nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒06‒28
thirty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Monetary Policy and Bubbles in New Keynesian Model with Overlapping Generations By Galí, Jordi
  3. Understanding a New Keynesian Model with Liquidity By Jia, Pengfei
  4. Risk Premia at the ZLB: A Macroeconomic Interpretation By Francois Gourio; Phuong Ngo
  5. Generational Distribution of Fiscal Burdens: A Positive Analysis By Uchida, Yuki; Ono, Tetsuo
  6. Redistribution and the Monetary–Fiscal Policy Mix By Saroj Bhattarai; Jae Won Lee; Choongryul Yang
  7. Risk shocks, due loans, and policy options: When less is more! By José R. Maria; Paulo Júlio; Sílvia Santos
  8. Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing up the Real Income Channel By Adrien Auclert; Matthew Rognlie; Martin Souchier; Ludwig Straub
  9. Recycling Carbon Tax Revenue to Maximize Welfare By Stephie Fried; Kevin Novan; William B. Peterman
  10. The Macro Effects of Climate Policy Uncertainty By Stephie Fried; Kevin Novan; William B. Peterman
  11. Capital-Reallocation Frictions and Trade Shocks By Lanteri, Andrea; Medina, Pamela; Tan, Eugene
  12. No country is an island: international cooperation and climate change By Ferrari, Massimo; Pagliari, Maria Sole
  13. On the design of labor market programs as stabilization policies By Euiyoung Jung
  14. Can Wealth Buy Health? A Model of Pecuniary and Non-Pecuniary Investments in Health By Margaris, Panagiotis; Wallenius, Johanna
  15. Monetary Policy, Redistribution, and Risk Premia By Rohan Kekre; Moritz Lenel
  16. The Safety Net as a Springboard? A General Equilibrium based Policy Evaluation By Ferraro, Domenico; Jaimovich, Nir; Molinari, Francesca; Young, Cristobal
  17. Business Cycle during Structural Change: Arthur Lewis' Theory from a Neoclassical Perspective By Storesletten, Kjetil; Zhao, Bo; Zilibotti, Fabrizio
  18. Computing Equilibria of Stochastic Heterogeneous Agent Models Using Decision Rule Histories By Marcelo Veracierto
  19. The Gold Standard and the International Dimension of the Great Depression. By Luca Pensieroso; Romain Restout
  20. Reforming the Individual Income Tax in Spain By Guner, Nezih; Lopez-Segovia, Javier; Ramos Magdaleno, Roberto
  21. Business Cycle Fluctuations in Mirrlees Economies: The case of i.i.d. shocks​ By Marcelo Veracierto
  22. Temptation and Incentives to Wealth Accumulation By Orazio Attanasio; Agnes Kovacs; Patrick Moran
  23. Real Estate and Rental Markets during Covid Times By Bertrand Achou; Hippolyte d'Albis; Eleni Iliopulos
  24. Technological growth and hours in the long run: Theory and evidence By Reif, Magnus; Tesfaselassie, Mewael F.; Wolters, Maik H.
  25. Rising inequality and trends in leisure By Boppart, Timo; Ngai, L. Rachel
  26. Fiscal regimes and the exchange rate By Enrique Alberola-Ila; Carlos Cantú; Paolo Cavallino; Nikola Mirkov
  27. Why Do Couples and Singles Save During Retirement? By Mariacristina De Nardi; Eric French; John Bailey Jones; Rory McGee
  28. Bad Jobs and Low Inflation By Renato Faccini; Leonardo Melosi
  29. The search theory of OTC markets By Weill, Pierre-Olivier
  30. Fiscal Rule and Public Investment in Chile By J. Rodrigo Fuentes; Raimundo Soto; Klaus Schmidt-Hebbel

  1. By: Galí, Jordi
    Abstract: I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model's welfare implications.
    Keywords: Asset Price Volatility; Economic Fluctuations; monetary policy rules; Stabilization policies
    JEL: E44 E52
    Date: 2020–06
  2. By: Solikin M. Juhro; Reza
    Abstract: This paper studies the role of macroprudential policy in the insulation properties of flexible exchangerates. To this end, we build a small open economy New Keynesian DSGE model with a bankingsector where, in the model economy, entrepreneurs may take foreign loans, and the exchange rateintervention is undertaken via a modified Taylor-rule. We also add a macroprudential measure,which limits the entrepreneurs’ foreign to domestic loan ratio. From the analysis, three significantresults emerge. First, the responses of aggregate output, consumption, investment, and inflation varywidely concerning the type of foreign shocks and the combinations of macroprudential policy andexchange rate intervention. Second, the flexible exchange rate’s insulation properties seem to dependon the foreign shock hitting the economy. Under a foreign interest rate shock, a higher exchange rateintervention destabilizes output. Whereas under a risk premium shock, it stabilizes output. Finally, under the foreign shocks, tightening the macroprudential measure does not necessarily stabilize output in the economy.
    Keywords: exchange rate, macroprudential policy, credit frictions, external shocks
    JEL: E30 E32 E44 E51 E52 G21 G28
    Date: 2020
  3. By: Jia, Pengfei
    Abstract: The Global Financial Crisis of 2007--2009 and its aftermath have called for a rethink of the role of money in shaping business cycle fluctuations. To this end, this paper studies a New Keynesian model with money (liquidity). In the model, agents hold government money and other financial assets. However, there is a "short rate disconnect" (i.e., an interest rate spread) between the policy rate on money and the interest rate on household's savings. The paper shows that there exists a meaningful "liquidity effect" that is quantitatively significant for the macroeconomy. As the spread increases, so does the price of liquidity. In a model where consumption and money are complements, such an increase in the opportunity cost of money induces agents to consume less and work less. Both the effects imply that the real wage can fall, which in turn puts downward pressures on inflation via the New Keynesian Phillips curve. The fall in inflation makes the monetary authority cut the nominal interest rates by more, but at the cost of increasing the spread even further. In addition, the paper compares the dynamic responses to technology shocks and monetary policy shocks for the model with liquidity and the standard New Keynesian model. The results show that the responses can be quantitatively different for the two models. Finally, this paper studies the interaction between the liquidity effect and monetary policy, highlighting the liquidity effect that can play in business cycles.
    Keywords: Liquidity, Money, New Keynesian model, Business cycle fluctuations
    JEL: E32 E41 E51 E52 E62
    Date: 2021–06–14
  4. By: Francois Gourio; Phuong Ngo
    Abstract: Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing correlation in turn reduces the term premium, and hence contributes to explaining the decline in long-term interest rates. We use the model to evaluate this mechanism quantitatively. Our results shed light on the validity of the New Keynesian ZLB model, a cornerstone of modern macroeconomic theory.
    Keywords: zero lower bound; liquidity trap; stock market; inflation premia; term premia; risk premia
    JEL: C61 E31 E52 E62
    Date: 2020–01–03
  5. By: Uchida, Yuki; Ono, Tetsuo
    Abstract: This study presents a political economy model with overlapping generations to analyze the effects of population aging on fiscal policy formation and the resulting distribution of the fiscal burden across generations. The analysis focuses on the role of endogenous labor supply and shows that increased political weight of the old, arising from population aging, leads to an increase in the ratios of public debt and labor income tax revenue to GDP and an initial decrease followed by an increase in the ratio of capital income tax revenue to GDP. The result fits well with the evidence in OECD countries.
    Keywords: Generational burden; Overlapping generations; Political economy; Population aging; Public debt
    JEL: D70 E24 E62 H60
    Date: 2021–05–14
  6. By: Saroj Bhattarai; Jae Won Lee; Choongryul Yang
    Abstract: We show that the effectiveness of redistribution policy in stimulating the economy and improving welfare is directly tied to how much inflation it generates, which in turn hinges on monetary-fiscal adjustments that ultimately finance the transfers. We compare two distinct types of monetary-fiscal adjustments: In the monetary regime, the government eventually raises taxes to finance transfers, while in the fiscal regime, inflation rises, effectively imposing inflation taxes on public debt holders. We show analytically in a simple model how the fiscal regime generates larger and more persistent inflation than the monetary regime. In a quantitative application, we use a two-sector, two-agent New Keynesian model, situate the model economy in a COVID-19 recession, and quantify the effects of the transfer components of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We find that the transfer multipliers are significantly larger under the fiscal regime—which results in a milder contraction—than under the monetary regime, primarily because inflationary pressures of this regime counteract the deflationary forces during the recession. Moreover, redistribution produces a Pareto improvement under the fiscal regime.
    Keywords: Household heterogeneity; Redistribution; Monetary-fiscal policy mix; Transfer multiplier; Welfare evaluation; COVID-19; CARES Act
    JEL: E53 E62 E63
    Date: 2021–03–01
  7. By: José R. Maria; Paulo Júlio; Sílvia Santos
    Abstract: We use a dynamic stochastic general equilibrium model endowed with a complex banking system—in which due loans, occasionally binding credit restrictions, a cost of borrowing channel, and regulatory (capital and impairment) requirements coexist—to analyze the performance of various policy options impacting impairment recognition by banks. We discuss how looser or tighter policy designs affect output and welfare—both in the steady state and alongside dynamics—and the main driving forces that lie beneath the effects. The holding cost of due loans, restrictions to credit, dividend strategy, and the cure rate are key components of the driveshaft propelling policies to outcomes. We find that looser policies outperform tighter ones only if reflected into higher capital buffers (extra income is retained and not distributed as dividends) and for sufficiently low values of the holding cost. Higher cure rates increase the effectiveness of looser policies—they dominate for a wider range of holding costs—by raising the benefits of delaying impairment recognition. A policy targeting impairment recognition seems to take the upper edge due to its combined steady-state and business-cycle effects, but a policy that allows the regulatory impairment recognition to respond to the cycle is more effective from a business-cycle stabilization standpoint. Occasionally binding credit restrictions boost the effectiveness of looser policies during recessions due to its asymmetric effects over the cycle, pushing the mean output upwards.
    JEL: E32 E44 H62
    Date: 2021
  8. By: Adrien Auclert; Matthew Rognlie; Martin Souchier; Ludwig Straub
    Abstract: Introducing heterogeneous households to a New Keynesian small open economy model amplifies the real income channel of exchange rates: the rise in import prices from a depreciation lowers households’ real incomes, and leads them to cut back on spending. When the sum of import and export elasticities is one, this channel is offset by a larger Keynesian multiplier, heterogeneity is irrelevant, and expenditure switching drives the output response. With plausibly lower short-term elasticities, however, the real income channel dominates, and depreciation can be contractionary for output. This weakens monetary transmission and creates a dilemma for policymakers facing capital outflows. Delayed import price pass-through weakens the real income channel, while heterogeneous consumption baskets can strengthen it.
    JEL: E52 F32 F41
    Date: 2021–05
  9. By: Stephie Fried; Kevin Novan; William B. Peterman
    Abstract: This paper explores how to recycle carbon tax revenue back to households to maximize welfare. Using a general equilibrium lifecycle model calibrated to reflect the heterogeneity in the U.S. economy, we find the optimal policy uses two thirds of carbon-tax revenue to reduce the distortionary tax on capital income while the remaining one third is used to increase the progressivity of the labor-income tax. The optimal policy attains higher welfare and more equality than the lump-sum rebate approach preferred by policymakers as well as the approach originally prescribed by economists -- which called exclusively for reductions in distortionary taxes.
    Keywords: Carbon tax; Overlapping generations; Revenue recycling
    JEL: E62 H21 H23
    Date: 2021–04–02
  10. By: Stephie Fried; Kevin Novan; William B. Peterman
    Abstract: Uncertainty surrounding if and when the U.S. government will implement a federal climate policy introduces risk into the decision to invest in capital used in conjunction with fossil fuels. To quantify the macroeconomic impacts of this climate policy risk, we develop a dynamic, general equilibrium model that incorporates beliefs about future climate policy. We find that climate policy risk reduces carbon emissions by causing the capital stock to shrink and become relatively cleaner. Our results reveal, however, that a carbon tax could achieve the same reduction in emissions at less than half the cost.
    Keywords: Climate Policy; Policy Uncertainty
    JEL: H30 Q58 H23
    Date: 2021–03–19
  11. By: Lanteri, Andrea; Medina, Pamela; Tan, Eugene
    Abstract: What are the short- and medium-term effects of an import-competition shock on firm dynamics and aggregate productivity? We address this question by combining detailed data on investment dynamics of Peruvian manufacturing firms, data on trade flows from China, and a quantitative general-equilibrium model with heterogeneous firms subject to idiosyncratic shocks. In the data, we find evidence of substantial frictions that slow capital reallocation, by rendering disinvestment and firm exit costly. In our model, these frictions shape the transitional dynamics after a trade shock. On impact, a drop in output prices due to import competition induces a spike in inaction, and exit of some productive firms, consistent with our empirical evidence. These effects expand the aggregate productivity wedge relative to a frictionless benchmark. Overall, productivity gains materialize slowly over time, whereas welfare gains emerge early in the transition.
    Keywords: capital reallocation; Firm Dynamics; Investment Irreversibility; Trade Shocks
    Date: 2020–05
  12. By: Ferrari, Massimo; Pagliari, Maria Sole
    Abstract: In this paper we explore the cross-country implications of climate-related mitigation policies. Specifically, we set up a two-country, two-sector (brown vs green) DSGE model with negative production externalities stemming from carbon-dioxide emissions. We estimate the model using US and euro area data and we characterize welfare-enhancing equilibria under alternative containment policies. Three main policy implications emerge: i) fiscal policy should focus on reducing emissions by levying taxes on polluting production activities; ii) monetary policy should look through environmental objectives while standing ready to support the economy when the costs of the environmental transition materialize; iii) international cooperation is crucial to obtain a Pareto improvement under the proposed policies. We finally find that the objective of reducing emissions by 50%, which is compatible with the Paris agreement's goal of limiting global warming to below 2 degrees Celsius with respect to pre-industrial levels, would not be attainable in absence of international cooperation even with the support of monetary policy. JEL Classification: F42, E50, E60, F30
    Keywords: climate modelling, DSGE model, open-economy macroeconomics, optimal policies
    Date: 2021–06
  13. 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
  14. By: Margaris, Panagiotis; Wallenius, Johanna
    Abstract: In this paper we develop and estimate a life cycle model that features pecuniary and non-pecuniary investments in health, along with a cognitive ability gradient associated with said investments, in order to rationalize the socioeconomic gradients in health and life expectancy in the United States. Agents accumulate health capital, which affects the level of utility, labor productivity, the distribution of medical spending shocks and life expectancy. We find that the cognitive ability gradient to health investments and the differences in lifetime income account for the lion's share of the observed life expectancy gap. Providing universal health insurance coverage has heterogeneous effects, depending on the progressivity of the financing mechanism, and at best results in a modest decrease in the life expectancy gap.
    Keywords: health; inequality; Life Cycle; time use
    JEL: D31 E21 I14
    Date: 2020–05
  15. By: Rohan Kekre; Moritz Lenel
    Abstract: We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks and amplifies their real effects by 1.3-1.5 times.
    JEL: E44 E52 G12
    Date: 2021–05
  16. By: Ferraro, Domenico; Jaimovich, Nir; Molinari, Francesca; Young, Cristobal
    Abstract: We develop a search-and-matching model where the magnitude of unemployment insurance benefits affects the likelihood that unemployed actually engage in active job search. To quan- titively discipline this relation we use administrative data of unemployed search audits. We use the model to quantify the effects of unemployment reforms. For small benefits' increases, the policymaker faces a trade-off between an uptick in the measure of unemployed actually searching and a fall in the unemployment exit-rate conditional on searching. For larger bene- fits' increases, an active search margin magnifies the benefits' disincentives, leading to a bigger drop in the employment rate than previously thought.
    Date: 2020–05
  17. By: Storesletten, Kjetil; Zhao, Bo; Zilibotti, Fabrizio
    Abstract: We document that business cycles change during the process of development. In countries with large declining agricultural sectors, aggregate employment is uncorrelated with GDP. During booms, agricultural employment declines even though agricultural labor productivity increases relative to other sectors. We construct a unified theory of business cycles and structural change consistent with the stylized facts. The theory focuses on the simultaneous decline and modernization of agriculture. As capital accumulates, agriculture becomes increasingly capital intensive as traditional agriculture is crowded out. We estimate the model and show that it accounts well for both structural transformation and business cycle fluctuations in China.
    Date: 2020–06
  18. By: Marcelo Veracierto
    Abstract: This paper introduces a general method for computing equilibria with heterogeneous agents and aggregate shocks that is particularly suitable for economies with private information. Instead of the cross-sectional distribution of agents across individual states, the method uses as a state variable a vector of spline coefficients describing a long history of past individual decision rules. Applying the computational method to a Mirrlees RBC economy with known analytical solution recovers the solution perfectly well. This test provides considerable confidence on the accuracy of the method.
    Keywords: Computational methods; heterogeneous agents; business cycles; private information
    JEL: C63 D82 E32
    Date: 2020–02–18
  19. By: Luca Pensieroso; Romain Restout
    Abstract: Was the Gold Standard a major determinant of the onset and protracted character of the Great Depression of the 1930s in the United States and worldwide? In this paper, we model the ‘Gold-Standard hypothesis’ in an open-economy, dynamic general equilibrium framework. We show that encompassing the international and monetary dimensions of the Great Depression is important to understand the turmoil of the 1930s, especially outside the United States. Contrary to what is often maintained in the literature, our results suggest that the vague of successive nominal exchange rate devaluations coupled with the monetary policy implemented in the United States did not act as a relief. On the contrary, they made the Depression worse.
    Keywords: Great Depression, Gold Standard, Open Macroeconomics, Dynamic General Equilibrium.
    JEL: N10 E13 N01
    Date: 2021
  20. By: Guner, Nezih; Lopez-Segovia, Javier; Ramos Magdaleno, Roberto
    Abstract: We study how much revenue can be generated by more progressive personal income taxes in Spain. We build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. An increase (decrease) in labor income taxes for individuals who earn more (less) than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an effective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The additional revenue from labor income taxes is only 0.82% higher, while the total tax revenue declines by 1.55%. The total tax revenue is higher if marginal taxes are raised only for the top earners. The increase, however, must be substantial and cover a large segment of top earners. The new tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than e41,699) raises the total taxes by 2.81%.
    Keywords: Labor Supply; Laffer Curve; progressivity; taxation; Top Earners
    JEL: E21 E6 H2 J2
    Date: 2020–05
  21. By: Marcelo Veracierto
    Abstract: I consider a real business cycle model in which agents have private information about the i.i.d. realizations of their value of leisure. For the case of logarithmic preferences I provide an analytical characterization of the solution to the associated mechanism design problem. Moreover, I show a striking irrelevance result: That the stationary behavior of all aggregate variables are exactly the same in the private information economy as in the full information case. Numerical simulations indicate that the irrelevance result approximately holds for more general CRRA preferences.
    Keywords: business cycles; Mirrlees economies; mechanism design; aggregation
    JEL: D82 E32
    Date: 2020–02–18
  22. By: Orazio Attanasio; Agnes Kovacs; Patrick Moran
    Abstract: We propose a rich model of household behavior to study the effect of two important policies: mortgage interest tax deduction and mandatory mortgage amortization. These policies have attracted some controversy, first because they are conceived to increase overall saving, an objective that the literature does not agree they can achieve, and second because they incentivize illiquid savings and may thus increase the share of ‘wealthy hand-to-mouth’ households. We build a life-cycle model where housing may act as a commitment device to counteract present biases arising from temptation. We show that the model matches several empirical facts, including the large share of wealthy hand-to-mouth households. We evaluate the effect of the two policies and find that they increase wealth accumulation by 7 and 10% respectively. Our results demonstrate that these policies not only induce portfolio re-balancing, as emphasized by the previous literature, but also increase savings by making commitment more accessible.
    JEL: D11 D14 D91 E21 R21
    Date: 2021–06
  23. By: Bertrand Achou (Retirement and Savings Institute HEC Montréal); Hippolyte d'Albis (CNRS and Paris School of Economics); Eleni Iliopulos (EPEE, University of Evry, Univ. Paris-Saclay and Cepremap.)
    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
    JEL: E3 G1 C1 I3
    Date: 2021
  24. By: Reif, Magnus; Tesfaselassie, Mewael F.; Wolters, Maik H.
    Abstract: Over the last decades, hours worked per capita have declined substantially in many OECD economies. Using the standard neoclassical growth model with endogenous work-leisure choice, we assess the role of trend growth slowdown in accounting for the decline in hours worked. In the model, a permanent reduction in technological growth decreases steady state hours worked by increasing the consumption-output ratio. Our empirical analysis exploits cross-country variation in the timing and the size of the decline in technological growth to show that technological growth has a highly significant positive effect on hours. A decline in the long-run trend of technological growth by one percentage point is associated with a decline in trend hours worked in the range of one to three percent. This result is robust to controlling for taxes, which have been found in previous studies to be an important determinant of hours. Our empirical finding is quantitatively in line with the one implied by a calibrated version of the model, though evidence for the model's implication that the effect on hours works via changes in the consumption-output ratio is rather mixed.
    Keywords: Productivity growth,technological growth,working hours,employment
    JEL: E24 O40
    Date: 2021
  25. By: Boppart, Timo; Ngai, L. Rachel
    Abstract: This paper develops a model that generates rising average leisure time and increasing leisure inequality along a path of balanced growth. Households derive utility from three sources: market goods, home goods and leisure. Home production and leisure are both activities that require time and capital. Households allocate time and capital to these non-market activities and supply labor. The dynamics are driven by activity-specific TFP growth and a spread in the distribution of household-specific labor market efficiencies. When the spread is set to replicate the increase in wage inequality across education groups, the model can account for the observed average time series and cross-sectional dynamics of leisure time in the U.S. over the last five decades.
    Keywords: leisure; labor supply; inequality; home-production; balanced growth path; forthcoming
    JEL: N0
    Date: 2021–03–30
  26. By: Enrique Alberola-Ila; Carlos Cantú; Paolo Cavallino; Nikola Mirkov
    Abstract: In this paper, we argue that the effect of monetary and fiscal policies on the exchange rate depends on the fiscal regime. A contractionary monetary (expansionary fiscal) shock can lead to a depreciation, rather than an appreciation, of the domestic currency if debt is not backed by future fiscal surpluses. We look at daily movements of the Brazilian real around policy announcements and find strong support for the existence of two regimes with opposite signs. The unconventional response of the exchange rate occurs when fiscal fundamentals are deteriorating and markets' concern about debt sustainability is rising. To rationalize these findings, we propose a model of sovereign default in which foreign investors are subject to higher haircuts and fiscal policy shifts between Ricardian and non-Ricardian regimes. In the latter, sovereign default risk drives the currency risk premium and affects how the exchange rate reacts to policy shocks.
    Keywords: exchange rate, monetary policy, fiscal policy, fiscal dominance, sovereign default
    JEL: E52 E62 E63 F31 F34 F41 G15
    Date: 2021–06
  27. By: Mariacristina De Nardi; Eric French; John Bailey Jones; Rory McGee
    Abstract: While the savings of retired singles tend to fall with age, those of retired couples tend to rise. We estimate a rich model of retired singles and couples with bequest motives and uncertain longevity and medical expenses. Our estimates imply that while medical expenses are an important driver of the savings of middle-income singles, bequest motives matter for couples and high-income singles, and generate transfers to non-spousal heirs whenever a household member dies. The interaction of medical expenses and bequest motives is a crucial determinant of savings for all retirees. Hence, to understand savings, it is important to model household structure, medical expenses, and bequest motives.
    Keywords: Couples; Singles; Savings; Medical expenses; Bequest motives
    JEL: D15 D31 E21 H31
    Date: 2021–05–25
  28. By: Renato Faccini; Leonardo Melosi
    Abstract: The low rate of inflation observed in the U.S. over the entire past decade is hard to reconcile with traditional measures of labor market slack. We show that an alternative notion of slack that encompasses workers' propensity to search on the job explains this missing inflation. We derive this novel concept of slack from a model in which a drop in the on-the-job search rate lowers the intensity of interfirm wage competition to retain or hire workers. The on-the-job search rate can be measured directly from aggregate labor-market flows and is countercyclical. Its recent drop is corroborated by micro data.
    Keywords: Missing inflation; on-the-job search; employment-to-employment rate; labor market slack; Phillips curve; cyclical misallocation; micro data; heterogeneous agents
    JEL: C32 E31 E37
    Date: 2020–03–05
  29. By: Weill, Pierre-Olivier
    Abstract: I review the recent literature that applies search-and-matching theory to the study of Over-the-Counter (OTC) financial markets. I formulate and solve a simple model in order to illustrate the typical assumptions and economic forces at play in existing work. I then offer thematic tours of the literature and, in the process, discuss avenues for future research.
    Keywords: Asset Pricing; OTC markets; search frictions
    JEL: G11 G12 G21
    Date: 2020–06
  30. By: J. Rodrigo Fuentes; Raimundo Soto; Klaus Schmidt-Hebbel
    Abstract: We use three different approaches --narrative approach, counterfactual synthetic control method, and DSGE model--to assess the design and operation of the Chilean fiscal rule and its impact on public investment. We acknowledge the substantial progress in building a modern institutional framework for fiscal policy made during the past 30 years. Nevertheless, we find that the rule is incomplete in at least two dimensions: it lacks an escape clause and it needs supplementing the budget balance rule with a debt rule. The former was made patent with the breaching of the rule in 2009 and the subsequent inability of the authorities to steer fiscal accounts back to its long-term sustainable path. The latter showed in the speedy built up of the public debt in the last decade as a result of the need to finance fiscal deficits. We propose a number of reforms to existing fiscal institutions, including improving on the transparency and accountability of the institutional framework, a reformulation of the rule to consider a multi-year horizon planning of public finance (including investment plans, balance sheet management), escape clauses, and a debt anchor among others. This will complement the actual fiscal framework, especially nowadays when the fiscal stance has deteriorated significantly and is expected to worsen as a result of the Coronavirus pandemics.
    Date: 2020

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