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on Dynamic General Equilibrium |
| By: | Jaqueson K. Galimberti |
| Abstract: | Experienced-based-expectations allow the outcomes people experience to shape their views regarding future outcomes. We describe three forms of experienced-based-expectations and show how they can be applied in general equilibrium. The three expectations processes differ according to the nature of the information people use to form expectations and according to how well people understand their economic environment. In the context of a non-linear new Keynesian business cycle model, we show that experienced-based-expectations generally lead to increased volatility and sustained persistence, akin to scarring, relative to rational expectations. Through this expectations channel, periods of sustained bad outcomes, such as systematically low aggregate technology shocks, lead to persistently lower inflation. Changes in the inflation target have a greater effect on behavior when expectations are formed using outcomes on endogenous variables than when they are formed using outcomes on the shocks. |
| Keywords: | Experience, expectations, learning, persistence, scarring, macroeconomic dynamics |
| JEL: | E32 E71 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-69&r= |
| By: | Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay, Université Paris-Saclay); Cuong Le Van (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IPAG Business School, TIMAS - Institute of Mathematics and Applied Science, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Ngoc-Sang Pham (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie) |
| Abstract: | We show that both real indeterminacy and asset price bubble may appear in an infinite-horizon exchange economy with infinitely lived agents and an imperfect financial market. We clarify how the asset structure and heterogeneity (in terms of preferences and endowments) affect the existence and the dynamics of asset price bubbles as well as the equilibrium indeterminacy. Moreover, this paper bridges the literature on bubbles in models with infinitely lived agents and that in overlapping generations models (Tirole, 1985). |
| Keywords: | in- tertemporal equilibrium,borrowing constraint,real indeterminacy,asset price bubble |
| Date: | 2020–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02993656&r= |
| By: | Szabolcs Deak (Department of Economics, University of Exeter); Paul Levine (School of Economics, University of Surrey); Afrasiab Mirza (Department of Economics, University of Birmingham); Joseph Pearlman (Department of Economics, City University London) |
| Abstract: | We study the design of monetary policy rules robust to model uncertainty across a set of well-established DSGE models with varied financial frictions. In our novel forward-looking approach, policymakers weight models based on relative forecasting performance. We find that models with frictions between households and banks forecast best during periods of financial turmoil while those with frictions between banks and firms perform best during tranquil periods. However, a model without financial frictions performs nearly as well as models with financial frictions on average. The optimal robust policy is close to a price-level rule which is key when facing uncertainty over the nature of financial frictions. |
| Keywords: | Bayesian estimation, DSGE models, financial frictions, forecasting, prediction pools, optimal simple rules |
| JEL: | D18 D91 Z1 C9 |
| Date: | 2021–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:2104&r= |
| 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. |
| Keywords: | effort,hours,labor adjustment,labor market deregulation,labor productivity,structural reform |
| JEL: | E30 E50 E60 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:222021&r= |
| By: | Andersen, Torben M.; Bhattacharya, Joydeep |
| Abstract: | Governments, motivated by a desire to improve upon long-run laissez faire, routinely undertake enduring, productive expenditures, say, in public education, that generate positive externalities across cohorts but require investments be made up front. If everyone after the policy is initiated is at least as happy as before and there are some outstanding resources, the Hicks-Kaldor efficiency rule suggests that the present value of these resources could, hypothetically, be distributed to future generations creating the potential for generational Pareto improvement. The literature recognizes the challenge in constructing a policy that is actually Pareto-improving since the policy itself may generate general-equilibrium gains and losses spread across generations. The paper takes on this task. In a dynamically-efficient economy with an intergenerational human capital externality, it constructs an equilibrium path with public education financed by non-explosive debt and taxes that truly improves upon laissez faire, yet no generation is harmed along the transition, not even the current ones. |
| Date: | 2020–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202001010800001067&r= |
| By: | Assenmacher, Katrin; Berentsen, Aleksander; Brand, Claus; Lamersdorf, Nora |
| Abstract: | We study the macroeconomic effects of central bank digital currency (CBDC) in a dynamic general equilibrium model. Timing and information frictions create a need for inside (bank deposits) and outside money (CBDC) to finance production. To steer the quantity of CBDC, the central bank can set the lending and deposit rates for CBDC as well as collateral and quantity requirements. Less restrictive provision of CBDC reduces bank deposits. A positive interest spread on CBDC or stricter collateral or quantity constraints reduce welfare but can contain bank disintermediation, especially if the elasticity of substitution between bank deposits and CBDC is small. JEL Classification: E58, E41, E42, E51, E52 |
| Keywords: | central bank digital currency, monetary policy, search and matching |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212578&r= |
| By: | Gianluca Benigno; Luca Fornaro; Michael Wolf |
| Abstract: | We present a model that reproduces two salient facts characterizing the international monetary system: Fast growing emerging countries i) run current account surpluses, ii) accumulate international reserves and receive net private in flows. We study a two-sector, tradable and nontradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. The optimal reserve management en- tails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention. The model is also consistent with the negative relationship between in flows of foreign aid and growth observed in low income countries. |
| Keywords: | foreign reserve accumulation, gross capital flows, growth, financial crises, allocation, puzzle, exchange rate undervaluation |
| JEL: | F31 F32 F41 F43 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1279&r= |
| By: | Cyrille Lenoel; Garry Young |
| Abstract: | We set out a framework that can be used to evaluate policies intended to mitigate the economic effects of Covid-19. In our framework shocks that affect only certain sectors can spill over to other sectors because of input-output linkages and limited income insurance. We show that policies such as the furlough scheme can prevent the sharp rises in unemployment that might arise in the absence of the scheme, and illustrate how such policies can be evaluated using the framework. |
| Keywords: | Covid-19, recession, sectoral model, input-output |
| JEL: | E00 E12 E20 E23 E24 E30 E52 E60 E62 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:531&r= |
| By: | Richard Foltyn; Jonna Olsson |
| Abstract: | This paper explores how heterogeneity in life expectancy, objective (statistical) as well as subjective, affects savings behavior between healthy and unhealthy people. Using data from the Health and Retirement Study, we show that people in poor health not only have shorter actual lifespan, but are also more pessimistic about their remaining time of life. Using a standard overlapping-generations model, we show that differences in life expectancy can explain one third of the differences in accumulated wealth with an important part driven by pessimism among unhealthy people. |
| Keywords: | Life expectancy, preference heterogeneity, subjective beliefs, life cycle |
| JEL: | D15 E21 G41 I14 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2021_13&r= |
| By: | Gavazza, Alessandro; Lanteri, Andrea |
| Abstract: | This article studies equilibrium dynamics in consumer durable goods markets after aggregate credit shocks. We introduce two novel features into a general-equilibrium model of durable consumption with heterogeneous households facing idiosyncratic income risk and borrowing constraints: (1) indivisible durable goods are vertically differentiated in their quality and (2) trade on secondary markets at market-clearing prices, with households endogenously choosing when to trade or scrap their durables. The model highlights a new transmission mechanism for macroeconomic shocks and successfully matches several empirical patterns that we document using data on U.S. car markets around the Great Recession. After a tightening of the borrowing limit, debt-constrained households postpone the decision to scrap and upgrade their low-quality cars, which depresses mid-quality car prices. In turn, this effect reduces wealthy households’ incentives to replace their mid-quality cars with high-quality ones, thereby decreasing new-car sales. We further use our framework to evaluate targeted fiscal stimulus policies such as the Car Allowance Rebate System in 2009 (“Cash for Clunkers”). |
| Keywords: | credit constraints; durable goods; 771004; SES 1756992 |
| JEL: | E21 E32 L62 |
| Date: | 2021–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:107605&r= |
| By: | Ruiz-García, J. C. |
| Abstract: | How do financial frictions affect firm dynamics, allocation of resources across firms, and aggregate productivity and output? Is the nature of productivity shocks that firms face primary for the effects of financial frictions? I first use a comprehensive dataset of Spanish firms from 1999 to 2014 to estimate non-parametrically the firm productivity dynamics. I find that the productivity process is non-linear, as persistence and shock variability depend on past productivity, and productivity shocks are non-Gaussian. These dynamics differ from the ones implied by a standard AR(1) process, commonly used in the firm dynamics literature. I then build a model of firm dynamics with financial frictions in which productivity shocks are non-linear and non-Gaussian. The model is consistent with a host of evidence on firm dynamics, financial frictions, and firms’ financial behaviour. In the model economy, financial frictions affect the firm life cycle. Without financial frictions, the size of an entrant firm will be three times larger. Furthermore, profit accumulation, which allows firms to overcome financial frictions, is slow, and it only speeds up when firms are mature. As a consequence, the average exiting firm is smaller than it would be without financial frictions. The aggregate consequences of financial frictions are significant. They result in misallocation of capital and reduce aggregate productivity by 16%. This figure is only 8% if productivity dynamics evolve according to a standard AR(1) process. |
| Keywords: | Firm Dynamics, Non-Linear Productivity Process, Financial Frictions, Misallocation |
| JEL: | E22 G32 O16 |
| Date: | 2021–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2157&r= |
| 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. |
| Keywords: | Investment, Adjustment costs, Weak identification |
| JEL: | C2 E22 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-65&r= |
| By: | Maebayashi, Noritaka |
| Abstract: | This study investigates expenditure- and tax-based consolidations under the rule of reductions in debt-to-GDP ratios to the target level as well as the effects of these consolidations on fiscal sustainability and welfare, using an overlapping generations model with exogenous growth settings. We derive (i) the global transition dynamics of the economy, (ii) a threshold (ceiling) of public debt to ensure fiscal sustainability, (iii) sustainable paces of these consolidations, and (iv) optimal pace of consolidations from viewpoints of both social welfare and fairness of each generation's welfare. We find that higher paces or lower targets of debt-to-GDP ratio make fiscal policies more sustainable. The pace required of tax-based consolidation to ensure fiscal sustainability is higher than that required of expenditure-based consolidation. As for welfare, countries may differ in their choice of the type of consolidation. It depends on how large outstanding debts relative to capital are and how large the utility derived by individuals from public goods and services is. By contrast, a common result from the viewpoints of both social welfare and fair distribution of welfare across generations is that very slow pace of fiscal consolidation cannot be supported. |
| Keywords: | Fiscal consolidation, Paces of consolidation, Fiscal sustainability, Welfare |
| JEL: | E62 H40 H60 |
| Date: | 2021–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109059&r= |
| By: | Gianni De Nicolo (Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)); Nataliya Klimenko (University of Zurich); Sebastian Pfeil (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)); Jean-Charles Rochet (Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute (GFRI); University of Zurich - Swiss Banking Institute (ISB)) |
| Abstract: | We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation. |
| Keywords: | Bank capital requirements, credit crunch, systemic risk |
| JEL: | E21 E32 F44 G21 G28 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2152&r= |
| By: | Grossman, Gene M.; Helpman, Elhanan; Oberfield, Ezra; Sampson, Thomas |
| Abstract: | We study the determinants of factor shares in a neoclassical environment with capital-skill complementarity and endogenous education. In this environment estimates of the elasticity of substitution between capital and labor that fail to account for human capital levels will be biased upward. We develop a model with overlapping generations, technology-driven neoclassical growth, and ongoing increases in educational attainment. For a class of production functions featuring capital-skill complementarity, a balanced growth path exists and is characterized by an inverse relationship between the rates of capital-and labor-augmenting technological progress and the capital share in national income. |
| Keywords: | neoclassical growth; balanced growth; human capital; education; technological progress; capital-skill complementarity; capital share; labor share |
| JEL: | E25 J24 O41 |
| Date: | 2021–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:106968&r= |
| By: | Cesa-Bianchi, Ambrogio (Bank of England); Ferrero, Andrea (Bank of England) |
| Abstract: | Sectoral supply shocks can trigger shortages in aggregate demand when strong sectoral complementarities are at play. US data on sectoral output and prices offer support to this notion of ‘Keynesian supply shocks’ and their underlying transmission mechanism. Demand shocks derived from standard identification schemes using aggregate data can originate from sectoral supply shocks that spillover to other sectors via a Keynesian supply mechanism. This finding is a regular feature of the data and is independent of the effects of the 2020 pandemic. In a New Keynesian model with input-output network calibrated to three-digit US data, sectoral productivity shocks generate the same pattern for output growth and inflation as observed in the data. The degree of sectoral interconnection, both upstream and downstream, and price stickiness are key determinants of the strength of the mechanism. Sectoral shocks may account for a larger fraction of business-cycle fluctuations than previously thought. |
| Keywords: | Keynesian supply shocks; input-output matrix; granular fluctuations; approximate factor model |
| JEL: | C32 E23 E32 |
| Date: | 2021–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0934&r= |
| By: | Moore, Rachel; Pecoraro, Brandon |
| Abstract: | Macroeconomic analyses of wealth taxes typically treat all household wealth as taxable, despite noted administrative difficulties with including owner-occupied housing and noncorporate equity in the tax base. In this paper, we quantify the macroeconomic and budgetary impact of avoidance due to these exclusions from a stylized, broad-based, top-wealth tax in the United States. We use a two-sector, large-scale overlapping generations model where, in the presence of exclusions, avoidance behavior arises endogenously through households’ reallocation of wealth and firms’ reallocation of economic activity. We find that while the macroeconomic and budgetary effects of the housing exclusion are insignificant, the noncorporate equity exclusion introduces a production-level distortion that results in a significant reallocation of economic activity from the corporate to noncorporate sector. We show that the federal revenue loss due to legal avoidance in the latter case can be similar to the amount lost due to illegal evasion via under-reporting wealth, but nonetheless have a quantitatively distinct path of macroeconomic aggregates. Finally, because interest in a wealth tax is linked to its potential for financing federal outlays, we show how variation in macroeconomic and budgetary effects across alternative expenditures affects the amount of new outlays availed by the tax itself. We find that while dedicating new revenue to public infrastructure investment leads to the largest increase in aggregate output, dedicating new revenue to federal debt reduction leads to the largest increase in outlays. |
| Keywords: | dynamic scoring; wealth tax; avoidance; evasion; |
| JEL: | E62 H26 H27 |
| Date: | 2021–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109120&r= |
| By: | Andersen, Torben M.; Bhattacharya, Joydeep; Gestsson, Marias H. |
| Abstract: | Under dynamic efficiency, a pay-as-you-go (PAYG) pension scheme helps the current generation of retirees but hurts future generations because they are forced to save via a return-dominated scheme. Abandoning it is deemed welfare-improving but typically not for all generations. But what if agents are present-biased (hence, undersave for retirement) and the “paternalistically motivated forced savings†component of a PAYG scheme motivated its existence in the first place? This paper shows it is possible to transition from such a PAYG scheme on to a higher return, mandated fully-funded scheme; yet, no generation is hurt in the process. The results inform the debate on policy design of pension systems as more and more policy makers push for the transition to take place but are forced to recognize that current retirees may get hurt along the way. |
| Date: | 2021–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202106010700001814&r= |
| By: | Santiago Camara |
| Abstract: | This paper presents evidence of an informational effect in changes of the federal funds rate around FOMC announcements by exploiting exchange rate variations for a panel of emerging economies. For several FOMC announcements dates, emerging market economies' exchange rate strengthened relative to the US dollar, in contrast to what the standard theory predicts. These results are in line with the information effect, which denote the Federal Reserve's disclosure of information about the state of the economy. Using Jarocinski \& Karadi 2020's identification scheme relying on sign restrictions and high-frequency surprises of multiple financial instruments, I show how different US monetary policy shocks imply different spillovers on emerging markets financial flows and macroeconomic performance. I emphasize the contrast in dynamics of financial flows and equity indexes and how different exchange rate regimes shape aggregate fluctuations. Using a structural DSGE model and IRFs matching techniques I argue that ignoring information shocks bias the inference over key frictions for small open economy models. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2108.01026&r= |
| By: | Benny Kleinman; Ernest Liu; Stephen J. Redding |
| Abstract: | We develop a dynamic spatial general equilibrium model with forward-looking investment and migration decisions. We characterize analytically the transition path of the spatial distribution of economic activity in response to shocks. We apply our framework to the reallocation of US economic activity from the Rust Belt to the Sun Belt from 1965-2015. We find slow convergence to steady-state, with US states closer to steady-state at the end of our sample period than at its beginning. We find substantial heterogeneity in the effects of local shocks, which depend on capital and labor dynamics, and the spatial and sectoral incidence of these shocks. |
| JEL: | F14 F15 R12 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29101&r= |
| By: | Polo, Alberto (Bank of England) |
| Abstract: | I document three salient features of the transmission of monetary policy shocks: imperfect pass-through to deposit rates, impact on credit spreads, and substitution between deposits and other bank liabilities. I develop a monetary model consistent with these facts, where banks have market power on deposits, a duration-mismatched balance sheet, and a dividend-smoothing motive. Deposit demand has a dynamic component, as in the literature on customer markets. A financial friction makes non-deposit funding supply imperfectly elastic. The model indicates that imperfect pass-through to deposit rates is an important source of amplification of monetary policy shocks. |
| Keywords: | Monetary policy transmission; deposit rates; banks; market power |
| JEL: | E43 E52 G21 |
| Date: | 2021–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0933&r= |
| By: | Sugata Marjit; Noritsugu Nakanishi |
| Abstract: | This paper explores the role of wage fund as the basic source of credit, capital or finance in a dynamic Ricardian model, which consists of three classes of agents: the workers, the capitalist, and the producers of goods. We introduce and develop an elaborate dynamic wage fund model in the context of contemporary economic theory. The modified golden rule can be derived based on a mechanism significantly different from the standard Ramsey-Cass-Koopmans optimal growth framework. We also show that, although international trade in a static setting in the wage fund framework has real asymmetric distributional effects on the welfare of the agents just like the Stolper-Samuelson theorem, those asymmetric distributional impacts are nullified in the dynamic setting. In fact, trade liberalization is Pareto improving along the balanced growth path. |
| Keywords: | wage fund, Ricardo model, modified golden rule, gains from trade, balanced growth path |
| JEL: | B12 B17 F10 F43 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9218&r= |
| By: | Andersen, Torben M.; Bhattacharya, Joydeep |
| Abstract: | Many countries, in an effort to address the problem that too many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, who wish to borrow, to save for retirement. Further, if agents are present-biased, they disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counter-intuitively, that pitted against laissez faire, mandatory pensions succeed by incentivizing the young to borrow more and the middle-aged to save nothing on their own, in effect, rendering the latter's present-biasedness inconsequential. |
| Date: | 2021–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202102010800001016&r= |