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

  1. The macroeconomics of carry trade gone wrong: corporate and consumer losses in emerging Europe By Egle Jakucionyte; Sweder van Wijnbergen
  2. 'Quantitative Easing' and central bank asset purchases in South Africa: A DSGE approach By Cobus Vermeulen
  3. Piecewise-Linear Approximations and Filtering for DSGE Models with Occasionally Binding Constraints By Aruoba, Boragan; Cuba-Borda, Pablo; Hilga-Flores, Kenji; Schorfheide, Frank; Villalvazo, Sergio
  4. Short-Time Work and Precautionary Savings By Dengler, Thomas; Gehrke, Britta
  5. Redistributive effects of pension reforms: Who are the winners and losers? By Sanchez-Romero, Miguel; Schuster, Philip; Prskawetz, Alexia
  6. From Dual to Unified Employment Protection: Transition and Steady State By Dolado, Juan J.; Lale, Etienne; Siassi, Nawid
  7. Interest Rate Uncertainty and Sovereign Default Risk By Alok Johri; Shahed Khan; César Sosa-Padilla
  8. Central bank digital currency in an open economy By Ferrari, Massimo; Mehl, Arnaud; Stracca, Livio
  9. Environment, public debt and epidemics By Marion Davin; Mouez Fodha; Thomas Seegmuller
  10. Asymmetry, terms of trade and the aggregate supply curve in an open economy model By Ashima Goyal; Abhishek Kumar
  11. Unemployment risk, liquidity traps and monetary policy By Bonciani, Dario; Oh, Joonseok
  12. Trade Credit and Sectoral Comovement during the Great Recession By Jorge Miranda-Pinto; Gang Zhang
  13. The Stable Transformation Path By Buera, Francisco J; Kaboski, Joseph; Mestieri, Martí; O'Connor, Daniel
  14. Barriers to Global Capital Allocation By Bruno Pellegrino; Enrico Spolaore; Romain Wacziarg
  15. Federal unemployment reinsurance and local labor-market policies By Ignaszak, Marek; Jung, Philip; Kuester, Keith
  16. (S)Cars and the Great Recession By Attanasio, Orazio; Larkin, Kieran; Padula, Mario; Ravn, Morten O
  17. The Macroeconomic Effects of a Carbon Tax to Meet the U.S. Paris Agreement Target: The Role of Firm Creation and Technology Adoption By Alan Finkelstein Shapiro; Gilbert E. Metcalf
  18. Offshoring and Inflation By Comin, Diego; Johnson, Robert
  19. Expectations-driven liquidity traps: Implications for monetary and fiscal policy By Nakata, Taisuke; Schmidt, Sebastian
  20. Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics By Niepelt, Dirk
  21. The effect of inter vivos gifts taxation on wealth inequality and economic growth By Template-Type: ReDIF-Paper 1.0; Ryota Nakano
  22. Reserve Accumulation, Macroeconomic Stabilization, and Sovereign Risk By Javier Bianchi; César Sosa Padilla
  23. Deep Learning Classification: Modeling Discrete Labor Choice By Maliar, Lilia; Maliar, Serguei
  24. The constraint on public dept when r By Ricardo Reis
  25. Rigid Wages, Endogenous Job Destruction, and Destabilizing Spirals By Euiyoung Jung
  26. The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S. By Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L.
  27. The Liquidity Channel of Fiscal Policy By Christian Bayer; Benjamin Born; Ralph Luetticke
  28. How Should Tax Progressivity Respond to Rising Income Inequality By Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L.
  29. Public Debt as Private Liquidity: Optimal Policy By Angeletos, George-Marios; Collard, Fabrice; Dellas, Harris
  30. The commitment benefit of consols in government debt management By Davide Debortoli; Ricardo Nunes; Pierre Yared
  31. Social Distancing in Macroeconomic Models By Yoseph Getachew
  32. Automation, Offshoring and Employment Distribution in Western Europe By Jocelyn Maillard

  1. By: Egle Jakucionyte (Bank of Lithuania, Vilnius University); Sweder van Wijnbergen (Tinbergen Institute, CEPR, University of Amsterdam)
    Abstract: This paper analyzes the macroeconomic consequences of foreign currency losses by banks, corporates and consumers in order to find whether some allocations of losses are better from a macroeconomic perspective than others. To that end, we construct a New Keynesian DSGE model with debt overhang for corporate borrowers, monitoring costs for household mortgage debt and leverage constraints for banks. The Hungarian experience at the end of 2008 and model estimation on Hungarian data motivate these financial frictions. Model simulation shows that making corporate borrowers bear currency risk results in worse macroeconomic outcomes than shifting currency mismatch losses to banks. Foreign currency mortgages to households, however, generate lower output than currency mismatch in the banking sector. The fact that households do not suffer from debt overhang, among other reasons, is driving this result.
    Keywords: Currency mismatch, household debt, corporate debt, leveraged banks, small open economy, Bayesian estimation
    JEL: E44 G21 F41 P2
    Date: 2020–04–22
  2. By: Cobus Vermeulen
    Abstract: This paper develops a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model to evaluate the effect of the temporary emergency purchases of government bonds by the South African Reserve Bank (SARB) during 2020. The model is constructed in the portfolio balancing framework, in which the non-bank private sector holds a portfolio of imperfectly substitutable domestic government bonds of different maturities. This allows bond purchases by the central bank, through changing the composition of household bond portfolios, to influence the macroeconomy. The model is calibrated and simulated on South African data. Consistent with similar models of Quantitative Easing simulated for the US and the UK, the results here illustrate that bond purchases by the SARB could have a broader stimulatory macroeconomic impact, over and above the SARB’s primary objective of providing liquidity to domestic ï¬ nancial markets. This includes an expansion in the money supply, a fall in long-term government bond yields, and an increase in consumption, inflation and output. However, given the relatively small scale of the SARB’s bond purchases, the stimulus effect is modest.
    Keywords: open-economy DSGE, central bank asset purchases, quantitative easing, portfolio balance theory
    JEL: E12 E17 E44 E52
    Date: 2020–11
  3. By: Aruoba, Boragan; Cuba-Borda, Pablo; Hilga-Flores, Kenji; Schorfheide, Frank; Villalvazo, Sergio
    Abstract: We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle filter, the COPF significantly reduces the persistence of the Markov chain, improves the accuracy of Monte Carlo approximations of posterior moments, and drastically speeds up computations. We use the techniques to estimate a small-scale DSGE model to assess the effects of the government spending portion of the American Recovery and Reinvestment Act in 2009 when interest rates reached the zero lower bound.
    Keywords: Bayesian estimation; Effective Lower Bound on Nominal Interest Rates; Nonlinear Filtering; Nonlinear Solution Methods; Particle MCMC
    JEL: C5 E4 E5
    Date: 2020–10
  4. By: Dengler, Thomas (Humboldt University Berlin); Gehrke, Britta (University of Rostock)
    Abstract: In the Covid-19 crisis, most OECD countries use short-time work schemes (subsidized working time reductions) to preserve employment relationships. This paper studies whether short-time work can save jobs through stabilizing aggregate demand in recessions. We build a New Keynesian model with incomplete asset markets and labor market frictions, featuring an endogenous firing as well as a short-time work decision. In recessions, short-time work reduces the unemployment risk of workers, which mitigates their precautionary savings motive and aggregate demand falls by less. Using a quantitative model analysis, we show that this channel can increase the stabilization potential of short-time work over the business cycle up to 55%, even more when monetary policy is constrained by the zero lower bound. Further, an increase of the short-time work replacement rate can be more effective compared to an increase of the unemployment benefit replacement rate.
    Keywords: short-time work, fiscal policy, incomplete asset markets, unemployment risk, matching frictions
    JEL: E21 E24 E32 E52 E62 J63
    Date: 2021–04
  5. By: Sanchez-Romero, Miguel; Schuster, Philip; Prskawetz, Alexia
    Abstract: As the heterogeneity in life expectancy by socioeconomic status increases, pension systems become more regressive implying wealth transfers from short to long lived individuals. Various pension reforms aim to reduce these inequalities that are caused by ex-ante differences in life expectancy. However, these pension reforms may themselves induce redistribution effects since a) life expectancy is not perfectly correlated to socioeconomic status and b) pension reforms themselves will have an impact on life cycle decisions (education, consumption, health, labor supply) and ultimately also on life expectancy and the composition of the population. To account for these feedback effects of pension reforms in heterogenous aging societies we propose an OLG framework that is populated by heterogeneous individuals that initially differ by their learning ability and disutility from the effort of attending schooling. These initial heterogeneities imply differences in ex ante life expectancies. Within this framework we study two pension reforms that aim to account for these differences in ex ante life expectancies. We show that by including the feedback of pension reforms on individual behavior, new redistributions may result.
    Keywords: Overlapping generations,Mortality and fertility differentials,Inequality,Life cycle,Pensions,Progressivity
    Date: 2021
  6. By: Dolado, Juan J.; Lale, Etienne; Siassi, Nawid
    Abstract: Three features of real-life reforms of dual employment protection legislation (EPL) systemsnare particularly hard to study through the lens of standard labour-market search models: (i) the excess job turnover implied by dual EPL, (ii) the non-retroactive nature of EPL reforms, and (iii) the transition dynamics from dual to a unified EPL system. In this paper we develop a computationally tractable model addressing these issues. Our main finding is that the welfare gains of reforming a dual EPL system are sizeable and achieved mostly through a decrease in turnover at short job tenures. This conclusion continues to hold in more general settings featuring wage rigidities, heterogeneity in productivity upon matching, and human capital accumulation. We also find substantial cross-sectional heterogeneity in welfare effects along the transition to a unified EPL scheme. Given that the model is calibrated to data from Spain, often considered as the epitome of a labour market with dual EPL, our results should provide guidance for a wide range of reforms of dual EPL systems.
    Date: 2020–11
  7. By: Alok Johri (McMaster University); Shahed Khan (University of Western Ontario); César Sosa-Padilla (University of Notre Dame/NBER)
    Abstract: International data suggests that fluctuations in the level and volatility of the world interest rate (as measured by the US treasury bill rate) are positively correlated with both the level and volatility of sovereign spreads in emerging economies. We incor- porate an estimated time-varying process for the world interest rate into a model of sovereign default calibrated to a panel of emerging economies. Time variation in the world interest rate interacts with default incentives in the model and leads to state con- tingent effects on borrowing and sovereign spreads which resemble those found in the data. The model delivers up to one-half of the positive comovement between the level and volatility of world interest rate and the level of sovereign spreads seen in emerg- ing economies. Moreover, the model also delivers significant positive co-movements between the volatility of the spread and the process for the world interest rate which is also consistent with the data. Our model provides one potential source for the observed bunching in default probabilities observed across nations, namely the world interest rate process. Our model generates a positive and significant correlation (0.51) between the spreads of two nations with uncorrelated income processes. This is close to the observed mean correlation in the data (0.61).
    Keywords: Sovereign Debt Sovereign Default Interest Rate Spread Time-varying Volatility Uncertainty Shocks
    JEL: F34 F41 E43 E32
    Date: 2020–12
  8. By: Ferrari, Massimo; Mehl, Arnaud; Stracca, Livio
    Abstract: We examine the open-economy implications of the introduction of a central bank digital currency (CBDC). We add a CBDC to the menu of monetary assets available in a standard two-country DSGE model and consider a broad set of alternative technical features in CBDC design. We analyse the international transmission of standard monetary policy and technology shocks in the presence and absence of a CDBC and the implications for optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks to a significant extent, thereby increasing international linkages. But the magnitude of these effects depends crucially on CBDC design and can be significantly dampened if the CBDC possesses specific technical features. We also show that domestic issuance of a CBDC increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies.
    Keywords: Central bank digital currency; DSGE model; international monetary system; open-economy; Optimal monetary policy
    JEL: E50 F30
    Date: 2020–10
  9. By: Marion Davin (CEE-M - Centre d'Economie de l'Environnement - Montpellier - UMR 5211 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Mouez Fodha (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We study whether fiscal policies, especially public debt, can help to curb the macroeconomic and health consequences of epidemics. Our approach is based on three main features: we introduce the dynamics of epidemics in an overlapping generations model to take into account that old people are more vulnerable; people are more easily infected when pollution is high; public spending and public debt can be used to tackle the effects of epidemics. We show that fiscal policies can promote the convergence to a stable steady state with no epidemics. When public policies are not able to permanently eradicate the epidemic, public debt and income transfers could reduce the number of infected people and increase capital and GDP per capita. As a prerequisite, pollution intensity should not be too high. Finally, we define a household subsidy policy which eliminates income and welfare inequalities between healthy and infected individuals.
    Keywords: public debt,epidemics,pollution,overlapping generations
    Date: 2021–05–07
  10. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Abhishek Kumar (Indira Gandhi Institute of Development Research)
    Abstract: We find a basic new Keynesian monetary policy DSGE model estimated for differing countries (India and the US) gives deep parameter estimates, impulse responses and forecast error variance decompositions for each in line with theory and country structure, implying similar functional forms can be estimated for different countries with estimated coefficients capturing differences in structure. Features that create excess volatility, especially in emerging markets, explain differences in policy shocks. The feature explored in this paper is external terms of trade. When this is dampened in the emerging market, using policy tools other than the policy rate, the aggregate supply curve, which was relatively steeper, becomes flatter. As a result, volatility of interest rates and their impact on output and inflation, which was relatively higher in India, becomes lower than in the US. Asymmetries between the countries are reversed. The estimated coefficient of the terms of trade is relatively higher in the US Taylor rule. It follows emerging market central banks need policy tools in addition to interest rates to affect volatility creating variables like external terms of trade.
    Keywords: DSGE, India, US, Asymmetry, Open economy model, Terms of trade, Aggregate supply curve
    JEL: E32 F41 F44
    Date: 2021–04
  11. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: When the economy is in a liquidity trap and households have a precautionary motive to save against unemployment risk, adverse demand shocks cause severe deflationary spirals and output contractions. In this context, we study the implications of optimal monetary policy, which consists of keeping the nominal rate at zero longer than implied by current macroeconomic conditions. Under such policy and incomplete markets, expected improvements in labour market conditions mitigate the rise in unemployment risk and decline in demand. As a result, market incompleteness may alleviate contractions in output and inflation during a liquidity trap. However, reducing market incompleteness mitigates the fall in demand under realistic monetary policy rules.
    Keywords: Unemployment risk; Liquidity trap; Zero lower bound; Monetary policy
    JEL: E21 E24 E32 E52 E61
    Date: 2021–05–14
  12. By: Jorge Miranda-Pinto (School of Economics, University of Queensland; MRG - School of Economics, The University of Queensland); Gang Zhang
    Abstract: We show that, unlike any other recession after World War II, sectoral output comovement significantly increased during the Great Recession. On the other hand, trade credit supply, as measured by the ratio of account receivables to the total value of outputs, collapsed during the Great Recession. We show that sectoral comovement was larger for sectors connected through trade credit. We then develop a multisector model with occasionally binding credit constraints and endogenous supply of trade credit to explain these facts. The model shows that equilibrium trade credit reflects both the intermediate supplier’s and client’s bank lending conditions, and thus has asymmetric effects on sectoral outputs. When banking shocks are idiosyncratic, trade credit serves as a mitigation mechanism as firms are able to substitute bank loans for trade credit. However, when banking shocks are strongly correlated, trade credit amplifies the negative financial shock and generates the sharp increase in sectoral comovement observed during the Great Recession. We show that production network models with reduced form wedges are unable to generate this pattern, and that a model with endogenous trade credit amplifies the Great Recession in 18%.
    Keywords: Sectoral Comovement, Production Network, Trade Credit, Financial Friction
    JEL: C67 E23 E32 E44 E51 F40 G30
  13. By: Buera, Francisco J; Kaboski, Joseph; Mestieri, Martí; O'Connor, Daniel
    Abstract: Standard dynamic models of structural transformation, without knife-edge and counterfactual parameter values, preclude balanced growth path (BGP) analysis. This paper develops a dynamic equilibrium concept for a more general class of models --- an alternative to a BGP, which we coin a Stable Transformation Path (STraP). The STraP characterizes the medium-term dynamics of the economy in a turnpike sense; it is the path toward which the economy (quickly) converges from an arbitrary initial capital stock. Calibrated simulations demonstrate that the relaxed parameter values that the STraP allows have important quantitative implications for structural transformation, investment, and growth. Indeed, analyzing the dynamics along the STraP, we show that the modern dynamic model of structural transformation makes progress over the Neoclassical growth model in matching key growth and capital accumulation patterns in cross-country data, including slow convergence.
    Keywords: growth; investment dynamics; Non-balanced Growth
    Date: 2020–10
  14. By: Bruno Pellegrino; Enrico Spolaore; Romain Wacziarg
    Abstract: We quantify the impact of barriers to international investment, using a novel multi-country dynamic general equilibrium model with heterogeneous investors and imperfect capital mobility. Our model yields a gravity equation for bilateral foreign asset positions. We estimate this gravity equation using recently developed foreign investment data that have been restated to account for offshore investment and financing vehicles. We show that a parsimonious implementation of the model with four barriers (geographic distance, cultural distance, foreign investment taxation, and political risk) accounts for a large share of the observed variation in bilateral foreign investment positions. Our model predicts (out of sample) a significant home bias, higher rates of return on capital in emerging markets, as well as “upstream” capital flows. In our benchmark calibration, we estimate that the capital misallocation induced by these barriers reduces World GDP by 7%, compared to a situation without barriers. We also find that barriers to global capital allocation contribute significantly to cross-country inequality: the standard deviation of log capital per employee is 80% higher than it would be in a world without barriers to international investment, while the dispersion in output per employee is 42% higher.
    Keywords: capital allocation, capital flows, foreign investment, culture, geography, gravity, international macroeconomics, international finance, misallocation, open economy
    JEL: E22 E44 F20 F30 F40 G15 O40
    Date: 2021
  15. By: Ignaszak, Marek; Jung, Philip; Kuester, Keith
    Abstract: Consider a union of atomistic member states, each faced with idiosyncratic business-cycle shocks. Private cross-border risk-sharing is limited, giving a role to a federal unemployment-based transfer scheme. Member states control local labor-market policies, giving rise to a trade-off between moral hazard and insurance. Calibrating the economy to a stylized European Monetary Union, we find notable welfare gains if the federal scheme's payouts take the member states' past unemployment level as a reference point. Member states' control over policies other than unemployment benefits can limit generosity during the transition phase.
    Keywords: Fiscal Federalism; labor-market policy; Search and Matching; Unemployment reinsurance
    JEL: E24 E32 E62
    Date: 2020–11
  16. By: Attanasio, Orazio; Larkin, Kieran; Padula, Mario; Ravn, Morten O
    Abstract: US households' consumption and car purchases collapsed during the Great Recession for reasons that are still poorly understood. In this paper we use the Consumer Expenditure Survey to derive cohort and business cycle decompositions of consumption prfio les. When decomposing the car expenditure data into its extensive and intensive margins, we find that the intensive margin contracted sharply in the Great Recession, a fi nding in stark contrast to conventional wisdom and to the experience of prior recessions. We interpret the evidence through the prism of a very rich life-cycle model where individuals are subject to idiosyncratic uninsurable income shocks, aggregate income shocks, wealth shocks, and credit shocks. We show that, because of their salience and the transaction costs, cars are particularly sensitive to changes in the perception of future expected income and its variability. We find that on top of a large aggregate income shock, life-cycle income pro file shocks and wealth shocks are important determinants of consumption choices during the Great Recession.
    Keywords: Consumption; durables adjustment; the Great Recession
    JEL: D12 D14 E21 E32
    Date: 2020–10
  17. By: Alan Finkelstein Shapiro; Gilbert E. Metcalf
    Abstract: We analyze the quantitative labor market and aggregate effects of a carbon tax in a framework with pollution externalities and equilibrium unemployment. Our model incorporates endogenous labor force participation and two margins of adjustment influenced by carbon taxes: (1) firm creation and (2) green production-technology adoption. A carbon-tax policy that reduces carbon emissions by 35 percent – roughly the emissions reductions that will be required under the Biden Administration's new commitment under the Paris Agreement – and transfers the tax revenue to households generates mild positive long-run effects on consumption and output; a marginal increase in the unemployment and labor force participation rates; and an expansion in the number and fraction of firms that use green technologies. In the short term, the adjustment to higher carbon taxes is accompanied by gradual gains in output and consumption and a negligible expansion in unemployment. Critically, abstracting from endogenous firm entry and green-technology adoption implies that the same policy has substantial adverse short- and long-term effects on labor income, consumption, and output. Our findings highlight the importance of these margins for a comprehensive assessment of the labor market and aggregate effects of carbon taxes.
    JEL: E20 E24 E62 H23 O33 Q52 Q54 Q55 Q58
    Date: 2021–05
  18. By: Comin, Diego; Johnson, Robert
    Abstract: Did trade integration suppress inflation in the United States? We say no, in contradiction to the conventional wisdom. Our answer leverages two basic facts about the rise of trade: offshoring accounts for a large share of it, and it was a long-lasting, phased-in shock. Incorporating these features into a New Keynesian model, we show trade integration was inflationary. This result continues to hold when we extend the model to account for US trade deficits, the pro-competitive effects of trade on domestic markups, and cross-sector heterogeneity in trade integration in a multisector model. Further, using the multisector model, we demonstrate that neither cross-sector evidence on trade and prices, nor aggregate time series price level decompositions are informative about the impact of trade on inflation.
    Date: 2020–10
  19. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely-studied fundamental-driven liquidity traps are not a useful guide for enhancing welfare in this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing for the use of government spending as an additional stabilization tool can exacerbate deflationary pressures and demand deficiencies during the liquidity trap episodes. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.
    Keywords: discretion; effective lower bound; Fiscal policy; monetary policy; Policy Delegation; Sunspot equilibria
    JEL: E52 E61 E62
    Date: 2020–11
  20. By: Niepelt, Dirk
    Abstract: We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with "pseudo wedges" and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.
    Keywords: bank profits; Central bank digital currency; deposits; equivalence; Friedman Rule; monetary policy; money creation; Ramsey Policy; Reserves
    JEL: E42 E43 E51 E52 G21
    Date: 2020–11
  21. By: Template-Type: ReDIF-Paper 1.0; Ryota Nakano (Graduate School of Economics, Osaka University)
    Abstract: In this study, we develop a three-period overlapping generations model with inter vivos gifts and human capital accumulation. We examine the effect of inter vivos gift taxation on wealth inequality and economic growth. The analysis shows that an increase in the tax rate reduces inequality, and a positive tax rate maximizes the growth rate.
    Keywords: economic growth, human capital accumulation, intergenerational transfer, wealth inequality, gift taxation
    JEL: O11 O40 I24
    Date: 2021–05
  22. By: Javier Bianchi (Federal Reserve Bank of Minneapolis); César Sosa Padilla (University of Notre Dame/NBER)
    Abstract: In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with fixed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand amplification generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that financing reserves with debt accumulation may not necessarily lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our findings sug- gest that a simple linear rule linked to spreads can achieve significant welfare gains, while those rules currently used in policy studies of reserve adequacy can be counterproductive.
    Keywords: International reserves Sovereign default Macroeconomic stabilization Fixed exchange rates Inflation targeting
    JEL: F32 F34 F41
    Date: 2020–12
  23. By: Maliar, Lilia; Maliar, Serguei
    Abstract: We introduce a deep learning classification (DLC) method for analyzing equilibrium in discrete-continuous choice dynamic models. As an illustration, we apply the DLC method to solve a version of Krusell and Smith's (1998) heterogeneous-agent model with incomplete markets, borrowing constraint and indivisible labor choice. The novel feature of our analysis is that we construct discontinuous decision functions that tell us when the agent switches from one employment state to another, conditional on the economy's state. We use deep learning not only to characterize the discrete indivisible choice but also to perform model reduction and to deal with multicollinearity. Our TensorFlow-based implementation of DLC is tractable in models with thousands of state variables.
    Keywords: classification; deep learning; discrete choice; Indivisible labor; intensive and extensive margins; logistic regression; neural network
    Date: 2020–10
  24. By: Ricardo Reis
    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: 2021–05
  25. By: Euiyoung Jung (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper studies the theoretical link between real wage rigidity and the destabilizing mechanism driven by the countercyclical precautionary saving demand against unemployment risk. First, I analytically show that destabilizing supply-demand feedback is a general equilibrium outcome of rigid labor cost adjustments. Second, the calibrated wage rigidity consistent with empirical labor market dynamics suggests that real wages are less likely to be sufficiently rigid to cause the destabilizing mechanism. Finally, the way we model job destruction dynamics can have a fundamental impact on the range of real wage rigidity consistent with empirical labor market dynamics and, thus, economic dynamics. Therefore, in contrast to the presumption of many researchers, assuming exogenous job destruction is not innocuous.
    Keywords: New Keynesian,Labor market,Uncertainty,Unemployment,Incomplete markets
    Date: 2021–04
  26. By: Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L.
    Abstract: We provide a quantitative analysis of the trade-offs between health outcomes and the distribution of economic outcomes associated with alternative policy responses to the COVID-19 pandemic. We integrate an expanded SIR model of virus spread into a macroeconomic model with realistic income and wealth inequality, as well as occupational and sectoral heterogeneity. In the model, as in the data, economic exposure to the pandemic is strongly correlated with financial vulnerability, leading to very uneven economic losses across the population. We summarize our findings through a "distributional pandemic possibility frontier," which shows the distribution of economic welfare costs associated with the different aggregate mortality rates arising under alternative containment and fiscal strategies. For all combinations of health and economic policies we consider, the economic welfare costs of the pandemic are large and heterogeneous. Thus, the choice governments face when designing policy is not just between lives and livelihoods, as is often emphasized, but also over who should bear the burden of the economic costs. We offer a quantitative framework to evaluate both trade-offs.
    Date: 2020–09
  27. By: Christian Bayer; Benjamin Born; Ralph Luetticke
    Abstract: We provide evidence that expansionary fiscal policy lowers return differences between public debt and less liquid assets—the liquidity premium. We rationalize this finding in an estimated heterogeneous-agent New-Keynesian model with incomplete markets and portfolio choice, in which public debt affects private liquidity. This liquidity channel stabilizes fixed-capital investment. We then quantify the long-run effects of higher public debt and find little crowding out of capital, but a sizable decline of the liquidity premium, which increases the fiscal burden of debt. We show that the revenue-maximizing level of public debt is positive and has increased to 60 percent of GDP post-2010.
    Keywords: Business cycles, fiscal policy, HANK, incomplete markets, liquidity premium, public debt
    JEL: C11 D31 E21 E32 E63
    Date: 2021
  28. By: Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L.
    Abstract: We address this question in a heterogeneous-agent incomplete-markets model featuring exogenous idiosyncratic risk, endogenous skill investment, and flexible labor supply. The tax and transfer schedule is restricted to be log-linear in income, a good description of the US system. Rising inequality is modeled as a combination of skill-biased technical change and growth in residual wage dispersion. When facing shifts in the income distribution like those observed in the US, a utilitarian planner chooses higher progressivity in response to larger residual inequality but lower progressivity in response to widening skill price dispersion reflecting technical change. Overall, optimal progressivity is approximately unchanged between 1980 and 2016. We document that the progressivity of the actual US tax and transfer system has similarly changed little since 1980, in line with the model prescription.
    Keywords: inequality; InequalityMarkets; Labor Supply; optimal taxation; redistribution; Tax progressivity
    JEL: D30 E20 H20 I22 J22 J24
    Date: 2020–10
  29. By: Angeletos, George-Marios; Collard, Fabrice; Dellas, Harris
    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.
    Keywords: optimal policy; piblic debt; private liquidity
    JEL: E62
    Date: 2020–11
  30. By: Davide Debortoli; Ricardo Nunes; Pierre Yared
    Abstract: We consider optimal government debt maturity in a deterministic economy in which the government can issue any arbitrary debt maturity structure and in which bond prices are a function of the government's current and future primary surpluses. The government sequentially chooses policy, taking into account how current choices -which impacts future policy- feed back into current bond prices. We show that issuing consols constitutes the unique stationary optimal debt portfolio, as it boosts government credibility to future policy and reduces the debt financing costs.
    Keywords: Public debt, optimal taxation, fiscal policy
    JEL: H63 H21 E62
    Date: 2021–05
  31. By: Yoseph Getachew
    Abstract: The paper introduces voluntary social distancing to the canonical epidemiology model, integrated into a conventional macroeconomic model. The model is extended to include treatment, vaccination, and government-enforced lockdown. Infection-averse individuals face a trade-off between a costly social distancing and the risk of getting infected and losing next-period labor income. We find an individual's social distancing is proportional to the welfare loss she incurs when moving to the infected compartment. It increases in the individual's psychological discount factor but decreases in the probability of receiving a vaccination. Quantitatively, a laissez-faire social distancing flattens the infection curve that minimizes the economic damage of the epidemic. A government-enforced social distancing is more effective in flattening the infection curve but has a detrimental effect on the economy.
    Keywords: COVID-19, lockdown, social distancing, macroeconomics, pandemics
    JEL: E1 H0 I1
    Date: 2021–01
  32. By: Jocelyn Maillard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon)
    Abstract: This paper investigates the effects of automation and offshoring on the dynamics of the occupational distribution of employment with a focus on Western Europe between 2000 and 2016. I use a general equilibrium model with three regions, three types of workers, ICT capital, trade in final goods and endogenous offshoring. Fed with exogenous measures of ICT-capital prices and trade costs, the model replicates key features of the data. It matches the observed dynamics of offshoring to Eastern Europe and Asian countries. It also reproduces accurately the observed polarization of the labor market: abstract and manual labor increase while routine labor falls. A counterfactual experiment reveals that automation is the main driver of polarization. Since it is also the only factor that drives individuals to become abstract (highskill) workers, it is welfare enhancing. The effects of falling trade costs on labor polarization are smaller, but imply welfare gains.
    Keywords: Automation,offshoring,labor-market polarization,European employment distribution
    Date: 2021–05–06

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