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on Dynamic General Equilibrium |
| By: | Mariia A. Elkina (National Research University Higher School of Economics) |
| Abstract: | Financial repression (FR) allows the government to save on its interest rate payments. However, forcing financial intermediaries to increase the share of government debt in their portfolios can alter transmission of macroeconomic shocks. In this paper, we raise the question whether it is the case. Simulations of a DSGE model with financial frictions indicate that the presence of FR creates an additional link between changes in government fiscal position and dynamics of corporate credit terms. Holding regulatory environment constant, if government wishes to issue more debt, it has to offer higher return on its debt and reduce its FR revenues. Lower FR revenues translate into better borrowing terms for entrepreneurs and higher private investment. Hence, FR can either amplify or dampen output response to the shock, depending on whether this shock increases or decreases government financing needs |
| Keywords: | financial repression, business cycle, government debt, general equilibrium, financial frictions. |
| JEL: | E32 E60 H60 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:246/ec/2021&r= |
| By: | Kamalyan, Hayk |
| Abstract: | This paper studies state-dependent effects of monetary policy shocks. I first consider state-dependence of policy actions in a simple static model. The model predicts that effectiveness of monetary policy is positively related to the level of output. I next use an estimated DSGE model to quantitatively assess asymmetries in policy transmission mechanism. Consistent with the intuition of the simple model, I find that the effects of monetary policy on output are less powerful in recessions compared to expansions. By contrast, inflation is more sensitive in recessionary states. The latter implies that the aggregate price flexibility is varying across the business cycle. In particular, prices are more flexible when the economy is in a recessionary state. Conversely, prices become more rigid in expansionary states. |
| Keywords: | Expansions, Recessions, State-Dependent Transmission Mechanism, New-Keynesian Model |
| JEL: | E31 E32 E37 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107489&r= |
| By: | Kamalyan, Hayk |
| Abstract: | In ``The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models'' published in the American Economic Review, Steinsson (2008) argues that a baseline open economy sticky price model with real shocks can rationalize the real exchange rate persistence and hump-shaped dynamics observed in data. The current paper shows that i) the dynamics of the real exchange rate depend upon the parameter values of the Taylor rule, ii) the model cannot simultaneously match the observed dynamics of the real exchange rate and the close co-movement between the real and nominal currency returns. Thus, the baseline framework is not capable of fully capturing the real exchange rate adjustment process. |
| Keywords: | Real exchange rate adjustment, Nominal-real exchange rate co-movement, New Keynesian model, Monetary policy rule |
| JEL: | E52 E58 F31 F41 |
| Date: | 2020–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107491&r= |
| By: | Jagjit S. Chadha; Germana Corrado; Luisa Corrado; Ivan De Lorenzo Buratta |
| Abstract: | We develop a DSGE model with heterogeneous agents, where savers own firms and riskpricing banks while borrowers require loans to establish their consumption plans. The bank lends at an external finance premium (EFP) over the policy rate as a function of the asset price, housing collateral, the demand for loans and their perceived riskiness. We suggest that the close relationship between aggregate consumption and house prices is related to collateral effects. We also outline the role of the EFP in determining consumption spillovers between borrowers and lenders. We solve the model with occasionally-binding constraints to examine the redistributive role of macro-prudential policies in terms of welfare. Countercyclical deployment of the loan-to-value constraint placed on borrowers can limit the scale of the downturn from a negative house price shock. Furthermore, when the zero lower bound acts to constrain monetary policy, looser macroprudential policies can act as an effective substitute for lower policy rates. Finally, we show that co-ordinated macroprudential and fiscal policies can also attenuate the welfare losses that arise from uncertainty banks may face about default probabilities. |
| JEL: | E32 E44 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202103&r= |
| By: | Lanteri, Andrea; Rampini, Adriano A. |
| Abstract: | We analyze the constrained-efficient allocation in an equilibrium model of investment and capital reallocation with heterogeneous firms facing collateral constraints. The model features two types of pecuniary externalities: collateral externalities, because the resale price of capital affects firms' ability to borrow, and distributive externalities, because buyers of old capital are more financially constrained than sellers, consistent with empirical evidence. We show analytically and quantitatively that the equilibrium price of old capital is inefficiently high in general, because the distributive pecuniary externality exceeds the collateral externality, by a factor of two in the calibrated model. New investment generates a positive aggregate externality by reducing the future price of old capital, fostering reallocation toward more constrained firms. The constrained-efficient allocation induces a consumption-equivalent welfare gain of 5% compared to the competitive equilibrium, and can be implemented with subsidies on new capital and taxes on old capital. |
| Keywords: | capital reallocation; Collateral; constrained efficiency; Investment Subsidies; Pecuniary externalities |
| JEL: | D51 E22 E44 G31 H21 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15690&r= |
| By: | Kollmann, Robert |
| Abstract: | This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These "expectations-driven" liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a "fundamentals-driven" liquidity trap. |
| Keywords: | domestic and international shock transmission; Exchange rate; expectations-driven and fundamentals-driven liquidity traps; Net exports; terms of trade; zero lower bound |
| JEL: | E3 E4 F2 F3 F4 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15631&r= |
| By: | Fernández-Villaverde, Jesús; Mandelman, Federico; Yu, Yang; Zanetti, Francesco |
| 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 high-productivity firms' output share. Firms want to get bigger and hire more workers, in stark contrast with the classic monopsony model, where a firm aims to reduce the amount of labor it hires. The combination of search complementarities and monopsony power induces 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. |
| Keywords: | Market concentration; Monopsony Power; search complementarities; Superstar Firms |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15788&r= |
| By: | Broer, Tobias; Kohlhas, Alexandre; Mitman, Kurt; Schlafmann, Kathrin |
| Abstract: | We document systematic differences in macroeconomic expectations across U.S. households and rationalize our findings with a theory of information choice. We embed this theory into an incomplete-markets model with aggregate risk. Our model is quantitatively consistent with the pattern of expectation heterogeneity in the data. Relative to a full-information counterpart, our model implies substantially increased macroeconomic volatility and inequality. We show through the example of a wealth tax that neglecting the information channel leads to erroneous conclusions about the effects of policies. While in the model without information choice a wealth tax reduces wealth inequality, in our framework it reduces information acquired in the economy, leading to increased volatility and higher wealth inequality in equilibrium. |
| Keywords: | Heterogenous information; incomplete markets; precautionary savings; unemployment |
| JEL: | D84 E21 E27 E62 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15934&r= |
| By: | Mitman, Kurt; Rabinovich, Stanislav |
| Abstract: | We investigate the optimal response of unemployment insurance to economic shocks, both with and without commitment. The optimal policy with commitment follows a modified Baily-Chetty formula that accounts for job search responses to future UI benefit changes. As a result, the optimal policy with commitment tends to front-load UI, unlike the optimal discretionary policy. In response to shocks intended to mimic those that induced the COVID-19 recession, we find that a large and transitory increase in UI is optimal; and that a policy rule contingent on the change in unemployment, rather than its level, is a good approximation to the optimal policy. |
| Keywords: | Markov perfect equilibrium; optimal policy; Unemployment insurance |
| JEL: | E6 H1 J65 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15748&r= |
| By: | Madeira, João; Palma, Nuno Pedro G.; van der Kwaak, Christiaan |
| Abstract: | Advanced economies tend to have large but unstable intermediation sectors. We employ a DSGE model with banks featuring limited liability to investigate how risk shocks in the financial sector affect long-run macroeconomic outcomes. With full deposit insurance, banks expand balance sheets when risk increases, leading to higher investment and output. With no deposit insurance, we observe substantial drops in long-run credit provision, investment, and output. These differences provide a novel argument in favor of deposit insurance. Finally, our welfare analysis finds that increased risk reduces welfare, except when there is full deposit insurance and deadweight costs are small. |
| Keywords: | Costly state verification; deposit insurance; endogenous leverage; intermediation; investment; limited liability; Regulation; risk |
| JEL: | E22 E44 G21 O16 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15841&r= |
| By: | Drautzburg, Thorsten; Fernández-Villaverde, Jesús; Guerron, Pablo |
| Abstract: | We argue that social and political risk causes significant aggregate fluctuations by changing workers' bargaining power. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks trigger output and unemployment movements. To quantify the aggregate importance of these distribution shocks, we extend an otherwise standard neoclassical growth economy. We model distribution shocks as exogenous changes in workers' bargaining power in a labor market with search and matching. We calibrate our economy to the U.S. corporate non-financial business sector, and we back out the evolution of workers' bargaining power. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 28% of aggregate fluctuations and have a welfare cost of 2.4% in consumption units. |
| Keywords: | Aggregate fluctuations; bargaining shocks; Distribution risk; historical narrative; partial filter |
| JEL: | E32 E37 E44 J20 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15979&r= |
| By: | Cavalcanti, Tiago; Kaboski, Joseph; Martins, Bruno; Santos, Cezar |
| 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 arise 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. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15930&r= |
| By: | Dix-Carneiro, Rafael; Goldberg, Pinelopi Koujianou; Meghir, Costas; Ulyssea, Gabriel |
| 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. |
| JEL: | F14 F16 J46 O17 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:-85244&r= |
| By: | Kärkkäinen, Samu; Nyholm, Juho |
| Abstract: | We analyze the economic effects of a debt-to-income constraint for the Finnish economy. Our benchmark is a DSGE model which is designed to capture the most prominent features of the Finnish economy and is calibrated using Finnish macroeconomic data. The baseline model incorporates a loan-to-value type of constraint for new mortgage loans. We study the effects of replacing this with a neutral DTI constraint, neutral meaning that the level of the constraint is set so that it would not alter the mortgage loans-to-GDP ratio in the long run. We find that the replacement would have only small long run effects on the economy, and it would poten-tially reduce the volatility of several variables associated with the housing markets. |
| Keywords: | Suomen Pankki,Aino 3.0,DSGE,mallit,Suomi |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:12021&r= |
| By: | Mendoza, Enrique G; Rojas, Eugenio; Tesar, Linda; Zhang, Jing |
| Abstract: | COVID-19 became a global health emergency when it threatened the catastrophic collapse of health systems as demand for health goods and services and their relative prices surged. Governments responded with lockdowns and increases in transfers. Empirical evidence shows that lockdowns and healthcare saturation contribute to explain the cross-country variation in GDP drops even after controlling for COVID-19 cases and mortality. We explain this output-pandemia tradeoff as resulting from a shock to subsistence health demand that is larger at higher capital utilization in a model with entrepreneurs and workers. The health system moves closer to saturation as the gap between supply and subsistence narrows, which worsens consumption and income inequality. An externality distorts utilization, because firms do not internalize that lower utilization relaxes healthcare saturation. The optimal policy response includes lockdowns and transfers to workers. Quantitatively, strict lockdowns and large transfer hikes can be optimal and yield sizable welfare gains because they prevent a sharp rise in inequality. Welfare and output costs vary in response to small parameter changes or deviations from optimal policies. Weak lockdowns coupled with weak transfers programs are the worst alternative and yet are in line with what several emerging and least developed countries have implemented. |
| Keywords: | COVID; Fiscal policy; pandemia |
| JEL: | E25 E65 I1 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15846&r= |
| By: | Matthias Rottner |
| Abstract: | Motivated by the build-up of shadow bank leverage prior to the Great Recession, I develop a nonlinear macroeconomic model that features excessive leverage accumulation and show how this can cause a bank run. Introducing risk-shifting incentives to account for fluctuations in shadow bank leverage, I use the model to illustrate that extensive leverage makes the shadow banking system runnable, thereby raising the vulnerability of the economy to future financial crises. The model is taken to U.S. data with the objective of estimating the probability of a run in the years preceding the financial crisis of 2007-2008. According to the model, the estimated risk of a bank run was already considerable in 2004 and kept increasing due to the upsurge in leverage. I show that levying a leverage tax on shadow banks would have substantially lowered the probability of a bank run. Finally, I present reduced-form evidence that supports the tight link between leverage and the possibility of financial crises. |
| Keywords: | Financial crises, Shadow banks, Leverage, Credit booms, Bank runs |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2021/02&r= |
| By: | Anna, Beliansk; Eyquem, Aurélien; Poilly, Céline |
| Abstract: | Higher uncertainty about government spending generates a persistent decline in the economic activity in the Euro Area. This paper emphasizes the transmission channels explaining this empirical fact. First, a Stochastic Volatility model is estimated on European government consumption to build a measure of government spending uncertainty. Plugging this measure into a SVAR model, we stress that government spending uncertainty shocks have recessionary, persistent and humped-shaped effects. Second, we develop a New Keynesian model with financial frictions applying to a portfolio of equity and long-term government bonds. We argue that a portfolio effect -- resulting from the imperfect substitutability among both assets -- acts as a critical amplifier of the usual transmission channels. |
| Keywords: | Government spending uncertainty; portfolio adjustment cost; stochastic volatility |
| JEL: | E52 E62 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15894&r= |
| By: | Chang, Roberto; Martinez, Humberto; Velasco, Andrés |
| Abstract: | The advent of a pandemic is an exogenous shock, but the dynamics of contagion are very much endogenous Â?and depend on choices individuals make in response to incentives. In such an episode, economic policy can make a difference not just by alleviating economic losses but also by providing 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 Â?scal package resembling the U.S. CARES Act can result in two waves of infection. |
| Keywords: | contagion; dynamics; Economic Policy; incentives; Pandemic |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15977&r= |
| By: | Björn Brügemann (Vrije Universiteit Amsterdam) |
| Abstract: | This paper show analytically that introducing diminishing returns to labor at the firm level into the Diamond-Mortensen-Pissarides model, followed by recalibration, does not change aggregate dynamics of unemployment and vacancies. This invariance result holds for several standard calibration strategies developed for the model with constant returns, alternative bargaining solutions for the setting with diminishing returns, and different sources of diminishing returns. Invariance makes precise in which sense the common practice of abstracting from diminishing returns is innocuous. It provides an analytical benchmark for quantitative findings obtained in models that do combine a Diamond-Mortensen-Pissarides labor market with diminishing returns at the firm level. |
| Keywords: | Diminishing returns, Diamond-Mortensen-Pissarides model, Aggregate unemployment dynamics, Calibration, Bargaining |
| JEL: | E24 E32 J64 |
| Date: | 2021–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20210034&r= |
| By: | Nobuhiro Kiyotaki; John Moore; Shengxing Zhang |
| Abstract: | Entrepreneurs appear to borrow largely against their near-term revenues, even when their investment has a longer horizon. In this paper, we develop a model of credit horizons. A question of particular concern to us is whether persistently low interest rates can stifle economic activity. With this in mind, our model is of a small open economy where the world interest rate is taken to be exogenous. We show that a permanent fall in the interest rate can reduce aggregate investment and growth, and even lead to a drop in the welfare of everyone in the domestic economy. We use our framework to examine how credit horizons interact with plant dynamics and the evolution of productivity. Finally, we speculate that the measurement of total investment may camouflage the true level of productive investment in plant and human capital, and give too rosy a picture of property-fuelled booms sparked by low interest rates. |
| JEL: | E44 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28742&r= |
| By: | Martin F. Hellwig (Max Planck Institute for Research on Collective Goods) |
| Abstract: | The paper gives conditions for dynamic inefficiency of laissez-faire allocations in an overlapping-generations model with safe and risky assets. If the rate of population growth is certain, the conditions given depend only on how the rate of return on safe assets compares to the growth rate. If no safe assets are held, the implicit relative price for non-contingent intertemporal exchanges takes the place of the safe rate of return. Returns on risky assets do not enter the comparison. The conclusion holds regardless of whether welfare assessments are made from an interim perspective, taking account of the information that people have, or from an ex ante perspective. If a laissez-faire allocation is dynamically inefficient, a Pareto improvement can be implemented by a suitable fiscal policy intervention, which includes specific taxes or subsidies that neutralize incentive effects on risky investments and the price effects they induce. |
| Keywords: | Dynamic Inefficiency, overlapping-generations models, safe asset shortages, macro risk allocation, public debt |
| JEL: | D15 D61 E21 E22 E62 H30 |
| Date: | 2021–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2021_10&r= |
| By: | Brzustowski, Thomas; Caselli, Francesco |
| Abstract: | We develop and formalize an equilibrium concept for a dynamic economy in which production takes place in worker cooperatives. The concept rules out allocations of workers to cooperatives in which a worker in one cooperative could move to a different cooperative and make both herself and the existing workers in the receiving cooperative better off. It also rules out allocations in which workers in a cooperative would be made better off by some of the other workers leaving. We also provide a minimum-information equilibrium-selection criterion which operationalizes our equilibrium concept. We illustrate the application of our concept and operationalization in the context of an overlapping-generation economy with specific preferences and technology. The cooperative economy follows a dynamic path qualitatively similar to the path followed by a capitalist economy, featuring gradual convergence to a steady state with constant output. Quantitatively, however, the cooperative economy features a static inefficiency, in that, for a given aggregate capital stock, firm size is smaller than what a social planner would choose. On the other hand, the cooperative economy cannot be dynamically inefficient, and could accumulate capital at a rate that is higher or lower than the capitalist economy. We also present an illustrative calibration which quantitatively compares steady-state incomes in a cooperative and in a capitalist economy. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15720&r= |
| By: | Nikolay Iskrev |
| Abstract: | In this paper, I show how to perform spectral decomposition of the information about latent variables in dynamic economic models. A model describes the joint probability distribution of a set of observed and latent variables. The amount of information transferred from the former to the latter is measured by the reduction of uncertainty in the posterior compared to the prior distribution of any given latent variable. Casting the analysis in the frequency domain allows decomposing the total amount of information in terms of frequency-specific contributions as well as in terms of information contributed by individual observed variables. I illustrate the usefulness of the proposed methodology with applications to two DSGE models taken from the literature. |
| JEL: | C32 C51 C52 E32 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202105&r= |
| By: | Baqaee, David Rezza; Farhi, Emmanuel; Sangani, Kunal |
| Abstract: | We propose a supply-side channel for the transmission of monetary policy. We show that if, as is consistent with the empirical evidence, bigger firms have higher markups and lower pass-throughs than smaller firms, then a monetary easing endogenously increases aggregate TFP and improves allocative efficiency. This endogenous positive "supply shock" amplifies the effects of the positive "demand shock" on output and employment. The result is a flattening of the Phillips curve. This effect is distinct from another mechanism discussed at length in the real rigidities literature: a monetary easing leads to a reduction in desired markups because of strategic complementarities in pricing. We calibrate the model to match firm-level pass-throughs and find that the misallocation channel of monetary policy is quantitatively important, flattening the Phillips curve by about 70% compared to a model with no supply-side effects. We derive a tractable four-equation dynamic model and show that monetary easing generates a procyclical hump-shaped response in aggregate TFP and countercyclical dispersion in firm-level TFPR. The improvements in allocative efficiency amplify both the impact and persistence of interest rate shocks on output. |
| Keywords: | Incomplete pass-through; Misallocation; monetary policy; productivity |
| JEL: | E0 L1 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15702&r= |
| By: | Gorodnichenko, Yuriy; Maliar, Lilia; Maliar, Serguei; Naubert, Christopher |
| Abstract: | In this paper, we study household consumption-saving and portfolio choices in a heterogeneous-agent economy with sticky prices and time-varying total factor productivity and idiosyncratic stochastic volatility. Agents can save through liquid bonds and illiquid capital and shares. With rich heterogeneity at the household level, we are able to quantify the impact of uncertainty across the income and wealth distribution. Our results help us in identifying who wins and who loses when during periods of heightened individual and aggregate uncertainty. To study the importance of heterogeneity in understanding the transmission of economic shocks, we use a deep learning algorithm. Our method preserves non-linearities, which is essential for understanding the pricing decisions for illiquid assets. |
| Keywords: | deep learning; HANK; Heterogeneous Agents; Machine Learning; neural network |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15614&r= |
| By: | Lee E. Ohanian; Musa Orak; Shihan Shen |
| Abstract: | This paper revisits capital-skill complementarity and inequality, as in Krusell, Ohanian, Rios-Rull and Violante (KORV, 2000). Using their methodology, we study how well the KORV model accounts for more recent data, including the large changes in labor’s share of income that were not present in KORV. We study both labor share of gross income (as in KORV), and income net of depreciation. We also use non-farm business sector output as an alternative measure of production to real GDP. We find strong evidence for continued capital-skill complementarity in the most recent data, and that the model continues to closely account for the skill premium. The model captures the average level of labor share, though it overpredicts its level by 2-4 percentage points at the end of the period. |
| JEL: | E13 E25 J23 J3 J68 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28747&r= |
| By: | Dietrich, Alexander; Müller, Gernot; Schoenle, Raphael |
| Abstract: | Using a representative consumer survey in the U.S., we elicit beliefs about the economic impact of climate change. Respondents perceive a high probability of costly, rare disasters in the near future due to climate change, but not much of an impact on GDP growth. Salience of rare disasters through media coverage increases the disaster probability by up to 7 percentage points. We analyze these findings through the lens of a New Keynesian model with rare disasters. First, we illustrate how expectations of rare disasters impact economic activity. Second, we calibrate the model to capture the key aspects of the survey and quantify the expectation channel of climate change: disaster expectations lower the natural rate of interest by about 65 basis points and, assuming a conventional Taylor rule for monetary policy, inflation and the output gap by 0.3 and 0.2 percentage points, respectively. The effect is considerably stronger if monetary policy is constrained by the effective lower bound. |
| Keywords: | climate change; Disasters; Households Expectations; Media focus; monetary policy; Natural rate of interest; Paradox of Communication; survey |
| JEL: | E43 E52 E58 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15866&r= |
| By: | Reis, Ricardo |
| Abstract: | With real interest rates below the growth rate of the economy, but the marginal product of capital above it, the public debt can be lower than the present value of primary surpluses because of a bubble premia on the debt. The government can run a deficit forever. In a model that endogenizes the bubble premium as arising from the safety and liquidity of public debt, more government spending requires a larger bubble premium, but because people want to hold less debt, there is an upper limit on spending. Inflation reduces the fiscal space, financial repression increases it, and redistribution of wealth or income taxation have an unconventional effect on fiscal capacity through the bubble premium. |
| Keywords: | debt limits; debt sustainability; incomplete markets; Misallocation |
| JEL: | D52 E62 G10 H63 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15950&r= |
| By: | Bonnet, Odran; Chapelle, Guillaume; Trannoy, Alain; Wasmer, Etienne |
| Abstract: | Land is back. The increase in wealth in the second half of 20th century arose from housing and land. It should be taxed. We introduce land and housing structures in Judd's standard setup: first best optimal taxation is achieved with a property tax on land and requires no tax on capital. With positive taxes on housing rents, a first best is still possible but with subsidies to rental housing investments, and either with differential land tax rates or with a tax on imputed rents. It can be taxed. Even absent land taxes, one can tax it indirectly and reach a Ramsey-second best still with no tax on capital and positive housing rent taxes in the steady-state. This result extends to the dynamics under restrictions on parameters. |
| Keywords: | Capital; First best; housing; land; Optimal tax; Second best; wealth |
| JEL: | D63 R14 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15845&r= |
| By: | Jaccard, Ivan |
| Abstract: | This paper studies the effects of imperfect risk-sharing between lenders and borrowers on commercial property prices and leverage. The key friction is that agents use different discount rates to evaluate future flows. Eliminating this pecuniary externality generates large reductions in the volatility of real estate prices and credit. Therefore, policies that enhance risk-sharing between lenders and borrowers reduce the magnitude of boom-bust cycles in real estate prices. We also introduce health shocks to study the effect of the COVID-19 crisis on the commercial property market. JEL Classification: E32, E44, G10, E23 |
| Keywords: | asset pricing, incomplete markets, leverage cycle, pecuniary externalities |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212539&r= |
| By: | Westerhout, Ed (Tilburg University, Center For Economic Research); Meijdam, Lex (Tilburg University, Center For Economic Research); Ponds, Eduard (Tilburg University, Center For Economic Research); Bonenkamp, Jan |
| Keywords: | PAYG; Funding; Pensions; Aaron Rule |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:63418f60-e248-4dc9-aac8-ffefd6da93a4&r= |
| By: | Benigno, Pierpaolo; Rossi, Lorenza |
| Abstract: | Nonlinearities embedded in the standard New-Keynesian model show that a welfare-maximizing policymaker should behave in line with a contractionary bias, fearing more expansions in output and inflation rather than contractions. On the contrary, the aggregate-supply equation implies that any upward pressure coming from real marginal costs does not necessarily push up inflation. Once these two forces are combined in the optimal policy, an overall expansionary bias emerges. The nonlinearities of the AS equation combined with changes in volatility can be responsible for a flattening in the estimated linear Phillips curve. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15944&r= |
| By: | Kamalyan, Hayk |
| Abstract: | This paper evaluates state-dependence in monetary policy transmission mechanism under Calvo and Rotemberg price adjustment schemes. Although the two models are equivalent to first order, they produce very different results once considered at a higher order. In particular, the Rotemberg model produces more state-dependence compared to the Calvo model. The result is reversed once the macroeconomic wedges are eliminated from the models. |
| Keywords: | State-Dependence, Calvo, Rotemberg, Monetary Policy |
| JEL: | E30 E32 E50 E52 |
| Date: | 2021–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107490&r= |
| By: | Petrosky-Nadeau, Nicolas; Wasmer, Etienne; Weil, Philippe |
| Abstract: | In an economy with frictional goods and labor markets there exist a price and a wage that implement the constrained efficient allocation. This price maximizes the marginal revenue of labor, balancing a price and a trading effect on firm revenue, and this wage trades off the benefits of job creation against the cost of turnover in the labor market. We show under bargaining over prices and wages that a double Hosios condition: (i) implements the constrained efficient allocation; (ii) also minimizes the elasticity of labor market tightness and job creation to a demand shock, and; (iii) that the relative response of wages to that of unemployment to changes in demand flattens as workers lose bargaining power, and it is steepest when there is efficient rent sharing in the goods market between consumers and producers, thereby relating changes in the slope of a wage Phillips curve to the constrained efficiency of allocations. |
| Keywords: | aggregate demand; constrained efficiency; market power; Search and matching frictions; unemployment; Wage Phillips Curve |
| JEL: | E24 E32 J63 J64 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15833&r= |