nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒10‒11
twelve papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Macroeconomic Effects of Universal Basic Income Programs By Andre Luduvice
  2. Household Debt and the Effects of Fiscal Policy By Sami Alpanda; Hyunji Song; Sarah Zubairy
  3. Credit Supply Driven Boom-Bust Cycles By Yavuz Arslan; Bulent Guler; Burhan Kuruscu
  4. Passive Search and Jobless Recoveries By Alexey Gorn
  5. Rethinking the Welfare State By Nezih Guner; Remzi Kaygusuz; Gustavo Ventura
  6. Why Does Risk Matter More in Recessions than in Expansions? By Martin M. Andreasen; Giovanni Caggiano; Efrem Castelnuovo; Giovanni Pellegrino
  7. The Heterogeneous Impact of Referrals on Labor Market Outcomes By Benjamin Lester; David A. Rivers; Giorgio Topa
  8. Heterogeneity in Longevity, Redistribution, and Pension Reform By Julian Diaz Saavedra
  9. The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare By Almut Balleer; Georg Duernecker; Susanne K. Forstner; Johannes Goensch
  10. Is Marriage for White People? Incarceration, Unemployment, and the Racial Marriage Divide By Elisabeth M. Caucutt; Nezih Guner; Christopher Rauh
  11. Liquidity Crises, Liquidity Lines and Sovereign Risk By Yasin Kürsat Önder
  12. Creative Destruction, Distance to Frontier, and Economic Development By Michael Peters; Fabrizio Zilibotti

  1. By: Andre Luduvice
    Abstract: What are the consequences of a nationwide reform of a transfer system based on means-testing toward one of unconditional transfers? I answer this question with a quantitative model to assess the general equilibrium, inequality, and welfare effects of substituting the current US income security system with a universal basic income (UBI) policy. To do so, I develop an overlapping generations model with idiosyncratic income risk that incorporates intensive and extensive margins of the labor supply, on-the-job learning, and child-bearing costs. The tax-transfer system closely mimics the US design. I calibrate the model to the US economy and conduct counterfactual analyses that implement reforms toward a UBI. I find that an expenditure-neutral reform has moderate impacts on agents’ labor supply response but induces aggregate capital and output to grow due to larger precautionary savings. A UBI of $1,000 monthly requires a substantial increase in the tax rate of consumption used to clear the government budget and leads to an overall decrease in the macroeconomic aggregates, stemming from a drop in the labor supply. In both cases, the economy has more equally distributed disposable income and consumption. The UBI economy constitutes a welfare loss at the transition if it is expenditure-neutral and results in a gain in the second scenario.
    Keywords: Universal Basic Income; Social Insurance; Overlapping Generations; Labor Supply
    JEL: E21 H24 J22
    Date: 2021–09–28
  2. By: Sami Alpanda (University of Central Florida, Department of Economics); Hyunji Song (Texas A&M University, Department of Economics); Sarah Zubairy (Texas A&M University, Department of Economics)
    Abstract: This paper examines how the effects of government spending shocks depend on the balance-sheet position of households. Employing U.S. household survey data, we find that in response to a positive government spending shock, households with mortgage debt have a large, positive consumption response, while renters have a smaller rise in consumption. Homeowners without mortgage debt, in contrast, have an insignificant expenditure response. We consider a dynamic stochastic general equilibrium (DSGE) model with three types of households: savers who own their housing, borrowers with mortgage debt, and rule-of-thumb consumers who rent housing, and show that it can successfully account for these findings. The model suggests that liquidity constraints and wealth effects, tied to the persistence of public spending, play a crucial role in the propagation of government spending shocks. Our findings provide both empirical and theoretical support for the notion that household mortgage debt position plays an important role in the transmission mechanism of fiscal policy.
    Keywords: Fiscal shocks, Government spending, Household balance sheets, Household debt.
    JEL: E21 E32 E62
    Date: 2021–09–28
  3. By: Yavuz Arslan (University of Liverpool Management School); Bulent Guler (Indiana University, Department of Economics); Burhan Kuruscu (University of Toronto, Department of Economics)
    Abstract: Can shifts in the credit supply generate a boom-bust cycle similar to the one observed in the US around 2008? To answer this question, we develop a general equilibrium model that combines a rich heterogeneous agent overlapping-generations structure of households who make housing tenure decisions and borrow through long-term mortgages, firms that finance their working capital through short-term loans from banks, and banks whose ability to intermediate funds depends on their capital. Using a calibrated version of this framework, we find that shocks to banks’ leverage can generate sizable boom-bust cycles in the housing market, the banking sector, and the rest of the macroeconomy, which provides strong support for the credit supply channel. The deterioration of bank balance sheets during the bust, the existence of highly leveraged households, and the general equilibrium feedback from the credit supply to household labor income significantly amplify the bust. Moreover, mortgage credit growth across the income distribution is consistent with recent findings that were otherwise argued to be against the credit supply channel. A comparison of the model outcomes across credit supply, house price expectation, and productivity shocks suggests that housing busts accompanied by severe banking crises are more likely to be generated by credit supply shocks.
    Keywords: Credit Supply, House Prices, Financial Crises, Household and Bank Balance Sheets, Leverage, Foreclosures, Mortgage Valuations, Consumption, and Output
    Date: 2021–09
  4. By: Alexey Gorn
    Abstract: For employed workers, passive search is as important as active search. Passive search implies costly poaching by firms. I introduce poaching and passive search into a random matching model of the labor market. In the model, some firms switch from poaching to vacancy posting in recessions. Employed workers respond by increasing active search. By doing so, they crowd out unemployed workers both amplifying and propagating the reaction of unemployment to aggregate shocks. This mechanism can explain the counter-cyclicality of relative on-the-job search inferred from aggregate data. I provide cross-state empirical evidence supporting the mechanism
    Keywords: unemployment, passive search, jobless recoveries, on-the-job search
    JEL: E24 E32 J62 J63 J64
  5. By: Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Remzi Kaygusuz (Sabancy University); Gustavo Ventura (Arizona State University)
    Abstract: The U.S. spends non trivially on non-medical transfers for its working-age population in a wide range of programs that support low and middle-income households. How valuable are these programs for U.S. households? Are there simpler, welfare-improving ways to transfer resources that are supported by a majority? What are the macroeconomic effects of such alternatives? We answer these questions in an equilibrium, life-cycle model with single and married households who face idiosyncratic productivity risk, in the presence of costly children and potential skill losses of females associated with non-participation. Our findings show that a potential revenue-neutral elimination of the welfare state generates large welfare losses in the aggregate. Yet, most households support eliminating current transfers since losses are concentrated among a small group. We find that a Universal Basic Income program does not improve upon the current system. If instead per-person transfers are implemented alongside a proportional tax, a Negative Income Tax experiment, there are transfer levels and associated tax rates that improve upon the current system. Providing per-person transfers to all households is quite costly, and reducing tax distortions helps to provide for additional resources to expand redistribution.
    Keywords: Taxes and transfers, household labor supply, income risk, negative income tax.
    JEL: E62 H24 H31
    Date: 2021–07
  6. By: Martin M. Andreasen (Aarhus University, CREATES, and the Danish Finance Institute.); Giovanni Caggiano (Monash University and University of Padova.); Efrem Castelnuovo (University of Padova.); Giovanni Pellegrino (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: E32
    Date: 2021–10
  7. By: Benjamin Lester; David A. Rivers; Giorgio Topa
    Abstract: We document a new set of facts regarding the impact of referrals on labor market outcomes. Our results highlight the importance of distinguishing between different types of referrals—those from family and friends and those from business contacts—and different occupations. Then we develop an on-the-job search model that incorporates referrals and calibrate the model to key moments in the data. The calibrated model yields new insights into the roles played by different types of referrals in the match formation process, and provides quantitative estimates of the effects of referrals on employment, earnings, output, and inequality.
    Keywords: labor markets; referrals; networks; search theory; asymmetric information
    JEL: E42 E43 E44 E52 E58
    Date: 2021–10–01
  8. By: Julian Diaz Saavedra (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: The gap in the life expectancy of the elderly across educational groups is high, and this will probably increase over the coming decades. In this article, we use a computable overlapping generations model economy to show that the long-term link between heterogeneity in longevity and education could translate into an implicit tax/subsidy on the expected lifetime benefits to lifetime payroll taxes ratio, with rates around 10 percent, and that such rates pervert redistributive objectives of pension systems. We then analyze some parametric changes aimed at restoring the progressiveness of these systems in the long run, and find that a higher minimum pension or changes in the pension benefit formula go a long way as a tools to restore the system’s long-term progressivity.
    Keywords: Computable general equilibrium, social security reform, redistribution.
    JEL: C68 H55 H23
    Date: 2021–09–26
  9. By: Almut Balleer; Georg Duernecker; Susanne K. Forstner; Johannes Goensch
    Abstract: Idiosyncratic labor risk is a prevalent phenomenon with important implications for individual choices. In labor market research it is commonly assumed that agents have rational expectations and therefore correctly assess the risk they face in the labor market. We analyse survey data for the U.S. and document a substantial optimistic bias of households in their subjective expectations about future labor market transitions. Furthermore, we analyze the heterogeneity in the bias across different demographic groups and we find that high-school graduates tend to be strongly over-optimistic about their labor market prospects, whereas college graduates have rather precise beliefs. In the context of a quantitative heterogenous agents life cycle model we show that the optimistic bias has a quantitatively sizable negative effect on the life cycle allocation of income, consumption and wealth and implies a substantial loss in individual welfare compared to the allocation under full information. Moreover, we establish that the heterogeneity in the bias leads to pronounced differences in the accumulation of assets across individuals, and is thereby a quantitatively important driver of inequality in wealth.
    Keywords: subjective expectations, labor markets, consumption, asset accumulation, wealth inequality
    JEL: E21 D84
    Date: 2021
  10. By: Elisabeth M. Caucutt (University of Western Ontario); Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Christopher Rauh (University of Cambridge)
    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: 2021–07
  11. By: Yasin Kürsat Önder (-)
    Abstract: This paper quantitatively investigates the trade-offs of introducing an extra line of credit in an emergency situation. I show that temporary access to these lines for up to 3 percent of mean annual income during low liquidity periods yields long-term effects with a lower cost of borrowing but with incentives to accumulate higher debt. Permanent access, however, has only short-lived effects because temporal arrangement better completes the markets and induces market discipline as the government worries about rollover risk once the low liquidity period ends. I also present in an event analysis that Mexico’s arrangement of swap lines with the Federal Reserve amid the global financial crisis in 2008 helped avoid a potential debt crisis.
    Keywords: sovereign default, liquidity shocks, swap lines, sudden stops
    JEL: F30 F34
    Date: 2021–10
  12. By: Michael Peters; Fabrizio Zilibotti
    Abstract: We construct a model of creative destruction with endogenous firm dynamics. We integrate the theory into a general equilibrium multi-country model of technological convergence where countries interact via international spillovers. We derive implications for both firm dynamics and aggregate productivity dynamics. In richer economies, firms are on average larger and the best firms grow larger over time. In poorer economies, there is little creative destruction, low selection, and firms remain small. We estimate the parameters of the model using firm-level data for India and the United States. We study the effect of counterfactual policy reforms. Industrial policy that selectively targets the more productive firms can be beneficial in poor countries while being harmful in countries close to the economic frontier. The findings echo Acemoglu et al. (2006).
    JEL: O12 O4 O43
    Date: 2021–10

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