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on Dynamic General Equilibrium |
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Issue of 2021‒09‒27
twenty-one papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Cole, Stephen J. (Department of Economics Marquette University); Huh, Sungjun (Department of Economics Marquette University) |
| Abstract: | Housing markets are closely related to monetary policy. This paper studies the link between housing frictions and the effectiveness of forward guidance. A housing collateral constraint and forward guidance shocks are incorporated into a standard medium-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Our main results produce a number of important implications. First, financial frictions emanating from the housing market dampen the effectiveness of forward guidance on the economy. Second, forward guidance has asymmetric effects on the welfare of lenders and borrowers when housing frictions increase. Housing frictions also attenuate the effect of forward guidance at the zero lower bound. Finally, this article provides a solution to "forward guidance puzzle" of Del Negro et al. (2012). Thus, policymakers should consider housing frictions when examining the effects of forward guidance on the economy. |
| Keywords: | forward guidance, financial frictions, housing collateral, zero lower ground |
| JEL: | E32 E44 E52 R21 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrq:wpaper:2021-07&r= |
| By: | Eskelinen, Maria |
| Abstract: | In this paper I develop a New Keynesian dynamic stochastic general equilibrium model which features three different types of representative agents (THRANK): the poor hand-to-mouth, the wealthy hand-to-mouth and the non-hand-to mouth households. Compared to a full-scale HANK model, this model is easier to compute while reproducing many of the same monetary policy shock transmission channels. I show that monetary policy transmission takes place through a redistribution channel, as emphasised by Auclert (2019). In particular, the effects of a monetary policy shock are amplified as resources are redistributed from high-MPC households to low-MPC households. Monetary policy therefore becomes more effective compared to models with homogeneous MPC rates. Consumption inequality is countercyclical in this setting and a high degree of leverage amplifies the redistribution channel. These findings have important implications for understanding the effects of both monetary and macroprudential policy. JEL Classification: D31, E12, E21, E43, E52 |
| Keywords: | household heterogeneity, housing market, inequality, monetary policy |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212590&r= |
| By: | Narayana R. Kocherlakota |
| Abstract: | I reconsider the long-standing consensus view that macroeconomic stabilization should rely on monetary policy, not fiscal policy. I use an analytically tractable heterogeneous agent New Keynesian (HANK) model that is parameterized so as to admit a bubble in public debt. In this context, I show that it is possible to stabilize either inflation or output in response to aggregate shocks by varying only fiscal policy (that is, lump-sum uniform transfers). In contrast, when the public debt bubble is large, it is impossible to stabilize either inflation or output by varying only interest rates (monetary policy). The theoretical analysis implies that, in the presence of a large public debt bubble, fiscal policy is a more reliable stabilization tool than monetary policy. |
| JEL: | E58 E62 E63 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29226&r= |
| By: | Robert Calvert Jump (University of Greenwich); Paul Levine (University of Surrey) |
| Abstract: | This paper introduces unemployment hysteresis into a tractable New Keynesian three equation model using an insider-outsider labour market. We demonstrate that strict inflation targeting can lead to a unit root in the unemployment rate, but dual mandate monetary policy can stabilise the economy around its efficient employment rate. |
| JEL: | E24 E31 E32 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0821&r= |
| By: | Patrick Fève (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Pablo Garcia Sanchez (Unknown); Alban Moura (Unknown); Olivier Pierrard (Unknown) |
| Abstract: | We augment a simple Real Business Cycle model with financial intermediaries that may default on their liabilities and a financial friction generating social costs of default. We derive a closed-form solution for the general equilibrium of the economy, providing analytical results. Endogenous default generates a negative skew for aggregate variables and a positive skew for credit spreads, as documented in the empirical literature. Larger financial frictions strengthen asymmetry, which amplifies the welfare cost of fluctuations. Macro-prudential regulation alleviates both the cost of fluctuations and business-cycle asymmetry, at the expense of a steady-state distortion. Finally, we prove analytically the existence of an optimal level of regulation, which increases with the size of the financial friction. |
| Keywords: | Real Business Cycle model,Default,Financial frictions,Asymmetry,Optimal regulation |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03346173&r= |
| By: | Grégory Levieuge; Jean-Guillaume Sahuc |
| Abstract: | Empirical evidence suggests that bank lending rates are downward rigid: banks tend to adjust their rates more slowly and less completely to short-term market rates decreases than to increases. We investigate the macroeconomic consequences of this downward interest rate rigidity by introducing asymmetric bank lending rate adjustment costs in a macrofinance dynamic stochastic general equilibrium model. Calibrating the model to the euro area economy, we find that the difference in the initial response of GDP to positive and negative economic shocks of similar amplitude can reach up to 25%. This means that a central bank would have to cut its policy rate much more to obtain a symmetric medium-run impact on GDP. We also show that downward interest rate rigidity is stronger when policy rates are stuck at their effective lower bound, further disrupting monetary policy transmission. These findings imply that neglecting asymmetry in retail interest rate adjustments may yield misguided monetary policy decisions. |
| Keywords: | Downward Interest Rate Rigidity, Asymmetric Adjustment Costs, Banking Sector, DSGE Model, Euro Area |
| JEL: | E32 E44 E5 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:828&r= |
| By: | Ding Dong; Zheng Liu; Pengfei Wang |
| Abstract: | Recessions are associated with sharp increases in turbulence that reshuffles firms' productivity rankings. To study the business cycle implications of turbulence shocks, we use Compustat data to construct a measure of turbulence based on the (inverse of) Spearman correlations of firms' productivity rankings between adjacent years. We document evidence that turbulence rises in recessions, reallocating labor and capital from high-to low-productivity firms and reducing aggregate TFP and the stock market value of firms. A real business cycle model with heterogeneous firms and financial frictions can generate the observed macroeconomic and reallocation effects of turbulence. In the model, increased turbulence makes high-productivity firms less likely to remain productive, reducing their expected equity values and tightening their borrowing constraints relative to low-productivity firms. Thus, labor and capital are reallocated to low-productivity firms, reducing aggregate TFP and generating a recession with synchronized declines in aggregate output, consumption, investment, and labor hours, in line with empirical evidence. |
| Date: | 2021–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:93061&r= |
| By: | Alfred Duncan |
| Keywords: | DSGE; Reverse mode differentiation; Hamiltonian Monte Carlo; No U-Turn Sampler; Bayesian estimation |
| JEL: | C11 C13 C32 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:2108&r= |
| By: | Simon Mongey |
| Abstract: | I study a general equilibrium menu cost model with a continuum of sectors, idiosyncratic and aggregate shocks, and the novel feature that each sector consists of strategically engaged firms. Compared to an economy with monopolistically competitive sectors—separately parameterized to match the same microdata on price flexibility—the oligopoly economy features a smaller response of inflation to monetary shocks and output responses that are more than twice as large. Under the same parameters, output responses are five times larger. An oligopoly economy also (i) requires smaller menu costs and idiosyncratic shocks to match the microdata, addressing a significant challenge for mechanisms that generate non-neutrality via strategic complementarities, (ii) implies four times larger welfare losses from same sized nominal rigidities, and (iii) provides a novel rationale for positive menu costs: in an oligopoly firms prefer a degree of rigidity to complete flexibility. Quantitatively, the estimated degree of nominal rigidity is found to be close to optimal, from firms’ perspective. |
| JEL: | E0 E31 E32 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29233&r= |
| By: | Hyunduk Suh (Inha University) |
| Abstract: | Housing cycles can vary significantly across regions. This study investigates the macroeconomic implications of regionally heterogeneous housing cycles and stabilization policies. The general equilibrium model includes two separate regions, idiosyncratic shocks in regional housing markets, and inter-regional housing investments by households. Counterfactual simulations suggest that regional housing cycles can be a source of economic inequality between regions and the level of financial status by affecting consumption, housing service, debt and welfare asymmetrically across agents. Region-specific stabilization policies such as property tax, countercyclical loan-to-value, and housing supply policies can mitigate regional housing cycles, but it takes large policy responses if the cycle is caused by housing exuberance (demand) shocks. Those policies also have asymmetric welfare effects, while housing supply policy is the most beneficial to agents in the region that experiences the cycle. Leaning against the wind monetary policy is relatively ineffective in stabilizing regional housing prices and higher interest rates during housing price appreciations lower the welfare of borrowers in all regions. |
| Keywords: | Regionally heterogeneous housing cycles, monetary policy, macroprudential policy, housing |
| JEL: | E32 R31 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:inh:wpaper:2021-4&r= |
| By: | Seth G. Benzell; Laurence J. Kotlikoff; Guillermo LaGarda; Victor Yifan Ye |
| Abstract: | This paper develops a 17-region, 3-skill group, overlapping generations, computable general equilibrium model to evaluate the global consequences of automation. Automation, modeled as capital- and high-skill biased technological change, is endogenous with regions adopting new technologies when profitable. Our approach captures and quantifies key macro implications of a range of foundational models of automation. In our baseline scenario, automation has a moderate effect on regional outputs and a small effect on world interest rates. However, it has a major impact on inequality, both wage inequality within regions and per capita GDP inequality across regions. We examine two policy responses to technological change -- mandating use of the advanced technology and providing universal basic income to share gains from automation. The former policy can raise a region's output, but at a welfare cost. The latter policy can transform automation into a win-win for all generations in a region. |
| JEL: | E1 E23 F43 O31 O33 O4 O41 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29220&r= |
| By: | Bertrand Achou; Hippolyte d'Albis; Eleni Iliopulo |
| Abstract: | In this work we introduce rental markets in a general equilibrium model with borrowing constraints and infinitely lived agents. We estimate our model using standard Bayesian methods and match US data on recent decades. We highlight a crucial relationship that strongly links interest rates, house prices, and rents. It represents agents’ arbitrage when choosing their degree of participation in the housing market (i.e., their real estate holdings). This framework is particularly well suited for explaining recent trends in housing markets. It also allows us to parsimoniously track the unequal impact of shocks on agents’ decisions and welfare, depending on their housing status. |
| Keywords: | Housing, Rental Markets, Collateral Constraints, Financial Frictions |
| JEL: | E3 G1 C1 I3 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:rsi:irersi:6&r= |
| By: | Joshua Bernstein (Indiana University); Rupal Kamdar (Indiana University) |
| Abstract: | This paper studies optimal monetary policy under rational inattention: the policy maker optimally chooses her information subject to a processing constraint. Our analytical results emphasize how the policy maker’s information choices shape her expectations and the dynamics of the macroeconomy. Paying attention to demand shocks lowers output volatility and causes untracked supply shocks to drive inflation. Because persistent supply shocks have a minor impact on interest rates under full information in the New Keynesian model, the policy maker should focus her limited attention on demand shocks. Improvements in information can explain a declining slope of the empirical Phillips curve. |
| Keywords: | optimal monetary policy, rational inattention, expectations |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2021003&r= |
| By: | Anastasios Evgenidis (Newcastle University); Masashige Hamano (Waseda University); Wessel N. Vermeulen (Newcastle University) |
| Abstract: | We apply a Bayesian Panel VAR (BPVAR) and DSGE approach to study the regional effects of the 2011 Great East Japan Earthquake. We disentangle the persistent fall in electricity supply following the Fukushima accident, from the immediate but more temporary production shock attributable to the natural disaster. Specifically, we estimate the contribution of the electricity fall on the regions economic recovery. First, we estimate a BPVAR with regional-level data on industrial production, prices, and trade, to obtain impulse responses of the natural disaster shock. We find that all regions experienced a strong and persistent decline in trade, and long-lasting disruptions on production. Inflationary pressures were strong but short-lived. Second, we present a DSGE model that can capture key observations from this empirical model, and provide theoretical impulse response functions that distinguish the immediate production shock, from the persistent electricity supply shock. Thirdly, in line with the predictions from the theoretical model, counterfactual analysis via conditional forecasts based on our BPVAR reveals that the Japanese regional economies, particularly the hit regions, did experience a loss in production and trade due to the persistent fall in electricity supply. |
| Keywords: | Social Choice natural disasters; Bayesian Panel VAR; DSGE; regional spill-overs; counterfactual analysis |
| JEL: | E3 E6 Q54 R1 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:wap:wpaper:2111&r= |
| By: | Daniel Spiro |
| Abstract: | What is a good reduced-form representation of Ramsey-Cass-Koopmans. (RCK) model? Solow’s model (despite non-optimizing agents) provides predictions largely consistent with a closed-economy RCK but fundamentally differs regarding open-economy income convergence. Where RCK predicts partial income and consumption convergence between open economies Solow predicts full convergence. This paper presents, by a small modification of the savings behavior in the Solow model, a framework that matches RCK’s properties in closed and open economies. The model, labeled rSolow, is analytically tractable, allowing closed-form solutions of all variables, thus makes several explicit and novel predictions. This includes how income and inequality depend on country size; that income growth will be a U-shaped function of initial income thus creating differentiated convergence; and that poor countries bene.t from higher saving but rich countries may not. |
| Keywords: | convergence, Ramsey, Solow, inequality, growth |
| JEL: | E10 E21 F21 F43 O11 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9293&r= |
| By: | Miroslav Gabrovski; Victor Ortego-Marti (Department of Economics, University of California Riverside) |
| Abstract: | The co-movement of buyers and vacancies, i.e. the Beveridge Curve, is a key determinant of the cyclical properties of the housing market, as it determines the sign of the correlation between prices and key measures of liquidity such as vacancies (i.e.\ houses for sale), sales, and time-to-sell. As recent work has shown, to account for the core stylized facts of the housing market, search and matching models must be consistent with a positively correlated co-movement of buyers and vacancies, i.e.\ with an upward-sloping Beveridge Curve. This paper provides evidence that buyers and vacancies are positively correlated along the housing cycle, i.e. the Beveridge Curve on the housing market is upward sloping. Using data on vacancies and time-to-sell, we construct a series for buyers and estimate the slope of the Beveridge Curve. This approach requires only one minimal structural assumption: the existence of a matching function. Our findings confirm the positive relationship between buyers and vacancies over the business cycle, i.e. an upward sloping Beveridge Curve. In addition, we provide an estimate of the elasticity of vacancies with respect to buyers. We find that a one percent increase in vacancies is associated with around a two percent increase in buyers, confirming recent findings that buyers are more volatile than houses for sale. We hope that this estimate will help future researchers in this area. |
| Keywords: | Housing market; Search and matching; Beveridge Curve; Housing liquidity |
| JEL: | E2 E32 R21 R31 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:202113&r= |
| By: | Marcus Hagedorn |
| Abstract: | This paper proposes an equilibrium theory of nominal exchange rates, which offers a new perspective on various issues in open economy macroeconomics. The nominal exchange rate and portfolio choices are jointly determined in equilibrium, thus providing a new approach to overcoming the indeterminacy results in Kareken and Wallace (1981). The distinctive features of this theory are that the nominal exchange rate is determined in international financial markets, that the risk premium and UIP deviations are fully endogenous equilibrium objects and that the real exchange rate inherits its properties from the nominal exchange rate. In terms of policy, this novel theory implies that a country with an exchange rate peg and free asset mobility faces a tetralemma and not a trilemma, because it loses not only monetary policy independence but also fiscal policy independence. |
| Keywords: | exchange rate, determinacy, incomplete markets, monetary and fiscal policy, international asset flows |
| JEL: | D52 E31 E43 E52 E62 E63 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9290&r= |
| By: | Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Simon Scheidegger |
| Abstract: | Carbon taxation is a widely proposed and in some countries already adopted means to limit anthropogenic climate change. This paper studies carbon taxation using an 18-region, 80- period overlapping generations model. We focus on carbon policy that delivers present and future mankind the highest uniform percentage welfare gain. The policy combines global carbon taxation and region- and generation-specific net transfers. In our main calibration, uniform welfare-improving carbon tax policy can make those agents already here and those yet to come, no matter their location, 4.35 percent better off. Achieving (such) equal proportionate gains, which may be needed for universal support, requires major interregional as well as intergenerational transfers. Universal support, though, is not essential. For example, even absent participation by China, whose projected carbon emissions are massive, the rest of the world can still materially limit the carbon externality. However, absent China, their optimal carbon tax is roughly half as large, and the uniform welfare-improving gain is less than three-fifths as large. |
| JEL: | H23 O44 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29224&r= |
| By: | Laura Liu (Indiana University); Mikkel Plagborg-Møller (Princeton University) |
| Abstract: | We develop a generally applicable full-information inference method for heterogeneous agent models, combining aggregate time series data and repeated cross sections of micro data. To handle unobserved aggregate state variables that affect cross-sectional distributions, we compute a numerically unbiased estimate of the model-implied likelihood function. Employing the likelihood estimate in a Markov Chain Monte Carlo algorithm, we obtain fully efficient and valid Bayesian inference. Evaluation of the micro part of the likelihood lends itself naturally to parallel computing. Numerical illustrations in models with heterogeneous households or firms demonstrate that the proposed full-information method substantially sharpens inference relative to using only macro data, and for some parameters micro data is essential for identification. |
| Keywords: | Bayesian inference, data combination, heterogeneous agent models |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2021001&r= |
| By: | Hanming Fang; Dirk Krueger |
| Abstract: | The Affordable Care Act (ACA) is one of the most important reforms of the US health insurance system since the introduction of Medicare. Since employment is a main source of health insurance for the working age population in the United States, this sweeping health insurance reform also has important implications for the labor market and the macro economy. In this paper, we survey the prototype models that are used in the macro and labor literature, extended to integrate health and health insurance, to study the short- and long-run consequences of the ACA. We also suggest open areas for future research. |
| JEL: | E62 H51 I1 I13 I18 J33 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29240&r= |
| By: | Drudi, Francesco; Moench, Emanuel; Holthausen, Cornelia; Weber, Pierre-François; Ferrucci, Gianluigi; Setzer, Ralph; Adao, Bernardino; Dées, Stéphane; Alogoskoufis, Spyros; Téllez, Mar Delgado; Andersson, Malin; Di Nino, Virginia; Aubrechtova, Jana; Diez-Caballero, Arturo; Avgousti, Aris; Duarte, Claudia; Barbiero, Francesca; Estrada, Ángel; Boneva, Lena; Faccia, Donata; Breitenfellner, Andreas; Faiella, Ivan; Bua, Giovanna; Farkas, Mátyás; Bun, Maurice; Ferrari, Alessandro; Caprioli, Francesco; Fornari, Fabio; Ciccarelli, Matteo; Mendoza, Alberto Fuertes; Darracq Pariès, Matthieu; Garcia-Sanchez, Pablo; Giovannini, Alessandro; Papadopoulou, Niki; Grüning, Patrick; Parker, Miles; Guarda, Paolo; Petroulakis, Filippos; Hebbink, Gerbert; Piloiu, Anamaria; Murphy, Sarah Jane Hlásková; Ploj, Gasper; Ioannidis, Michael; Pointner, Wolfgang; Isgro, Lorenzo; Popov, Alexander; Kapp, Daniel; Prammer, Doris; Kashama, Mélissa Kasongo; Queiroz, Ricardo; Lopez-Garcia, Paloma; Rachedi, Omar; Lozej, Matija; Rognone, Lavinia; Lydon, Reamonn; Röhe, Oke; Manninen, Otso; Roos, Madelaine; Manzanares, Andrés; Russo, Simone; McInerney, Niall; Santabárbara, Daniel; Meinerding, Christoph; Schotten, Guido; Mikkonen, Katri; Sotomayor, Beatriz; Mistretta, Alessandro; Stracca, Livio; Mongelli, Francesco Paolo; Tamburrini, Fabio; Montes-Galdón, Carlos; Theofilakou, Anastasia; Müller, Georg; Tsalaporta, Pinelopi; Nerlich, Carolin; van den End, Jan Willem; Osiewicz, Malgorzata; Cruz, Lia Vaz; Osorno-Torres, Boris; Weth, Mark Andreas; Ouvrard, Jean-François; Gomez, Gonzalo Yebes; Page, Adrian |
| Abstract: | This paper analyses the implications of climate change for the conduct of monetary policy in the euro area. It first investigates macroeconomic and financial risks stemming from climate change and from policies aimed at climate mitigation and adaptation, as well as the regulatory and fiscal effects of reducing carbon emissions. In this context, it assesses the need to adapt macroeconomic models and the Eurosystem/ECB staff economic projections underlying the monetary policy decisions. It further considers the implications of climate change for the conduct of monetary policy, in particular the implications for the transmission of monetary policy, the natural rate of interest and the correct identification of shocks. Model simulations using the ECB’s New Area-Wide Model (NAWM) illustrate how the interactions of climate change, financial and fiscal fragilities could significantly restrict the ability of monetary policy to respond to standard business cycle fluctuations. The paper concludes with an analysis of a set of potential monetary policy measures to address climate risks, insofar as they are in line with the ECB’s mandate. JEL Classification: E52, E58, Q54 |
| Keywords: | climate change, environmental economics, green finance, monetary policy, sustainable growth economics |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021271&r= |