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on Dynamic General Equilibrium |
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Issue of 2021‒07‒19
27 papers chosen by |
| By: | Koffi, Siméon |
| Abstract: | This study sheds light on the effect of fiscal policy on the Ivorian economy by measuring the value of the different Keynesian multipliers and the possible origins of GDP fluctuation during the period of this study. For this paper, one preferred a Bayesian estimation of a Dynamic Stochastic General Equilibrium (DSGE) model using data from the Direction des Prévisions, des Politiques et des Statistiques Economiques (DPPSE), the Direction Générale du Budget et des Finances (DGBF) and the World Bank database over the period 2000Q1-2019Q4. The results show that (i) the increase in public investment has a positive effect on household consumption, the private sector, and then on the economic activity. The Keynesian multiplier of public investment has been estimated at about , (ii) lowering tax rates is likely to boost the economy but its impact remains weak, (iii) public expenditures, particularly personnel expenditures, have a negative effect on the Ivorian economy. |
| Keywords: | Bayesian estimation, DSGE, Keynesian multiplier, fiscal policy. |
| JEL: | C11 E61 E62 E63 |
| Date: | 2021–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108751&r= |
| By: | Takao Asano (Okayama University); Akihisa Shibata (Kyoto University); Masanori Yokoo (Okayama University) |
| Abstract: | This paper constructs a simple overlapping generations (OLG) model with the working and capitalist classes and two types of production technologies. The behavior of agents belonging to the working class is basically the same as that in the standard Diamond (1965) type OLG model, whereas agents belonging to the capitalist class face two available technologies, select the one with a higher return on capital, and bequeath their assets to the next generation without supplying labor. We show that in an extreme case, in which one technology is linear and the other is of the Leontief type, the dynamics of capital stock supplied by the capitalist class, which can be interpreted as public debt, is characterized by a rigid rotation on the circle, giving rise to quasi-periodic motions for a large set of parameter values. |
| Keywords: | Endogenous business cycles; technology choice; quasi-periodic motion; OLG model |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1063&r= |
| By: | Stephen Millard,; Margarita Rubio; Alexandra Varadi |
| Abstract: | We use a DSGE model with financial frictions, leverage limits on banks, loan-to-value limits and debt- service ratio (DSR) limits on mortgage borrowing, to examine: i) the effects of different macroprudential policies on key macro aggregates; ii) their interaction with each other and with monetary policy; and iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements can nullify the effects of financial frictions and reduce the effects of shocks emanating from the financial sector on the real economy. LTV limits, on their own, are not sufficient to constrain house- hold indebtedness in booms, though can be used with capital requirements to keep debt-service ratios under control. Finally, DSR limits lead to a significant decrease in the volatility of lending, consumption and inflation, since they disconnect the housing market from the real economy. Overall, DSR limits are welfare improving relative to any other macroprudential tool. |
| Keywords: | Macroprudential Policy, Monetary Policy, Leverage Ratio, Affordability Constraint, Col-lateral Constraint. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:2020/14&r= |
| By: | Federico Di Pace; Christoph Görtz |
| Abstract: | Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and prices of non-durables and services sticky, does not generate the empirically observed sectoral co-movement across expenditure categories in response to a monetary policy shock. We show that introducing frictions in financial markets in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence: a monetary tightening generates not only co-movement, but also a rise in credit spreads and a deterioration in bank equity. |
| Keywords: | financial intermediation, sectoral comovement, monetary policy, financial frictions, credit spreads |
| JEL: | E22 E32 E44 E52 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9142&r= |
| By: | Gustafsson, Johan (Department of Economics, Umeå University) |
| Abstract: | Alternative structures of public pension programs have distinct implications for the trade-offs that determine economic behavior over the life cycle. This paper studies these implications in terms of labor supply and economic inequality to characterize the equity–efficiency trade-off between a redistributive (Beveridgean) and an earnings-based (Bismarckian) benefit formula. The economy is modeled as a continuous-time overlapping generations model with endogenous labor supply, savings, and human capital formation. Individuals differ in ability, and they are free to choose how much to work at each period in time and when to enter and exit the labor market. Numerical simulations provide the qualitative insights that a redistributive pension system introduces opposite effects on the incentives to retire for high- and low-skilled individuals, which leads to an increased earnings inequality. This effect can, in turn, dominate the reduced pension inequality such that lifetime and population-wide income inequality increases. Ultimately, it appears that the equity–efficiency trade-off is difficult to characterize when accounting for endogenous labor supply on both the intensive and extensive margins. |
| Keywords: | Equity-Efficiency; Inequality; Public Pension Policy |
| JEL: | H55 I24 J22 |
| Date: | 2021–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0992&r= |
| By: | Gustafsson, Johan (Department of Economics, Umeå University) |
| Abstract: | This paper explores the effects of pension illiteracy on aggregate labor supply and the redistributive performance of public pension systems. I consider an overlapping generations model in continuous time populated with individuals who differ in labor productivity and pension literacy. Agents suffering from pension illiteracy fail to fully account for the structure of the pension system when planning their economic behavior over the life cycle. In particular, I assume that myopic agents treat changes to replacement income as exogenous in the active-retired trade-off and contributions to the pension system as a pure labor income tax. I find that pension illiteracy can negatively impact aggregate labor supply and increase earnings inequality and lifetime income inequality. This suggests that pension illiteracy may limit the efficiency gains of increasing the correlation between individual contributions and benefits, making the equity-efficiency trade-off difficult to characterize in the context of pension reforms. |
| Keywords: | Labor supply; Myopia; Public pension |
| JEL: | H55 J22 J26 |
| Date: | 2021–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0993&r= |
| By: | Mohammed Ait Lahcen; Garth Baughman; Stanislav Rabinovich; Hugo van Buggenum |
| Abstract: | We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – productivity and monetary – and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the U.S. postwar labor market and monetary data, and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks. |
| Keywords: | Money; Search; Inflation; Unemployment; Unemployment volatility; Fundamental surplus; Product-labor market interaction |
| JEL: | E24 E30 E40 E50 |
| Date: | 2021–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-40&r= |
| By: | Kheng, Veasna; Pan, Lei |
| Abstract: | This paper develops and estimates a small open economy real-business cycle model to study the dynamics of Cambodian current account. Differing from previous studies, we include net unilateral transfers and net foreign direct investment (FDI) as additional sources of macroeconomic fluctuations. We show that these two sources explain the variations in current account better than the shocks that are widely identified in the literature (i.e. productivity and interest rate). Our model captures Cambodia’s saving-and investment behaviour and matches well the evolution of its current account. Specifically, the measurement error is nearly 4% and the correlation between data and model is around 0.93. As a step further, using our well-fitted model, we predict the future trend of Cambodian current account in the context of negative shocks in productivity, remittance, FDI and COVID-19 pandemic. |
| Keywords: | real business cycle; current account; FDI; unilateral transfer; COVID-19 |
| JEL: | F3 F41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108489&r= |
| By: | Eduardo de Sá Fortes Leitão Rodrigues |
| Abstract: | This article investigates how increased uncertainty affects the effectiveness of public consumption on economic activity. The paper examines three main issues:first, the influence of uncertainty on output and macroeconomic aggregates. Second, the effects of public consumption on the economy. Third, the impact of a simultaneous shock of uncertainty and government consumption on economic activity.We use Vector Autoregression (VAR) models for the United States, Brazil and a panel VAR with six European countries. The empirical results indicate a disruptive effect of uncertainty on GDP, private consumption, investment and hours worked.The fiscal effects point to slightly different results for the two countries. For Brazil and the United States, the increase in public spending has positive and significant effects on GDP. Regarding the effects of government consumption (high uncertainty),the fiscal effects are not statistically significant, while in times of low uncertainty the effects are positive and significant.Subsequently, we designed a Dynamic Stochastic General Equilibrium (DSGE) model akin to Basu and Bundick (2017), and added three features: tax on labor income, the relationship between private consumption and government consumption and a simultaneous shock of uncertainty and government consumption. The model highlights four main conclusions. First, the negative influence of uncertainty on economic activity. Second, risk aversion magnifies the impact of the macroeconomic response. Third, public consumption has positive effects on economic activity. Finally, we examine the sensitivity of the economy’s responses to different configurations of the relationship between public and private consumption, under normal conditions or uncertainty shocks. The findings suggest that, when the economy is hit by a simultaneous shock of uncertainty and public consumption, it obscures the effectiveness of the fiscal stimulus on the economy, corroborating the empirical results. |
| Keywords: | Uncertainty Shocks, Public Consumption, Simultaneous Shocks |
| JEL: | D58 D80 E32 E62 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp01802021&r= |
| By: | Jake Bradley |
| Abstract: | There has been a substantial body of work modeling the co-movement of employment, vacancies and output over the business cycle. This paper builds on this literature, and informed by empirical investigation, models worker and firm search and hiring behavior in a more systematic manner. Consistent with empirical findings, for a given vacancy, a firm receives many applicants, and chooses their preferred candidate amongst the set. Similarly, workers in both unemployment and employment, can evaluate many open vacancies simultaneously and choose to which they make an application. Business cycles are propagated through turbulence in the economy. Structural parameters of the model are estimated on U.S. data, targeting aggregate time series. Consistent with data, the model is able to generate large volatility in unemployment,vacancies, and worker ows across jobs and employment state. Further, it provides a theoretical mechanism for the shift in the Beveridge curve after the 2008 recession, a phenomenon often referred to as the jobless recovery. That is, persistently low employment after the recession, despite output per worker and vacancies having returned to pre-crisis levels. |
| Keywords: | Beveridge curve, jobless recovery, screening |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:2020/11&r= |
| By: | Oleg Itskhoki; Dmitry Mukhin |
| Abstract: | The Mussa (1986) puzzle is the observation of a sharp and simultaneous increase in the volatility of both nominal and real exchange rates following the end of the Bretton Woods System of pegged exchange rates in 1973. It is commonly viewed as a central piece of evidence in favor of monetary non-neutrality because it is an instance in which a change in the monetary regime caused a dramatic change in the equilibrium behavior of a real variable (the real exchange rate) and is often further interpreted as direct evidence in favor of models with nominal rigidities in price setting. This paper shows that the data do not support this latter conclusion because there was no simultaneous change in the properties of the other macro variables, nominal or real. We show that an extended set of Mussa facts equally falsifies both conventional flexible-price RBC models and sticky-price New Keynesian models as explanations for the Mussa puzzle. We present a resolution to the broader Mussa puzzle based on a model of segmented financial market — a particular type of financial friction by which the bulk of the nominal exchange rate risk is held by financial intermediaries and is not shared smoothly throughout the economy. We argue that rather than discriminating between models with sticky versus flexible prices, or monetary versus productivity shocks, the Mussa puzzle provides sharp evidence in favor of models with monetary non-neutrality arising in the financial market, suggesting the importance of monetary transmission via the risk premium channel. |
| JEL: | E30 E40 E50 F30 F40 G10 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28950&r= |
| By: | Davide Fiaschi; Cristina Tealdi |
| Abstract: | We aim to identify winners and losers of a sudden inflow of low-skilled immigrants using a general equilibrium search and matching model in which employees, either native or non-native, are heterogeneous with respect to their skill level and produce different types of goods and Government expenditure in public goods is financed by a progressive taxation on wages and profits. We estimate the short-term impact of this shock for Italy in each year in the period 2008-2017 to be sizeable and highly asymmetric. In 2017, the real wages of low-skilled and high-skilled employees were 4% lower and 8% higher, respectively, compared to a counter-factual scenario with no non-natives. Similarly, employers working in the low-skilled market experienced a drop in profits of comparable magnitude, while the opposite happened to employers operating in the high-skilled market. Finally, the presence of non-natives led to a 14% increase in GDP and to an increment of approximately 70 billion euros in government revenues and 18 billion euros in social security contributions. |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2107.06544&r= |
| By: | Mosley, Max |
| Abstract: | This paper demonstrates how changes to welfare generosity during recessions induces a greater than usual economic response. This is predicated on the assumption that welfare recipients are likely to be liquidity-constrained and therefore highly responsive to a change in temporary income. This would result in two conclusions, (i) the effects of fiscal stimulus can be maximised when channelled through welfare and (ii) fiscal consolidation from these programs will have a strong contractionary effect on domestic output. Using tax-benefit microsimulation model UKMOD, we find 71% of means-tested welfare recipients are liquidity-constrained. We use this finding to calibrate an open-economy New Keynesian macroeconomic model to therefore illustrate the economic implications of positive changes to the program’s generosity, finding an impact fiscal multiplier of 1.5. For cuts to contributions, we find a negative multiplier of 1.8, implying past cuts to welfare had a sizeable contractionary effect on macroeconomic recovery. |
| Keywords: | Liquidity-Constrains, UKMOD, Fiscal Policy |
| JEL: | B22 E21 E62 H53 |
| Date: | 2021–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108620&r= |
| By: | Jesse Naidoo (Department of Economics, University of Pretoria) |
| Abstract: | I construct and partially characterize the solution of a life-cycle model of fertility choice and human capital accumulation. Because children take time to raise, women face a trade-off between between lifetime earnings and childbearing. The model implies that (i) earnings must drop discontinuously at the time of a birth; (ii) age at first birth and human capital will be positively correlated; and (iii) a permanently higher demand for skill causes women to delay first births. I show that the second of these predictions holds in a sample of South African women drawn from the first wave of the National Income Dynamics Study. |
| Keywords: | fertility, human capital, life-cycle |
| JEL: | J17 J24 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202148&r= |
| By: | Magnus Reif; Mewael F. Tesfaselassie; Maik H. Wolters |
| Abstract: | Over the last decades, hours worked per capita have declined substantially in many OECD economies. Using a 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 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9140&r= |
| By: | Miyazaki, Koichi |
| Abstract: | This study considers a three-period overlapping generations model with an endogenous growth setting, in which an agent borrows in the first period and repays the loan in the second period under a perfect credit market. Two educational subsidy schemes are considered: one is provided when an agent borrows and the other is provided when the agent repays their loan. This study compares the growth rates and social welfare under each educational subsidy scheme at a unique balanced growth path equilibrium. The first contribution of this paper is that it provides sufficient conditions under which the growth rate in one scheme is higher than that in the other. A key to determining the size relationship of growth rates is whether the production of goods and services is physical-capital-intensive, which determines the size of the interest rate. The second contribution is that it shows that higher growth and higher social welfare may not be achieved simultaneously. Specifically, this paper presents a case wherein, even if the growth rate when student loans are subsidized is higher than that when the cost of education is subsidized, social welfare defined by the Golden Rule criterion in the former scheme can be lower than that in the latter scheme. |
| Keywords: | Endogenous growth; educational subsidy; balanced growth path equilibrium; growth rate; social welfare; Golden Rule |
| JEL: | H52 I22 O40 |
| Date: | 2021–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108480&r= |
| By: | Kyle Dempsey; Felicia Ionescu |
| Abstract: | Using administrative data from Y-14M and Equifax, we find evidence for large spreads in excess of those implied by default risk in the U.S. unsecured credit market. These borrowing premia vary widely by borrower risk and imply a nearly flat relationship between loan prices and repayment probabilities, at odds with existing theories. To close this gap, we incorporate supply frictions – a tractably specified form of lending standards – into a model of unsecured credit with aggregate shocks. Our model matches the empirical incidence of both risk and borrowing premia. Both the level and incidence of borrowing premia shape individual and aggregate outcomes. Our baseline model with empirically consistent borrowing premia features 45% less total credit balances and 30% more default than a model with no such premia. In terms of dynamics, we estimate that lending standards were unchanged for low risk borrowers but tightened for high risk borrowers at the outset of Covid-19. Borrowing premia imply a smaller increase in credit usage in response to a negative shock, which this tightening reduced further. Since spreads on loans of all risk levels are countercyclical, all consumers use less unsecured credit for insurance over the cycle, leading to 60% higher relative consumption volatility than in a model with no borrowing premia. |
| Keywords: | Bankruptcy; Borrowing premia; Consumer credit; Business cycles |
| JEL: | E21 E32 E44 E51 G12 G21 G22 |
| Date: | 2021–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-39&r= |
| By: | Mikhail Golosov; Michael Graber; Magne Mogstad; David Novgorodsky |
| Abstract: | We study how Americans respond to idiosyncratic and exogenous changes in household wealth and unearned income. Our analyses combine administrative data on U.S. lottery winners with an event-study design that exploits variation in the timing of lottery wins. Our first contribution is to estimate the earnings responses to these windfall gains, finding significant and sizable wealth and income effects. On average, an extra dollar of unearned income in a given period reduces pre-tax labor earnings by about 50 cents, decreases total labor taxes by 10 cents, and increases consumption by 60 cents. These effects are heterogeneous across the income distribution, with households in higher quartiles of the income distribution reducing their earnings by a larger amount. Our second contribution is to develop and apply a rich life-cycle model in which heterogeneous households face non-linear taxes and make earnings choices along both intensive and extensive margins. By mapping this model to our estimated earnings responses, we obtain informative bounds on the impacts of two policy reforms: an introduction of UBI and an increase in top marginal tax rates. Our last contribution is to study how additional wealth and unearned income affect a wide range of behavior, including geographic mobility and neighborhood choice, retirement decisions and labor market exit, family formation and dissolution, entry into entrepreneurship, and job-to-job mobility. |
| JEL: | D15 H2 J22 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29000&r= |
| By: | Javier García-Cicco (Central Bank of Argentina) |
| Abstract: | We evaluate the dynamics of a small and open economy under alternative simple rules for different monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus is that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy instruments: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative ranking is indeed influenced by how agents form inflation-related expectations. |
| Keywords: | small open economy, monetary policy rules, macroeconomic models, inflation expectations |
| JEL: | E17 E52 E58 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:202191&r= |
| By: | Bolh, Nathalie; Wendner, Ronald |
| 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: | 2021–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108644&r= |
| By: | Miyake, Yusuke |
| Abstract: | Although many policies to raise the fertility rate have been conducted in many developed countries, they experience the low fertility rate. In the first place, what kind of impact will rapid population decline have on economic growth? This study is to analyze to answer these questions with two sector labor augmented growth model using two periods over-lapping-generations model. We consider a public capital by classifying it into two types, firstly, labor-augmented general public capital in final goods sector which indicated by Futagami, et al. (1993) and secondly, considering a public capital in childcare sector like as nursery school. This paper clearly shows the relationship between the optimal policies against the declining birthrate and an increase in the economic growth. |
| Keywords: | Public capital - Childcare capital - Income tax - Economic growth |
| JEL: | D91 E6 E62 O4 O41 |
| Date: | 2021–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108311&r= |
| By: | Mahdi Ebrahimi Kahou; Jesús Fernández-Villaverde; Jesse Perla; Arnav Sood |
| Abstract: | We propose a new method for solving high-dimensional dynamic programming problems and recursive competitive equilibria with a large (but finite) number of heterogeneous agents using deep learning. The „curse of dimensionality“ is avoided due to four complementary techniques: (1) exploiting symmetry in the approximate law of motion and the value function; (2) constructing a concentration of measure to calculate high-dimensional expectations using a single Monte Carlo draw from the distribution of idiosyncratic shocks; (3) sampling methods to ensure the model fits along manifolds of interest; and (4) selecting the most generalizable over-parameterized deep learning approximation without calculating the stationary distribution or applying a transversality condition. As an application, we solve a global solution of a multi-firm version of the classic Lucas and Prescott (1971) model of „investment under uncertainty.“ First, we compare the solution against a linear-quadratic Gaussian version for validation and benchmarking. Next, we solve nonlinear versions with aggregate shocks. Finally, we describe how our approach applies to a large class of models in economics. |
| Keywords: | dynamic programming, deep learning, breaking the curse of dimensionality |
| JEL: | C45 C60 C63 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9161&r= |
| By: | César Sosa-Padilla (University of Notre Dame / NBER); Federico Sturzenegger (Universidad de San Andrés/Harvard Kennedy School) |
| Abstract: | There has been substantial research on the bene ts of accumulating foreign reserves, but less on the relative merits of how these reserves are accumulated. In this paper we explore whether the form of accumulation a ects country risk. We rst present a model of endogenous sovereign debt defaults, where we show that reserve accumulation through the issuance of debt contingent on local output reduces spreads in a way that reserve accumulation with foreign borrowing does not. We con rm this model prediction when taking the theory to the data. These results suggest that attention should be placed on the way reserves are accumulated, a distinction that has important practical implications. In particular, our results call into question the benefits of programs of reserves strengthening through external debt such as those typically implemented by multilateral organizations. |
| Keywords: | International reserves, contingent debt, sovereign default, country spreads. |
| JEL: | F32 F34 F41 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:79&r= |
| By: | Bom, Pedro R.D.; Erauskin, Iñaki |
| Abstract: | A recent body of literature has sought to determine the causes of the global decline of the labor share. We study the role played by government investment—which has also fallen in many advanced economies over the past few decades—in the labor share decline. We first establish a theoretical link between government investment and the labor share using a general equilibrium macroeconomic model, where government capital enters the production function in a factor-augmenting fashion. Our analytic results show that a permanent cut to government investment causes a steady-state decline in the labor share if the elasticity of substitution between private capital and labor is less than one and public capital augments private capital. We then study the empirical relationship between these variables using two panel datasets covering 79 countries, both developing and developed, over the period 1970-2017. Using a system GMM estimator, we find a positive and statistically significant association between government investment and the labor share in advanced economies; for developing countries, however, we find no effect. |
| Keywords: | productive government investment; public investment; public capital; public infrastructure; factor income shares; labor share |
| JEL: | E25 E60 H54 |
| Date: | 2021–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108381&r= |
| By: | Johannes Brumm; Xiangyu Feng; Laurence J. Kotlikoff; Felix Kubler |
| Abstract: | Deficit finance is free when the growth rate routinely exceeds the government's borrowing rate. Or so many people say. This note presents three counterexamples. Each features a simple OLG economy with a zero growth rate and a negative government borrowing rate. None provides a basis for taking from the young and giving to the old. One example features idiosyncratic risk, one features policy uncertainty, and one features a safe borrowing rate that exceeds the safe lending rate. Progressive taxation cures the first problem. Policy resolution cures the second. And improved intermediation, perhaps organized by the government, cures the third. The three models are parables. Each conveys an inconvenient truth. Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance. |
| JEL: | E21 E6 H6 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28952&r= |
| By: | James Albrecht (Georgetown University); Xiaoming Cai (Peking University HSBC Business School); Pieter Gautier (Vrije Universiteit Amsterdam); Susan Vroman (Georgetown University) |
| 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 equilibrium. 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: | 2021–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20210060&r= |
| By: | Rumen Kostadinov (McMaster University); Francisco Roldán (International Monetary Fund) |
| Abstract: | We study the optimal design of a disinflation plan by a planner who lacks commitment and has imperfect control over inflation. The government’s reputation for being committed to the plan evolves as the public compares realized inflation to the announced targets. Reputation is valuable as it helps curb inflation expectations. At the same time, plans that are more tempting to break lead to larger expected reputational losses in the ensuing equilibrium. Taking these dynamics into consideration, the government announces a plan which balances promises of low inflation with dynamic incentives that make them credible. We find that, despite the absence of inflation inertia in the private economy, a gradual disinflation is preferred even in the zero-reputation limit. |
| Keywords: | Imperfect credibility, reputation, optimal monetary policy, time inconsistency |
| JEL: | E52 C73 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:76&r= |