nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒11‒08
fifteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Life Cycle UI with ex-ante Heterogeneous Workers By Heiler, Simon
  2. A Real-Business-Cycle model with robots: Lessons for Bulgaria By Vasilev, Aleksandar
  3. Green technology policies versus carbon pricing. An intergenerational perspective By Sebastian Rausch; Hidemichi Yonezawa
  4. How quantitatively important are shocks to consumption and income tax rates for business cycle fluctuations? Lessons from Bulgaria (1999-2020) By Vasilev, Aleksandar
  5. Redistributive policies in general equilibrium By George Economides; Apostolis Philippopoulos; Stylianos Sakkas
  6. Market Power and Inequality: a model of the Brazilian economy By Pedro Cavalcanti Gonçalves Ferreira
  7. The Macroeconomic Effects Of Lockdown Policies By Stéphane Auray; Aurélien Eyquem
  8. Testing for Spurious Dynamics in Structural Models with Applications to Monetary Policy By Mikhail Dmitriev; Manoj Atolia
  9. The dispersion of mark-ups in an open economy By Stéphane Auray; Aurélien Eyquem
  10. Cross-country unemployment insurance, transfers, and trade-offs in international risk sharing By Enders, Zeno; Vespermann, David
  11. Characterizing and Communicating the Balance of Risks of Macroeconomic Forecasts: A Predictive Density Approach for Colombia By Juan C. Méndez-Vizcaíno; Alexander Guarin; César Anzola-Bravo; Anderson Grajales-Olarte
  12. Risky Financial Collateral, Firm Heterogeneity, and the Impact of Eligibility Requirements By Matthias Kaldorf; Florian Wicknig
  13. Indebted Demand By Atif Mian; Ludwig Straub; Amir Sufi
  14. Evergreening By Miguel Faria-e-Castro; Pascal Paul; Juan M. Sanchez
  15. The Expectations Channel of Climate Change:Implications for Monetary Policy By Müller, Gernot; Dietrich, Alexander; Schoenle, Raphael

  1. By: Heiler, Simon
    JEL: E24 E21 J24 J64
    Date: 2021
  2. By: Vasilev, Aleksandar
    Abstract: Robots are introduced into a real-business-cycle setup augmented with a detailed government sector. Robots are modeled as an imperfect substitute for labor services. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2020). The quantitative importance of the presence of robots in the economy is investigated for business cycle fluctuations in Bulgaria. In the presence of robots, wages increase, but employment falls after a technology shock. However, for plausible parameter values, the effect is predicted to be quite small.
    Keywords: business cycles,robots
    JEL: E32 E24
    Date: 2021
  3. By: Sebastian Rausch; Hidemichi Yonezawa (Statistics Norway)
    Abstract: Technology policy is the most widespread form of climate policy and is often preferred over seemingly efficient carbon pricing. We propose a new explanation for this observation: gains that predominantly accrue to households with large capital assets and that influence majority decisions in favor of technology policy. We study climate policy choices in an overlapping generations model with heterogeneous energy technologies and distortionary income taxation. Compared to carbon pricing, green technology policy leads to a pronounced capital subsidy effect that benefits most of the current generations but burdens future generations. Based on majority voting which disregards future generations, green technology policies are favored over a carbon tax. Smart "polluter-pays" financing of green technology policies enables obtaining the support of current generations while realizing efficiency gains for future generations.
    Keywords: Climate Policy; Green Technology Policy; Carbon Pricing; Overlapping Generations; Intergenerational Distribution; Social Welfare; General Equilibrium
    JEL: Q54 Q48 Q58 D58 H23
    Date: 2021–10
  4. By: Vasilev, Aleksandar
    Abstract: This paper analyzes the macroeconomic effects of fluctuations in the marginal tax rates of consumption and income. To this end, stochastic tax rates are introduced as in Braun (1992), into a real-business-cycle setup augmented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2020). The quantitative importance of the presence of stochastic taxation is investigated for the stabilization of cyclical fluctuations in Bulgaria. The quantitative effect of such shocks to the marginal tax rates is found to be very small, and thus not important for either business cycle stabilization, or public finance issues.
    Keywords: business cycles,stochastic consumption and income taxes
    JEL: E32
    Date: 2021
  5. By: George Economides (Athens University of Economics and Business); Apostolis Philippopoulos (Athens University of Economics and Business); Stylianos Sakkas (European Commission - JRC)
    Abstract: We develop a general equilibrium OLG model to evaluate a wide menu of popular redistributive policies in a unified context. We work in two steps: First, we study how initial conditions in human and financial capital, as inherited from family background, shape individuals' human capital, and hence their work opportunities, income and wealth, and eventually macroeconomic outcomes. Second, we study which policies can reduce this type of inequality without, hopefully, damaging macroeconomic efficiency.
    Keywords: Inequality, efficiency, government expenditures, public policy.
    JEL: D63 H21 H50
    Date: 2021–10
  6. By: Pedro Cavalcanti Gonçalves Ferreira
    Abstract: This paper attempts to draw some lines regarding the interplay between market concentration and income inequality in the Brazilian economy. Our goal is to uncover some of the mechanisms by which market power influences macroeconomic aggregates and, consequently, indicators such as the share of the income appropriated by the richest and the Country's Gini index. For this purpose, we have first conducted an empirical estimation using a PVAR approach with data from Brazilian states. We found that the markup shock is positively related to inequality. Moreover, that result is robust to changes in the model specification or different Cholesky ordering. Second, we built a dynamic general equilibrium model and calibrated it to reproduce the Brazilian economy. The model has three representative agents and heterogeneity in asset market participation and labor supply/skills. Additionally, firms exhibit endogenous oligopolistic and oligopsonistic (in the labor market) behavior. In response to unexpected markup shocks, the model showed a regressive dynamic, transferring income from the bottom to the top of the distribution. Nevertheless, its effects on economic growth may be positive in the short term, due to the increased investment in creating new companies. The disturbances in the TFP reduce inequality on impact, which is due to the countercyclical behavior of the markup. Instead, when we allow the TFP shock to be correlated with the markup, this effect is reversed, with the largest share of income being appropriated by the wealthiest. Finally, it is noteworthy that the labor supply elasticities partially determine the behavior of income distribution between poor and middle-class households.
    Keywords: market power, inequality, markup, general equilibrium, antitrust policy, income distribution, Brazil.
    Date: 2021–11
  7. By: Stéphane Auray (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); Aurélien Eyquem (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique, CREM - Centre de recherche en économie et management - CNRS - Centre National de la Recherche Scientifique - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - UNICAEN - Université de Caen Normandie - NU - Normandie Université, GREDI - Groupe de recherche en économie et développement international [Sherbrooke] - UdeS - Université de Sherbrooke)
    Abstract: A tractable incomplete-market model with unemployment, sticky prices, and a fiscal side is used to quantify the macroeconomic effects of lockdown policies and the miti-gating effects of raising government spending and implementing UI benefit extensions. We find that the effects of lockdown policies, although we are relatively conservative about the size of the lockdown, are huge: unemployment doubles on impact and al-most triples even for relatively short lockdown durations. Output falls dramatically and debt-output ratios increase by several tens of percentage points. In addition, the surge in unemployment risk triggers a rise in precautionary savings that make such shocks Keynesian supply shocks: aggregate demand falls by more than aggregate supply, and lockdown policies are deflationary. Unfortunately, we find that raising public spending and extending UI benefits stimulate aggregate demand or improve risk-sharing but has little effects on output and unemployment, although they do alleviate the welfare losses of lockdown policies for the households.
    Keywords: Lockdown,Unemployment,Borrowing constraints,Incomplete markets,Government spending,Unemployment insurance
    Date: 2020–04–16
  8. By: Mikhail Dmitriev (Department of Economics, Florida State University); Manoj Atolia (Department of Economics, Florida State University)
    Abstract: We propose a universal and straightforward test for validating assumptions in the structural models. Structural models impose a causal structure, take data as an input, and then produce exact structural parameters. We simulate the new data while breaking the original causal structure. We then feed the model the simulated data and then see whether it produces different results. If its conclusions are the same, then the models’ implications are not sensitive to the underlying data, and the model fails the test. We then apply our test to the models analyzing monetary policy. We find out that simple SVARs successfully pass the test and can be used to identify monetary policy effects. On the other hand, DSGE models estimated via full-information methods such as Smets and Wouters (2007) fail the test and potentially force their conclusions on the data.
    Keywords: VARs, SVARs, DSGE, monetary policy
    JEL: C68 E44 E61
    Date: 2021–10
  9. By: Stéphane Auray; Aurélien Eyquem (UL2 - Université Lumière - Lyon 2)
    Abstract: We introduce heterogeneous mark-ups through Bertrand competition in a two-country model with endogenous firms' entry and tradability `a la Ghironi and Melitz (2005). Bertrand competition generates a distribution of mark-ups according to which firms that are larger and more productive charge lower prices, attract larger market shares and extract larger mark-ups. First, we characterize first-best allocations and their implementation. We find that they are inde- pendent from the degree of mark-ups' heterogeneity, suppress the dispersion of mark-ups and imply zero distortions on labor as well as substantial subsidies to preserve firm's incentives to enter. Second, second-best alternative policies with a restricted number of instruments and a balanced budget significantly reduce the potential welfare gains from fiscal policies. Third, the total welfare losses from passive policies are lower under heterogeneous mark-ups than under homogeneous mark-ups: while the dispersion of mark-ups has negative effects on the intensive margin, output per firm, it also raises expected profits for potential entrants and raises the ex- tensive margin, the number of firms in both domestic and export markets, pushing them closer to their efficient levels. Fourth, we also investigate the dynamic properties of allocations under passive and optimal policies considering aggregate productivity shocks and trade liberalization experiments.
    Keywords: heterogeneous firms,endogenous entry,open economy,strategic pricing,optimal taxation
    Date: 2021
  10. By: Enders, Zeno; Vespermann, David
    JEL: F45 F44 E32
    Date: 2021
  11. By: Juan C. Méndez-Vizcaíno; Alexander Guarin; César Anzola-Bravo; Anderson Grajales-Olarte
    Abstract: Since July 2021, Banco de la República strengthened its forecasting process and communication instruments, by involving predictive densities in the projections of its models, PATACON and 4GM. This paper presents the main theoretical and empirical elements of the predictive density approach for macroeconomic forecasting. This model-based methodology allows to characterize the balance of risks of the economy, and to quantify their effects through a joint probability distribution of forecasts. We estimate this distribution based on the simulation of DSGE models, preserving the general equilibrium relationships and their macroeconomic consistency. We also illustrate the technical criteria used to represent prospective factors of risk through the probability distributions of shocks. **** RESUMEN: Desde julio de 2021, el Banco de la República fortaleció su proceso de pronóstico y sus instrumentos de comunicación al incorporar densidades predictivas en las proyecciones de sus modelos, PATACON y 4GM. Este artículo presenta los principales elementos teóricos y empíricos del enfoque de densidad predictiva para los pronósticos macroeconómicos. Esta metodología basada en modelos permite caracterizar el balance de riesgos de la economía y cuantificar sus efectos mediante una distribución de probabilidad conjunta de los pronósticos. Esta distribución se estima mediante la simulación de los modelos DSGE, preservando las relaciones de equilibrio general y la coherencia macroeconómica. También se ilustran los criterios técnicos utilizados para representar los factores de riesgo prospectivos a través de las distribuciones de probabilidad de los choques.
    Keywords: Macroeconomic forecasts, balance of risks, uncertainty, Bayesian forecasting, monetary policy models, Pronósticos macroeconómicos, balance de riesgos, incertidumbre, pronósticos bayesianos, modelos de política monetaria
    JEL: C11 C53 E17 E52
    Date: 2021–10
  12. By: Matthias Kaldorf (University of Cologne, Center for Macroeconomic Research); Florian Wicknig (University of Cologne, Center for Macroeconomic Research)
    Abstract: This paper studies how collateral premia affect the supply and quality of bonds issued by non-financial firms. Banks increase demand for bonds eligible as collateral, to which eligible firms respond by increasing their debt issuance and default risk. We characterize firm responses and aggregate collateral supply in a heterogeneous firm model with collat-eral premia and endogenous default risk. Using a calibration to euro area data, we study the impact of collateral easing, consistent with the ECB’s policy during the 2008 financial crisis and evaluate the quantitative relevance of firm responses. We find that firm responses substantially deteriorate collateral quality and dampen the total increase in collateral sup-ply. Our analysis suggests that an eligibility covenant conditioning eligibility on leverage and current default risk, is a potentially powerful instrument to mitigate the adverse impact of eligibility requirements on collateral quality while maintaining a high level of collateral supply.
    Keywords: Eligibility Premia, Corporate Bonds, Firm Heterogeneity, Collateral Policy
    JEL: E44 E58 G12 G32 G33
    Date: 2021–10
  13. By: Atif Mian; Ludwig Straub; Amir Sufi
    Abstract: We propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. At the core of the theory is the simple yet under-appreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent perpetual youth model, we find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies-such as accommodative monetary policy-generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
    JEL: E21 E44 E6
    Date: 2021–10
  14. By: Miguel Faria-e-Castro; Pascal Paul; Juan M. Sanchez
    Abstract: We develop a simple model of relationship lending where lenders have an incentive to evergreen loans by offering better terms to less productive and more indebted firms. We detect such lending distortions using loan-level supervisory data for the United States. Low-capitalized banks systematically distort their risk assessments of firms to window-dress their balance sheets and extend relatively more credit to underreported borrowers. Consistent with our theoretical predictions, these effects are driven by larger outstanding loans and low-productivity firms. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening can affect aggregate outcomes, resulting in lower interest rates, higher levels of debt, and lower aggregate productivity.
    Keywords: Evergreening; Zombie-Lending; Misallocation; COVID-19
    JEL: E32 E43 E44 E52 E60 G21 G32
    Date: 2021–10–22
  15. By: Müller, Gernot; Dietrich, Alexander; Schoenle, Raphael
    JEL: E43 E52 E58
    Date: 2021

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