii) the government provides employment subsidies to firms during the lockdown. However, the effects are heterogeneous and young non-essential firms are disproportionately affected. In addition, if lockdowns lead to more permanent reallocation across industries, the recession becomes more protracted. Although the paper is motivated by the lockdowns during the Covid-19 pandemic, the framework can be readily applied to large, temporary shocks of different nature.
    JEL: E32 E44 L25
    Date: 2021–04
  17. By: Valeria Rueda (University of Nottingham and CEPR); Galeria Rueda (University of Leicester)
    Abstract: We develop a model of joint job search and occupational choice in which job opportunities can be incompatible inside the couple. Typically, incompatibilities may arise because jobs are not in the same location. We show that the existence of incompatible jobs pushes some couples to sacrifice the career of one partner. The model predicts occupational switches throughout the career and at the time of couple formation. Gendered equilibria, whereby all women (or men) choose the accommodating occupation, may arise. Any element of ex-ante unfavorable gender gaps—for instance, due to discrimination or norms—is amplified and can generate large systemic differences in gender composition between occupations.
    Keywords: two-body problem, occupational specialization, career path
    JEL: C78 D13 D83
    Date: 2021–03
  18. By: Lengwiler, Yvan (University of Basel); Orphanides, Athanasios
    Abstract: Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. We show how such features in a central bank's collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This can potentially induce sovereign debt crises and defaults that would not otherwise arise.
    Keywords: monetary policy, government finance, yields, liquidity premium, default premium, collateral, cliff effect, multiple equilibria.
    JEL: E58 E62 E43
    Date: 2021–04
  19. By: Tanaka, Yasuhito
    Abstract: We present a game-theoretic analysis of fiscal policy under economic growth from the perspective of MMT using a simple two-periods overlapping generations (OLG) model. We show the following results. 1) Sustained budget deficits are necessary to maintain full-employment under economic growth driven by technological progress. 2) An excessive budget deficit triggers inflation, and after one period inflation full-employment is maintained by sustained budget deficits with constant price. 3) Insufficient government deficit causes involuntary unemployment, and we need extra budget deficit over its steady state value to recover full-employment. These budget deficits need not be, and must not be redeemed. Therefore, if it is institutionally and legally possible, they should be financed by seigniorage not by public debt.
    Keywords: Overlapping generations model, Full-employment, Budget deficit, Growth, MMT
    JEL: E12 E24
    Date: 2021–04–25
  20. By: Daniel Fehrle; Johannes Huber
    Abstract: We take the neoclassical perspective and apply the business cycle accounting method as proposed by Chari, Kehoe, and McGrattan (2007, Econometrica) for the Great Recession and the associated stimulus program in Germany 2008-2009. We include wedges to the variables government consumption, durables, investment, labor, net exports, and efficiency. The results suggest: The crisis was mainly driven by the efficiency wedge, followed by the net exports and the investment wedge. The government consumption wedge and in particular the durables wedge acted counter-cyclical. We attribute the latter to an internationally incomparably large cash for clunkers program and conclude that this subsidy on durable goods was more effective than pure government consumption. We introduce a strategy for likelihood maximization, which reliably and quickly locates the maximum; enables a detailed evaluation of the likelihood function and allows large robustness checks.
    Keywords: Fiscal stimulus, Great Recession, Business cycle accounting, Maximum-Likelihood
    JEL: C32 E20 E32 H12 H31
    Date: 2020–06

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