nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒11‒29
23 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Tax Incidence and Fiscal Sustainability in DSGE Model By Junko Doi; Kota Yamada; Masaya Yasuoka
  2. Quasi-Periodic Motions in a Polarized Overlapping Generations Model with Technology Choice By Takao Asano; Akihisa Shibata; Masanori Yokoo
  3. Wealth Effects, Price Markups, and the Neo-Fisherian Hypothesis By Marco Airaudo; Ina Hajdini
  4. The Geography of Job Creation and Job Destruction By Kuhn, Moritz; Manovskii, Iourii; Qiu, Xincheng
  5. Aggregate dynamics and microeconomic heterogeneity: the role of vintage technology. By Giuseppe Fiori; Filippo Scoccianti
  6. Financial Crises, Investment Slumps, and Slow Recoveries By Mr. Ruy Lama; Mai Hakamada; Ms. Valerie Cerra
  7. Dynamic Labor Reallocation with Heterogeneous Skills and Uninsured Idiosyncratic Risk By Faia, Ester; Kudlyak, Marianna; Shabalina, Ekaterina
  8. The Heterogeneous Impact of Referrals on Labor Market Outcomes By Benjamin Lester; David A. Rivers; Giorgio Topa
  9. Determinacy and E-stability with interest rate rules at the zero lower bound By Eo, Yunjong; McClung, Nigel
  10. Parameter Uncertainty and Effective Lower Bound Risk By Naoto Soma
  11. The Murder-Suicide of the Rentier: Population Aging and the Risk Premium By Joseph Kopecky; Alan M. Taylor
  12. The Political (In)Stability of Funded Social Security By Beetsma, Roel M. W. J.; Komada, Oliwia; Makarski, Krzysztof; Tyrowicz, Joanna
  13. Permanent versus transitory income shocks over the business cycle By Agnes Kovacs; Concetta Rondinelli; Serena Trucchi
  14. For the Benefit of All: Fiscal Policies and Equity-Efficiency Trade-offs in the Age of Automation By Nikolay Gueorguiev; Mr. Kenji Moriyama; Luis-Felipe Zanna; Ryota Nakatani; Hiroaki Miyamoto; Lahcen Bounader; Mr. Andrew Berg
  15. Efficiency versus Insurance: Capital Income Taxation and Privatizing Social Security By Makarski, Krzysztof; Tyrowicz, Joanna; Komada, Oliwia
  16. Global models for a global pandemic: the impact of COVID-19 on small euro area economies By Pablo Garcia; Pascal Jacquinot; Crt Lenarcic; Matija Lozej; Kostas Mavromatis
  17. Education Quality, Green Technology, and the Economic Impact of Carbon Pricing By Macdonald, Kevin; Patrinos, Harry A.
  18. Aging, migration and monetary policy in Poland By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  19. A Simple Macrofiscal Model for Policy Analysis: An Application to Morocco By Daniel Baksa; Mr. Ales Bulir; Mr. Roberto Cardarelli
  20. Welfare Costs of Exchange Rate Fluctuations: Evidence from the 1972 Okinawa Reversion By Kano, Kazuko; Kano, Takashi
  21. Should Central Banks Issue Digital Currency? By Todd Keister; Daniel R. Sanches
  22. Untying the Knot: How Child Support and Alimony Affect Couples’ Decisions and Welfare By Hanno Foerster
  23. Leverage Cycles, Growth Shocks, and Sudden Stops in Capital Inflows By Lorenz Emter

  1. By: Junko Doi (Kansai University); Kota Yamada (kansai University); Masaya Yasuoka (Kwansei Gakuin University)
    Abstract: The aims of our study are to set a Dynamic Stochastic General Equilibrium (DSGE) model and to examine how increased income or consumption tax rates affect the ratio of public debt to GDP and other macroeconomic parameters. We consider taxation of three types, on labor income, capital income, and consumption. Results derived from our simulation show that an increase in income tax rates of these forms of taxation raises the ratio of public debt to GDP because GDP and tax revenues decrease. An increase in consumption tax rate can reduce the ratio of public debt to GDP because of an increase in the aggregate demand that is pulled up by the investment. Our study shows that a decrease in the income tax rate reduces the ratio of public debt to GDP.
    Keywords: DSGE Model, Fiscal Sustainability, Taxation.
    JEL: E60
    Date: 2021–11
  2. By: Takao Asano (Okayama University); Akihisa Shibata (Kyoto University); Masanori Yokoo (Okayama University)
    Abstract: This paper constructs a simple overlapping generations (OLG) model with the working and capitalist classes and two types of production technologies. The behavior of agents belonging to the working class is basically the same as that in the standard Diamond (1965) type OLG model, whereas agents belonging to the capitalist class face two available technologies, select the one with a higher return on capital, and bequeath their assets to the next generation without supplying labor. Using techniques concerning the circle map in dynamical systems theory, we show that in an extreme case in which one technology is linear and the other is of the Leontief type, the economy exhibits bounded, non-periodic but non-chaotic motions for a large set of parameter values. We provide explicit formulas for the rotation number and the absolutely continuous invariant probability measure of our model.
    Keywords: Endogenous business cycles; technology choice; quasi-periodic motion; OLG model; rotation numbe
    Date: 2021–11
  3. By: Marco Airaudo; Ina Hajdini
    Abstract: By introducing Jaimovich-Rebelo (JR) consumption-labor nonseparable preferences into an otherwise standard New Keynesian model, we show that the occurrence of positive comovement between inflation and the nominal interest rate conditional on a nominal shock - the so-called neo-Fisherian hypothesis - depends on the extent of wealth effects in households’ labor supply decisions. Neo-Fisherianism appears more prominent in economic environments with i) weaker wealth effects on labor supply (in particular for Greenwood-Hercowitz-Huffmann preferences where wealth effects are absent), and ii) smaller price-to-wage markups (for which the steady state is less distorted). The stabilizing properties of Taylor rules under JR preferences are scrutinized.
    Keywords: Monetary Policy; Neo-Fisherianism; Wealth Effects; Markups
    JEL: E40 E50
    Date: 2021–11–17
  4. By: Kuhn, Moritz (University of Bonn); Manovskii, Iourii (University of Pennsylvania); Qiu, Xincheng (University of Pennsylvania)
    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.
    Keywords: local labor markets, unemployment, vacancies, search and matching
    JEL: J63 J64 E24 E32 R13
    Date: 2021–10
  5. By: Giuseppe Fiori (Board of Governors of the Federal Reserve System); Filippo Scoccianti (Bank of Italy)
    Abstract: We study how the timing of technology adoption through capital accumulation shapes firm-level productivity dynamics and quantify its aggregate implications in a model of heterogeneous firms. Using data on the census of incorporated Italian firms and exploiting the lumpiness of capital accumulation, we document that large investment episodes lead to productivity gains at the firm and sectoral level due to vintage effects. In a general equilibrium model of firm heterogeneity, we find that the presence of vintage technology constitutes a powerful microeconomic-based amplification mechanism of aggregate shocks relative to a benchmark real business cycle model.
    Keywords: business cycles, (S,s) policies, vintage effects, firm heterogeneity.
    JEL: D24 E22 E32
    Date: 2021–11
  6. By: Mr. Ruy Lama; Mai Hakamada; Ms. Valerie Cerra
    Abstract: One of the most puzzling facts in the wake of the Global Financial Crisis (GFC) is that output across advanced and emerging economies recovered at a much slower rate than anticipated by most forecasting agencies. This paper delves into the mechanics behind the observed slow recovery and the associated permanent output losses in the aftermath of the crisis, with a particular focus on the role played by financial frictions and investment dynamics. The paper provides two main contributions. First, we empirically document that lower investment during financial crises is the key factor leading to permanent loss of output and total factor productivity (TFP) in the wake of a crisis. Second, we develop a DSGE model with financial frictions and capital-embodied technological change capable of reproducing the empirical facts. We also evaluate the role of financial policies in stabilizing output and TFP in response to disruptions in financial markets.
    Keywords: Medium-term TFP loss; impulse response; investment dynamics; hysteresis effect; aftermath of a financial crises; Total factor productivity; Global financial crisis of 2008-2009; Banking crises; Self-employment; Global
    Date: 2021–06–25
  7. By: Faia, Ester (Goethe University Frankfurt); Kudlyak, Marianna (Federal Reserve Bank of San Francisco); Shabalina, Ekaterina (Goethe University Frankfurt)
    Abstract: Occupational specificity of human capital motivates an important role of occupational reallocation for the economy's response to shocks and for the dynamics of inequality. We introduce occupational mobility, through a random choice model with dynamic value function optimization, into a multi-sector/multi-occupation Bewley (1980)-Aiyagari (1994) model with heterogeneous income risk, liquid and illiquid assets, price adjustment costs, and in which households differ by their occupation-specific skills. Labor income is a combination of endogenous occupational wages and idiosyncratic shock. Occupational reallocation and its impact on the economy depend on the transferability of workers' skills across occupations and occupational specialization of the production function. The model matches well the statistics on income and wealth inequality, and the patterns of occupational mobility. It provides a laboratory for studying the short- and long-run effects of occupational shocks, automation and task encroaching on income and wealth inequality. We apply the model to the pandemic recession by adding an SIR block with occupation-specific infection risk and a ZLB policy and study the impact of occupational and aggregate labor supply shocks. We find that occupational mobility may tame the effect of the shocks but amplifies earnings inequality, as compared to a model without mobility.
    Keywords: occupational mobility, heterogeneous agents, skills, income and wealth inequality, discrete choice optimization
    JEL: J22 J23 J31 J62 E21 D31
    Date: 2021–10
  8. 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: 2021–10–26
  9. By: Eo, Yunjong; McClung, Nigel
    Abstract: We evaluate and compare alternative monetary policy rules, namely average inflation targeting, price level targeting, and traditional inflation targeting rules, in a standard New Keynesian model that features recurring, transient zero lower bound regimes. We use determinacy and expectational stability (E-stability) of equilibrium as the criteria for stabilization policy. We find that price level targeting policy, including nominal income targeting as a special case, most effectively promotes determinacy and E-stability among the policy frameworks, whereas standard inflation targeting rules are prone to indeterminacy. Average inflation targeting can induce determinacy and E-stability effectively, provided the averaging window is sufficiently long.
    JEL: E31 E47 E52 E58
    Date: 2021–11–15
  10. By: Naoto Soma (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Associate Professor, Yokohama National University, E-mail:
    Abstract: Uncertainty is a fact of life for central banks, and the effective lower bound (ELB) of short-term nominal interest rates has become one source of uncertainty for many of them. This paper analyzes the effects of uncertainty about monetary policy transmission on inflation in a canonical New Keynesian model with optimal discretionary monetary policy under the ELB. The main finding is that a greater degree of uncertainty enlarges the "deflationary bias" of the economy. In the model, the central bank reacts to the uncertainty by attenuating the response of the nominal interest rate to exogenous shocks. Such inactive policy response leaves the fall in inflation caused by the ELB risk partially untreated, which lowers the inflation expectations of private agents and results in undershooting of the inflation target.
    Keywords: Model Uncertainty, Effective Lower Bound, Deflationary Bias, Risky Steady State
    JEL: D81 E32 E52
    Date: 2021–11
  11. By: Joseph Kopecky (Department of Economics, Trinity College Dublin); Alan M. Taylor (Department of Economics and Graduate School of Management, University of California, Davis)
    Abstract: Population aging has been linked to global declines in real interest rates. A similar trend is seen for equity risk premia, which are on the rise. An existing literature can explain part of the declining trend in safe rates using demographics, but has no mechanism to speak to trends in relative returns on different assets. We calibrate a heterogeneous agent life-cycle model with equity markets and aggregate risk, and we show that aging demographics can simultaneously account for both the majority of a downward trend in the risk free rate, while also increasing the return premium attached to risky assets. This is because the life-cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations we find declines in the safe rate that are considerably larger than most existing estimates between the years 1990 and 2017. We are also able to account for most of the rise in the equity risk premium. Projecting forward to 2050 we show that persistent demographic forces will continue to push the risk free rate further into negative territory, while the equity risk premium remains elevated.
    Keywords: life-cycle model, demographics, rates of return, safe assets, risky assets, secular stagnation
    JEL: E21 E43 G11 J11
    Date: 2020–03
  12. By: Beetsma, Roel M. W. J. (University of Amsterdam); Komada, Oliwia (GRAPE); Makarski, Krzysztof (Warsaw School of Economics); Tyrowicz, Joanna (University of Warsaw)
    Abstract: We analyze the political stability of funded social security. Using a stylized theoretical framework we study the mechanisms behind governments capturing social security assets in order to lower current taxes. The results and the driving mechanisms carry over to a fully-fledged and carefully calibrated overlapping generations model with an aging population. Funding is efficient in a Kaldor-Hicks sense. We demonstrate that, even though we can rationalize the actual introduction of a two-pillar defined-contribution scheme with funding through a majority vote, a new vote to curtail the funded pillar through asset capture or permanent diversion of contributions to the pay-as-you-go pillar always receives majority support. For those alive and thus allowed to vote, the temporary reduction in taxes outweighs the reduction in retirement benefits. This result is robust to substantial intra-cohort heterogeneity and other extensions, and only overturned with a sufficient degree of altruism. Our analysis rationalizes the experience of Central and Eastern European countries, who rolled back their funded pension pillars soon after setting them up.
    Keywords: social security, funding, pay-as-you-go, asset capture, majority vote, welfare
    JEL: H55 D72 E17 E27
    Date: 2021–10
  13. By: Agnes Kovacs (The University of Manchester); Concetta Rondinelli (Bank of Italy); Serena Trucchi (Cardiff University)
    Abstract: This paper investigates how income shocks shape consumption dynamics over the business cycle. First, we break new ground and create a unique panel dataset of transitory and permanent income shocks by combining household-level income expectations with the findings of the DNB Household Survey conducted in the Netherlands in the period 2006-2018. We then use the first and second moments of the identified income shocks in a structural life-cycle framework and show that the model matches the observed consumption patterns well. Finally, using counterfactual model simulations, we assess the importance of the nature of income shocks (permanent income hypothesis), future income uncertainties (precautionary saving motive), and cohort effects, and show how they individually shaped consumption dynamics over that period in the Netherlands.
    Keywords: subjective expectations, income shocks, consumption, business cycle
    JEL: C13 D12 D91 E21
    Date: 2021–11
  14. By: Nikolay Gueorguiev; Mr. Kenji Moriyama; Luis-Felipe Zanna; Ryota Nakatani; Hiroaki Miyamoto; Lahcen Bounader; Mr. Andrew Berg
    Abstract: Many studies predict massive job losses and real wage decline as a result of the ongoing widespread automation of production, a trend that may be further aggravated by the COVID-19 crisis. Yet automation is also expected to raise productivity and output. How can we share the gains from automation more widely, for the benefit of all? And what are the attendant equity-efficiency trade-offs? We analyze this issue by considering the effects of fiscal policies that seek to redistribute the gains from automation and address income inequality. We use a dynamic general equilibrium model with monopolistic competition, including a novel specification linking corporate power to automation. While fiscal policy cannot eliminate the classic equity-efficiency trade-offs, it can help improve them, reducing inequality at small or no loss of output. This is particularly so when policy takes advantage of novel, less distortive transmission channels of fiscal policy created by the empirically observed link between corporate market power and automation.
    Keywords: Automation; Fiscal Policy; Redistribution; Technological Change; Mark-up.; C. welfare implication; equivalent income; POLICY package; B. disposable income; D. social welfare; policy package; Robotics; Income inequality; Disposable income; Technological innovation
    Date: 2021–07–16
  15. By: Makarski, Krzysztof (Warsaw School of Economics); Tyrowicz, Joanna (University of Warsaw); Komada, Oliwia (GRAPE)
    Abstract: We study the interactions between capital income tax and social security privatization in the context of rising longevity. In an economy with idiosyncratic income shocks, redistributive defined benefit social security provides some insurance against income uncertainty. This insurance comes at the expense of efficiency loss due to labor supply distortions. The existing view in the literature states that reducing this distortion by introducing (partially funded) defined contribution social security would reduce welfare because the loss of insurance and the transitory fiscal gap dominate the efficiency gains. However, prior research financed the transitory costs of the reform by taxing consumption. We show that in the context of longevity, capital income taxation provides a superior alternative: welfare gains are sufficient to outweigh the loss of insurance and transitory fiscal gap. We provide explanations for a mechanism behind this result and we reconcile our results with the earlier literature.
    Keywords: longevity, capital income taxation, social security reform, fiscal policy, welfare effects
    JEL: C68 D72 E62 H55 J26
    Date: 2021–10
  16. By: Pablo Garcia; Pascal Jacquinot; Crt Lenarcic; Matija Lozej; Kostas Mavromatis
    Abstract: This paper analyses the effects of the COVID-19 pandemic shock on small open economies in a monetary union with an application to the euro area. Accounting for a high degree of openness and a strong dependence on intra and extra union trade, we focus on the size and the direction of international spillovers – both from the shock itself and from the ensuing fiscal response. To do so, we use a unified modelling framework: The Euro Area and the Global Economy (EAGLE) model. Furthermore, within this general framework, we assess the extent to which specific modelling features shape the dynamic responses to the COVID-19 pandemic. The main messages are as follows. First, fiscal spillovers from the rest of the monetary union do matter. Second, the effective lower bound amplifies the size of the spillovers. Third, the design of wage negotiations leads to wage subsidies having negative international fiscal policy spillovers. Fourth, import content of government spending interacts with the effective lower bound, strongly affecting the size and sign of spillovers. Fifth, when households have finite lifetimes, the responses of output and inflation are amplified compared to the case with infinitely lived households. Finally, a next generation EU instrument is more effective when financed using a tax on consumption.
    Keywords: DSGE Modelling, International Spillovers, Monetary Union, Euro Area, COVID-19
    JEL: C53 E32 E52 F45
    Date: 2021–10
  17. By: Macdonald, Kevin (World Bank); Patrinos, Harry A. (World Bank)
    Abstract: Carbon pricing is increasingly used by governments to reduce emissions. The effect of carbon pricing on economic outcomes as well as mitigating factors has been studied extensively since the early 1990s. One mitigating factor that has received less attention is education quality. If technological change that reduces the reliance of production on emissions is skill-biased, then carbon pricing may increase the skill premium of earnings and subsequent wage inequality; however, a more elastic skill supply through better education quality may mitigate adverse economic outcomes, including wage inequality, and enhance the effect of carbon pricing on technological change and subsequently emissions. A general equilibrium, overlapping-generations model is proposed, with endogenous skill investment in which the average skill level of the workforce can affect the need for emissions in an aggregate production function. This study uses data on industrial emissions linked to the Organisation for Economic Co-operation and Development's Programme for International Assessment of Adult Competencies dataset for European Union countries. The findings show that, within countries, cognitive skills are positively associated with employment in industries that rely less on emissions for production and in industries that, over time, have been able to reduce their reliance on emissions for production. In the estimated general equilibrium model, higher cognitive skills reduce an economy's reliance on emissions for production. Having higher quality education—defined as the level of cognitive skills attained by workers per unit of cost—increases the elasticity of skill supply and, as a result, mitigates a carbon tax's economic costs including output loss and wage inequity, and enhances its effect on emissions reduction. The implication is that investments in education quality are needed for better enabling green technological innovation and adaptation and reducing inequality that results from carbon pricing.
    Keywords: carbon pricing, education, skills, learning outcomes
    JEL: Q43 O47 Q56 O41
    Date: 2021–10
  18. By: Marcin Bielecki (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics)
    Abstract: Poland faces a particularly sharp demographic transition. The old-age dependency ratio is expected to increase from slightly above 20% in 2000 to over 60% in 2050. At the same time the country has recently witnessed a huge wave of immigration, mostly from Ukraine. In this paper we investigate how aging and migration will affect the Polish economy and what consequences these adjustments have for its monetary policy. Using a general equilibrium model with life-cycle considerations, we show that the decline in the natural rate of interest (NRI) due to demographic processes is substantial, amounting to more than 1.5 percentage points, albeit spread over a period of 40 years. The impact of migration flows is relatively small and cannot significantly alleviate the downward pressure on the NRI induced by populating aging. If the central bank is slow in learning about the declining NRI, an extended period of inflation running below the target is likely. In this case, the probability of hitting the zero lower bound (ZLB) becomes a major constraint on monetary policy while it could remain under control if the central bank uses demographic trends to update the NRI estimates in real time.
    Keywords: aging, monetary policy, migration, life-cycle models
    JEL: E43 E52
    Date: 2021
  19. By: Daniel Baksa; Mr. Ales Bulir; Mr. Roberto Cardarelli
    Abstract: The paper describes a semistructural macrofiscal approach to simulating and forecasting macroeconomic policies. The model focuses on only a few variables that are consistent with the New Keynesian framework. Thanks to its simplicity, it facilitates an initial and intuitive understanding of monetary and fiscal policy transmission channels, and their main impact on economic activity. The model is adapted to Morocco and we demonstrate its application with an illustrative scenario of policy responses to a slower-than-expected recovery from the Covid-19 pandemic, under different monetary policy and exchange rate regimes.
    Keywords: Fiscal Policy, Morocco, Fiscal Multiplier; fiscal policy transmission channels; Policy reaction function; B. aggregate supply; peg regime; fiscal policy transmission mechanisms; Exchange rate arrangements; Real exchange rates; Output gap; Inflation targeting; Maghreb; Global
    Date: 2021–07–16
  20. By: Kano, Kazuko; Kano, Takashi
    Abstract: The main tenet of the New Keynesian (NK) paradigm is that price dispersion caused by nominal price stickiness is the primary source of allocative inefficiency. This study empirically evaluates the welfare implications of NK models by observing how internal and external price dispersion responds to two types of large aggregate shocks: high inflation and sharp currency depreciation. For this purpose, we consider the history of US military deployment on a small southern island in Japan called Okinawa following the Pacific War. We investigate unique data variations in micro-level retail prices surveyed in Okinawa and mainland Japan before and after the Okinawan reversion to Japanese sovereignty in May of 1972. By considering the Okinawan experience of three currency regimes during the high inflation period of the early 1970s as valid quasi-natural experiments, we identify statistically significant deteriorations of currency misalignment associated with the sudden exogenous large USD depreciation versus the JPY following the Nixon Shock. Furthermore, we observe that these massive aggregate shocks left the average absolute size of price changes mostly unchanged, but significantly increased the average frequency of price changes in Okinawa. Because a calibrated small open-economy menu cost model fits these empirical findings better than the Calvo model, the welfare costs of exchange rate fluctuations may be more elusive than suggested by the openeconomy NK literature.
    Keywords: Currency regime, Currency misalignment, Welfare cost, Okinawan reversion, Menu cost model
    JEL: F31 F41 F45
    Date: 2021–11
  21. By: Todd Keister; Daniel R. Sanches
    Abstract: We study how the introduction of central bank digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. We highlight an important policy tradeoff: While a digital currency tends to promote efficiency in exchange, it may also crowd out bank deposits, raise banks’ funding costs, and decrease investment. We derive conditions under which targeted digital currencies, which compete only with physical currency or only with bank deposits, raise welfare. If such targeted currencies are infeasible, we illustrate the policy tradeoffs that arise when issuing a single, universal digital currency.
    Keywords: Monetary policy; public vs. private money; electronic payments; liquidity premium; disintermediation
    JEL: E42 E58 G28
    Date: 2021–11–03
  22. By: Hanno Foerster (Boston College)
    Abstract: In many countries divorce law mandates post-marital maintenance payments (child support and alimony) to insure the lower earner in married couples against financial losses upon divorce. This paper studies how maintenance payments affect couples’ intertemporal decisions and welfare. I develop a dynamic model of family labor supply, housework, savings and divorce and estimate it using Danish register and survey data. The model captures the policy trade off between providing insurance to the lower earner and enabling couples to specialize efficiently, on the one hand, and maintaining labor supply incentives for divorcees, on the other hand. I use the estimated model to study various counterfactual policy scenarios. I find that alimony payments come with strong labor supply disincentives and as a consequence fail to provide consumption insurance. The welfare maximizing policy involves increasing the lump sum component of child support, increasing the dependence of child support on the payer’s income and reducing alimony payments relative to the Danish status quo. Switching to the welfare maximizing policy makes women better and men worse off, but comparisons to first best allocations show that Pareto improvements are feasible, highlighting a limitation of child support and alimony policies.
    Keywords: marriage and divorce, child support, alimony, household behavior, labor supply, limited commitment
    JEL: D10 D91 J18 J12 J22 K36
    Date: 2020–03–30
  23. By: Lorenz Emter (Central Bank of Ireland and Department of Economics, Trinity College Dublin)
    Abstract: Using a quarterly panel of 98 advanced as well as emerging and developing countries from 1990 to 2017 this paper shows that domestic variables are significantly related to the probability of incurring sharp reversals in capital inflows controlling for global push factors. In particular, negative growth shocks combined with high levels of leverage in the domestic private sector are a significant determinant of sudden stops. This is in line with real business cycle models including an occasionally binding credit constraint and income trend shocks.
    Keywords: international capital flows, sudden stops, financial stability
    JEL: E32 F30 F32 F34 G15
    Date: 2020–07

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