nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒08‒09
28 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Monetary Policy and the Persistent Aggregate Effects of Wealth Redistribution By Martin Kuncl; Alexander Ueberfeldt
  2. Precautionary saving and un-anchored expectations By Grimaud, Alex
  3. Misallocation and inequality By Nezih Guner; Alessandro Ruggieri
  4. A tail of three occasionally-binding constraints: a modelling approach to GDP-at-Risk By Aikman, David; Bluwstein, Kristina; Karmakar, Sudipto
  5. Policy biases in a model with labor market frictions By Richard Dennis; Tatiana Kirsanova
  6. Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity By Jose-Maria Da-Rocha; Diego Restuccia; Marina M. Tavares
  7. Empirical evidence on the Euler equation for investment in the US By Guido Ascari; Qazi Haque; Leandro M. Magnusson; Sophocles Mavroeidis
  8. Fiscal policy and informality in Colombia By García-Suaza, A; Gómez, M; Jaramillo, F
  9. Negative Income Tax and Universal Basic Income in the Eyes of Aiyagari By Yongsung Chang; Jong-Suk Han; Sun-Bin Kim
  10. Financial Shocks, Uncertainty Shocks, and Monetary Policy Trade-Offs By Brianti, Marco
  11. Human Capital and the Timing of the First Birth By Jesse Naidoo
  12. Health capital norms and intergenerational transmission of non-communicable chronic diseases By Goulão, Catarina; Pérez-Barahona, Agustín
  13. Optimal Corrective Policies under Financial Frictions By Andreas Schabert
  14. Sharing Asymmetric Tail Risk Smoothing, Asset Pricing and Terms of Trade By Corsetti, G.; Lipińska, A.; Lombardo, G.
  15. The uneven economic consequences of COVID 19: A structural analysis By Martin Kuncl; Austin McWhirter; Alexander Ueberfeldt
  16. Liquidity Traps, Prudential Policies, and International Spillovers By Javier Bianchi; Louphou Coulibaly
  17. Pandemic Lockdown: The Role of Government Commitment By Christian Moser; Pierre Yared
  18. Social Interactions in a Pandemic By Laura Alfaro; Ester Faia; Nora Lamersdorf; Farzad Saidi
  19. The Bank Liquidity Channel of Financial (In)stability By Joshua Bosshardt; Ali Kakhbod; Farzad Saidi
  20. Financial Intermediation and Structural Change: Theory and Evidence By David Jones; Corrado Di Maria; Simone Valente
  21. Automation, Growth, and Factor Shares in the Era of Population Aging By Andreas Irmen
  22. Practical Optimal Income Taxation By Jonathan Heathcote; Hitoshi Tsujiyama
  23. Automation, Education, and Population: Dynamic Effects in an OLG Growth and Fertility Model By Catarina Peralta; Pedro Mazeda Gil
  24. Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment By Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
  25. Price rigidity in Brazil: Microeconomic evidence and Macroeconomic Implications By Debora Silva Oliveira; Mauro Rodrigues
  26. The Welfare Costs of Business Cycles Unveiled: Measuring the Extent of Stabilization Policies By Fernando Barros; Fabio Gomes; Andre Luduvice
  27. A theory of optimal paid parental leave policies By Miyazaki, Koichi
  28. From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective By Brent Bundick; Nicolas Petrosky-Nadeau

  1. By: Martin Kuncl; Alexander Ueberfeldt
    Abstract: We identify a sizable wealth redistribution channel which creates a monetary policy trade-off whereby short-term economic stimulus is followed by persistently lower output over the medium term. This trade-off is stronger in economies with more nominal household debt but weakened by a more aggressive monetary policy stance and underprice-level targeting. Given this trade-off, low-for-long episodes can lead to persistently depressed output. The medium-term implications of the wealth redistribution channel rely on the presence of labor supply heterogeneity, which we show both analytically and in the context of an estimated New Keynesian general equilibrium model with household heterogeneity.
    Keywords: Monetary policy framework; Monetary policy transmission
    JEL: E21 E50
    Date: 2021–08
  2. By: Grimaud, Alex
    Abstract: This paper revisits monetary policy in a heterogeneous agents new Keynesian (HANK) model where agents use adaptive learning (AL) in order to form their expectations. Due to the households' finite heterogeneity triggered by idiosyncratic unemployment risk, the model is subject to micro-founded heterogeneous expectations that are not anchored to the rational expectation path. Households experience different histories which has non-trivial consequences on their individual AL processes. In this model, supply shocks generate precautionary saving and possible long-lasting disinflationary traps associated with excess saving. Dovish policies focused on closing the output gap dampen the learning effects which is in contradiction with previously established representative agent under learning results. Price level targeting appears to resolve most of the problem by netter anchoring long-run expectations of future utility flows.
    Keywords: Adaptive learning, supply shocks, precautionary saving, heterogeneous expectations, HANK and price level targeting
    JEL: E25 E31 E52
    Date: 2021–07–05
  3. By: Nezih Guner; Alessandro Ruggieri
    Abstract: For a large set of countries with different GDP per capita levels, we document how the distribution of labour earnings varies by development. Data reveals that the distribution of earnings changes with development in a particular way: while there is a larger mass at the left-tail, the right-tails shrinks, and moves towards the center. As a result, while the standard deviation of log earnings increases with development, the mean-to-median ratio declines. We interpret this fact within a model economy with heterogeneous workers and firms, which features industry dynamics, labor market frictions captured by a matching function, skill accumulation of workers with learning-by-doing and on-the-job training, and earnings inequality both across firms and workers. The benchmark economy is calibrated to the UK. We study how the earnings distribution changes as we increase two distortions in the benchmark economy: wedges on firms' output correlated with firm productivity and reductions in the labor market's ability to match unemployed workers and open vacancies. These distortions lead to the misallocation of resources and reduce employment and the GDP per capita. But they also affect how much firms are willing to pay to workers, how well higher skilled workers are matched with firms with higher productivity, and how much training workers receive. The model is consistent with a host of factors on how firm size distribution, firms' training decisions, and workers' life-cycle earnings profiles change with development and generates the observed patterns of changes in earnings distribution with development.
    Keywords: labor market frictions, correlated distortions, productivity, establishment size, human capital accumulation, job training, life-cycle wage profile, inequality, development
    Date: 2021
  4. By: Aikman, David (King's College London); Bluwstein, Kristina (Bank of England); Karmakar, Sudipto (Bank of England)
    Abstract: We build a semi-structural New Keynesian model with financial frictions to study the drivers of macroeconomic tail risk (‘GDP-at-Risk’). We analyse the empirically observed fat left tail of the GDP distribution by modelling three key non-linearities emphasised in the literature: 1) an effective lower bound on nominal interest rates, 2) a credit crunch in bank credit supply when bank capital depletes, and 3) deleveraging by borrowers when debt service burdens become excessive. We obtain three key results. First, our model generates a significantly fat-tailed distribution of GDP – a finding that is absent in most linear New Keynesian and RBC models. Second, we show how these constraints interact with each other. We find that an economy prone to debt deleveraging will experience significantly more credit crunch and effective lower bound episodes than otherwise. Moreover, as the effective lower bound becomes more proximate, the frequency of credit crunch episodes increases significantly. As a rule of thumb, we find that each 50 basis point decline in monetary policy headroom requires additional capital buffers of 1% of assets or 2%–2.5% points lower debt service burdens to hold the risk level constant. Third, we use the model to generate a historical decomposition of GDP-at-Risk for the United Kingdom. The implied risk outlook deteriorates significantly in the run-up to the Global Financial Crisis, driven by depleted capital buffers and increasing debt burdens. Since then, GDP-at-Risk has remained elevated, with greater bank resilience and lower debt offset by the limited capacity of monetary policy to cushion adverse shocks.
    Keywords: Financial crises; bank capital; debt deleveraging; macroprudential policy; effective lower bound; GDP-at-Risk
    JEL: G01 G28
    Date: 2021–07–26
  5. By: Richard Dennis; Tatiana Kirsanova
    Abstract: We develop a model with labor-market matching frictions that is subject to a range of shocks, including shocks to matching efficiency and bargaining power, and use the model to examine how monetary policy should respond to such shocks. We show that optimal monetary policy is highly efficient at responding to these labor market shocks, producing outcomes that are close to the flex-price equilibrium. Moreover, this efficiency remains if monetary policy is conducted with discretion, indicating that time-inconsistency and forward-guidance are not central to the policy response. We also show that several popular simple rules are also effective at responding to these labor market shocks.
    Keywords: Labor market frictions, matching, optimal policy
    JEL: E52 E61 C62 C73
    Date: 2021–07
  6. By: Jose-Maria Da-Rocha; Diego Restuccia; Marina M. Tavares
    Abstract: What accounts for income per capita and total factor productivity (TFP) differences across countries? We study resource misallocation across heterogeneous production units in a general equilibrium model where establishment productivity and size are affected by policy distortions. We solve the model in closed form and show that the effect of policy distortions hinges crucially on the size distribution of establishments approximately satisfying Zipf's law, an empirical phenomenon that can be interpreted to imply that misallocation is low or that the establishments' lifespan is long, or both. More distorted economies feature higher establishment lifespan which amplifies the negative effect of distortions on productivity and establishment growth. Policy distortions substantially reduce aggregate TFP, an effect that is 2.8-fold larger than in the model with unrestricted size distribution and 6.9-fold larger with perfectly correlated distortions.
    Keywords: distortions, misallocation, investment, productivity, Zipf's law.
    JEL: O11 O3 O41 O43 O5 E0 E13 C02 C61
    Date: 2021–08–03
  7. By: Guido Ascari; Qazi Haque; Leandro M. Magnusson; Sophocles Mavroeidis
    Abstract: The Euler equation model for investment with adjustment costs and variable capital utilization is estimated using aggregate US post-war data with econometric methods that are robust to weak instruments and exploit information in possible structural changes. Various alternative identification assumptions are considered, including external instruments, and instruments obtained from Dynamic Stochastic General Equilibrium models. Results show that the elasticity of capital utilization and investment adjustment cost parameters are very weakly identified. This is because investment appears to be unresponsive to changes in capital utilization and the real interest rate.
    Date: 2021–07
  8. By: García-Suaza, A; Gómez, M; Jaramillo, F
    Abstract: This paper studies how informality reacts to fiscal policy instruments. We develop an analytical framework with a dual labor market with frictions, where the formal sector, in contrast to the informal sector, produces with technology using capital and pay taxes. We calibrate the model for the Colombian economy and quantify to what extent a decrease in payroll taxes is effective to create formal jobs in a context where government compensates for the reduction in revenues by using other fiscal instruments, such as reducing expenditure or increasing other taxes, e.g., consumption or capital income taxes.
    Keywords: Informality; occupational choice; payroll taxes; fiscal policy
    JEL: E24 E62 J01 J21 J32
    Date: 2021–06–28
  9. By: Yongsung Chang; Jong-Suk Han; Sun-Bin Kim
    Abstract: We compare two redistribution programs - negative income tax (NIT) and universal basic income (UBI) - through the lens of Aiyagari (1994), a standard heterogeneous agent general equilibrium model. Mankiw (2020) proposes an example where an NIT and a UBI appear identical. We show that while Mankiw's example provides identical economic incentives to individual workers, the size of the government vastly differs. According to our quantitative analysis designed to replicate Mankiw's example, the UBI requires a program budget that is 15% of GDP, whereas the NIT requires 3.8% of GDP. Nevertheless, neither redistribution program significantly improves social welfare in the long run because of the reduction in capital and labor - via (i) tax distortion and (ii) a weak motive for precautionary saving and working.
    Keywords: Redistribution; Negative Income Tax; Universal Basic Income; Government Budget;
    Date: 2021–07
  10. By: Brianti, Marco (University of Alberta, Department of Economics)
    Abstract: This paper separately identifies financial and uncertainty shocks using a novel SVAR procedure and discusses their distinct monetary policy implications. The procedure relies on the qualitatively different responses of corporate cash holdings: after a financial shock, firms draw down their cash reserves as they lose access to external finance, while uncertainty shocks drive up cash holdings for precautionary reasons. Although both financial and uncertainty shocks are contractionary, my results show that the former are inflationary while the latter generate deflation. I rationalize this pattern in a New-Keynesian model: after a financial shock, firms increase prices to raise current liquidity; after an uncertainty shock, firms cut prices in response to falling demand. These distinct channels have stark monetary policy implications: conditional on uncertainty shocks, the monetary authority can potentially stabilize output and inflation at the same time, while in the case of financial shocks, the central bank can stabilize inflation only at the cost of more unstable output fluctuations.
    Keywords: financial shocks; uncertainty shocks; SVAR; inflation; monetary policy
    JEL: E30 E31 E32 E44
    Date: 2021–08–02
  11. By: Jesse Naidoo
    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 capita, life-cycle
    JEL: J17 J24
    Date: 2021–07
  12. By: Goulão, Catarina; Pérez-Barahona, Agustín
    Abstract: We look at how social norms regarding health aect the dynamics of an epidemic of NCDs. We present an overlapping generations model in which agents live for three periods (childhood, adulthood and old age). Adulthood consumption choices have a impact on the health capital of the following period, which is in part inherited by their ospring and aects their osprings' probability of developing a NCD. As a result of this intergenerational externality, agents would choose lower health conditions and higher unhealthy activities than that which is socially optimal. In addition, parental choices aect their own old age health capital with which their ospring compare their own. A social norm imposing agents to be as healthy as the previous generation balances the negative eects of unhealthy adulthood choices. Fiscal policies alone or combined with public policies regarding social norms can be used to restore optimality. Our results underline the interplay between sin taxes and health-related social norms.
    JEL: H21 H23 I18
    Date: 2021–07–30
  13. By: Andreas Schabert (University of Cologne, Center for Macroeconomic Research, Albertus-Magnus-Platz, 50923 Cologne, Germany)
    Abstract: This paper examines credit market policies under pecuniary externalities induced by collateral constraints. Pigouvian taxes/subsidies on debt or savings are derived as Ramsey-optimal policies. Firstly, prudential (ex-ante) debt taxes can restore constrained efficiency. Secondly, when policies are non-state and non-time contingent, debt subsidies can be superior to debt taxes. Thirdly, ex-ante saving subsidies are desirable when distributive effects dominate collateral effects. Fourthly, both effects can simultaneously be addressed by non-contingent saving subsidies. The analysis indicates that optimal policies can improve on constrained efficiency and that inefficiencies due to financial externalities can most effectively be addressed by interest rate reductions.
    Keywords: Pecuniary externalities, collateral constraint, incomplete markets, Pigouvian policies, inequality
    JEL: E44 G28 H23
    Date: 2021–07
  14. By: Corsetti, G.; Lipińska, A.; Lombardo, G.
    Abstract: With the Global Financial Crisis, the COVID-19 pandemic, and the looming Climate Change, investors and policymakers around the world are bracing for a new global environment with heightened tail risk. Asymmetric exposure to this risk across countries raises the private and social value of arrangements improving insurance. We offer an analytical decomposition of the welfare effects of efficient capital market integration into a "smoothing" and a "level effect". Enhancing risk sharing affects the volatility of consumption, but also brings about equilibrium adjustment in asset and goods prices. This in turn drives relative wealth and consumption, as well as labor and capital allocation, across borders. Using model simulation, we explore quantitatively the empirical relevance of the different channels through which riskier and safer countries benefit from sharing macroeconomic risk. We offer an algorithm for the correct solution of the equilibrium using DSGE models under complete markets, at higher order of approximation.
    Keywords: International Risk Sharing, Asymmetry, Fat Tails, Welfare, Transfer Problem
    JEL: F15 F41 G15
    Date: 2021–07–26
  15. By: Martin Kuncl; Austin McWhirter; Alexander Ueberfeldt
    Keywords: The COVID-19 shock had severe economic implications, which were unequally distributed across Canadian households and businesses. Using a structural model with wealth, housing and income differences across households, we create a scenario that mimics key aggregate economic consequences of the COVID-19 shock. We find the following:•The uneven shock consequences—in particular, higher unemployment risk faced by young households during the COVID-19 pandemic—amplified the negative implications for the macroeconomy, household vulnerabilities and consumption inequality. •Government support programs stimulated the economy and reduced consumption inequality and medium-term household vulnerabilities.•A stronger monetary policy response completely offsetting the effective lower bound constraint would have had positive implications for output, inequality and medium-term vulnerabilities.
    JEL: E20 E52 E62
    Date: 2021–08
  16. By: Javier Bianchi; Louphou Coulibaly
    Abstract: We present a simple open economy framework to study the transmission channels of monetary and macroprudential policies and evaluate the implications for international spillovers and global welfare. Using an analytical decomposition, we first identify three transmission channels: intertemporal substitution, expenditure switching, and aggregate income. Quantitatively, expenditure switching plays a prominent role for monetary policy, while macroprudential policy operates almost entirely through intertemporal substitution. Turning to the normative analysis, we show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing output today and reducing capital flows to lower the likelihood of a future recession. However, leaning against the wind is not necessarily optimal, even in the absence of capital controls. Finally, we argue that contrary to emerging policy concerns, capital controls are not beggar-thy-neighbor and can enhance global macroeconomic stability.
    Keywords: Monetary and macroprudential policies; Liquidity traps; International spillovers; Capital flows
    JEL: E21 E52 F32 E62 E44 E43 E23
    Date: 2021–07–27
  17. By: Christian Moser; Pierre Yared
    Abstract: This paper studies lockdown policy in a dynamic economy without government commitment. Lockdown imposes a cap on labor supply, which improves health prospects at the cost of economic output and consumption. A government would like to commit to the extent of future lockdowns in order to guarantee an economic outlook that supports efficient levels of investment into intermediate inputs. However, such a commitment is not credible, since investments are sunk at the time when the government chooses a lockdown. As a result, lockdown under lack of commitment deviates from the optimal policy. Rules that limit a government’s lockdown discretion can improve social welfare, even in the presence of noncontractible information. Quantitatively, lack of commitment causes lockdown to be significantly more severe than is socially optimal. The output and consumption loss due to lack of commitment is greater for higher intermediate input shares, higher discount rates, higher values of life, higher disease transmission rates at and outside of work, and longer vaccine arrival times.
    Keywords: Lockdown; Coronavirus; Commitment; Flexibility; Non-pharmaceutical interventions; Pandemic restrictions; SIRD model; Rules; Optimal policy; COVID-19; SARS-CoV-2
    JEL: E61 I18 H12
    Date: 2021–08–03
  18. By: Laura Alfaro (Harvard Business School & NBER); Ester Faia (Goethe University Frankfurt & CEPR); Nora Lamersdorf (Goethe University Frankfurt); Farzad Saidi (University of Bonn & CEPR)
    Abstract: Externalities and social preferences, such as patience and altruism, play a key role in the endogenous choice of social interactions, which in turn affect the diffusion of a pandemic or patterns of social segregation. We build a dynamic model, augmented with an SIR block, in which agents optimally choose the intensity of both general and group-specific social interactions. The equilibria in the baseline and the SIR-network model result from a matching process governed by optimally chosen contact rates. Taking into account agents’ endogenous behavior generates markedly different predictions relative to a naıve SIR model. Through a planner’s problem, we show that neglecting agents’ response to risk leads to misguided policy decisions. Mobility restrictions beyond agents’ restraint are needed to the extent that aggregate externalities are not curtailed by social preferences.
    Keywords: social interactions, pandemics, SIR network models, social preferences, social planner, targeted policies
    JEL: D62 D64 D85 D91 E70 I10 I18
    Date: 2021–08
  19. By: Joshua Bosshardt (Federal Housing Finance Agency); Ali Kakhbod (Rice University); Farzad Saidi (UniversityofBonn & CEPR)
    Abstract: We examine the system-wide effects of liquidity regulation on banks’ balance sheets. In the general equilibrium model, banks have to hold liquid assets, and choose among illiquid assets varying in the extent to which they are difficult to value before maturity, e.g., structured securities. By improving the liquidity of interbank markets, tighter liquidity requirements induce banks to invest in such complex assets. We evaluate the welfare properties of combining liquidity regulation with other financial-stability policies, and show that it can complement ex-ante policies, such as asset-specific taxes, whereas it can undermine the benefits of ex-post interventions, such as quantative easing.
    Keywords: liquidity regulation, securitization, interbank markets, financial stability, quantitative easing
    JEL: E44 G01 G21 G28
    Date: 2021–08
  20. By: David Jones (University of East Anglia); Corrado Di Maria (University of East Anglia); Simone Valente (University of East Anglia)
    Abstract: Does financial intermediation affect structural change? We investigate both theoretically and empirically whether financial development accelerates structural change during the post-industrialization phase where employment, value-added and expenditure shares change towards services and away from manufacturing. We build a dynamic general equilibrium model where firms and households face different types of intermediation costs, and structural change can be driven by mutually independent technology differences { exogenous productivity gaps or asymmetric factor elasticities { as well as by learning-by-doing. Besides suggesting a stronger impact of financial development when productivity is endogenous and services are labor-intensive, all the model specifications robustly predict that exogenous reductions in intermediation costs { e.g., deregulation shocks { accelerate the pace and extent of structural change. We test this prediction empirically by examining the effects of state by- state bank branching deregulation in the United States in the 1970-1990s period. Using a range of estimation techniques including synthetic control methods { pooled, augmented, and with staggered treatment { we show that bank branching deregulation accelerated the structural change that was already underway, i.e., services account for a greater share of output and employment than they would have in the absence of deregulation.
    Keywords: Economic growth, structural change, nancial development, banking deregulation
    JEL: O14 O16 O41 O47 G28
    Date: 2021–07–29
  21. By: Andreas Irmen
    Abstract: How does population aging affect economic growth and factor shares in times of increasingly automatable production processes? The present paper addresses this question in a new macroeconomic model of automation where competitive firms perform tasks to produce output. Tasks require labor and machines as inputs. New machines embody superior technological knowledge and substitute for labor in the performance of tasks. Automation is labor-augmenting in the reduced-form aggregate production function. If wages increase then the incentive to automate becomes stronger. Moreover, the labor share declines even though the aggregate production function is Cobb-Douglas. Population aging due to a higher longevity reduces automation in the short and promotes it in the long run. It boosts the growth rate of absolute and per-capita GDP in the short and the long run, lifts the labor share in the short and reduces it in the long run. Population aging due to a decline in fertility increases automation, reduces the growth rate of GDP, and lowers the labor share in the short and the long run. In the short run, it may or may not increase the growth rate of per-capita GDP, in the long run it unequivocally accelerates per-capita GDP growth.
    Keywords: population aging, automation, factor shares, endogenous technical change, endogenous labor supply
    JEL: E22 J11 J22 J23 O33 O41
    Date: 2021
  22. By: Jonathan Heathcote; Hitoshi Tsujiyama
    Abstract: We review methods used to numerically compute optimal Mirrleesian tax and transfer schedules in heterogeneous agent economies. We show that the coarseness of the productivity grid, while a technical detail in terms of theory, is critical for delivering quantitative policy prescriptions. Existing methods are reliable only when a very fine grid is used. The problem is acute for computational approaches that use a version of the Diamond-Saez implicit optimal tax formula. If using a very fine grid for productivity is impractical, then optimizing within a flexible parametric class is preferable to the non-parametric Mirrleesian approach.
    Keywords: Ramsey taxation; Optimal income taxation; Mirrlees taxation
    JEL: H24 H21
    Date: 2021–07–30
  23. By: Catarina Peralta (Faculty of Economics, University of Porto); Pedro Mazeda Gil (Faculty of Economics, University of Porto and CEF.UP)
    Abstract: We address two main structural changes occurring in developed countries: the rise of automation and population ageing. We use an R&D-based growth model in an OLG framework with endogenous education and fertility, and automation in the production process. Our model is able to combine the growth of real wages over time and either a fall or an increase in birth rates, consistent with recent data regarding the birth rate by skill group. Moreover, our model allows for the study of the interplay between the effects of population ageing and those of automation. The results show a dynamics consistent with the US trends for the period covering 1970 to 2019.
    Keywords: Ageing; Automation; Economic growth; Endogenous fertility
    JEL: J11 J23 J24 O3 O4
    Date: 2021–07
  24. By: Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
    Abstract: The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New Area-Wide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as reflected in negative biases in inflation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interest-rate forward guidance and large-scale asset purchases. When considering alternatives to inflation targeting, we find that make-up strategies such as price-level targeting and average-inflation targeting can, if they are well-understood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound. JEL Classification: E31, E32, E37, E52, E58
    Keywords: asset purchases, effective lower bound, forward guidance, make-up strategies, monetary policy
    Date: 2021–07
  25. By: Debora Silva Oliveira; Mauro Rodrigues
    Abstract: This paper calibrates multi-sector models of menu costs with intermediate inputs to the Brazilian economy. In particular, we use the model proposed by Nakamura and Steinsson (2010) to undestand the degree of monetary non-neutralitry induced by price rigidity. For comparison, we estimate a VAR model for the aggregate economy (Shapiro and Watson, 1988) and compute the share of real GDP fluctuations due to nominal shocks. Multi-sector models account for up to 12.6% of output fluctuations. This is consistent with our VAR estimations, where the nominal component is responsible for approximately 15% of the observed variation in aggregate output.
    Keywords: Price rigidity; monetary non-neutrality; Microdata
    JEL: E30 E50
    Date: 2021–08–05
  26. By: Fernando Barros; Fabio Gomes; Andre Luduvice
    Abstract: How can we measure the welfare benefit of ongoing stabilization? We develop a methodology to calculate the welfare cost of business cycles taking into account that observed consumption is partially smoothed. We propose a decomposition that disentangles consumption in a mix of laissez-faire (absent policies) and riskless components. With a novel identification strategy, we estimate the span of stabilization power. Our results show that the welfare cost of total fluctuations is 5.81 percent of lifetime consumption, in which 80 percent is smoothed by the status quo, yielding a residual 1.05 percent to be tackled by policy.
    Keywords: business cycles; consumption; stabilization; macroeconomic history
    JEL: E32 E21 E63 N10
    Date: 2021–07–30
  27. By: Miyazaki, Koichi
    Abstract: This study examines paid parental leave policies in which a pregnant worker can choose not to take a temporary leave and a worker on leave can choose not to return to work after the leave period ends. An optimal paid parental policy is defined as a policy that maximizes social welfare. In the optimal paid parental leave policy, where a pregnant worker voluntarily chooses to take a leave and a worker on leave voluntarily chooses to return to work after the leave period ends, the income risk caused by the leave is not necessarily perfectly shared among workers and workers on leave. In addition, by lengthening the leave period, another feasible parental leave policy that does not satisfy the incentive constraint improves social welfare, implying that the length of the leave under the optimal paid parental leave policy is ``short." A numerical example of the model justifies that both a short-leave-with-generous-leave-benefits policy and the long-leave-with-less-generous-leave-benefits policy observed across most OECD countries can be optimal.
    Keywords: Paid parental leave policy; lack of commitment; incentive constraint; optimal policy
    JEL: D61 E24 J38
    Date: 2021–08–03
  28. By: Brent Bundick; Nicolas Petrosky-Nadeau
    Abstract: The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy which stabilizes “shortfalls” rather than “deviations” of employment from its maximum level leads to higher inflation and more hiring at all times due to expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher nominal policy rates on average which provide more policy space and better outcomes during a zero lower bound episode. Our model suggests that the FOMC's reinterpretation of its employment mandate could alter the business-cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.
    Keywords: Monetary Policy; Equilibrium Unemployment; Nominal Rigidities; Zero Lower Bound
    JEL: E32 E52 J64
    Date: 2021–07–15

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