nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒11‒01
fifteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Phase-Dependent Monetary and Fiscal Policy By Kamalyan, Hayk
  2. A note on capital income taxation with involuntary unemployment By Minoru Watanabe
  3. Modelling and Estimating Large Macroeconomic Shocks During the Pandemic By Luisa Corrado; Stefano Grassi; Aldo Paolillo
  4. Scrapping, Renewable Technology Adoption, and Growth By Bernardino Adão; Borghan Narajabad; Ted Temzelides
  5. The Geography of Job Creation and Job Destruction By Moritz Kuhn; Iourii Manovskii; Xincheng Qiu
  6. Bank Runs, Fragility, and Credit Easing By Manuel Amador; Javier Bianchi
  7. The Euro Area’s pandemic recession: A DSGE interpretation By Cardani, Roberta; Croitorov, Olga; Giovannini, Massimo; Pfeiffer, Philipp; Ratto, Marco; Vogel, Lukas
  8. An Economy of Neural Networks: Learning from Heterogeneous Experiences By Artem Kuriksha
  9. The Fiscal and Welfare Effects of Policy Responses to the Covid-19 School Closures By Nicola Fuchs-Schündeln; Dirk Krueger; André Kurmann; Etienne Lalé; Alexander Ludwig; Irina Popova
  10. Demographic change, secular stagnation and inequality: automation as a blessing? By Arthur Jacobs; Freddy Heylen
  11. The Role of Sovereign Wealth Funds in Commodity-Exporting Economies When Commodity Prices Affect Interest Spreads By Shigeto Kitano; Kenya Takaku
  12. Price Stickiness Heterogeneity and Equilibrium Determinacy By Jae Won Lee; Woong Yong Park
  13. Exchange Rate Volatility and Cross–Border Travel: Theory and Empirics By Wisarut Suwanprasert
  14. Three Liquid Assets By Nicola Amendola; Lorenzo Carbonari; Leo Ferraris
  15. Control theory in infinite dimension for the optimal location of economic activity: The role of social welfare function By Raouf Boucekkine; Giorgio Fabbri; Salvatore Federico; Fausto Gozzi

  1. By: Kamalyan, Hayk
    Abstract: This paper studies how the effects of monetary and fiscal policy vary depending on the business cycle phase. It shows that in a medium-scale DSGE model, estimated on US data, monetary policy has a stronger impact on the economy in downturns and booms. Labor and capital income taxes display similar patterns. Government expenditure shocks and consumption tax shocks, on the contrary, have a stronger impact on output in depressions and recoveries. The paper also shows that accounting for the source of business cycle fluctuations is potentially important when assessing state-dependence in policy transmission.
    Keywords: business cycle phases, phase-dependent policy, monetary policy, fiscal policy
    JEL: E31 E32 E37 E52 E62
    Date: 2021–10–24
  2. By: Minoru Watanabe (Research Fellow, Graduate School of Economics, Kobe University/Hokusei Gakuen University)
    Abstract: This study develops a standard overlapping generations model with imperfect labor markets. The results indicate that a higher capital income tax promotes not only economic growth but also employment if pension benefits exist.
    Date: 2021–10
  3. By: Luisa Corrado (DEF and CEIS, Università di Roma "Tor Vergata"); Stefano Grassi (DEF and CEIS, Università di Roma "Tor Vergata"); Aldo Paolillo (DUniversità di Roma "Tor Vergata")
    Abstract: This paper proposes and estimates a new Two-Sector One-Agent model that features large shocks. The resulting medium-scale New Keynesian model includes the standard real and nominal frictions used in the empirical literature and allows for heterogeneous COVID-19 pandemic exposure across sectors. We solve the model nonlinearly and we propose a new nonlinear, non-Gaussian fiter designed to handle large pandemic shocks to make inference feasible. Monte Carlo experiments show that it correctly identifies the source and time location of shocks with a massively reduced running time, making the estimation of macro-models with disaster shocks feasible. The estimation is carried out using the Sequential Monte Carlo sampler recently proposed by Herbst and Schorfheide (2014). Our empirical results show that the pandemic-induced economic downturn can be reconciled with a combination of large demand and supply shocks. More precisely, starting from the second quarter of 2020, the model detects the occurrence of a large negative demand shock in consuming all kinds of goods, together with a large negative demand shock in consuming contact-intensive products. On the supply side, our proposed method detects a large labor supply shock to the general sector and a large labor productivity shock in the pandemic-sensitive sector.
    Keywords: COVID-19, Nonlinear, Non-Gaussian, Large shocks, DSGE
    JEL: C11 C51 E30
    Date: 2021–10–15
  4. By: Bernardino Adão; Borghan Narajabad; Ted Temzelides
    Abstract: We develop a dynamic general equilibrium integrated assessment model that incorporates scrapping costs due to new technology adoption in renewable energy as well as externalities associated with carbon emissions and renewable technology spillovers. We use world economy data to calibrate our model and investigate the effects of the scrapping channel on renewable energy adoption and on the optimal energy transition. Our calibrated model implies several interesting connections between scrapping costs, the two externalities, policy, and welfare. We investigate the relative effectiveness of two policy instruments-Pigouvian carbon taxes and policies that internalize spillover effects-in isolation as well as in tandem. Our findings suggest that scrapping costs are of quantitative importance for technology adoption and the energy transition. The two policy instruments are better thought of as complements rather than substitutes.
    JEL: H21 O14 O33 Q54 Q55
    Date: 2021
  5. By: Moritz Kuhn; Iourii Manovskii; Xincheng Qiu
    Abstract: Spatial differences in labor market performance are large and highly persistent. Using data from the United States, Germany, and the United Kingdom, we document striking similarities in spatial differences in unemployment, vacancies, job finding, and job filling within each country. This robust set of facts guides and disciplines the development of a theory of local labor market performance. We find that a spatial version of a Diamond-Mortensen-Pissarides model with endogenous separations and on-the-job search quantitatively accounts for all the documented empirical regularities. The model also quantitatively rationalizes why differences in job-separation rates have primary importance in inducing differences in unemployment across space while changes in the job-finding rate are the main driver in unemployment fluctuations over the business cycle.
    JEL: E24 E32 J63 J64 R13
    Date: 2021–10
  6. By: Manuel Amador; Javier Bianchi
    Abstract: We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors' confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.
    JEL: E44 E58 F34 G01 G21 G33
    Date: 2021–10
  7. By: Cardani, Roberta (European Commission); Croitorov, Olga (European Commission); Giovannini, Massimo (European Commission); Pfeiffer, Philipp (European Commission); Ratto, Marco (European Commission); Vogel, Lukas (European Commission)
    Abstract: The COVID-19 pandemic led to a sharp contraction of economic activity in the euro area (and worldwide). Its anatomy differs strongly from other crises in recent history. We analyse the short-term economic effects of the COVID-19 shock through the lens of an estimated DSGE model. We augment the canonical DSGE set-up with ‘forced savings’ (lockdowns, social distancing), labour hoarding (short-time work) and liquidity-constrained firms to capture salient demand and supply effects of the COVID shock and the containment and stabilisation policies. Shock decompositions with the estimated model show the dominant role of 'lockdown shocks' ('forced savings', labour hoarding) in explaining the quarterly pattern of real GDP growth in 2020, complemented by a negative contribution from foreign and investment demand particularly in 2020q2 and a negative impact of persistently higher (precautionary) savings. The initial inflation response has been modest compared to the severity of the recession.
    Keywords: COVID-19, estimated DSGE model, Euro Area, recession, forced savings
    JEL: C11 E1 E20
    Date: 2021–10
  8. By: Artem Kuriksha
    Abstract: This paper proposes a new way to model behavioral agents in dynamic macro-financial environments. Agents are described as neural networks and learn policies from idiosyncratic past experiences. I investigate the feedback between irrationality and past outcomes in an economy with heterogeneous shocks similar to Aiyagari (1994). In the model, the rational expectations assumption is seriously violated because learning of a decision rule for savings is unstable. Agents who fall into learning traps save either excessively or save nothing, which provides a candidate explanation for several empirical puzzles about wealth distribution. Neural network agents have a higher average MPC and exhibit excess sensitivity of consumption. Learning can negatively affect intergenerational mobility.
    Date: 2021–10
  9. By: Nicola Fuchs-Schündeln; Dirk Krueger; André Kurmann; Etienne Lalé; Alexander Ludwig; Irina Popova
    Abstract: Using a structural life-cycle model and data on school visits from Safegraph and school closures from Burbio, we quantify the heterogeneous impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. Our data suggests that secondary schools were closed for in-person learning for longer periods than elementary schools (implying that younger children experienced less school closures than older children), and that private schools experienced shorter closures than public schools, and schools in poorer U.S. counties experienced shorter school closures. We then extend the structural life cycle model of private and public schooling investments studied in Fuchs-Schuendeln, Krueger, Ludwig and Popova (2021) to include the choice of parents whether to send their children to private schools, empirically discipline it with data on parental investments from the PSID, and then feed into the model the school closure measures from our empirical analysis to quantify the long-run consequences of the Covid-19 school closures on the cohorts of children currently in school. Future earnings- and welfare losses are largest for children that started public secondary schools at the onset of the Covid-19 crisis. Comparing children from the top- to children from the bottom quartile of the income distribution, welfare losses are ca. 0.8 percentage points larger for the poorer children if school closures were unrelated to income. Accounting for the longer school closures in richer counties reduces this gap by about 1/3. A policy intervention that extends schools by 3 months (6 weeks in the next two summers) generates significant welfare gains for the children and raises future tax approximately sufficient to pay for the cost of this schooling expansion.
    JEL: E24 E62
    Date: 2021–10
  10. By: Arthur Jacobs; Freddy Heylen (-)
    Abstract: We construct and calibrate an overlapping generations model incorporating demographic change and the possibility to automate the production process to test the hypothesis put forward by Acemoglu and Restrepo (2017). In line with their hypothesis, we find that ageing is a powerful force stimulating the adoption of automation technologies in OECD economies. Ageing-induced automation is found to soften the negative effects of labour scarcity and rising old-age dependency rates on per capita growth, but the compensation is incomplete. One important reason is that automated tasks are far from perfect substitutes for tasks executed by human labour. A second reason is that ageing-induced automation reduces the intensity of positive behavioural reactions to ageing in the form of retiring later and investing more in human capital. Moreover, the partial compensation comes at the price of rising wage and welfare inequality between individuals of different innate ability level and a fall in the net labour share of income. Compared to existing literature, we pay special attention to the theoretical and empirical foundations of the modelling of automation. Theoretically, our work is the first one testing this hypothesis that relates the approach to automation rigorously to the state-of the-art conception by Acemoglu and Restrepo (2018a; 2018b). Empirically, we tested and largely confirmed the validity of our approach and calibration by comparing model predictions of (changes in) automation density to actual data on robotization in a cross-country fashion.
    Keywords: Automation, Demographic change, Secular stagnation, Overlapping generations model, Robotics, Factor shares
    JEL: E22 E27 J11 J23 J24 J31
    Date: 2021–10
  11. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, JAPAN); Kenya Takaku (Faculty of International Studies, Hiroshima City University, JAPAN)
    Abstract: We reconsider the role of a sovereign wealth fund in commodity-exporting economies facing recent volatile fluctuations of commodity prices due to the COVID-19 shock. We examine the welfare-improving effect of a sovereign wealth fund from the new perspective of the link between commodity prices and interest rate spreads, which is unique to emerging economies. We show that a sovereign wealth fund becomes more effective in improving welfare for commodity-exporting economies with a stronger link between their com-modity prices and interest rate spreads.
    Keywords: Sovereign wealth fund; Commodity prices; Interest rate spreads; DSGE model; Financial frictions; Emerging economies
    JEL: E32 E44 F32 O20 Q48
    Date: 2021–10
  12. By: Jae Won Lee; Woong Yong Park
    Abstract: This paper shows that the requirement for monetary policy to achieve equilibrium determinacy is substantially loosened when price change frequencies are heterogeneous. The result holds both in a simple sticky price model with the constant elasticity of substitution aggregator and no trend inflation and in an extended model with a variable elasticity of substitution aggregator that permits trend inflation at the historical level. With a realistic cross-sectional distribution of the price change frequency, monetary policy can achieve equilibrium determinacy with much weaker responses to inflation. We then revisit the debate on the role of monetary policy in the transition from the Great Inflation to the Great Moderation in the postwar US economy. The evidence that the US economy was subject to self-fulfilling expectations-driven fluctuations in the pre-Volcker period and that the systematic shift in the monetary policy rule has played a decisive role in stabilizing inflation is found to be much weakerthan previously concluded in the literature.
    Keywords: Heterogeneity in Price Stickiness; Equilibrium Determinacy; Sectoral Relative Price Dispersion; Monetary Policy; Great Inflation
    JEL: E12 E31 E43 E52 N12
    Date: 2021–10
  13. By: Wisarut Suwanprasert
    Abstract: I develop a search-theoretic model to study how consumers’ search behavior responds to exchange rate volatility. The model offers two main predictions. First, the number of cross-border travelers is increasing in exchange rate volatility. Second, the elasticity of cross-border travel with respect to exchange rate volatility is increasing in transportation cost. I use monthly Canadian traveler data from 2005 to 2012 to test the model’s predictions. The estimate suggests that when exchange rate volatility increases by one standard deviation, the number of same-day travelers increases by 1.6 percent. When exchange rate volatility is measured by implied volatilities, the estimates increase to 2.1–2.5 percent. When the data is restricted to the subperiod before the 2008 financial crisis, the estimated coefficients of exchange rate volatility and implied volatilities increase to 4 percent and 7.3–10.7 percent, respectively. This paper concludes that cross-border shopping behavior responds to both ex ante and ex post exchange rate volatilities.
    Keywords: International Price Differences; Exchange Rate; Exchange Rate Volatility; Cross-border Shopping; Implied Volatility
    JEL: F10 F14 F31
    Date: 2021–08
  14. By: Nicola Amendola (DEF, Università di Roma "Tor Vergata"); Lorenzo Carbonari (CEIS & DEF, Università di Roma "Tor Vergata"); Leo Ferraris (Università di Milano-Bicocca)
    Abstract: We examine a theoretical model of liquidity with three assets {money, government bonds and equity- that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.
    Keywords: Money, Bonds, Equity, Liquidity, Credit Easing.
    JEL: E40
    Date: 2021–10–14
  15. By: Raouf Boucekkine (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université, IMéRA - Institute for Advanced Studies - Aix-Marseille University); Giorgio Fabbri (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes); Salvatore Federico (DEPS - Dipartimento di Economia Politica e Statistica - UNISI - Università degli Studi di Siena = University of Siena); Fausto Gozzi (LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli [Roma])
    Abstract: In this paper, we consider an abstract optimal control problem with state constraint. The methodology relies on the employment of the classical dynamic programming tool considered in the infinite dimensional context. We are able to identify a closed-form solution to the induced Hamilton-Jacobi-Bellman (HJB) equation in infinite dimension and to prove a verification theorem, also providing the optimal control in closed loop form. The abstract problem can be seen an abstract formulation of a PDE optimal control problem and is motivated by an economic application in the context of continuous spatiotemporal growth models with capital di usion, where a social planner chooses the optimal location of economic activity across space by maximization of an utilitarian social welfare function. From the economic point of view, we generalize previous works by considering a continuum of social welfare functions ranging from Benthamite to Millian functions. We prove that the Benthamite case is the unique case for which the optimal stationary detrended consumption spatial distribution is uniform. Interestingly enough, we also find that as the social welfare function gets closer to the Millian case, the optimal spatiotemporal dynamics amplify the typical neoclassical dilution population size effect, even in the long-run.
    Date: 2021

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