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on Dynamic General Equilibrium |
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Issue of 2022‒01‒10
nineteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Chou, Jenyu (School of Economics, University of Nottingham Ningbo China); Easaw, Joshy (Cardiff Business School); Minford, Patrick (Cardiff Business School) |
| Abstract: | The purpose of this paper is to investigate the empirical performance of the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model in its usual form with full-information rational expectations and compare it with versions assuming inattentiveness- namely sticky information and imperfect information data revision. Using a Bayesian estimation approach on US quarterly data (both realtime and survey) from 1969 to 2015, we find that the model with sticky information fits best and is the only one that can generate the delayed responses observed in the data. The imperfect information data revision model is improved fits better when survey data is used in place of real-time data, suggesting that it contains extra information. |
| Keywords: | Forecasting Popular Votes Shares; Electoral Poll; Forecast combination, Hybrid model; Support Vector Machine |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2021/35&r= |
| By: | François Le Grand (EMLYON Business School); Xavier Ragot (Observatoire français des conjonctures économiques) |
| Abstract: | We present a truncation theory of idiosyncratic histories for heterogeneous agent models. This method allows us to derive optimal Ramsey policies in heterogeneous agent models with aggregate shocks, in general frameworks. We use this method to characterize the optimal level of unemployment insurance over the business cycle in a production economy, with occasionally binding credit constraints. |
| Keywords: | Incomplete markets; Optimal policies; Heterogeneous agent models |
| JEL: | E21 E44 D91 D31 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/4lhe3u3c38ojohjlcbfaupcjr&r= |
| By: | Abbritti, Mirko; Consolo, Agostino; Weber, Sebastian |
| Abstract: | Standard New Keynesian (NK) models feature an optimal inflation target well below two percent, limited welfare losses from business cycle fluctuations and long-term monetary neutrality. We develop a NK framework with labour market frictions, endogenous productivity and downward wage rigidity (DWR) which challenges these results. The model features a non-vertical long-run Phillips curve between inflation and unemployment and a trade-off between price distortions and output hysteresis that change the welfare-maximizing inflation level. For a plausible set of parameters, the optimal inflation target is in excess of two percent, a target value commonly used across central banks. Deviations from the optimal target carry welfare costs multiple times higher than in traditional NK models. The main reason is that endogenous growth and DWR generate asymmetric and hysteresis effects on unemployment and output. Price level targeting or a Taylor-rule responding to the unemployment rate can handle better the asymmetric and hysteresis effects in our model and deliver significant welfare gains. Our results are robust to the inclusion of the effective lower bound on the monetary policy interest rate. JEL Classification: E24, E3, E5, O41, J64 |
| Keywords: | downward wage rigidity, endogenous growth, monetary policy, monetary policy invariance hypothesis, optimal inflation target, zero lower bound |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212635&r= |
| By: | Minoru Watanabe (Research Fellow, Graduate School of Economics, Kobe University/Hokusei Gakuen University) |
| Abstract: | This breif article describes the development of a simple overlapping generations model with unemployment and endogenous fertility to analyze the impact of increasing capital income tax. We find that higher capital income tax promotes employment and fertility. |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:2128&r= |
| By: | Marcin Kolasa; Michal Brzoza-Brzezina; Krzysztof Makarski |
| Abstract: | We study the macroeconomic effects of the COVID-19 epidemic in a quantitative dynamic general equilibrium setup with nominal rigidities. We evaluate various containment policies and show that they allow to dramatically reduce the welfare cost of the disease. Then we investigate the role that monetary policy, in its capacity to manage aggregate demand, should play during the epidemic. According to our results, treating the observed output contraction as a standard recession leads to overly expansionary policy. Finally, we check how central banks should resolve the trade-off between stabilizing the economy and containing the epidemic. If no administrative restrictions are in place, the second motive prevails and, despite the deep recession, optimal monetary policy is in fact contractionary. Conversely, if sufficient containment measures are introduced, central bank interventions should be expansionary and help stabilize economic activity. |
| Keywords: | COVID-19; Epidemics; Containment measures; Monetary policy |
| Date: | 2021–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/274&r= |
| By: | Fuchs-Schündeln, Nicola; Krueger, Dirk; Kurmann, André; Lalé, Etienne; Ludwig, Alexander; Popova, Irina |
| 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-Schündeln, 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 topto 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 revenues approximately sufficient to pay for the cost of this schooling expansion. |
| Keywords: | Covid-19,school closures,inequality,intergenerational persistence |
| JEL: | D15 D31 E24 I24 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:icirwp:4121&r= |
| By: | Balke, Neele (University of Chicago); Lamadon, Thibaut (University of Chicago) |
| Abstract: | This paper examines how employer- and worker-specific productivity shocks transmit to earnings and employment in an economy with search frictions and firm commitment. We develop an equilibrium search model with worker and firm shocks and characterize the optimal contract offered by competing firms to attract and retain workers. In equilibrium, riskneutral firms provide only partial insurance against shocks to risk-averse workers and offer contingent contracts, where payments are backloaded in good times and frontloaded in bad times. We prove that there exists a unique spot target wage, which serves as an attraction point for smooth wage adjustments. The structural model is estimated on matched employer-employee data from Sweden. The estimates indicate that firms absorb persistent worker and firm shocks, with respective passthrough values of 27 and 11%, but price permanent worker differences, a large contributor (32%) to variations in wages. A large share of the earnings growth variance can be attributed to job mobility, which interacts with productivity shocks. We evaluate the effects of redistributive policies and find that almost 40% of government-provided insurance is undone by crowding out firm-provided insurance. |
| Keywords: | wages; salary; |
| JEL: | J31 |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ifauwp:2021_019&r= |
| By: | Patrick Grüning (Latvijas Banka & Vilnius University); Justina Banionienė (Kaunas University of Technology); Lina Dagilienė (Kaunas University of Technology); Michael Donadelli (University of Brescia); Marcus Jüppner (Deutsche Bundesbank, Goethe University); Renatas Kizys (University of Southampton); Kai Lessmann (Potsdam Institute for Climate Impact Research) |
| Abstract: | The Circular Economy (CE) challenges the traditional linear economy model to arrive at a sustainable economy that minimizes resource use, its negative environmental impact, and dependency on resource imports. We develop a multi-sector dynamic stochastic general equilibrium small open economy model with endogenous adoption of exogenous foreign technology innovations, endogenous environmental quality, and CE elements, comprising recyclable waste as well as recycling and refurbishing sectors. We analyze the model-implied impulse response functions with respect to several economic shocks and conduct a rich scenario-based analysis, for which the scenarios are derived from the 9R strategies. We find important trade-offs to be considered by the economy with respect to circularity, trade, environment, and growth – the four dimensions of the quadrilemma of a small open circular economy. We find that none of the six shocks considered and in none of the eight scenarios analyzed the quadrilemma can be resolved. However, a positive shock to the price of energy or a lower energy share in one of the two intermediate goods sectors provide benefits to three out of four dimensions of the quadrilemma. |
| Keywords: | Circular economy, Small open economy, Recycling, Refurbishing, Endogenous economic growth, Technology adoption, General equilibrium, Energy |
| JEL: | E2 F4 O3 O4 Q4 Q5 |
| Date: | 2021–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:96&r= |
| By: | Axelle Ferriere (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Philipp Grubener (Goethe-University - Goethe-Universität Frankfurt am Main); Gaston Navarro (Federal Reserve Board); Oliko Vardishvili (Yale University [New Haven]) |
| Abstract: | We study the optimal joint design of targeted transfers and progressive income taxes. We develop a simple analytical model and demonstrate an optimally negative relation between transfers and income-tax progressivity, due to both efficiency and redistribution concerns. That is, higher transfers should be financed with lower income-tax progressivity. We next quantify the optimal fiscal plan in a rich dynamic model calibrated to the U.S. economy. Transfers should be generous and financed with moderate income-tax progressivity. To redistribute while preserving efficiency, average tax-and-transfer rates should be more progressive than marginal rates. Transfers, even if lump-sum, precisely allow to disentangle average from marginal rates. Targeted transfers further implement non-monotonic marginal rates, but generate only modest additional gains relative to a lump-sum transfer. Quantitatively, the left tail of the income distribution determines the optimal size of the transfer, while the right tail drives the optimal income-tax progressivity. |
| Keywords: | Fiscal Policy,Optimal Taxation,Redistribution,Heterogeneous Agents |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03466762&r= |
| By: | Cristina Badarau (Université de Bordeaux); Corentin Roussel (Université de Bordeaux) |
| Abstract: | In the aftermath of the Global Financial Crisis, financial regulation uses micro- and macro-prudential rules, most of the time motivated by empirical studies. This article suggests a theoretical explanation for countercyclical and progressive capital requirements that incorporate micro- and macro-prudential stabilization objectives. The Capital Adequacy Ratio (CAR) imposed to individual banks by a Prudential Authority (PA) would thus represent an optimal regulation whose aim is to avoid individual and systemic risk accumulation by imposing minimal constraints to financial institutions. This corresponds to the implementation of optimal time-varying prudential capital requirements to banks, with non-linear structure, that allows PA to take progressive countercyclical actions in order to insure financial stability. We also test the mechanism in a DSGE model and show that it would be more suitable for the financial and real stability compared to the existing fixed prudential ratios. |
| Keywords: | prudential regulation model, optimal CAR, time-varying capital requirements, DSGE model |
| JEL: | E |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2021.11&r= |
| By: | Hernán D. Seoane |
| Abstract: | This paper introduces digital assets, crypto assets in general, and Central Bank Dig- ital Currency in particular, into an otherwise standard New-Keynesian closed economy model with Financial Frictions. We use this setting to study the impact of a change in preferences towards the use of digital assets and to address whether the emergence of this type of instruments affect the transmission of monetary policy shocks. In this context we study the introduction of Central Bank Digital Currencies. The model is stylized but it could be a baseline for the design of models for quantitative analysis. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econpr:_33&r= |
| By: | Jess Benhabib; Wei Cui; Jianjun Miao |
| Abstract: | The distributions of wealth in the US and many other countries are strikingly concentrated on the top and skewed to the right. To explain the income and wealth inequality, we provide a tractable heterogeneous-agent model with incomplete markets in continuous time. We separate illiquid capital assets from liquid bond assets and introduce capital return jump risks. Under recursive utility, we derive optimal consumption and wealth in closed form and show that the stationary wealth distribution has an exponential right tail. Our calibrated model can match the income and wealth distributions in the US data including the extreme right tail. We also study the effect of taxes on the distribution of wealth. |
| JEL: | C61 D83 E21 E22 E31 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29544&r= |
| By: | Tsung-Hsien Li; Jan Sun |
| Abstract: | Many credit cardholders in the U.S. turn to expensive payday loans, even though they have not yet exhausted their credit lines. This results in significant monetary costs and has been coined the “Payday Loan Puzzle.” We propose the novel explanation that households use payday loans to protect their credit scores since payday lenders do not report to credit bureaus. To quantitatively examine this hypothesis, we build a two-asset Huggett-type model with two default options as well as hidden information and actions. Using our calibrated model, we can account for 40% of the empirically identified payday loan borrowers with liquidity left on their credit cards. We can also match the magnitude of monetary costs due to this seeming pecuniary mistake. To inform the policy debate over payday lending, we assess the welfare implications of several policy counterfactuals. We find that either banning payday loans or increasing their default costs results in aggregate welfare losses. |
| Keywords: | Consumer Credit, Bankruptcy, Default, Payday Loan, Financial Regulation, Type Score, Asymmetric Information, Hidden Action, Cross-Subsidization |
| JEL: | D82 E21 E49 G18 G51 K35 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2021_324&r= |
| By: | Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Simon Scheidegger |
| Abstract: | Climate change will impact current and future generations in different regions very differently. This paper develops a large-scale, annually calibrated, multi-region, overlapping generations model of climate change to study its heterogeneous effects across space and time. We model the relationship between carbon emissions and the global average temperature based on the latest climate science. Predicated average global temperature is used to determine, via pattern-scaling, region-specific temperatures and damages. Our main focus is determining the carbon policy that delivers present and future mankind the highest uniform percentage welfare gains – arguably the policy with the highest chance of global adoption. Damages from climate change are positive for all regions apart from Russia and Canada, with India and South Asia Pacific suffering the most. The optimal policy is implemented via a time-varying global carbon tax plus region-and generation-specific net transfers. Uniform welfare improving carbon policy can materially limit global emissions, dramatically shorten the use of fossil fuels, and raise the welfare of all current and future agents by over four percent. Unfortunately, the pursuit of carbon policy by individual regions, even large ones, makes only a limited difference. However, coalitions of regions, particularly ones including China, can materially limit carbon emissions. |
| Keywords: | none |
| JEL: | H23 O44 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:21.15&r= |
| By: | Lacava, Chiara |
| Abstract: | I measure the effects of workers' mobility across regions of different productivity through the lens of a search and matching model with heterogeneous workers and firms estimated with administrative data. In an application to Italy, I find that reallocation of workers to the most productive region boosts productivity at the country level but amplifies differentials across regions. Employment rates decline as migrants foster job competition, and inequality between workers doubles in less productive areas since displacement is particularly severe for low-skill workers. Migration does affect mismatch: mobility favors co-location of agents with similar productivity but within-region rank correlation declines in the most productive region. I show that worker-firm complementarities in production account for 33% of the productivity gains. Place-based programs directed to firms, like incentives for hiring unemployed or creating high productivity jobs, raise employment rates and reduce the gaps in productivity across regions. In contrast, subsidies to attract high-skill workers in the South have limited effects. |
| Keywords: | cross-regional mobility,mismatch,search-matching,sorting,productivity differentials |
| JEL: | J61 J64 R13 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:icirwp:4421&r= |
| By: | Sanou Issa (UP2 - Université Panthéon-Assas) |
| Abstract: | This paper examines wealth and income inequalities in a simple neoclassical growth model with consumption externality. Unlike the conventional setups, we assume endogenous labor supply, heterogeneous preferences and heterogeneity of households' initial asset holdings. We highlight that in presence of heterogeneous preferences, when labor supply is elastic, wealth inequality is not deterministic and an initially wealthy and more jealous household could be caught up by an initially less wealthy and less jealous household. Our study also reveals the existence of an additional condition to the reduction of wealth inequality and shows that there is reduction in wealth inequality if wealth is highly unevenly distributed. These results are supported by our numerical simulations. |
| Keywords: | Consumption externality,Income Inequality,Heterogeneous preferences,Labour supply,Status-seeking JEL classification D31,D62,D91,E13,J22,O41 |
| Date: | 2021–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03408115&r= |
| By: | Bagliano, Fabio C.; Fugazza, Carolina; Nicodano, Giovanna |
| Abstract: | This paper examines households’ self-insurance in financial markets when a rare personal disaster, such as disability or long-term unemployment, may occur during working years. Personal disaster risk alters lifetime ex-ante investment choices, even if most workers will not experience a disaster. Uncertainty about the size of human capital losses, which characterizes rare disasters, results in lower risk-taking at the beginning of working life, and is crucial in order to match the observed age profiles of US investors from 1992 to 2016. JEL Classification: D15, E21, G11 |
| Keywords: | beta distribution, disability risk, disaster risk, non-linear income process, portfolio choice, unemployment risk |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2021132&r= |
| By: | Marc Fleurbaey (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Marie-Louise Leroux (ESG-UQAM - UQAM - Université du Québec à Montréal = University of Québec in Montréal); Pierre Pestieau (Université de Liège); Gregory Ponthiere (UCL - Université Catholique de Louvain = Catholic University of Louvain); Stéphane Zuber (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | While little agreement exists regarding the taxation of bequests in general, there is a widely held view that accidental bequests should be subjected to a confiscatory tax. We reexamine the optimal taxation of accidental bequests by introducing a concern for compensating individuals for a premature death. Assuming that individuals care about what they leave to their offspring, we show that, whereas the 100 % tax view holds under the utilitarian criterion, the ex post egalitarian criterion (giving priority to the worst-off ex post) implies subsidizing accidental bequests so as to compensate the short-lived. In a second-best setting, compensating the short-lived justifies taxing total bequests at a rate increasing with the age of the deceased. Finally, when the model is extended to an intergenerational setting, accidental bequests cannot be used as a redistributive tool anymore, so that ex post egalitarianism rejoins the 100 % tax view. |
| Keywords: | mortality,accidental bequests,optimal taxation,compensation,OLG models |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:hal:pseptp:halshs-03454842&r= |
| By: | Kai Arvai |
| Abstract: | How can a currency union be sustained when member states have an exit option? This paper derives how fiscal and monetary policies can ensure the survival of a common currency, i countries want to leave the union. A union-wide central bank can prevent a break-up by setting interest rates in favor of the country that wants to exit. I show how a central bank does this by following a monetary rule with state-dependent country weights. The paper then demonstrates in a simulation that a central bank can only sustain the union for a while with this rule, but not permanently and that the best way to sustain the union is through fiscal transfers. |
| Keywords: | Currency union, Monetary policy, Lack of commitment, Exit option, Fiscal Policy |
| JEL: | E42 E52 E61 F33 F45 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:850&r= |