nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2021‒12‒13
fifteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. What is the child-related compensational pension system good for and what is not? By Németh, Petra; Szabó-Bakos, Eszter
  2. Optimal Monetary Policy in a Small Open Economy with Non-tradable Goods By Jia, Pengfei
  3. Nonlinearities and Workers' Heterogeneity in Unemployment Dynamics By Adjemian, Stéphane; Karamé, Frédéric; Langot, François
  4. Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt By Mr. Francisco Roch; Francisco Roldán
  5. Taxing income or consumption: macroeconomic and distributional effects for Italy By D'ANDRIA Diego; DEBACKER Jason; EVANS Richard W.; PYCROFT Jonathan; ZACHLOD-JELEC Magdalena
  6. Zero Lower Bound on Inflation Expectations By Gorodnichenko, Yuriy; Sergeyev, Dmitriy
  7. Search Externalities in Firm-to-Firm Trade By John Spray
  8. Robust Optimal Macroprudential Policy By Mr. Francisco Roch; Giselle Montamat
  9. Macroeconomic Implications of Inequality and Income Risk By Aditya Aladangady; Etienne Gagnon; Benjamin K. Johannsen; William B. Peterman
  10. Inflation tolerance ranges in the new keynesian model By Hervé Le Bihan; Magali Marx; Julien Matheron
  11. Are Government Spending Shocks Inflationary at the Zero Lower Bound? New Evidence from Daily Data By Sangyup Choi; Junhyeok Shin; Seung Yong Yoo
  12. Young Firms and Monetary Policy Transmission By Thomas McGregor
  13. A Dual Banking Sector With Credit Unions and Traditional Banks : What Implications on Macroeconomic Performances? By Thibaud Cargoet; Simon Cornée; Franck Martin; Tovonony Razafindrabe; Fabien Rondeau; Christophe Tavéra
  14. Unintended Effects From the Expansion of the Non-Contributory Health System in Peru By Jose Torres
  15. The Morocco Policy Analysis Model: Theoretical Framework and Policy Scenarios By Adam Remo; Aya Achour; Omar Chafik; Mr. Ales Bulir

  1. By: Németh, Petra; Szabó-Bakos, Eszter
    Abstract: There is increasing attention to the sustainability and fairness of the pay-as-you-go pension system as a consequence of the aging society and the imbalance between the old and the young generation’s number. In this system, the pension depends only on the previous contribution, which indirectly punishes childbearing. The purpose of this article is to compare the effect of the present Hungarian regulation to a possible child-related compensational pension scheme, where the amount of pension takes into account the childbearing time. The evaluation of the pension systems is based on the lifespan utility of representative agents (with or without children) and the economic effects of the possible pension reform. We built up a dynamic general equilibrium model in an overlapping generations framework (calibrated on the basis of Hungarian data) to investigate the effects of our pension reform proposal. As a result we receive that such a pension system could increases the utility of the consumer who has children by 0.2149% percent, but decrease the steady state utility of childless consumer by 0,0130% percent. The amount of children and the time spent with children increase slightly, but these positive elements that could have raised the output does not compensate the negative effect of the decreasing work-related efforts, so the output falls.
    Keywords: Computable General Equilibrium Models, OLG model, Public Pension, Retirement Policies
    JEL: C68 H55 J26 D15
    Date: 2021–12–04
  2. By: Jia, Pengfei
    Abstract: This paper studies optimal monetary policy in a small open economy DSGE model with non-tradable goods and sticky prices. The introduction of non-traded goods is shown to have important implications for the transmission of shocks and monetary policy arrangements. First, the results show that positive technology shocks need not lead to deflation. In response to technology shocks, real exchange rates and the terms of trade depreciate. The relative price of tradable to non-tradable goods may increase or decrease, depending on the shocks. Second, based on welfare analysis, this paper evaluates the performance of different interest rate rules. The results show that if monetary policy is not very aggressive, the Taylor-type interest rate policy that targets CPI inflation performs the best. However, as monetary policy becomes relatively aggressive, the policy that targets domestic inflation is shown to yield the highest level of welfare. Third, this paper studies the Ramsey policy and optimal allocations. The results indicate that the Ramsey optimal policy stabilizes the inflation rates in both production sectors, while allowing for volatilities in CPI inflation, real exchange rates, the terms of trade, and the relative price of tradable goods. This suggests that the interest rate rules targeting CPI inflation or exchange rates are suboptimal. The results also show that in response to sector specific shocks, the Ramsey planner only cares about the inflation rate in the sector where the shock originates.
    Keywords: Optimal monetary policy; Small open economy; Non-tradable goods, Business cycles; Exchange rates
    JEL: E31 E32 E52 F31 F41
    Date: 2021–11–23
  3. By: Adjemian, Stéphane (University of Le Mans); Karamé, Frédéric (University of Le Mans); Langot, François (University of Le Mans)
    Abstract: This study demonstrates that nonlinearities, coupled with worker heterogeneity, make it possible to reconcile the Diamond–Mortensen–Pissarides model with the labor market dynamics observed in the United States. Nonlinearities, induced by firings and downward real wage rigidities, magnify adjustments in quantities, whereas heterogeneity concentrates them on the low-paid workers' submarkets. The model fits the job finding, job separation, and unemployment rates well. It also explains the Beveridge curve's dynamics and the cyclicality of the involuntary component of separations. The estimated dynamics of the aggregate shock that allows generating the US labor market fluctuations has a correlation with unemployment that changes of sign during the 80s. We also show that the differences in adjustment between submarkets predicted by the model are consistent with the data of job flows by educational attainment.
    Keywords: search and matching, unemployment dynamics, nonlinearities, particle filter, maximum likelihood estimation
    JEL: C51 E24 E32
    Date: 2021–10
  4. By: Mr. Francisco Roch; Francisco Roldán
    Abstract: We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a standard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond structure (e.g., the GDP-linked bond issued by Argentina in 2005), the model with robustness generates ambiguity premia in bond spreads that can explain most of what the literature has labeled as novelty premium. While the government would be better off with this bond when facing rational expectations lenders, this additional source of premia leads to welfare losses when facing robust lenders. Finally, we characterize the optimal design of the state-contingent bond and show how it varies with the level of robustness. Our findings rationalize the little use of these instruments in practice and shed light on their optimal design.
    Keywords: Sovereign debt; default; state-contingent debt instruments; robust control; ambiguity premia; probability distortion; robust lender; State-contingent debt; ambiguity aversion; debt structure; threshold bond; Bonds; Debt default; Rational expectations; Asset prices
    Date: 2021–03–12
  5. By: D'ANDRIA Diego (European Commission - JRC); DEBACKER Jason; EVANS Richard W.; PYCROFT Jonathan (European Commission - JRC); ZACHLOD-JELEC Magdalena (European Commission - JRC)
    Abstract: We study a set of tax reforms introducing a budget-neutral tax shift in Italy, from labour income to consumption taxes. To this end we use a microsimulation model to provide the output with which to estimate the parameters of tax functions in an overlapping-generations computable general equilibrium model. In doing so we make marginal and average tax rates bivariate non-linear functions of capital income and labour income. The methodology allows for the representation of the non-linearities of the tax and social benefit system and interactions between capital and labour incomes. The linked macro model then simulates labour supply, consumption and savings in a dynamic setting, thus accounting for behavioural and general equilibrium effects within a life-cycle optimization framework. Our simulations show that a tax shift made by cutting personal income tax rates might bring significant efficiency gains in Italy, with limited regressive effects, notwithstanding the revenue-compensating increase in consumptions taxes.
    Keywords: computable general equilibrium, overlapping generations, taxation, microsimulation, Italy, tax shift
    Date: 2021–12
  6. By: Gorodnichenko, Yuriy (University of California, Berkeley); Sergeyev, Dmitriy (Bocconi University)
    Abstract: We document a new fact: in U.S., European and Japanese surveys, households do not expect deflation, even in environments where persistent deflation is a strong possibil- ity. This fact stands in contrast to the standard macroeconomic models with rational expectations. We extend a standard New Keynesian model with a zero-lower bound on inflation expectations. Unconventional monetary policies, such as forward guid- ance, are weaker. In liquidity traps, the government spending output multiplier is finite, and adverse aggregate supply shocks are not expansionary. The possibility of confidence-driven liquidity traps is attenuated.
    Keywords: inflation expectations, non-rational beliefs, survey data
    JEL: E5 E7 G4
    Date: 2021–11
  7. By: John Spray
    Abstract: I develop a model of firm-to-firm search and matching to show that the impact of falling trade costs on firm sourcing decisions and consumer welfare depends on the relative size of search externalities in domestic and international markets. These externalities can be positive if firms share information about potential matches, or negative if the market is congested. Using unique firm-to-firm transaction-level data from Uganda, I document empirical evidence consistent with positive externalities in international markets and negative externalities in domestic markets. I then build a dynamic quantitative version of the model and show that, in Uganda, a 25% reduction in trade costs led to a 3.7% increase in consumer welfare, 12% of which was due to search externalities.
    Keywords: Firm-to-Firm Trade; VAT Data; Search-and-Matching; Importing; transport cost reduction; buyer-supplier search; search externality; welfare gains from trade; consumer welfare; Imports; Labor market frictions; Search models; Value-added tax; East Africa; Global
    Date: 2021–03–19
  8. By: Mr. Francisco Roch; Giselle Montamat
    Abstract: We consider how fear of model misspecification on the part of the planner and/or the households affects welfare gains from optimal macroprudential taxes in an economy with occasionally binding collateral constraints as in Bianchi (2011). On the one hand, there exist welfare gains from internalizing how borrowing decisions in good times affect the value of collateral during a crisis. On the other hand, interventions by a robust planner that has in mind a model far from the true underlying distribution of shocks, can result in negligible welfare gains, or even losses. This is because a policy that is robust to misspecification, as in Hansen and Sargent (2011), is optimal under a "worst-case'' scenario but not under alternative distributions of the state. A robust planner introduces taxes that are 5 percentage points higher but does not achieve a significant increase in welfare gains compared to a non-robust planner when the true underlying model is not the worst-case. If households also make choices that are robust to model misspecification, the gains are significantly reduced and a highly-robust planner "underborrows" and induces welfare losses. If, however, the worst-case scenario is indeed realized, then welfare gains are the largest possible.
    Keywords: Robustness; Model Uncertainty; Macroprudential Policy; Sudden Stops.
    Date: 2021–02–26
  9. By: Aditya Aladangady; Etienne Gagnon; Benjamin K. Johannsen; William B. Peterman
    Abstract: We explore the long-run relationship between income risk, inequality, and the macroeconomy in an overlapping-generations model in which households face uncertain streams of labor income and returns on their savings. To manage those risks, households can apportion their savings to a bond, whose return is safe and identical across households, and a productive asset, whose return is uncertain and can differ persistently across households. We find that greater polarization in households' labor income and returns on their savings generally accentuates households' demand for risk-free assets and the compensation they require for bearing risk, leading to higher measured income and wealth inequality, a lower risk-free real interest rate, and higher risk premiums. These findings suggest that the factors behind the observed rise in inequality over the past few decades might have contributed to the observed fall in the risk-free real interest rate and widening gap between the risk-free real interest rate and the rate of return on capital. We also find that the magnitude of the decline in the risk-free real interest rate and offsetting rise in risk premiums depend importantly on the source of income polarization, with the effects being especially large when greater inequality is caused by increased dispersion in returns on risky assets. Thus, the macroeconomic implications not only depend on the amount of inequality, but also the source of this inequality.
    Keywords: Income and wealth inequality; Heterogeneous returns; Risk-free real interest rate; Risk premium
    JEL: D31 D33 E21 E25 J11
    Date: 2021–11–18
  10. By: Hervé Le Bihan (Banco de España and Banque de France); Magali Marx (Banque de France); Julien Matheron (Banque de France)
    Abstract: A number of central banks in advanced countries use ranges, or bands, around their inflation target to formulate their monetary policy strategy. The adoption of such ranges has been proposed by some policymakers in the context of the Fed and the ECB reviews of their strategies. Using a standard New Keynesian macroeconomic model, we analyze the consequences of tolerance range policies, characterized by a stronger reaction of the central bank to inflation when inflation lies outside the range, than when it is close to the target, i.e., the central value of the band. We show that (i) a tolerance band should not be a zone of inaction: the lack of reaction within the band endangers macroeconomic stability and leads to the possibility of multiple equilibria; (ii) the trade-off between the reaction needed outside the range versus inside appears unfavorable: a very strong reaction, when inflation is far from the target, is required to compensate for a moderately lower reaction within tolerance band; (iii) these results, obtained within the framework of a stylized model, are robust to many alterations, in particular allowing for the zero lower bound.
    Keywords: monetary policy, inflation ranges, inflation bands, zero lower bound (ZLB), endogenous regime switching
    JEL: E31 E52 E58
    Date: 2021–11
  11. By: Sangyup Choi (Yonsei Univ); Junhyeok Shin (Johns Hopkins University); Seung Yong Yoo (Yonsei University)
    Abstract: Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying a government spending multiplier at the ZLB, empirical evidence has not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline persistently in response to a positive government spending shock at the ZLB. When compared to normal times, government spending shocks are less inflationary and less expansionary at the ZLB. Our finding is difficult to reconcile with the larger fiscal multiplier at the binding ZLB often predicted by standard New Keynesian models via rising inflation and a falling real interest rate. High-frequency developments in consumer confidence, economic policy uncertainty, and oil prices, as well as changes in the component of military spending during the ZLB period, do not explain this anomaly.
    Keywords: Zero lower bound; Government spending; Online price index; High-frequency data; New Keynesian model; COVID-19
    JEL: E31 E32 E62 F31 F41
    Date: 2021–12
  12. By: Thomas McGregor
    Abstract: We investigate the role of business dynamism in the transmission of monetary policy by exploitingthe variation in firm demographics across U.S. states. Using local projections, we find that a larger fraction of young firms significantly mutes the effects of monetary policy on the labor market and personal income over the medium term. The firm entry rate and the employment share of young firms are key factors underpinning these results, which are robust to a battery of robustness tests. We develop a heterogeneous-firm model with age-dependent financial frictions that rationalizes the empirical evidence.
    Keywords: firm demographics; business dynamism; monetary policy; local projections; U.S. states.; U.S. states; monetary policy shock; entry rate; population demographics; policy function; startup firm; exit rate; firm productivity; growth rate; Employment; Wages; Personal income; Credit ratings; Global
    Date: 2021–03–05
  13. By: Thibaud Cargoet (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Simon Cornée (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Franck Martin (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Tovonony Razafindrabe (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Fabien Rondeau (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Christophe Tavéra (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France)
    Abstract: Cet article ́etudie les implications macro ́economiques associées à la présence d’un secteur bancaire dual au sein d’une ́economie. Ce secteur regroupe à parts égales des banques mutualistes et coopératives (credit unions) et des banques de type capitaliste (cette situation s’observe notamment pour la France). Nous adoptons un modélisation macroéconomique de type DSGE idans laquelle les banques mutualistes et coopératives sont différenciées des banques traditionnelles de la manière suivante : elles pratiquent une interm ́ediation financière traditionnelle centrée sur le couple crédits/dépôts avec un recours plus faible aux activités de portefeuilles ; elles se concentrent principalement sur le financement des ménages et des petites et moyennes entreprises ; elles ont enfin un pass-through de taux d’int érêt plus faible que les banques traditionnelles. Les simulations du modèle montrent que cette configuration du secteur bancaire diminue le caractère contra-cyclique de la politique mon ́etaire mais elle constitue en revanche un facteur stabilisant pour l’économie. This article studies the macroeconomic implications generated by a dual banking sector. By dual sector, we refer to a banking sector including mutual and cooperative banks (credit unions) and traditional banks operate in substantially equal parts (as the case of France for example). We propose a DSGE macroeconomic model integrating a dual banking sector. Mutual and cooperative banks are differentiated from capitalist banks in the following way: they practice traditional financial intermediation centered on the loan - deposit pair with less recourse to portfolio activities; they mainly focus on financing households and small and medium-sized enterprises; Finally, they have a lower interest rate pass-through than traditional banks. Model simulations show that this configuration of the banking sector reduces the counter-cyclical property of monetary policy, but on the other hand it constitutes a stabilizing factor for the economy.
    Keywords: Banking sector, Credit Unions, DSGE Model, Monetary Policy
    JEL: E47 E52 G2
    Date: 2021–11
  14. By: Jose Torres
    Abstract: Over the last two decades, the Peruvian government has made great efforts to improve access to health care by significantly augmenting the coverage of the non-contributory public health care system Seguro Integral de Salud (SIS). This expansion has a positive impact on welfare and public health indicators, as it limits the risk of catastrophic health-related costs for previously uninsured individuals and allows for the appropriate treatment of illnesses. However, it also entails some unintended consequences for informality, tax revenues, and GDP, since a few formal agents are paying for a service that the majority of (informal) agents receive for free. In this paper, we use a general equilibrium model calibrated for Peru to simulate the expansion of SIS to quantify the unintended effects. We find that overall welfare increases, but informality rises by 2.7 percent, while tax revenues and output decrease by roughly 0.1 percent. Given the extent of the expansion in eligibility, the economic relevance of these results seems negligible. However, this occurs because the expansion of coverage was mostly funded by reducing the spending per-insured person. In fact, we find larger costs if public spending is increased to improve the quality of service given universal coverage.
    Keywords: care system Seguro Integral de Salud; IMF working paper Western Hemisphere department; unintended effect; health shock; health risk; avg. health spending; non-contributory health system SIS; Self-employment; Health care; Health care spending; Insurance; South America; Caribbean
    Date: 2021–04–23
  15. By: Adam Remo; Aya Achour; Omar Chafik; Mr. Ales Bulir
    Abstract: The Morocco Policy Analysis model (MOPAM) was created in the Bank Al-Maghrib to simulate the impact of external developments, domestic macroeconomic policies, and structural reforms on key macroeconomic aggregates. We describe its structure and demonstrate its operation on two medium-term scenarios: (1) fiscal consolidation to stabilize the debt-to-GDP ratio and (2) the effects of the COVID-19 shock, including the endogenous fiscal and monetary policy response.
    Keywords: MOPAM policy option; B. policy scenario; B. scenario assumption; fiscal consolidation scenario; monetary policy response; COVID-19; Fiscal consolidation; Value-added tax; Global; Maghreb
    Date: 2021–04–30

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