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on Dynamic General Equilibrium |
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Issue of 2021‒11‒15
fourteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Sushant Acharya; Edouard Challe; Keshav Dogra |
| Abstract: | We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from that in a representative agent model because monetary policy can affect consumption inequality by reducing both idiosyncratic consumption risk and the inequality that arises from households’ unequal exposures to aggregate shocks. Simple target criteria summarize the planner’s trade-off between consumption inequality, productive efficiency and price stability. Mitigating consumption inequality requires putting some weight on stabilizing the level of output and correspondingly reducing the weights on the output gap and the price level relative to an economy without inequality. |
| Keywords: | Economic models; Monetary policy |
| JEL: | E21 E30 E52 E63 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-55&r= |
| By: | Grimaud, Alex |
| Abstract: | This paper investigates monetary policy in a heterogeneous agent new Keynesian (HANK) model where agents face idiosyncratic income risk and use adaptive learning in order to form their expectations. Households experience different histories and observe different idiosyncratic variables. This gives rise to idiosyncratic learning processes, which naturally implies the existence of heterogeneous expectations. In HANK models, supply shocks generate precautionary saving. The learning setup amplifies this effect and can result in long-lasting disinflationary traps. Dovish Taylor rules focused on closing the output gap dampen the learning effects. Price level targeting improves the inflation and output stabilization trade-off by better anchoring expectations. |
| Keywords: | adaptive learning,precautionary saving,restricted perception equilibrium,heterogeneous expectations,heterogeneous agent |
| JEL: | E25 E31 E52 E70 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuweco:082021&r= |
| By: | Okano, Mitsuhiro |
| Abstract: | This study develops a two-country new Keynesian (NK) model that incorporates deep habits in consumption and investigates the macroeconomic dynamics under the optimal coordinated monetary policy. We show that in response to the structural shocks, the central bank changes the interest rate significantly in the two-country open economy model compared with the closed economy where the central bank is reluctant to move interest rates. When a deep consumption habit exists, the international central bank can exploit the terms of trade externalities. Habit formation might boost the expenditure switching effect, which differentiates the aggressiveness of the central bank between closed and open economies with deep habit. Moreover, we showed that the deviations from the law of one price, or the goods-specific real exchange rate, generated endogenously by the deep habit are significantly related to the degree of home bias. In particular, the deviations fully disappeared when there is no home bias. |
| Keywords: | Optimal monetary policy; Deep habit; Policy coordination; Commitment; |
| JEL: | E52 E58 F41 |
| Date: | 2021–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110259&r= |
| By: | Paola Boel; Julian Diaz; Daria Finocchiaro |
| Abstract: | We study the redistributive effects of expected inflation in a microfounded monetary model with heterogeneous discount factors and collateral constraints. In equilibrium, this heterogeneity leads to borrowing and lending. Model assumptions also guarantee a tractable distribution of money and capital holdings. Several results emerge from our analysis. First, in this framework expected inflation is detrimental to capital accumulation. Second, expected inflation affects borrowing and lending when collateral constraints are present, thus also inducing redistributive effects through credit. Third, we find this channel to be regressive when we calibrate our model using US data. This is because the drop in borrowers’ capital caused by inflation is larger when capital is used as collateral. |
| Keywords: | money; heterogeneity; collateral constraint; welfare cost of inflation |
| JEL: | E40 E50 |
| Date: | 2021–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:93337&r= |
| By: | Federico Guglielmo Morelli; Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique); Jean-Philippe Bouchaud; Marco Tarzia |
| Abstract: | We study a self-reflexive DSGE model with heterogeneous households, aimed at characterising the impact of economic recessions on the different strata of the society. Our framework allows to analyse the combined effect of income inequalities and confidence feedback mediated by heterogeneous social networks. By varying the parameters of the model, we find different crisis typologies: loss of confidence may propagate mostly within high income households, or mostly within low income households, with a rather sharp crossover between the two. We find that crises are more severe for segregated networks (where confidence feedback is essentially mediated between agents of the same social class), for which cascading contagion effects are stronger. For the same reason, larger income inequalities tend to reduce, in our model, the probability of global crises. Finally, we are able to reproduce a perhaps counter-intuitive empirical finding: in countries with higher Gini coefficients, the consumption of the lowest income households tends to drop less than that of the highest incomes in crisis times. |
| Date: | 2021–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03378921&r= |
| By: | Xu Zhang |
| Abstract: | This paper evaluates the effects of forward guidance and large-scale asset purchases (LSAP) when the nominal interest rate reaches the zero lower bound. I investigate the effects of the two policies in a dynamic new Keynesian model with financial frictions adapted from Gertler and Karadi (2011, 2013), with changes implemented so that the framework delivers realistic predictions for the effects of each policy on the entire yield curve. I then match the change that the model predicts would arise from a linear combination of the two shocks with the observed change in the yield curve in a 30-minute window around Federal Reserve announcements, allowing me to identify the separate contributions of each shock to the effects of the announcement. My estimates imply that LSAP was more important in influencing output and inflation than forward guidance. |
| Keywords: | Business fluctuations and cycles; Central bank research; Econometric and statistical methods; Interest rates |
| JEL: | E5 G0 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-54&r= |
| By: | Aleksandar Vasilev |
| Abstract: | We introduce a military sector and external security considerations into a real-business-cycle setup with a public sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). We investigate the quantitative importance of the presence of a military sector and external threat considerations for the cyclical fluctuations in Bulgaria. We find the quantitative effect of such aspects to be very small, and thus not important for business cycle stabilization, or public finance issues, as in Bulgaria the spending on military is relatively small relative to the size of the economy. |
| Keywords: | Business cycles, military spending, security considerations, external threats, Bulgaria |
| JEL: | E24 E32 |
| Date: | 2021–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2021_03&r= |
| By: | Stéphane Auray (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po); David L. Fuller |
| Abstract: | In this paper, we investigate the causes and consequences of "unclaimed" unemployment insurance (UI) benefits. A search model is developed where the costs to collecting UI benefits include both a traditional "fixed" administrative cost and an endogenous cost arising from worker and firm interactions. Experience rated taxes give firms an incentive to challenge a worker's UI claim, and these challenges are costly for the worker. Exploiting data on improper denials of UI benefits across states in the U.S. system, a two-way fixed effects analysis shows a statistically significant negative relationship between the improper denials and the UI take-up rate, providing empirical support for our model. We calibrate the model to elasticities implied by the two-way fixed effects regression to quantify the relative size of these UI collection costs. The results imply that on average the costs associated with firm challenges of UI claims account for 41% of the total costs of collecting, with improper denials accounting for 8% of the total cost. The endogenous collection costs imply the unemployment rate responds much slower to changes in UI benefits relative to a model with fixed collection costs. Finally, removing all eligibility requirements and allowing workers to collect UI benefits without cost shows these costs to be 4,5% of expected output net of vacancy costs. Moreover, this change has minimal impact on the unemployment rate. |
| Keywords: | Unemployment insurance,Take-up rate,Experience rating,Matching frictions,Search |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03385921&r= |
| By: | Jacek Rothert (United States Naval Academy; Group for Research in Applied Economics (GRAPE)); Jacob M. Short (Bank of Canada) |
| Abstract: | The canonical one-sector model over predicts international capital flows by a factor of ten. We show that introducing a non-traded goods sector can reconcile the differences between the theoretical predictions and the observed flows. We analyze the quantitative impact of the nontraded sector using a calibrated model of a small open economy, in which non-traded goods are used in consumption and investment, and need capital and labor to be produced. The model features international frictions directly affecting international borrowing and lending, as well as domestic frictions that limit the scope of inter-sectoral reallocation of capital and labor. We find that: (1) the impact of domestic frictions on the size of international capital flows is similar to the impact of international frictions, and (2) the median elasticity of capital flows with respect to international frictions in the two-sector model with costly inter-sectoral reallocation is about 50-60% lower than that same elasticity in the one-sector model. |
| Keywords: | non-traded sector, capital flows, savings wedge, allocation puzzle |
| JEL: | F21 F43 O41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:59&r= |
| By: | Jang, Youngsoo |
| Abstract: | How do differences in the government’s political and commitment structure affect the aggregate economy, inequality, and welfare? I analyze this question, using a calibrated Aiyagari’s (1994) economy with wealth effects of labor supply wherein a flat tax rate and transfers are endogenously determined according to its political and commitment structure. I compare four economies: a baseline economy, an economy with the optimal tax with commitment in all steady states, an economy with the optimal tax without commitment, and a political economy with sequential voting. I obtain two main findings. First, the commitment structure shifts the government’s weighting between redistribution and efficiency. A lack of commitment leads the government to pursue a more redistributive policy at the expense of efficiency. Second, given a lack of commitment, the political economy with voting yields greater welfare than the economy with the time-consistent optimal policy. In the latter case, a lack of commitment hinders the government from implementing a more frugal policy desirable in the long run; instead, it cares more for low-income and wealth households, resulting in a substantial efficient loss. However, in the political economy with voting, the government considers only the interests of the median voter, who is middle class and reluctant to bear larger distortions from a higher tax rate and larger transfers. These findings imply that in terms of welfare, policies targeting the middle class would possibly be better than those exquisitely designed for the general public. |
| Keywords: | Commitment, Time-Consistent Policy, Political Economy, Voting |
| JEL: | E61 H11 P16 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:110466&r= |
| By: | Fahle, Sean; Barczyk, Daniel; Kredler, Matthias |
| JEL: | D1 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc21:242406&r= |
| By: | Ferreira, M.; Haber, T.; Rörig, C. |
| Abstract: | Using a unique dataset covering the universe of Portuguese firms and their credit situation we show that financially constrained firms are found across the entire firm size distribution, account for a larger total asset share compared to standard heterogeneous firms models, and exhibit a higher cyclical sensitivity, conditional on size. In light of these findings we reassess the importance of the firm distribution in shaping aggregate outcomes in the canonical model of heterogeneous firms with financial frictions. We augment the productivity process with ex-ante heterogeneity of firms, allowing us to match the distribution of constrained firms conditional on size. This, together with the fact that constrained firms have a higher capital elasticity, leads to up to four times larger aggregate fluctuations and capital misallocation. |
| Keywords: | Firm size, business cycle, financial accelerator |
| JEL: | E62 E22 E23 |
| Date: | 2021–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2176&r= |
| By: | Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos |
| Abstract: | This paper, using a microfounded macroeconomic model that embeds the key features of the Greek economy, studies the efficacy of the various policy measures taken, at national and EU level, to cushion the economic effects of the pandemic shock. The paper attempts to give quantitative answers to questions like: What are the effects of these policies and, especially, what are the implications of the fiscal transfers and grants from the Recovery Fund and the quantitative policies of the ECB, like the PEPP, for the Greek economy? Do they help the real economy and, if yes, by how much? What would have happened had these measures not taken? How costly will be the re-emergence of the fear of debt default and risk premia? |
| Keywords: | central banking, fiscal policy, international lending, pandemic |
| JEL: | E50 E60 F30 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9371&r= |
| By: | Schiller, Jonathan; Gross, Jonas |
| JEL: | E42 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc21:242350&r= |