nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒07‒12
29 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Should Hong Kong switch to Taylor Rule?—Evidence from DSGE Model By Meenagh, David; Minford, Patrick; Zhao, Zhiqi
  2. An Optimal Macroprudential Policy Mix for Segmented Credit Markets By Jelena Zivanovic
  3. Monetary Policy and Welfare with Heterogeneous Firms and Endogenous Entry By Dudley Cooke; Tatiana Damjanovic
  4. Flexible inflation targeting with active fiscal policy By Harrison, Richard
  5. A note on the fertility-income relationship and childcare outside home By Aso, Hiroki
  6. US Postwar Macroeconomic Fluctuations Without Indeterminacy By Joshua Brault; Hashmat Khan; Louis Phaneuf; Jean Gardy Victor
  7. Optimal Central Banking Policies: Envisioning the Post-Digital Yuan Economy with Loan Prime Rate-setting By King Yoong Lim; Chunping Liu; Shuonan Zhang
  8. Status Externalities and Low Birth Rates in Korea By Seongeun Kim; Michèle Tertilt; Minchul Yum
  9. No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development By David Kohn; Fernando Leibovici; Michal Szkup
  10. Evaluating the Effects of the Home Affordable Modification Program By Richard Cóndor
  11. Labor adjustment and productivity in the OECD By Dossche, Maarten; Gazzani, Andrea; Lewis, Vivien
  12. U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter By Shaghil Ahmed; Ozge Akinci; Albert Queraltó
  13. Dynamic Labor Reallocation with Heterogeneous Skills and Uninsured Idiosyncratic Risk By Ester Faia; Marianna Kudlyak; Ekaterina Shabalina
  14. Endogenous Uncertainty and Credit Crunches By Ludwig Straub; Robert Ulbricht
  15. Food subsidies and cash transfers in Egypt: Evaluating general equilibrium benefits and trade-offs By Breisinger, Clemens; Kassim, Yumna; Kurdi, Sikandra; Randriamamonjy, Josée; Thurlow, James
  16. Modeling optimal quarantines with waning immunity By Aditya Goenka; Lin Liu; Nguyen, Manh-Hung
  17. Nursing Homes in Equilibrium: Implications for Long-term Care Policies By Tatyana Koreshkova; Minjoon Lee
  18. A Theory of Debt Accumulation and Deficit Cycles By Antonio Mele
  19. The Welfare Costs of Job Loss and Decarbonization– Evidence from Germany's Coal Phase Out By Haywood, Luke; Janser, Markus; Koch, Nicolas
  20. Redistributive Policy and R&D-based Growth By Ken Tabata
  21. Heterogeneous Firms, R&D Policies and the Long Shadow of Business Cycles By Cristiana Benedetti-Fasil; Giammario Impullitti; Omar Licandro; Petr Sedlacek
  22. Micro Risks and Pareto Improving Policies with Low Interest Rates By Mark Aguiar; Manuel Amador; Cristina Arellano
  23. Conspicuous leisure, time allocation, and obesity Kuznets curves By Nathalie Mathieu-Bolh; Ronald Wendner
  24. Search, Screening and Sorting By Xiaoming Cai; Pieter Gautier; Ronald Wolthoff
  25. Searching for Hysteresis By Luca Benati; Thomas Lubik
  26. Distributional Effects of Emission Pricing in a Carbon-Intensive Economy: The Case of Poland By Marek Antosiewicz; J. Rodrigo Fuentes; Piotr Lewandowski; Jan Witajewski-Baltvilks
  27. UI Generosity and Job Acceptance: Effects of the 2020 CARES Act By Petrosky-Nadeau, Nicolas; Valletta, Robert G.
  28. Optimal robust monetary policy with parameters and output gap uncertainty By Adriana Grasso; Guido Traficante
  29. On the Foundations of Competitive Search Equilibrium with and without Market Makers By James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman

  1. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Zhao, Zhiqi (Cardiff Business School)
    Abstract: This paper studies the economy of Hong Kong through the lens of a small open economy DSGE model with a currency board exchange rate commitment. It assumes flexible prices and a banking system that provides credit to entrepreneurial household-firms; the money supply is fully backed by reserves under the currency board. We estimate and evaluate the model by Indirect Inference over the sample period of 1994Q1-2018Q3; we find that it matches the data behaviour, as represented by a VAR. We examined the economy’s volatility using bootstrapping of the model innovations, under both the estimated currency board model and a standard alternative regime with floating exchange rate and a Taylor rule; we found that Hong Kong welfare is higher in the currency board, which substantially reduces output volatility.
    Keywords: Currency Board, Monetary Policy, Hong Kong, Indirect Inference
    JEL: E52 F41 G5
    Date: 2021–06
  2. By: Jelena Zivanovic
    Abstract: This paper analyzes the design of simple macroprudential rules for bank and non-bank credit markets in a medium-scale dynamic stochastic general equilibrium model. In the model, mutual funds support corporate bond issuance by rms with access to capital markets; a banking sector supplies loans to the remaining producers. This model is used to study the optimal design of monetary and macroprudential rules and to address whether financial stability in the banking and bond markets is welfare improving. First, in response to aggregate productivity and financial shocks, the welfare-maximizing monetary policy rule implies near price stability, while the optimal macroprudential policy rule stabilizes bank credit and bond volumes. Second, there is no trade-off between price and financial stability. Third, if the central bank cannot correctly identify a sector-specific financial shock, responding optimally as if the shock affects both sectors, then welfare outcomes are negligibly worse than those under the optimal policy.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; Credit risk management; Financial stability; Financial system regulation and policies
    JEL: E30 E44 E50
    Date: 2021–06
  3. By: Dudley Cooke (University of Exeter); Tatiana Damjanovic (Durham University Business School)
    Abstract: This paper studies the welfare consequences of monetary policy in a stickywage New Keynesian model with heterogenous firms and endogenous entry. Cross-sectional dispersion in price-markups and labor shares is generated by a translog demand structure and aggregate fluctuations in these variables are driven by firm entry and selection. We show that when the distribution of firm-level productivity is Pareto, selection is such that the aggregate price-markup and labor share are fixed. If firm entry is static, the divine coincidence appears, and wage stability is optimal. If firm entry is dynamic, or selection is weakened, optimal stabilization policy accounts for the size distribution of firms. We calculate the welfare loss of ignoring firm entry and selection to be 0.1 − 0.3 percent of steady state consumption.
    Keywords: Firm Entry, Heterogenous Firms, Optimal Monetary Policy, Translog Preferences
    JEL: E32 E52 L11
    Date: 2021–02
  4. By: Harrison, Richard (Bank of England)
    Abstract: This paper studies optimal time‑consistent monetary policy in a simple New Keynesian model with long‑term nominal government debt. Fiscal policy is ‘active’, so that stabilisation of the government debt stock is a binding constraint on monetary policy. Away from the lower bound on the monetary policy rate, optimal monetary policy cannot fully offset the effects of shocks to the natural rate of interest, reducing welfare. At the lower bound, recessionary shocks increase the real value of government debt, generating the anticipation of higher future inflation to stabilise real debt. Higher inflation expectations reduce real interest rates, mitigating the effects of recessionary shocks. If debt duration is long enough, improved performance at the lower bound may outweigh higher welfare losses in normal times, compared with the case in which fiscal policy is ‘passive’.
    Keywords: Optimal monetary policy; fiscal policy; effective lower bound; government debt
    JEL: E52 E58 E62
    Date: 2021–07–02
  5. By: Aso, Hiroki
    Abstract: This study constructs an overlapping generations model with Stone-Geary preferences and child care outside home. When income is sufficiently large, individuals can afford to have more children due to childcare services outside home. As a result, we demonstrate the demographic transition; thereafter fertility rebound and eventually decreasing fertility.
    Keywords: Fertility-income relationship, Childcare outside home, Stone-Geary preferences
    JEL: J11 J13
    Date: 2021–07–01
  6. By: Joshua Brault (Department of Economics, Carleton University); Hashmat Khan (Department of Economics, Carleton University); Louis Phaneuf (Department of Economics, Universite du Quebec a Montreal); Jean Gardy Victor
    Abstract: We estimate a multi-shock DSGE model with a Bayesian method that differentiates between states of determinacy and indeterminacy. Determinacy is statistically preferred to indeterminacy before and after 1980. Key to this finding is a Taylor rule wherein the Fed targets output growth relative to trend instead of the level of the output gap or a mix of output gap and output growth. This allows us to revisit postwar macroeconomic fluctuations without indeterminacy. Relative to the pre-1980s, we find that the post-1983 contribution of shocks to the marginal efficiency of investment to the cyclical variance of output growth fell from 50% in the pre-1980s to 20% during the Great Moderation. Greater nominal wage flexibility was a main source of decline in the volatility of output and working hours during the Great Moderation, a finding which appears consistent with the post-1980 large deunionization in the private sector. Lower inflation variability resulted mostly from the Fed’s hawkish stance against inflation and changes in preference parameters. Lower trend inflation and smaller shocks were not major factors driving the Great Moderation.
    Keywords: Monetary Policy; Determinacy; Bayesian Estimation; Sources of Business Cycle; Changes in Aggregate Volatility
    JEL: E31 E32 E37
    Date: 2021–02–19
  7. By: King Yoong Lim; Chunping Liu; Shuonan Zhang
    Abstract: We develop a DSGE model with cash and digital currency to study the financial stability properties of two potential central banking policies in China. Specifically, a Loan Prime Rate (LPR)-setting policy function and central bank digital currency (CBDC) implementation are examined. Distinguish between a benchmark model and a "Post-CBDC world", we Bayesian-estimate the model. Post-CBDC implementation, we find macroeconomic variables to display greater procyclicality to real shocks. However, we also find a potential LPR-setting policy to exhibit an improved stabilization property in the post-CBDC world. We uncover an optimal design of LPR policy function, which targets more specifically housing and capital asset markets, as well as the growth in CBDC. This suggests a potential policy complementarity between these two seemingly unrelated central banking policies in the financial stability agenda of China going forward.
    Keywords: China, Digital Currency, Loan Prime Rate, Monetary Policy, Bayesian DSGE models.
    JEL: E4 E52 E58 C11
    Date: 2021–06
  8. By: Seongeun Kim; Michèle Tertilt; Minchul Yum
    Abstract: East Asians, especially South Koreans, appear to be preoccupied with their offspring’s education—most children spend time in expensive private institutes and in cram schools in the evenings and on weekends. At the same time, South Korea currently has the lowest total fertility rate in the world. In this paper, we propose a theory with status externalities and endogenous fertility that connects these two facts. Using a quantitative heterogeneous-agent model calibrated to Korea, we find that fertility would be 16% higher in the absence of the status externality. Furthermore, childlessness in the poorest quintile would fall from five to less than one percent. We then explore the effects of various government policies. A pro-natal transfer increases fertility and reduces education while an education tax reduces both education and fertility, with heterogeneous effects across the income distribution. The policy mix that maximizes the current generation’s welfare consists of an education tax of 12% and moderate pro-natal transfers—a monthly child allowance of 3% of average income for 18 years. This would raise average fertility by about 5% and decrease education spending by 16%. Although this policy increases the welfare of the current generation, it may not do the same for future generations as it lowers their human capital.
    Keywords: Fertility, Status, Externality, Education, Childlessness, Korea
    JEL: D13 E24 I2 J10 J13 D62 O40
    Date: 2021–06
  9. By: David Kohn; Fernando Leibovici; Michal Szkup
    Abstract: We study the role of financial development on the aggregate and welfare implications of reducing trade barriers on imports of physical capital and intermediate inputs. We document that financially underdeveloped economies feature a slower response of real GDP, consumption, and investment following trade liberalization episodes that improve access to imported production inputs. To quantify the role of financial development, we set up a quantitative general equilibrium model with heterogeneous firms subject to financial constraints and estimate it to match salient features from Colombian plantlevel data. We find that the adjustment to a decline of import tariffs on physical capital and intermediate inputs is significantly slower in financially underdeveloped economies in line with the empirical evidence. These effects reduce the welfare gains from trade liberalization and make them more unequal across agents.
    Date: 2020
  10. By: Richard Cóndor
    Abstract: The Home Affordable Modification Program (HAMP) was a loan modification program introduced in 2009, in the U.S., to assist highly indebted homeowners with avoiding foreclosure. This program also encouraged private lenders to offer more sustainable modifications. This paper studies the role of HAMP in preventing higher foreclosures rates during and after the Great Recession, in the context of a general-equilibrium heterogeneous-agents model with two types of households (Borrowers and Savers), uninsurable idiosyncratic risk, and both private and HAMP modifications. The main result is that, without HAMP, the peak in the foreclosure rate could have been 50% larger (3.2 percent vs 2.2 percent in data).
    JEL: G51 E44 C61
    Date: 2021–06
  11. By: Dossche, Maarten; Gazzani, Andrea; Lewis, Vivien
    Abstract: Labor productivity is more procyclical in OECD countries with lower employment volatility. To capture this new stylized fact, we propose a business cycle model with employment adjustment costs, variable hours and labor effort. We show that, in our model with variable effort, greater labor market frictions are associated with procyclical labor productivity as well as stable employment. In contrast, the constant-effort model fails to replicate the observed cross-country pattern in the data. By implication, labor market deregulation has a greater effect on the cyclicality of labor productivity and on the relative volatility of employment when effort can vary. JEL Classification: E30, E50, E60
    Keywords: effort, hours, labor adjustment, labor market deregulation, labor productivity.
    Date: 2021–06
  12. By: Shaghil Ahmed; Ozge Akinci; Albert Queraltó
    Abstract: We explore how the sources of shocks driving interest rates, country vulnerabilities, and central bank communications affect the spillovers of U.S. monetary policy changes to emerging market economies (EMEs). We utilize a two-country New Keynesian model with financial frictions and partly dollarized balance sheets, as well as poorly anchored inflation expectations reflecting imperfect monetary policy credibility in vulnerable EMEs. Contrary to other recent studies that also emphasize the sources of shocks, our approach allows the quantification of effects on real macroeconomic variables as well, in addition to financial spillovers. Moreover, we model the most relevant vulnerabilities structurally. We show that higher U.S. interest rates arising from stronger U.S. aggregate demand generate modestly positive spillovers to economic activity in EMEs with stronger fundamentals but can be adverse for vulnerable EMEs. In contrast, U.S. monetary tightening’s driven by a more-hawkish policy stance cause a substantial slowdown in activity in all EMEs. Our model also captures the challenging policy tradeoffs that EME central banks face, and we show that these tradeoffs can potentially be improved by clearer communications from them.
    Keywords: financial frictions; U.S. monetary policy spillovers; adaptive expectations
    JEL: E32 E44 F41
    Date: 2021–06–01
  13. By: Ester Faia; Marianna Kudlyak; Ekaterina Shabalina
    Abstract: Occupational specificity of human capital motivates an important role of occupational reallocation for the economy’s response to shocks and for the dynamics of inequality. We introduce occupational mobility, through a random choice model with dynamic value function optimization, into a multi-sector/multi-occupation Bewley (1980)- Aiyagari (1994) model with heterogeneous income risk, liquid and illiquid assets, price adjustment costs, and in which households differ by their occupation-specific skills. Labor income is a combination of endogenous occupational wages and idiosyncratic shock. Occupational reallocation and its impact on the economy depend on the transferability of workers’ skills across occupations and occupational specialization of the production function. The model matches well the statistics on income and wealth inequality, and the patterns of occupational mobility. It provides a laboratory for studying the short- and long-run effects of occupational shocks, automation and task encroaching on income and wealth inequality. We apply the model to the pandemic recession by adding an SIR block with occupation-specific infection risk and a ZLB policy and study the impact of occupational and aggregate labor supply shocks. We find that occupational mobility may tame the effect of the shocks but amplifies earnings inequality, as compared to a model without mobility.
    Keywords: Occupational Mobility; Heterogeneous Agents; Skills; Income and Wealth Inequality; Discrete Choice Optimization
    JEL: J22 J23 J31 J62 E21 D31
    Date: 2021–06–10
  14. By: Ludwig Straub (Harvard University); Robert Ulbricht (Boston College)
    Abstract: We develop a theory of endogenous uncertainty in which the ability of investors to learn about firm-level fundamentals is impaired during financial crises. At the same time, higher uncertainty reinforces financial distress. Through this two-way feedback loop, a temporary financial shock can cause a persistent reduction in risky lending, output, and employment that coincides with increased uncertainty, default rates, risk premia and disagreement among forecasters. We embed our mechanism into a standard real business cycle model and show how it manifests as an endogenous and highly internally persistent process for aggregate productivity.
    Keywords: Endogenous uncertainty, financial crises, internal persistence
    JEL: D83 E32 E44 G01
    Date: 2020–06–26
  15. By: Breisinger, Clemens; Kassim, Yumna; Kurdi, Sikandra; Randriamamonjy, Josée; Thurlow, James
    Abstract: Most Egyptians receive food subsidies, which are the cornerstone of the country’s social protection system. The government recently attempted to reduce subsidies, with limited success, and introduced a cash transfer program targeting the poor. We use a dynamic general equilibrium model of the Egyptian economy to evaluate the growth and distributional impacts of subsidy reforms and cash transfers. We find that the welfare of poor households would be enhanced by a smaller, but better targeted food subsidy program, and that, if the cost savings from reforms are channeled into investment, faster economic growth would eventually outweigh any short-term welfare losses. However, most of the gains from subsidy reforms accrue to nonpoor households. Combining subsidy reforms with cash transfers leads to the largest welfare gains for the poor, while leaving the welfare of nonpoor households largely intact. The latter is crucial to maintaining support for ongoing subsidy reform efforts.
    Keywords: EGYPT, ARAB COUNTRIES, MIDDLE EAST, NORTH AFRICA, social protection, cash transfers, subsidies, poverty, models, dynamic general equilibrium model, trade off, food subsidies
    Date: 2021
  16. By: Aditya Goenka (University of Birmingham); Lin Liu (University of Liverpool); Nguyen, Manh-Hung (Toulouse School of Economics)
    Abstract: This paper studies continuing optimal quarantines (can also be interpreted as lockdowns or self-isolation) in the long run if a disease (Covid-19) is endemic and immunity can fail, i.e. the disease has SIRS dynamics. We model how the disease related mortality affects optimal choices in a dynamic general equilibrium neoclassical growth framework. An extended welfare function that incorporates loss from mortality is used. Without welfare loss from mortality, in the long run even if there is continuing mortality, it is not optimal to impose a quarantine. We characterize the optimal decision of quarantines and how the disease endemic steady state changes with effectiveness of quarantine, productivity of working from home, rate of mortality from the disease, and failure of immunity. We also give the sufficiency conditions for economic models with SIRS dynamics - a class of models which are non-convex and have endogenous discounting so that no existing results are applicable.
    Keywords: Infectious diseases, Covid-19, SIRS model, mortality, quarantine, sufficiency conditions, lockdown, self-isolation
    JEL: E13 E22 D15 D50 D63 I10 I15 I18 O41 C61
    Date: 2021–06
  17. By: Tatyana Koreshkova (Concordia University); Minjoon Lee (Carleton University)
    Abstract: We build an equilibrium model of the market for nursing home care with decision-makers on both sides of the market. The nursing home demand arises as a result of stochastic dynamic optimizations by households heterogeneous in age, health, wealth; and the cost of home-and-community-based care. On the supply side, locally competitive nursing homes decide prices and care intensity. The government pays for the long-term care of the poorest. We estimate the model parameters using Health and Retirement Survey and simulate the model to quantitatively evaluate the effects of long-term care policies on prices, intensities, care allocation, and welfare.
    Date: 2020–09
  18. By: Antonio Mele (University of Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))
    Abstract: This paper introduces a tractable model of sovereign debt where governments cannot default strategically, but face intertemporal tradeoffs between (i) preferring more primary deficits to less and (ii) avoiding costly defaults. Governments run deficits when debt and, then, the marginal costs of increasing debt are low. However, after an extended period of debt accumulation, default probabilities begin to rise quickly, and so do the marginal costs of running debt. Eventually, debt reaches a critical level relative to the size of the economy, a fiscal tipping point, after which debt accumulation stops, with governments cycling between deficits and surpluses, until perhaps a time of default. The main conclusions are that (i) fiscal tipping points typically occur when distanceto- default is between 10% and 20%; (ii) tipping points are pushed back in a stable macroeconomic environment, such that default premiums are higher in countries that implement austerity earlier and remain positive even when exogenous risk is very small (two “volatility paradoxes”); (iii) liquidity conditions and fiscal reforms may affect default probabilities in an ambiguous way; (iv) fiscal austerity may arrive too late: “debt intolerance” arises around the fiscal tipping point.
    Keywords: government debt; default; fiscal tipping points; austerity; deficit cycles, volatility paradox.
    JEL: G01 G15 G38 E43 E44 E61
    Date: 2021–07
  19. By: Haywood, Luke (Mercator Research Institute on Global Commons and Climate Change (MCC)); Janser, Markus (Institute for Employment Research (IAB), Nuremberg); Koch, Nicolas (Mercator Research Institute on Global Commons and Climate Change (MCC))
    Abstract: Decarbonizing economies is an enormous task. Public debate often focuses on the job loss of workers in fossil industries. Why is job loss costly? Who is most affected? Can delaying transition reduce welfare costs? What other policy instruments may be available? We present a simple job search framework that calculates life-time welfare costs of job loss. We apply the model to the archetypical fossil industry - coal mining. Based on the universe of German coal employment biographies, we estimate the model and decompose welfare costs. We find that unemployment is a small factor: Higher wages and job security in coal drive welfare costs. We distinguish welfare costs by age, education and business cycle. High-educated workers aged 31-49 face highest losses. Based on a detailed demographic projection, we estimate that advancing coal exit from 2038 to 2030 increases unmitigated welfare costs by one third. Labor market policy promoting career switches rather than retirement can alleviate these welfare costs: A wage insurance scheme is estimated to reduce welfare losses by 80-99% at reasonable costs.
    Keywords: job loss, structural change, just transition, coal exit
    JEL: J64 L16 Q54
    Date: 2021–06
  20. By: Ken Tabata (School of Economics, Kwansei Gakuin University)
    Abstract: This study examines how redistributive policy attempting to reduce inequality by taxing the bequests of the rich and redistributing the revenue to the poor affects economic growth in an overlapping generations model of R&D-based growth with both product development and process innovation. We show that such a policy simultaneously increases growth and reduces inequality in the long run. When the market structure adjusts, partially reducing inequality in the short run, the effect of redistributive policy on economic growth depends on the values of the social return to variety parameter. However, when the market structure adjusts fully in the long run, the redistributive policy decreases the entry of new firms but raises economic growth and reduces inequality. These favorable predictions of redistributive bequest taxation on growth and inequality are partly consistent with the empirical findings that redistribution is generally benign in terms of economic growth and that lower post-transfer inequality is correlated with faster and more durable growth.
    Keywords: R&D, Product Development, Process Innovation
    JEL: E62 H50 O31 O40
    Date: 2021–07
  21. By: Cristiana Benedetti-Fasil (European Commission - JRC); Giammario Impullitti (School of Economics, University of Nottingham); Omar Licandro (School of Economics, University of Nottingham); Petr Sedlacek (Department of Economics, Oxford University)
    Abstract: Growth and business cycles have a long tradition of being studied separately. However, events such as the Great Recession raise concerns that severe downturns may have detrimental implications for growth. If so, what policies may help alleviate such long-lasting effects of large recessions? To study these questions, we develop a tractable general equilibrium model of endogenous growth featuring heterogeneous firms, financial constraints and a range of innovation policies. A preliminary analysis suggests that counter-cyclical tax credits may serve as a powerful automatic stabilizer alleviating the long-lasting negative effects of severe cyclical downturns.
    Keywords: Firm dynamics, innovation policy, endogenous growth, business cycles
    JEL: F12 F13 O31 O41
    Date: 2021–06
  22. By: Mark Aguiar; Manuel Amador; Cristina Arellano
    Abstract: We provide sufficient conditions for the feasibility of a Pareto-improving fiscal policy when the risk-free interest rate on government bonds is below the growth rate. We do so in the class of incomplete markets models pioneered by Bewley-Huggett-Aiyagari, but we allow for an arbitrary amount of ex ante heterogeneity in terms of preferences and income risk. We consider both the case of dynamic inefficiency as well as the more plausible case of dynamic efficiency. The key condition is that seigniorage revenue raised by government bonds exceeds the increase in the interest rate times the initial capital stock. The Pareto improving fiscal policies weakly expand every agent’s budget set at every point in time. The policies improve risk sharing and potentially guide the economy to a more efficient level of capital. In simulations, we find that the government must rely on moderate levels of debt issuance along the transition to the new steady state.
    Keywords: Government debt; Fiscal policy; Heterogeneous agents
    JEL: D20 E20 H20
    Date: 2021–06–28
  23. By: Nathalie Mathieu-Bolh (University of Vermont, USA); Ronald Wendner (University of Graz, Austria)
    Abstract: We build a theoretical model to explain the complex patterns of income and obesity, accounting for changes in behavior related to exercise. We combine the theory of time allocation with the theory of conspicuous leisure in a growth model, assuming that consumption expenditures connected to exercise time are conspicuous, and that conspicuous behavior changes with economic development. As a result, as economies develop, we show that there is a growing wedge between optimal exercise and consumption choices made by individuals with different income levels. We show that this pattern is connected to a dynamic Kuznets curve linking body weight to economic development over time, and a static Kuznets curve linking different steady state levels of income per worker to body weight. Thus, our model helps explain the rise and slowdown in obesity prevalence in the USA, as well as the positive correlation between obesity and income per worker in developing countries, and the negative correlation between obesity and income per worker in industrialized countries. We supplement our theoretical results with numerical simulations of the static and dynamic obesity Kuznets curves for the USA. We show that while exercise choices have contributed to a slowdown in the rise in obesity prevalence, there is to this date no dynamic Kuznets curve pattern for obesity in the USA. By contrast, we find the existence of a static Kuznets curve: the steady state level of average body weight increases with the per worker stock of capital up to a level of 186.5 pounds, corresponding to a capital stock 25% higher than the current steady state US capital stock, and decreases thereafter. We discuss policy implications of our findings.
    Keywords: Obesity; Status; Conspicuous leisure; Inequality; Kuznets Curve; Economic Development.
    JEL: D11 D30 H31 I15 O41
    Date: 2021–07
  24. By: Xiaoming Cai; Pieter Gautier; Ronald Wolthoff
    Abstract: We investigate the effect of search frictions on labor market sorting by constructing a model which is in line with recent evidence that employers collect a pool of applicants before interviewing a subset of them. In this environment, we derive the necessary and sufficient conditions for sorting in applications as well as matches. We show that positive sorting is obtained when production complementarities outweigh a force against sorting measured by a quality-quantity elasticity. Interestingly, we find that the required degree of production complementarity for positive sorting is increasing in the number of interviews: it ranges from square-root-supermodularity if each firm can interview a single applicant to log-supermodularity if each firm can interview all its applicants.
    Keywords: sorting, complementarity, search frictions, information frictions, heterogeneity
    JEL: D82 D83 E24
    Date: 2021–06–18
  25. By: Luca Benati; Thomas Lubik
    Abstract: Taking as data-generation process a standard DSGE model, we show via Monte Carlo that reliably detecting hysteresis, defined as the presence of aggregate demand shocks with a permanent impact on output, is a significant challenge, as model-consistent identification schemes (i) spuriously detect it with non-negligible probability when in fact the data-generation process features none, and (ii) have a low power to discriminate between alternative extents of hysteresis. We propose a simple approach to test for the presence of hysteresis, and to estimate its extent, based on the notion of simulating specific statistics (e.g., the fraction of frequency-zero variance of GDP due to hysteresis shocks) conditional on alternative values of hysteresis we impose upon the VAR, and then comparing the resulting Monte Carlo distributions to the corresponding distributions computed based on the actual data via the Kullback-Leibler divergence. Based on two alternative identification schemes, evidence suggests that post-WWII U.S. data are compatible with the notion of no hysteresis, although the most plausible estimate points towards a modest extent, equal to 7 per cent of the frequency-zero variance of GDP.
    Keywords: Hysteresis, permanent shocks, long-run restrictions, sign restrictions, Bayesian methods; Kullback-Leibler divergence
    JEL: E2 E3
    Date: 2021–05
  26. By: Marek Antosiewicz; J. Rodrigo Fuentes; Piotr Lewandowski; Jan Witajewski-Baltvilks
    Abstract: In this paper, we assess the distributional impact of introducing a carbon tax in Poland. We apply a two-step simulation procedure. First, we evaluate the economy-wide effects with a dynamic general equilibrium model. Second, we use a microsimulation model based on household budget survey data to assess the effects on various income groups and on inequality. We introduce a new adjustment channel related to employment changes, which is qualitatively different from price and behavioural effects, and is quantitatively important. We nd that the overall distributional effect of a carbon tax is largely driven by how the revenue is spent: distributing the revenues from a carbon tax as lump-sum transfers to households reduces income inequality, while spending the revenues on a reduction of labour taxation increases inequality. These results could be relevant for other coal-producing countries, such as South Africa, Germany, or Australia.
    Date: 2020
  27. By: Petrosky-Nadeau, Nicolas (Federal Reserve Bank of San Francisco); Valletta, Robert G. (Federal Reserve Bank of San Francisco)
    Abstract: To provide economic relief following the onset of the COVID-19 pandemic, the U.S. CARES Act granted an extra $600 per week in unemployment insurance (UI) benefit payments from late March through July 2020. This unprecedented increase in UI generosity caused weekly benefit payments to exceed prior earnings for most recipients, raising concern that many would be unwilling to accept job offers, slowing the labor market recovery. To assess the impact of the UI supplement, we analyze the job acceptance decision in a dynamic framework in which job seekers weigh the value of a job against remaining unemployed, accounting for the perceived state of the labor market and expected weeks of UI benefits. We derive a reservation level of benefit payments at which an individual is indifferent between accepting and refusing a job offer at their prior wage. Calculating the reservation benefit and comparing it to imputed benefit payments for a wide range of U.S. workers suggests that only a small fraction would turn down an offer to return to work at their previous wage under the CARES Act expanded UI payments. We supplement this quantitative assessment of reservation benefits with direct empirical analysis of labor force transitions using matched Current Population Survey (CPS) data, linked to annual earning records from the CPS income supplement to form UI replacement rates. The results show moderate disincentive effects of the $600 supplemental payments on job finding rates and by extension small effects of the $300 weekly supplement available during 2021.
    Keywords: unemployment, unemployment insurance, job acceptance, COVID-19, CARES Act
    JEL: J64 J65
    Date: 2021–06
  28. By: Adriana Grasso (Bank of Italy); Guido Traficante (European University of Rome)
    Abstract: This paper studies optimal robust monetary policy when the central bank imperfectly observes potential output and has Knightian uncertainty about the intertemporal elasticity of substitution and the slope of the Phillips curve. The literature on optimal robust monetary policy has focused on either imperfect observability of some variables or on parameter uncertainty. We characterize robust monetary policy analytically under the two types of uncertainty and show that in general they call for a more aggressive reaction of monetary policy compared with the certainty case.
    Keywords: potential output, parameter uncertainty, optimal monetary policy, Taylor rule
    JEL: E32 E52
    Date: 2021–06
  29. By: James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman
    Abstract: The literature offers two foundations for competitive search equilibrium, a Nash approach and a market-maker approach. When each buyer visits only one seller (or each worker makes only one job application), the two approaches are equivalent. However, when each buyer visits multiple sellers, this equivalence can break down. Our paper analyzes competitive search equilibrium with simultaneous search using the two approaches. We consider four cases defined by (i) the surplus structure (are the goods substitutes or complements?) and (ii) the mechanism space (do sellers post fees or prices?). With fees, the two approaches yield the same constrained efficient equilib-rium. With prices, the equilibrium allocation is the same using both approaches if the goods are complements, but is not constrained efficient. In the case in which only prices are posted and the goods are substitutes, the equilibrium allocations from the two approaches are different.
    Keywords: multiple applications, competitive search, market makers, efficiency
    JEL: C78 D44 D83
    Date: 2021

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