nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒06‒14
33 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk By Krueger, Dirk; Ludwig, Alexander; Villalvazo, Sergio
  2. Balanced-Budget Rules and Macroeconomic Stability with Overlapping Generations By Jang-Ting Guo; Yan Zhang
  3. Should monetary policy lean against the wind in a small-open economy? Revisiting the Tinbergen rule By Rogelio De la Peña
  4. Endogenous growth, skill obsolescence and fiscal multipliers By Lechthaler, Wolfgang; Tesfaselassie, Mewael F.
  5. A Model of Anticipated Consumption Tax Changes By Masashi Hino
  6. Cordon of Conformity:Why DSGE models Are Not the Future of Macroeconomics By Servaas Storm
  7. General Equilibrium Effects and Labor Market Fluctuations By Noritaka Kudoh; Hiroaki Miyamoto
  8. Efficiency in the Housing Market with Search Frictions By Miroslav Gabrovski; Victor Ortego-Marti
  9. Does idiosyncratic risk matter for climate policy? By Richard Jaimes
  10. Optimal Climate and Fiscal Policy in an OLG economy By Richard Jaimes
  12. 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
  13. Adaptive Importance Sampling for DSGE Models By Stefano Grassi; Marco Lorusso; Francesco Ravazzolo
  14. A quantitative analysis of the countercyclical capital buffer By Faria-e-Castro, Miguel
  15. The long-term distributional and welfare effects of Covid-19 school closures By Fuchs-Schündeln, Nicola; Krueger, Dirk; Ludwig, Alexander; Popova, Irina
  16. Worker heterogeneity, selection, and employment dynamics in the face of aggregate demand and pandemic shocks By Ravenna, Federico; Walsh, Carl
  17. The Distributional Implications of Climate Policies Under Uncertainty By Ulrich Eydam
  18. Trade, Unemployment, and Monetary Policy By Cacciatore, Matteo; Ghironi, Fabio
  19. Environment, public debt and epidemics By Marion Davin; Mouez Fodha; Thomas Seegmuller
  20. Revisiting intertemporal elasticity of substitution in a sticky price model By Kilponen, Juha; Vilmunen, Jouko; Vähämaa, Oskari
  21. The Rise of US Earnings Inequality: Does the Cycle Drive the Trend? By Heathcote, Jonathan; Perri, Fabrizio; Violante, Giovanni L.
  22. Income inequality, mortgage debt and house prices By Kösem, Sevim
  23. Universal Basic Income: A Dynamic Assessment By Daruich, Diego; Fernández, Raquel
  24. Robots and Unemployment By Noritaka Kudoh; Hiroaki Miyamoto
  25. The Role of Money in Monetary Policy at the Lower Bound By Billi, Roberto M; Söderström, Ulf; Walsh, Carl
  26. On the design of labor market programs as stabilization policies By Euiyoung Jung
  27. Capital Buffers in a Quantitative Model of Banking Industry Dynamics By Dean Corbae; Pablo D'Erasmo
  28. Education, Pension and Two-Sided Altruistic in an Endogenous Growth Model By Accolley, Delali; Langot, François
  29. Monetary dynamics in a network economy By Antoine Mandel; Vipin Veetil
  30. Climate Policies and Labor Markets in Developing Countries By Noe Reidt
  31. Memory, multiple equilibria and emerging market crises By Reffett, Kevin; Pierri, Damian
  32. Real Estate and Rental Markets during Covid Times By Bertrand Achou; Hippolyte d'Albis; Eleni Iliopulos
  33. Income inequality, financial intermediation, and small firms By Sebastian Doerr; Thomas Drechsel; Donggyu Lee

  1. By: Krueger, Dirk; Ludwig, Alexander; Villalvazo, Sergio
    Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium effects of private precautionary saving on factor prices and taxes capital unless the weight on future generations in the social welfare function is sufficiently high. For logarithmic utility a complete analytical solution of the Ramsey problem exhibits an optimal aggregate saving rate that is independent of income risk, whereas the optimal time-invariant tax on capital implementing this saving rate is increasing in income risk. The optimal saving rate is constant along the transition and its sign depends on the magnitude of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently induces a Pareto-improving transition even if the initial equilibrium capital stock is below the golden rule.
    Keywords: Idiosyncratic Risk,Taxation of Capital,Overlapping Generations,Precautionary Saving,Pecuniary Externalities
    JEL: H21 H31 E21
    Date: 2021
  2. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Yan Zhang (Zhongnan University of Economics and Law)
    Abstract: In the context of a stylized two-period overlapping generations model, this paper examines the macroeconomic (in)stability effects of a balanced-budget rule whereby constant government spending is financed by endogenous taxation on agents' labor income or consumption expenditures. In sharp contrast to previous studies for a representative-agent framework, our baseline economy always exhibits local determinacy and equilibrium uniqueness, hence both labor and consumption taxes are stabilizing instruments against cyclical fluctuations driven by animal spirits. Moreover, this no-indeterminacy result and associated dynamic equivalence between endogenous labor versus consumption taxation remain qualitatively robust to various modifications in the household-preference or firm-production formulations.
    Keywords: Balanced-Budget Rules; Indeterminacy; Overlapping Generations Model.
    JEL: E32 E62
    Date: 2021–05
  3. By: Rogelio De la Peña
    Abstract: It has been debated whether monetary policy should lean against the wind, i.e., if central banks should also respond to the build-up of financial imbalances. I contribute to the debate by showing that targeting the two policy objectives with a single instrument is more costly for a small-open economy than for a closed one. To this end, I develop a small-open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition in goods markets. I then estimate this model for Mexico to explore the policy regimes yielding the lowest welfare cost. My main finding is that the Tinbergen rule is alive and well. In addition, my model is useful to gauge macroprudential measures effectiveness when discriminating against foreign liabilities.
    JEL: C51 E32 E44 E52 E58 E61 F41 G21 G28
    Date: 2021–04
  4. By: Lechthaler, Wolfgang; Tesfaselassie, Mewael F.
    Abstract: We analyze the effects of government spending in a New-Keynesian model with search and matching frictions featuring endogenous growth through learning-by-doing and skill loss from long-term unemployment. We show that medium-run and long-run output and unemployment multipliers are much larger compared to the standard model that abstracts from endogenous growth and skill loss. In our model the aggregate effect of a temporary fiscal stimulus is amplified via the skill loss channel through lower training costs. Via the learning-by-doing channel, it leads to hysteresis in human capital accumulation and thereby output. These results hold for alternative forms of fiscal financing (lump-sum tax, distortionary tax and government debt) as well as alternative labor market institutions (US and Europe).
    Keywords: Sovereign default,debt restructuring,international financial architecture,creditor Coordination
    JEL: E24 E52
    Date: 2021
  5. By: Masashi Hino
    Abstract: This paper studies household spending responses to anticipated changes in the consumption tax. To do so, I construct a life-cycle heterogeneous-agent general equilibrium model with durables. The model features a wedge in durable transactions that reflects the actual consumption tax system: households pay the tax when buying the durables but do not receive the tax when selling them. There are three main findings. First, the baseline model reproduces an empirically consistent dynamic pattern of tax elasticity of the taxable spendings. Second, I find that life-cycle is a key component to match the level of tax elasticity of durable spending. Third, the baseline model generates smaller stockpiling of durables based on realistic motive than a model without the wedge. I then use the model for two counter-factual experiments.The first counter-factual experiment finds that the effect of a consumption tax cut is not symmetric to the tax hike. The second counter-factual experiment which compares a one-time tax hike and a multiple-times tax hike shows the multiple-times tax hike scheme generates smaller welfare cost than one-time tax hike.
    Date: 2021–01
  6. By: Servaas Storm (Delft University of Technology)
    Abstract: The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis to see how the fundamental pieces of the economy fit together, subject to it being 'properly micro-founded'. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.
    Keywords: New Keynesian DSGE models; rational expectations; micro-foundations; loanable funds model; Lucas critique; multiple equilibria; income distribution; demand-led growth; money and monetary production economy.
    JEL: E20 E60 F60 O10 O40
    Date: 2021–02–14
  7. By: Noritaka Kudoh (; Hiroaki Miyamoto (Tokyo Metropolitan University)
    Abstract: Business cycle models with search-matching frictions are studied to evaluate the importance of general equilibrium effects generated by movements in the stochastic discount factor and the income effect on labor supply. Without variable hours of work, the general equilibrium effect works only through the stochastic discount factor and is quantitatively very weak. With variable hours of work, the income effect generates procyclical movements in the value of leisure and the marginal hourly wage rate. This effect is sizable and dampens labor market fluctuations. We also study discount factor shocks and find that capital formation strongly enhances labor market fluctuations.
    Keywords: labor market search, stochastic discount factor, unemployment volatility
    JEL: E32 J20 J64
    Date: 2021–05
  8. By: Miroslav Gabrovski (University of Hawaii Manoa); Victor Ortego-Marti (Department of Economics, University of California Riverside)
    Abstract: This paper studies efficiency in the housing market in the presence of search frictions and endogenous entry of buyers and sellers. These two features are essential to explain the housing market stylized facts, in particular to generate an upward-sloping Beveridge Curve in the housing market. Search frictions and endogenous entry create two externalities in the market. First, there is a congestion externality common to markets with search frictions. Sellers do not internalize the effect of listing a house for sale on other sellers' probability of finding a buyer, and on buyers' home finding rate. Second, the endogenous entry of buyers leads to a composition externality, as new entrants in the markets value housing less and worsen the distribution of buyers' valuations and surplus. The equilibrium is inefficient even when the Hosios-Pissarides-Mortensen condition holds. We quantify the size of these externalities and how far the observed housing market is from the optimal allocation. The optimal vacancy rate, time-to-sell, and vacancies are about half their equilibrium counterparts, whereas the optimal number of buyers and homeowners are slightly above their decentralized equilibrium values. Finally, we investigate the effect of housing market policies on the equilibrium and how they can restore efficiency in the housing market.
    Keywords: Housing market; Search and matching; Beveridge Curve; Housing liquidity; Efficiency; housing policy
    JEL: E2 E32 R21 R31
    Date: 2021–05
  9. By: Richard Jaimes
    Abstract: This paper considers an overlapping generations model with idiosyncratic labor income risk and a climate externality. We illustrate analytically that market-based climate policies must be adjusted when there are other intertemporal distortions in the economy. Specifically, we show that under precautionary savings the government finds it optimal to tax capital and to correct the carbon price accordingly. In a numerical exercise, we find that idiosyncratic risk leads to an optimal capital income tax rate of 48% and a carbon price 11% lower than its Pigouvian level in the first best
    Keywords: Fiscal policy, Optimal taxation, Externalities, Environmental policies.
    JEL: E62 H21 H23 Q58
    Date: 2021–05–28
  10. By: Richard Jaimes
    Abstract: This paper develops a climate–economy model to study the joint design of optimal climate and fiscal policies in economies with overlapping generations. I demonstrate how capital taxation, if optimal, drives a wedge between the market costs of carbon (the net present value of marginal damages using the market interest rate) and the Pigouvian tax (the net present value of marginal damages using the consumption discount rate of successive overlapping generations). In contrast to deterministic infinitely-lived representative agent models, at the optimum, the capital income tax is positive, the carbon price equals the market costs of carbon but it falls short of the Pigouvian tax when (i) preferences are not separable over consumption and leisure; and (ii) labor income taxes cannot be age-dependent. I also show that restrictions on climate change policy provide a novel rationale for positive capital income taxes.
    Keywords: Climate change, Environmental policies, Externalities, Fiscal policy, Optimaltaxation.
    JEL: E62 H21 H23 Q58
    Date: 2021–06–04
  11. By: Marco Onofri; Gert Peersman; Frank R. Smets (-)
    Abstract: We analyze the effectiveness of a Negative Interest Rate Policy (NIRP) in a quantitative Dynamic Stochastic General Equilibrium model for the euro area with a nancial sector. Similarly to other studies in the literature, we show that a NIRP can have a contractionary effect on the economy when there is a zero lower bound on the interest rate of household deposits, and such deposits are the only source of bank funding and household savings. However, we show that the contractionary effects vanish and the NIRP becomes expansionary when we allow for additional assets in the savings portfolio of households, and when we introduce alternative sources of bank funding in the model, such as bank bonds. These two features, which characterize the euro area very well, are hence essential to study the effectiveness of a NIRP.
    Date: 2021–05
  12. By: Alan Finkelstein Shapiro (Tufts University); Gilbert E. Metcalf (Tufts University)
    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: firm creation and 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.
    Keywords: Environmental and Fiscal Policy, Carbon Tax, Endogenous Firm Entry, Green Technology Adoption, Search Frictions, Unemployment, Labor Force Participation
    JEL: E20 E24 E62 H23 O33 Q52 Q55
    Date: 2021–05
  13. By: Stefano Grassi (University of Rome Tor Vergata, Italy); Marco Lorusso (Newcastle University Business School, UK); Francesco Ravazzolo (Free University of Bozen-Bolzano, Italy; CAMP, BI Norwegian Business School, Norway; RCEA)
    Abstract: This paper introduces a new adaptive methodology for the estimation of Dynamic Stochastic General Equilibrium (DSGE) models based on the Mixture of Students t by Importance Sampling weighted Expectation-Maximization (MitISEM). The use of Importance Sampling and of an adaptive scheme based on Expectation-Maximization allows us to eciently estimate any sort of DSGE model. We apply the MitISEM in simulation examples with two workhorse DSGE models. Our results indicate how the MitISEM achieves identification of the model parameters even in the presence of bimodality. We also use the MitISEM to estimate an open economy model encompassing international trade between two countries, namely Canada and the US. For both countries, we consider a rich fiscal policy sector that includes two di erent types of public expenditure: productive and unproductive government spending. Our findings show that, in the presence of nominal rigidities, an increase in productive spending generates a crowding-in on domestic private consumption, whereas unproductive spending induces a fall in domestic private consumption. We also find that irrespective of the type of government expenditure, an increase in public spending for the domestic economy induces an exchange rate appreciation and an improvement in the trade balance. Finally, our results show that the degree of trade openness matters in terms of propagation of government spending shocks.
    Keywords: Adaptive Importance Sampling; DSGE Model; Expectation-Maximization; Fiscal policy; Open-Economy Model.
    JEL: C12 C22 G12 G13
    Date: 2021–05
  14. By: Faria-e-Castro, Miguel
    Abstract: What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2:5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium. JEL Classification: E4, E6, G2
    Keywords: countercyclical capital buffer, financial crises, macroprudential policy
    Date: 2021–06
  15. By: Fuchs-Schündeln, Nicola; Krueger, Dirk; Ludwig, Alexander; Popova, Irina
    Abstract: Using a structural life-cycle model, we quantify the heterogeneous impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. We quantitatively characterize the long-term consequences from a Covid-19 induced loss of schooling, and find average losses in the present discounted value of lifetime earnings of the affected children of close to 1%, as well as welfare losses equivalent to about 0:6% of permanent consumption. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.
    Keywords: Covid-19,school closures,inequality,intergenerational persistence
    JEL: D15 D31 E24 I24
    Date: 2021
  16. By: Ravenna, Federico; Walsh, Carl
    Abstract: In a new Keynesian model with random search in the labor market, endogenous selection among heterogeneous workers amplifies fluctuations in unemployment and results in excess unemployment volatility relative to the efficient allocation. Recessions disproportionately affect low-productivity workers, whose unemployment spells are inefficiently frequent and long. We consider a COVID-recession resulting from a negative demand shock and a surge in exogenous separations. High-productivity workers benefit if separations in a pandemic take the form of temporary layoffs, but this is not true for low-productivity workers. The unemployment consequences are especially severe when nominal interest rates are close to the effective lower bound.
    Keywords: COVID-19; Heterogeneity; selection; unemployment; ZLB constraint
    JEL: E24 E32 E52
    Date: 2020–07
  17. By: Ulrich Eydam (University of Potsdam)
    Abstract: Promoting the decarbonization of economic activity through climate policies raises many questions. From a macroeconomic perspective, it is important to understand how these policies perform under uncertainty, how they affect short-run dynamics and to what extent they have distributional effects. In addition, uncertainties directly associated with climate policies, such as uncertainty about the carbon budget or emission intensities, become relevant aspects. We study the implications of emission reduction schemes within a Two-Agent New-Keynesian (TANK) model. This quantitative exercise, based on data for the German economy, provides various insights. In the light of frictions and fluctuations, compared to other instruments, a carbon price (i.e. tax) is associated with lower volatility in output and consumption. In terms of aggregate welfare, price instruments are found to be preferable. Conditional on the distribution of revenues from climate policies, quantity instruments can exert regressive effects, posing a larger economic loss on wealth-poor households, whereas price instruments are moderately progressive. Finally, we find that unexpected changes in climate policies can induce substantial aggregate adjustments. With uncertainty about the carbon budget, the costs of adjustment are larger under quantity instruments.
    Keywords: macroeconomic dynamics, environmental policy, inequality, policy design
    JEL: Q52 Q58 E32 E61
    Date: 2021–06
  18. By: Cacciatore, Matteo; Ghironi, Fabio
    Abstract: We study how trade linkages affect the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. We show that the ability of the model to replicate key empirical regularities following trade integration---synchronization of business cycles across trading partners and reallocation of market shares toward more productive firms---is central to understanding how trade costs affect monetary policy trade-offs. First, productivity gains through firm selection reduce the need of positive inflation to correct long-run distortions. As a result, lower trade costs reduce the optimal average inflation rate. Second, as stronger trade linkages increase business cycle synchronization, country-specific shocks have more global consequences. Thus, the optimal stabilization policy remains inward looking. By contrast, sub-optimal, inward-looking stabilization---for instance too narrow a focus on price stability---results in larger welfare costs when trade linkages are strong due to inefficient fluctuations in cross-country aggregate demand.
    Keywords: Optimal monetary policy; trade integration
    JEL: E24 E32 E52 F16 F41 J64
    Date: 2020–06
  19. 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 (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 - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université)
    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: Epidemics,pollution,overlapping generations,public debt
    Date: 2021–05–10
  20. By: Kilponen, Juha; Vilmunen, Jouko; Vähämaa, Oskari
    Abstract: Macroeconomic models typically assume additively separable preferences where consumption enters the utility function in a logarithmic form. This restriction implies that consumption growth is highly sensitive to movements in real interest rates, which in turn implies an unrealistically steep demand curve and intertemporal trade-off. We re-estimate the stylized New Keynesian Model with US data using King-Plosser-Rebelo (1988) preferences with and without habits and show that the equilibrium real interest rate elasticity of output is in the range of 0.05 − 0.20 in the US. Such low real interest rate elasticity is better in line with the empirical consumption Euler equation literature and implies relatively weak transmission of monetary policy to output and inflation.
    JEL: E32 E52 E21
    Date: 2021–06–09
  21. By: Heathcote, Jonathan; Perri, Fabrizio; Violante, Giovanni L.
    Abstract: We document that declining hours worked are the primary driver of widening inequality in the bottom half of the male labor earnings distribution in the United States over the past 52 years. This decline in hours is heavily concentrated in recessions: hours and earnings at the bottom fall sharply in recessions and do not fully recover in subsequent expansions. Motivated by this evidence, we build a structural model to explore the possibility that recessions cause persistent increases in inequality; that is, that the cycle drives the trend. The model features skill-biased technical change, which implies a trend decline in low-skill wages relative to the value of non-market activities. With this adverse trend in the background, recessions imply a potential double-whammy for low skilled men. This group is disproportionately likely to experience unemployment, which further reduces skills and potential earnings via a scarring effect. As unemployed low skilled men give up job search, recessions generate surges in non-participation. Because non-participation is highly persistent, earnings inequality remains elevated long after the recession ends.
    Keywords: Earnings Losses upon Displacement; Non Participation; Recession; Skill Biased Technological Change; Zero Earnings
    JEL: E24 E32 J24 J64
    Date: 2020–06
  22. By: Kösem, Sevim (Bank of England)
    Abstract: This paper studies housing and credit market implications of increasing income inequality and discusses how a low interest rate environment can alter its consequences. I develop an analytical general equilibrium model with a novel borrower risk composition channel of income inequality. Following a rise in income inequality house prices and mortgage debt decline, and aggregate default risk increases. I then show that low real rates mitigate the depressing effect of inequality on house prices at the cost of amplifying the aggregate default risk. Using a panel of US states and instrumental variables approach, I verify the model’s predictions.
    Keywords: Income inequality; mortgage lending; mortgage default; house prices; real interest rates; risk taking; shift-share instruments
    JEL: D31 E44 E58 G21 R21
    Date: 2021–05–21
  23. By: Daruich, Diego; Fernández, Raquel
    Abstract: The idea of universal basic income (UBI)---a set income that is given to all without any conditions---is making an important comeback but there is no real evidence regarding its long-term consequences. This paper provides a very inexpensive evaluation of such a policy by studying its dynamic consequences in a general equilibrium model with imperfect capital markets and labor market shocks, in which households make decisions about education, savings, labor supply, and with intergenerational linkages via skill formation. The steady state of the model is estimated to match US household data. We find that a UBI policy that gives all households a yearly income equivalent to the poverty line level has very different welfare implications for those alive when the policy is introduced relative to future generations. While a majority of adults (primarily older non-college workers) would vote in favor of introducing UBI, all future generations (operating behind the veil of ignorance) would prefer to live in an economy without UBI. The expense of the latter leads to lower skill formation and education, requiring even higher tax rates over time. Modeling automation as an increased probability of being hit by an ``out-of-work'' shock, the model is also used to provide insights on how the benefits of UBI change as the environment becomes riskier. The results suggest that UBI may be a useful transitional policy to help current individuals whose skills are more likely to become obsolete and are unprepared for the increased risk, while, simultaneously, education policies may be implemented to increase the likelihood that future cohorts remain productive and employed.
    Keywords: Human Capital; Labor Supply; taxation; universal basic income
    JEL: H24 H31 I38 J24
    Date: 2020–06
  24. By: Noritaka Kudoh (Nagoya University); Hiroaki Miyamoto (Tokyo Metropolitan University)
    Abstract: This paper studies the impact of the robotics revolution on the labor market outcomes through the lens of capital-augmenting technological progress. We develop a tractable search-matching model with labor market segmentation and multi-factor production to find the condition under which the new technology harms the labor market in the long run. The robotics revolution hits the labor market for routine-task intensive jobs harder under a more generous unemployment policy. Automation of abstract tasks may cause a disaster for those who are reallocated to routine-task intensive occupations.
    Keywords: robots, capital-augmenting technological progress, search-matching frictions, unemployment, routinization
    JEL: E32 J20 J64
    Date: 2021–05
  25. By: Billi, Roberto M; Söderström, Ulf; Walsh, Carl
    Abstract: In light of the current low-interest-rate environment, we reconsider the merit of a money growth target (MGT) relative to a conventional inflation targeting (IT) regime, and to the notion of price level targeting (PLT). Through the lens of a New Keynesian model, and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate, we show, not surprisingly, that PLT performs best in terms of social welfare. However, the ranking between IT and MGT is not a foregone conclusion. In particular, although MGT makes monetary policy vulnerable to money demand shocks, it contributes to achieving price level stability and reduces the incidence and severity of the ZLB relative to both IT and PLT. We also show that MGT lessens the need for the fiscal authority to engage alongside the central bank in fighting recessions. To illustrate this fiscal benefit of MGT, we introduce a simple rule for the fiscal authority to raise government purchases when GDP falls below potential. If the government fails to make up for a substantial share of the shortfalls in GDP, then IT performs worse than MGT from the perspective of society.
    Keywords: Automatic Stabilizers; Fiscal policy; Friedman's k-percent rule; ZLB constraint
    JEL: E31 E42 E52
    Date: 2020–06
  26. 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 analyzes the optimal cyclical behavior of labor market policies in an economy with asset and labor market frictions. The policies of interest include unemployment insurance (UI) and employment protection (EP). In addition to their supply-side effects, labor market policies affect the aggregate demand via earning risk and redistribution channels. Under bilateral wage bargaining, I find that procyclical UI and countercyclical EP deliver superior welfare outcomes through stabilization via both supply and demand channels.
    Keywords: new keynesian,uncertainty,unemployment,incomplete markets,labor market policy New Keynesian,Uncertainty,Unemployment,Incomplete markets,Labor market policy JEL Classification: E12,E21,E24,E29,E32,E61,E69,J68,J65
    Date: 2021–05
  27. By: Dean Corbae; Pablo D'Erasmo
    Abstract: We develop a model of banking industry dynamics to study the quantitative impact of regulatory policies on bank risk taking and market structure. Since our model is matched to U.S. data, we propose a market structure where big banks with market power interact with small, competitive fringe banks as well as non-bank lenders. Banks face idiosyncratic funding shocks in addition to aggregate shocks which affect the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of capital. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We find that regulatory policies can have an important impact on banking market structure, which, along with selection effects, can generate changes in allocative efficiency and stability.
    Keywords: Macroprudential policy; Bank size distribution; Industry dynamics with imperfect competition
    JEL: E44 G21 L11
    Date: 2021–05–26
  28. By: Accolley, Delali; Langot, François
    Abstract: We have modeled jointly human capital accumulation through formal education and the various pillars of the Canadian retirement income system, using a three-period overlapping generations model with two-sided altruism. We have used this model to investigate the impacts on the real interest rate of the improvement in life expectancy in the presence of endogenous growth, as well as the impacts of raising various tax rates to finance the enhancement of pension plans. We have found that the endogenous accumulation of human capital through education reverts the decline in the real interest rate caused by the improvement in the life expectancy. We have also found that the best way of enhancing the Canada Pension Plan is not to raise the contribution rate, but to increase instead the maximum amount of earnings covered. ABSTRACT IN FRENCH- Nous avons modélisé conjointement l'accumulation du capital humain à travers l''éducation formelle et les divers piliers du système canadien de revenu de retraite, en utilisant un modèle de générations imbriquées sur trois périodes avec altruisme bilatéral. Nous avons utilisé ce modèle pour étudier les impacts de l'amélioration de l’espérance de vie sur le taux d'intérêt réel dans un contexte de croissance endogène, aussi bien que les impacts de l'augmentation de divers taux d'imposition dans le but de financer la bonification des programmes pension. Nous avons trouvé que l’accumulation endogène du capital humain à travers l’éducation renverse la baisse du taux d’intérêt réel causée par l’amélioration de l’espérance de vie. Nous avons aussi trouvé que la meilleure façon de bonifier le Régime de pensions du Canada n’est pas d’augmenter e taux de cotisation, mais plutôt d’augmenter le montant maximal de gains couverts.
    Keywords: demography, education, economic growth, human capital, overlapping generations, pension
    JEL: I25 O31 O41
    Date: 2021–05–13
  29. By: Antoine Mandel (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); Vipin Veetil (IIT Madras - Indian Institute of Technology Madras)
    Abstract: We develop a tractable model of price dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms that are governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal changes in demand and downstream via real changes in supply. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model provides an explanation of the price puzzle: a temporary rise in the price level in response to monetary contractions. In our setting, the puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions.
    Keywords: Out-of-Equilibrium Dynamics,Monetary Non-Neutrality,Money,Production Network,Price Puzzle
    Date: 2021–04
  30. By: Noe Reidt (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: This paper investigates the impact of climate policies on the labor markets in developing countries characterized by a large informal economy. I conduct the analysis employing a dynamic general equilibrium model, which incorporates the three prevalent working groups in developing countries: informal self-employment, informal employment, and formal employment. To capture the mobility of workers between these groups, I use a search and match mechanism with search frictions for formal and informal firms and with on-thejob search. The model is calibrated to India to elaborate on the impact of climate policies envisioning a tax on energy with different redistribution schemes of the tax revenue. The results show that climate policies strengthening the position of the productive formal sector can lead to a triple dividend effect: emissions drop due to the energy tax, whereas the redistribution scheme increases the formal labor share and welfare. Developing countries with widespread informality can utilize climate policies to improve labor conditions while reaching their climate targets.
    Keywords: development, climate policies, employment, search frictions, informality
    JEL: C68 E26 J46 J64 Q56
    Date: 2021–05
  31. By: Reffett, Kevin; Pierri, Damian
    Abstract: We present a new Generalized Markov Equilibrium (GME) approach to studying sudden stops and financial crises in emerging countries in small open economies with price dependent equilibrium collateral constraints. These models are known to have multiple equilibria. Our approach to characterizing and computing stochastic equilibrium dynamics is global, encompasses recursive equilibriumas a special case, yet allows for a much more exible approach to modeling memory and multiple equilibrium in models with equilibrium price-dependent collateral constraints. We construct ergodic GME selections from the sequential competitive equilibrium that at the same time can replicate all the observed phases of the macro crises associated with a sudden stop (boom, collapse, spiralized recession, recovery) while still being able to capture the long-run stylized behavior of the data. We also compute stochastic equilibrium dynamics associated with stationary and a non-stationary GME selections, and we find that a) the ergodic GME selectors generate stochastic dynamics which are less financially constrained, b) non-stationary GME selections exhibit a great range of fluctuations in macroeconomic aggregates compared to the stationary selections. Finally, from a theoretical perspective, we prove the existence of both sequential competitive equilibrium and (minimal state space) recursive equilibrium, and provide a complete constructive qualitative theory of recursive equilibrium comparative statics in deep parameters of these economies. Consistent with recent results in the literature, relative to the set of recursive equilibrium, we find 2 stationary equilibrium: one with high/overborrowing, the other with low/under borrowing. These equilibrium are extremal and \self-fulfilling" under rational expectations.
    Keywords: Recursive Equilibrium; Ergodicity; Small Open Economies; Financial Crises
    Date: 2021–06–11
  32. By: Bertrand Achou (HEC Montréal - HEC Montréal); Hippolyte d'Albis (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); Eleni Iliopulos (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay)
    Abstract: In this work we introduce a general equilibrium model with landlords, indebted owner-occupiers and renters to study housing markets' dynamics. We estimate it by using standard Bayesian methods and match the US data of the last decades. This framework is particularly suited to explain current trends on housing markets. We highlight the crucial relationship between interest rates, house prices and rents, and argue that it helps understanding the main driving forces. Our analysis suggests that current developments on housing markets can play a role for a recovery from the Covid pandemic as they have an expansionary effect on aggregate output. Moreover, we account for the heterogeneous impact of crisis-induced policies depending on agents' status on the housing market. We show how, despite an increase in housing prices, the welfare of landlords has been negatively hit. This is associated to the joint decrease in returns on housing and financial assets that reduces their financial incomes.
    Keywords: Housing,Rental Markets,Collateral Constraints,Financial Frictions,HANK Models
    Date: 2021–05
  33. By: Sebastian Doerr; Thomas Drechsel; Donggyu Lee
    Abstract: This paper shows that rising income inequality reduces job creation at small firms. High-income households save relatively less in the form of bank deposits while small firms depend on banks. We argue that a higher share of income accruing to top earners therefore erodes banks' deposit base and their lending capacity for small businesses, thus reducing job creation. Exploiting variation in top incomes across US states and an instrumental variable strategy, we establish that a 10 percentage point (pp) increase in income share of the top 10% reduces the net job creation rate of small firms by 1.5–2 pp, relative to large firms. The effects are stronger at smaller firms and in bank-dependent industries. Rising top incomes also reduce bank deposits and increase deposit rates, in line with a reduction in the supply of household deposits. We then build a general equilibrium model with heterogeneous households that face a portfolio choice between high-return investments and low-return deposits that insure against liquidity risk. Banks use deposits to lend to firms of different sizes subject to information frictions. We study job creation across firm sizes under counterfactual income distributions.
    Keywords: income inequality, job creation, small businesses, bank lending, household heterogeneity, financial frictions
    JEL: D22 D31 G21 L25
    Date: 2021–05

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