nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒09‒13
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Different policy effects of Ramsey and overlapping generations models By Watanabe, Minoru; Yasuoka, Masaya
  2. Italian Labour Frictions and Wage Rigidities in an Estimated DSGE By Josué Diwambuena; Raquel Fonseca; Stefan Schubert
  3. Human Capital Accumulation According to HANK By INOSE Junya
  4. Optimizing the life cycle path of pension premium payments and the pension ambition in the Netherlands By Harry ter Rele; Carolijn de Kok; Nicoleta Ciurila; Peter Zwaneveld
  5. Financial Development and Economic Growth in a Microfounded Small Open Economy Model By Zhang, Bo; Zhou, Peng
  6. Investment Shocks By Benjamin Caswell
  7. Forward guidance with unanchored expectations By Eusepi, Stefano; Gibbs, Chris; Preston, Bruce
  8. A semi-structural model with banking sector for stress testing scenario design By J. Sebastián Becerra; José Carreño; Juan Francisco Martínez
  9. Medical Expenditures over the Life Cycle: Persistent Risks and Insurance By FUKAI Taiyo; ICHIMURA Hidehiko; KITAO Sagiri; MIKOSHIBA Minamo
  10. Optimal Taxation in the Endogenous Growth Framework with the Private Information By Guo, Lu; Yan, Chong
  11. Is Marriage for White People? Incarceration, Unemployment, and the Racial Marriage Divide By Caucutt, E. M.; Guner, N.; Rauh, C.
  12. Education, Lack of Complementary Investment and Underemployment In an Open Economy By Sugata Marjit; Rashmi Ahuja; Abhilasha Pandey
  13. Social Mobility And Preferences For Open Access Societies By Alexandra Pripadcheva; Dmitriy Veselov
  14. Energy and Economic Implications of Carbon Neutrality in China -- A Dynamic General Equilibrium Analysis By Shenghao Feng; Xiujian Peng; Philip Adams

  1. By: Watanabe, Minoru; Yasuoka, Masaya
    Abstract: Effects of taxation are examined in many studies. For such studies, the model economy assumes a logarithmic utility function. Results derived from our study indicate that attention should be devoted to using logarithm utility functions. We check the redistribution policy effect financed by capital income taxation in models of two types: a Ramsey model and an overlapping generations model. If the labor supply is inelastic, then effects of the redistribution policy financed by taxation of capital income differs between the Ramsey model and the overlapping generations model. However, if the labor supply is elastic, then the policy financed by capital income taxation is the same between the Ramsey model and the overlapping generations model. Moreover, this study presents simulation results.
    Keywords: Overlapping generations model, Ramsey model, Redistribution, Taxation
    JEL: E24 H20
    Date: 2021–09–06
  2. By: Josué Diwambuena (Free University of Bozen-Bolzano, Italy); Raquel Fonseca (ESG-University of Quebec at Montreal and CIRANO); Stefan Schubert (Free University of Bozen-Bolzano, Italy)
    Abstract: This paper investigates how Italian labour market institutions influence business cycle fluctuations. We apply a DSGE model that features Italian labour market rigidities and we estimate the latter on Italian data using Bayesian techniques to assess the effects of demand, supply, and labour market shocks on the macroeconomy, and to measure their significance for economic fluctuations. Our results show: First, technology, time preference and wage bargaining shocks are key drivers of economic fluctuations across horizons. Second, matching efficiency and wage bargaining shocks are significant sources of unemployment and vacancies fluctuations but their role is limited for output fluctuations. Third, labour market relaxation policies have only marginally contributed to the reduction in unemployment. Last, accounting for wage rigidities influences labour market dynamics and helps the model to fit data well. We, therefore, urge policymakers to support additional changes in labour market institutions.
    Keywords: DSGE; Labour market frictions; Bayesian estimation; Italy.
    JEL: E24 E32 C51 C52
    Date: 2021–09
  3. By: INOSE Junya
    Abstract: The heterogeneous model in macroeconomics has produced great developments in recent decades. One major development which includes heterogeneity relates to consumer behavior, especially in describing income and wealth inequality. More powerful and sophisticated computing technologies and the increasing availability of microdata have fueled these developments. Among these developments is the invention of the Heterogeneous agent New Keynesian (HANK) models. We advanced the Huggett model of income and wealth distribution to include human capital accumulation. The inclusion of human capital accumulation into a heterogeneous agent model enables us to capture not only wealth, but skill inequality and its dynamics. This paper provides two main contributions. We (i) construct a mathematical tool to analyze models with non-linearity, and (ii) provide implications for the policy of wealth redistribution, especially basic income. The conclusions of this analysis can be again summarized by the following three points: (i) the introduction of basic income may increase the share of liquidity constrained households, (ii) the introduction of basic income results in a decrease of the aggregate share of time spent investing in human capital, and (iii) the introduction of basic income may increase consumption and this may result in an increase in the interest rate.
    Date: 2021–08
  4. By: Harry ter Rele (CPB Netherlands Bureau for Economic Policy Analysis); Carolijn de Kok; Nicoleta Ciurila (CPB Netherlands Bureau for Economic Policy Analysis); Peter Zwaneveld (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Pension premium rates and pension benefits are independent of age or family situation in the second pillar of the Dutch pension system. In a life cycle model calibrated on Dutch data we investigate the optimal arrangement of pension premiums and benefits taking into consideration two factors: the fact that incomes generally rise with age and the presence of children in the early years of the household. Our analysis points out that due to these factors lifetime welfare can be raised by a delay of pension premium payments towards later working ages. A lower pension ambition further enhances lifetime welfare. Taking these factors into consideration when designing the pension system increases lifetime welfare by an amount that equals a 3.4 percent increase in lifetime consumption if no borrowing constraints are imposed and 2.8 percent if, more realistically, we impose these constraints. Family size (i.e. number of children) has a large impact on optimal pension premiums and optimal pension ambition. Policy conclusions from our results should carefully weigh the calculated welfare gain against possible negative and positive effects of non-modelled aspects.
    JEL: D91 G11 G23
    Date: 2021–04
  5. By: Zhang, Bo (Beijing University of Chemical Technology); Zhou, Peng (Cardiff Business School)
    Abstract: The global financial crisis since 2008 revived the debate on whether or not and to what extent financial development contributes to economic growth. This paper reviews different theoretical schools of thought and empirical findings on this nexus, building on which we aim to develop a unified, microfounded model in a small open economy setting to accommodate various theoretical possibilities and empirical observations. The model is then calibrated to match some well-documented stylized facts. Numerical simulations show that, in the long run, the welfaremaximizing level of financial development is lower than the growth-maximizing level. In the short run, the price channel (through world interest rate) dominates the quantity-channel (through financial productivity), suggesting a vital role of international cooperation in tackling systemic risk of the global financial system.
    Keywords: economic growth; financial development; open economy; DSGE
    Date: 2021–09
  6. By: Benjamin Caswell
    Abstract: Shocks to the marginal efficiency of investment (MEI) play a significant role in business cycle fluctuations. However, in standard quantitative models, positive (negative) MEI shocks tend to cause consumption to fall (rise) on impact while investment rises (falls). This conflicts with the well-established observation that consumption and investment are both procyclical and move together over the business cycle. This paper demonstrates that MEI shocks can generate positive comovement between consumption and investment in a standard RBC framework through the inclusion of a time-varying labour wedge. This allows for tractable analytical expressions, and straightforward graphical interpretations, which describe the subset of the parameter space where positive comovement is achieved.
    Keywords: comovement problem, investment shocks, labour wedge, business cycles
    JEL: E27 E32
    Date: 2021
  7. By: Eusepi, Stefano; Gibbs, Chris; Preston, Bruce
    Abstract: We study zero interest-rate policy in response to a large negative demand shock when long-run expectations can fall over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal forward guidance policy makes large front-loaded promises to stabilize expectations. Policy is too stimulatory in the event of transitory shocks, but provides insurance against persistent shocks. The optimal policy is well-approximated by a constant calendar-based forward guidance, independent of the shock’s realised persistence. The insurance property distinguishes our paper from other bounded rationality papers that solve the forward guidance puzzle and generates important quantitative differences.
    JEL: E32 D83 D84
    Date: 2021–08–31
  8. By: J. Sebastián Becerra; José Carreño; Juan Francisco Martínez
    Abstract: In this paper, we estimate a semi-structural New-Keynesian model for the Chilean economy. Our contribution consists of including a financial block, with an explicit description of the lending interest rate, credit volume, credit risk, and interest rate spreads. Firstly, we find the presence of a financial accelerator, that amplifies shocks. We find a significant relevance of financial sector feedback to the real economy. The incorporation of financial elements in a simple and flexible way allows the developed macro-financial model to be useful for various purposes. In this work, we carry out exercises in which extreme scenarios are simulated and are suitable for stress testing purposes.
    Date: 2021–07
  9. By: FUKAI Taiyo; ICHIMURA Hidehiko; KITAO Sagiri; MIKOSHIBA Minamo
    Abstract: This paper analyzes individuals' medical expenditure risks over the life-cycle and roles of the national health insurance system using nationwide administrative data of health insurance claims (NDB) in Japan. Health shocks are highly persistent and estimated distribution of lifetime medical expenditures varies greatly with the assumed order of persistence. We build a structural life-cycle model for males and females, and single and married households with different labor productivity and assets, and quantify economic and welfare effects of medical expenditure risks and the insurance system. The national health insurance characterized by age-dependent copay rates and progressive out-of-pocket ceilings protects households from expenditure risks well, and has significant effects on their life-cycle savings. Responses to health insurance reform are highly heterogeneous. In response to lower benefits, high-income households turn to self-insurance and increase savings, while low-income households reduce savings and consumption and many of them become recipients of welfare transfers. Welfare effects of such a reform also vary across households and low-income and unhealthy households fare worse than the average. We also show that effects of health insurance reform depend on the generosity of other welfare programs and differ across households.
    Date: 2021–08
  10. By: Guo, Lu; Yan, Chong
    Abstract: Differing from taxes of the new dynamic public finance theory without growth, our paper setups an endogenous growth model with the public finance sector which levies heterogeneous non-linear income taxes and linear flat-rate tax on gross outputs to guarantee the optimal investment in the public goods accumulation. Each taxation has individual effect: heterogeneous non-linear income taxes are used to keep standard Euler equation hold; flat-rate tax is used to compensate for the fiscal gap. The paper firstly makes the growth rate endogenous, and show there is a unique steady state growth rate for every aggregate variable by keeping assumptions of the dynamic general equilibrium theory unchangeable. We further prove the growth must exist when externalities are provided by public finance sector. The steady state growth rate can be expressed by coefficients, and the steady state intertemporal relationships of aggregate variables help us simplify simulation equations and calculations on endogenous heterogeneous non-linear income taxes in infinite periods.
    Keywords: endogenous tax; public finance; growth; uniqueness
    JEL: E6 H21 O41
    Date: 2021–07–16
  11. By: Caucutt, E. M.; Guner, N.; Rauh, C.
    Abstract: The difference in marriage rates between black and white Americans is striking. Wilson (1987) suggests that a skewed sex ratio and higher rates of incarceration and unemployment are responsible for lower marriage rates among the black population. In this paper, we take a dynamic look at the Wilson Hypothesis. Incarceration rates and labor market prospects of black men make them riskier spouses than white men. We develop an equilibrium search model of marriage, divorce, and labor supply in which transitions between employment, unemployment, and prison differ by race, education, and gender. The model also allows for racial differences in how individuals value marriage and divorce. We estimate the model and investigate how much of the racial divide in marriage is due to the Wilson Hypothesis and how much is due to differences in preferences for marriage. We find that the Wilson Hypothesis accounts for more than three quarters of the model's racial-marriage gap. This suggests policies that improve employment opportunities and/or reduce incarceration for black men could shrink the racial-marriage gap.
    Keywords: Marriage, Race, Incarceration, Inequality, Unemployment
    JEL: J12 J J64
    Date: 2021–09–06
  12. By: Sugata Marjit; Rashmi Ahuja; Abhilasha Pandey
    Abstract: In many developing economies rate of unemployment is increasing with skill accumulation and thereby leading to underemployment. Our paper offers to look at skill formation as a demand side problem not as a traditional supply side problem and also how skill formation or education affects unemployment among the remaining uneducated. We have developed a general equilibrium model of a small open developing economy incorporating skill formation, unemployment of unskilled labour in the formal sector and an informal sector which absorbs unemployed workers at a flexible wage rate. In this set up greater education for a group may generate educated unemployment within the group and increase unemployment of the uneducated outside the group leading to underemployment through the expansion of the informal sector. Both effects are due to shortage of complementary investment in production activities. Our theoretical findings are motivated by existing empirical evidence and a fresh empirical exercise undertaken using panel data of 32 countries.
    Keywords: skill formation, informal employment, skilled-unskilled wage inequality, underemployment
    JEL: J24 J31 E26 E24
    Date: 2021
  13. By: Alexandra Pripadcheva (National Research University Higher School of Economics); Dmitriy Veselov (National Research University Higher School of Economics)
    Abstract: This study investigates a dynamic political economy model that provides a link between the intensity of social mobility in society and the barriers to entry on markets in modern democracies. We use overlapping generation model in which all agents are divided by three groups: unskilled workers, skilled workers and capitalists. Social mobility is determined by the parental endogenous education decision and by the level of barriers to entry on markets, which is a political outcome. We show that a majority of voters may support high barriers to entry if perspectives of upward mobility for high-skilled workers is sufficiently low for every institutional set-up and there are direct payments from incumbent capitalists to a group of unskilled workers. This outcome also leads to persistently lower social mobility for every social group and to a lower level of education in the society. The model provides a theoretical justification of the empirical evidence, suggesting that a higher level of economic inequality is associated with a lower quality of economic institutions in democracies.
    Keywords: social mobility, economic barriers, economic institutions, democracy
    JEL: J62 O15 O43 P16
    Date: 2021
  14. By: Shenghao Feng; Xiujian Peng; Philip Adams
    Abstract: This study investigates the energy and economic implications of China's carbon neutrality path over the period of 2020 to 2060. We use a recursive dynamic CGE model, CHIANGEM-E, to conduct the analysis. Notable advancements from the original CHINAGEM model include: 1) detailed energy sector disaggregation, 2) a new electricity generation nesting structure, and 3) carbon capture and storage (CCS) mechanisms. Our simulation shows that to achieve carbon neutrality in 2060, China needs change its energy consumption structure significantly. Coal and gas consumption will decline dramatically while the demand for renewable energy, especially demand for solar and wind energy will increase considerably. However, the negative effects of the dramatic carbon emission reduction on China's macro economy is limited. In particular, by 2060 real GDP will be 1.36 percent lower in carbon neutrality scenario (CNS) than in the base case scenario. The carbon price level will be 1614 CNY per tonne of carbon dioxide in 2060 in CNS. The substantial changes in China's energy structure imply significant changes to its fossil fuel imports. China's import demand for coal, crude oil and gas will all fall sharply. By 2060, China's imports of coal and gas will be more than 60% lower and its oil imports will be around 50% lower than their respective base-case levels.
    Keywords: Carbon neutrality, economic implication, energy consumption, China, CGE
    JEL: C68 Q4
    Date: 2021–08

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