nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒10‒04
ten papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. More Money for Some: The Redistributive Effects of Open Market Operations By Christian Bustamante
  2. Pay-as-you-go pension systems supported by the old rich By Kotono Tanigawa; Tomoya Sakagami
  3. Why Does Risk Matter More in Recessions than in Expansions? By Martin M. Andreasen; Giovanni Caggiano; Efrem Castelnuovo; Giovanni Pellegrino
  4. The Decline in Capital-Skill Complementarity By Gonzalo Castex; Stanley Cho; Evgenia Dechter
  5. Useful Results for the Simulation of Non-Optimal Economies with Heterogeneous Agents By Damián Pierri
  6. Money Creation and Banking: Theory and Evidence By Heon Lee
  7. Business Dynamism, Sectoral Reallocation and Productivity in a Pandemic By Guido Ascari; Andrea Colciago; Riccardo Silvestrini
  8. Energy Efficiency and CO2 Emission Fluctuations By Soojin Jo; Lilia Karnizova
  9. Fiscal Policy in the Age of COVID: Does it ‘Get in all of the Cracks?’ By Pierre-Olivier Gourinchas; Ṣebnem Kalemli-Özcan; Veronika Penciakova; Nick Sander
  10. Trade Policy is Real News: Theory and Evidence By George Alessandria; Carter Mix

  1. By: Christian Bustamante
    Abstract: Using a general equilibrium search-theoretic model of money, I study the distributional effects of open market operations. In my model, heterogeneous agents trade bilaterally among themselves in a frictional market and save using cash and illiquid short-term nominal government bonds. Wealth effects generate slow adjustments in agents’ portfolios following their trading activity in decentralized markets, giving rise to a persistent and nondegenerate distribution of assets. The model reproduces the distribution of asset levels and portfolios across households observed in the data, which is crucial to quantitatively assess the incidence of monetary policy changes at the individual level. I find that an open market operation targeting a higher nominal interest rate requires increasing the relative supply of bonds, raising the ability of agents to self-insure against idiosyncratic shocks. As a result, in the long run, inequality falls, and the inefficiencies in decentralized trading shrink. This leads agents that are relatively poor and more liquidity-constrained to benefit the most by increasing their consumption and welfare.
    Keywords: Inflation and prices; Monetary policy; Monetary policy implementation; Monetary policy transmission
    JEL: E21 E32 E52
    Date: 2021–09
  2. By: Kotono Tanigawa (Kumamoto Gakuen University); Tomoya Sakagami (Kumamoto Gakuen University)
    Abstract: In this paper, we present a pension policy that supplements the pay-as-you-go pension system with payments by old generations with a high assets income. This supplement is intended to reduce intergenerational inequity. To analyze the effect of this pension policy on both capital stock in the economy and the utilities of the rich and the poor, we build an Over-Lapping Generations model with different incomes when young. This model finds that the stable steady-state capital stock level increases as the old rich generation contributes to the pension system. We also find by numerical simulations that there is a Pareto efficient premium level between high-income and low-income people.
    Keywords: pay-as-you-go pension system, intergenerational inequity, overlapping generations model
    Date: 2021–09
  3. By: Martin M. Andreasen (Department of Economics and Business Economics, CREATES, Aarhus University, The Danish Finance Institute); Giovanni Caggiano (Monash University, University of Padova); Efrem Castelnuovo (University of Padova); Giovanni Pellegrino (Department of Economics and Business Economics, Aarhus University)
    Abstract: This paper uses a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences and approximated to third order around its risky steady state replicates these state-dependent responses. The key mechanism behind this result is that firms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions.
    Keywords: New Keynesian Model, Nonlinear SVAR, Non-recursive identification, State-dependent uncertainty shock, Risky steady state
    JEL: C15 C32 C53 E30
    Date: 2021–09–29
  4. By: Gonzalo Castex (UNSW School of Economics); Stanley Cho (UNSW School of Economics); Evgenia Dechter (UNSW School of Economics)
    Abstract: We revisit the capital-skill complementarity hypothesis and examine whether and under what conditions this mechanism can explain the developments in wage inequality and labor share in the 1963–2016 period. Krusell, Ohanian, Rios-Rull, and Violante (2000) show that a model with capital-skill complementarity mechanism matches the data well and can account for the changes in wage inequality in the 1963–1992 period. We show that applying the model to the 1963–2016 period delivers a good ï¬ t for the skill premium; however, it does not predict the declining pattern in labor share in the last two decades. We modify the model to allow for a flexible technology structure and show that the degree of capital-skill complementarity is declining over time. The model with time-varying capital-skill complementarity can match the changes in skill premium and labor share in the 1963–2016 period.
    Keywords: capital-skill complementarity, technological change, skill-premium, labor share
    JEL: E13 E25 J23 J31 O33
    Date: 2021–07
  5. By: Damián Pierri (Universidad Carlos III Madrid & IIEP-BAIRES (UBA-CONICET))
    Abstract: This paper deals with infinite horizon non-optimal economies with aggregate uncertainty and a finite number of heterogeneous agents. It derives sufficient conditions for the existence of a recursive structure, an ergodic, a stationary, and a non-stationary equilibria. It also gives an answer to the following question: is it possible to derive a general framework which guarantees that numerical simulations truly reflect the behavior of endogenous variables in the model? We provide sufficient conditions to give an affirmative answer to this question for endowment economies with incomplete markets and uncountable exogenous shocks. These conditions guarantee the ergodicity of the process and hold for a particular selection mechanism. For economies with finitely many shocks or for an arbitrary selection in economies with uncountable shocks, it is only possible to show that a computable, time independent and recursive representation generates a stationary Markov process. The results in this paper suggest that often a well-defined stochastic steady state in heterogenous agent models is sensitive to the initial conditions of the economy; a fact which imply that heterogeneity may have irreversible long-lasting effects.
    Date: 2021–08
  6. By: Heon Lee
    Abstract: This paper develops a monetary-search model where the money multiplier is endogenously determined. I show that when the central bank pays interest on reserves, the money multiplier and the quantity of the reserve can depend on the nominal interest rate and the interest on reserves. The calibrated model can explain the evolution of the money multiplier and the excess reserve-deposit ratio in the pre-2008 and post-2008 periods. The quantitative analysis suggests that the dramatic changes in the money multiplier after 2008 are driven by the introduction of the interest on reserves with a low nominal interest rate.
    Date: 2021–09
  7. By: Guido Ascari; Andrea Colciago; Riccardo Silvestrini
    Abstract: Asymmetric effects across sectors are the distinctive features of the Covid-19 shock. Business Formation Statistics in the United States show a reallocation of entry and exit opportunities across sectors in the initial phase of the pandemic. To explain these facts, we propose an Epidemiological-Industry Dynamic model with heterogeneous firms and endogenous firms dynamics. Our analysis suggests that the cleansing effect on business dynamism of the Covid-19 crisis, which typically characterizes recessions, is sector-specific. The framework can rationalize the dynamics of aggregate productivity during the crisis. Monetary policy and sticky wages are central ingredients to capture reallocation effects. Social distancing, by smoothing out cleansing in the social sector, slows down the reallocation process and prolongs the recession, but saves lives.
    Keywords: Covid-19; Productivity; Entry; Reallocation.
    JEL: E3 L16 I3
    Date: 2021–09
  8. By: Soojin Jo (Yonsei University and Bank of Canada); Lilia Karnizova (Department of Economics, University of Ottawa)
    Abstract: CO2 emissions are commonly perceived to rise and fall with aggregate output. Yet many factors, including energy efficiency improvements, emission coefficient variations, and shifts to cleaner energy, can break the positive emissions-output relationship. To evaluate the importance of such factors, we uncover shocks that by construction reduce emissions without lowering output. These novel shocks explain a substantial fraction of emission fluctuations. We interpret these shocks as changes in the energy efficiency of consumer products, after extensive examinations of their impacts on macroeconomic and environmental indicators. Consequently, models omitting energy efficiency likely overestimate the trade-off between environmental protection and economic performance.
    Keywords: CO2 emissions, energy efficiency, E-DSGE, sign restrictions.
    JEL: E32 Q43 Q50 Q55
    Date: 2021
  9. By: Pierre-Olivier Gourinchas; Ṣebnem Kalemli-Özcan; Veronika Penciakova; Nick Sander
    Abstract: We study the effects of fiscal policy in response to the COVID-19 pandemic at the firm, sector, country and global level. First, we estimate the impact of COVID-19 and policy responses on small and medium sized enterprise (SME) business failures. We combine firm-level financial data from 50 sectors in 27 countries, a detailed I-O network, real-time data on lockdown policies and mobility patterns, and a rich model of firm behavior that allows for several dimensions of heterogeneity. We find: (a) Absent government support, the failure rate of SMEs would have increased by 9 percentage points, significantly more so in emerging market economies (EMs). With policy support it only increased by 4.3 percentage points, and even decreased in advanced economies (AEs). (b) Fiscal policy was poorly targeted: most of the funds disbursed went to firms who did not need it. (c) Nevertheless, we find little evidence of the policy merely postponing mass business failures or creating many ‘zombie’ firms: failure rates rise only slightly in 2021 once policy support is removed. Next, we build a tractable global intertemporal general equilibrium I-O model with fiscal policy. We calibrate the model to 64 countries and 36 sectors. We find that: (d) a sizable share of the global economy is demand-constrained under COVID-19, especially so in EMs. (e) Globally, fiscal policy helped offset about 8% of the downturn in COVID, with a low ‘traditional’ fiscal multiplier. Yet it significantly reduced the share of demand- constrained sectors, preserving employment in these sectors. (f) Fiscal policy exerted small and negative spillovers to output in other countries but positive spillovers on employment. (g) A two-speed recovery would put significant upwards pressure on global interest rates which imposes an additional headwind on the EM recovery. (h) Corporate and sovereign spreads rise when global rates increase, suggesting that EM may face challenging external funding conditions as AEs economies normalize.
    JEL: C67 D2 E62 E65 F32 F41 G33
    Date: 2021–09
  10. By: George Alessandria; Carter Mix
    Abstract: We evaluate the aggregate effects of changes in trade barriers when these changes can be implemented slowly over time and trade responds gradually to changes in trade barriers because firm-level trade costs make exporting a dynamic decision. Our model shows how expectations of changes in trade barriers affect the economy. We find that while decreases in trade barriers increase economic activity, expectations of lower future trade barriers temporarily decrease investment, hours worked, and output. Further- more, canceling an expected decline in future trade barriers raises investment and output in the short run but substantially lowers medium-run growth. These effects are larger when the expected reform is bigger. In the data, we find that countries with more trade growth after the General Agreement on Tariffs and Trade (GATT) rounds decreased investment and hours worked in the years leading to the tariff cuts, as predicted by our model.
    Keywords: Trade Policy; Business Cycles; Sunk Costs; Gains from Trade
    JEL: E31 F12
    Date: 2021–09–24

This nep-dge issue is ©2021 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.