nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒01‒17
twelve papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Dynare: Reference Manual Version 5 By Adjemian, Stéphane; Bastani, Houtan; Juillard, Michel; Karamé, Fréderic; Mihoubi, Ferhat; Mutschler, Willi; Pfeifer, Johannes; Ratto, Marco; Rion, Normann; Villemot, Sébastien
  2. Gauging the effects of the German COVID-19 fiscal stimulus package By Hinterlang, Natascha; Moyen, Stéphane; Röhe, Oke; Stähler, Nikolai
  3. Monetary Policy and Endogenous Financial Crises By Collard, Fabrice; Boissay, Frédéric; Galì, Jordi; Manea, Cristina
  4. The Productivity Puzzle and the Decline of Unions By Mitra, Aruni
  5. Stuck at home: Housing demand during the COVID- 19 pandemic By William Gamber; James Graham; Anirudh Yadav
  6. Entry, Variable Markups, and Business Cycles By William L. Gamber
  7. Regulating Credit Booms from Micro and Macro Perspectives By Ogawa, Toshiaki
  8. Equilibrium Unemployment: The Role of Discrimination By Juan C. Córdoba; Anni T. Isojärvi; Haoran Li
  9. Reputation, Learning and Externalities in Frictional Markets By Farzad Pourbabaee
  10. News-Driven International Credit Cycles By Galip Kemal Ozhan
  11. Fiscal regimes and the exchange rate By Enrique Alberola; Carlos Cantú; Paolo Cavallino; Nicola Mirkov
  12. Corporate legacy debt, inflation, and the efficacy of monetary policy By Goodhart, C. A. E.; Peiris, M. U.; Tsomocos, Dimitrios P; Wang, Xuan

  1. By: Adjemian, Stéphane; Bastani, Houtan; Juillard, Michel; Karamé, Fréderic; Mihoubi, Ferhat; Mutschler, Willi; Pfeifer, Johannes; Ratto, Marco; Rion, Normann; Villemot, Sébastien
    Abstract: Dynare is a software platform for handling a wide class of economic models, in particular dynamic stochastic general equilibrium (DSGE) and overlapping generations (OLG) models. The models solved by Dynare include those relying on the rational expectations hypothesis, wherein agents form their expectations about the future in a way consistent with the model. But Dynare is also able to handle models where expectations are formed differently: on one extreme, models where agents perfectly anticipate the future; on the other extreme, models where agents have limited rationality or imperfect knowledge of the state of the economy and, hence, form their expectations through a learning process. Dynare offers a user-friendly and intuitive way of describing these models. It is able to perform simulations of the model given a calibration of the model parameters and is also able to estimate these parameters given a dataset. Dynare is a free software, which means that it can be downloaded free of charge, that its source code is freely available, and that it can be used for both non-profit and for-profit purposes.
    Keywords: Dynare; Numerical methods; Perturbation; Rational expectations
    JEL: C5 C6 C8
    Date: 2022–01
  2. By: Hinterlang, Natascha; Moyen, Stéphane; Röhe, Oke; Stähler, Nikolai
    Abstract: We simulate the fiscal stimulus packages set up by the German government to allevi-ate the costs of the COVID-19 pandemic in a dynamic New Keynesian multi-sectorgeneral equilibrium model. We find that, cumulated over 2020-2022, output lossesrelative to steady state can be reduced by more than 4 PP. On average, welfare costsof the pandemic can be mitigated by 5%, and even by 20% for liquidity-constrainedhouseholds. The long-run present value multiplier of the package amounts to 0.2. Consumption tax cuts and transfers to households primarily stabilize private con-sumption, and subsidies prevent firm defaults. The most cost-efficient measure isan increase in productivity-enhancing public investment. However, it materializesonly in the medium to long-term.
    Keywords: Fiscal Policy,COVID-19,DSGE Modelling,Sectoral Heterogeneity
    JEL: E1 E2 E62 H2 H30
    Date: 2021
  3. By: Collard, Fabrice; Boissay, Frédéric; Galì, Jordi; Manea, Cristina
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: Financial crisis ; monetary policy
    Date: 2021–12–20
  4. By: Mitra, Aruni
    Abstract: This paper argues that rapid de-unionization during the 1980s can explain the sudden vanishing of the procyclicality of productivity in the U.S. I use cross-sectional evidence from U.S. states and industries to argue that the lower cost of hiring and firing workers due to the decline in union power prompted firms to rely less on labour hoarding, making productivity less procyclical. Allowing the hiring cost to decrease by the same proportion as the decline in union density can match almost the entire drop in cyclical productivity correlations in a model with endogenous effort and costly employment adjustment.
    Keywords: productivity, unions, hiring cost, factor utilization, DSGE
    JEL: E22 E23 E24 E32 J50
    Date: 2021–10–03
  5. By: William Gamber; James Graham; Anirudh Yadav
    Abstract: The COVID-19 pandemic induced an increase in both the amount of time that households spend at home and the share of expenditures allocated to at-home consumption. These changes coincided with a period of rapidly rising house prices. We interpret these facts as the result of stay-at-home shocks that increase demand for goods consumed at home as well as the homes that those goods are consumed in. We first test the hypothesis empirically using US cross-county panel data and instrumental variables regressions. We find that counties where households spent more time at home experienced faster increases in house prices. We then study various pandemic shocks using a heterogeneous agent model with general equilibrium in housing markets. Stay-at-home shocks explain around half of the increase in model house prices in 2020. Lower mortgage rates explain around one third of the price rise, while unemployment shocks and fiscal stimulus have relatively small effects on house prices. We find that young households and first-time home buyers account for much of the increase in housing demand during the pandemic, but they are largely crowded out of the housing market by the equilibrium rise in house prices.
    Keywords: COVID-19, Pandemic, Stay at Home, Housing, House Prices, Consumption, Mortgage Interest Rates, Unemployment, Fiscal Stimulus
    JEL: E21 E32 E60 E62 E65 R21 R30
    Date: 2021–12
  6. By: William L. Gamber
    Abstract: The creation of new businesses declines in recessions. In this paper, I study the effects of pro-cyclical business formation on aggregate employment in a general equilibrium model of firm dynamics. The key features of the model are that the elasticity of demand faced by firms falls with their market share and that adjustment costs slow the reallocation of employment between firms. In response to a decline in entry, incumbent firms' market shares increase, their elasticity of demand falls, and they increase their markups and reduce employment. To quantify the model, I study the relationship between variable input use and revenue in panel data on large firms. Viewed through the lens of my model, my estimates imply that for large firms, the within-firm elasticity of the markup to relative sales is 25 percent. I use the calibrated model to study shocks to entry, finding that a fall in entry can lead to a significant contraction in employment. A shock to entry that replicates the decline in the number of businesses during the Great Recession generates a prolonged 2.5 percent fall in employment in the model. Finally, I show that the declining correlation between revenue and variable input use over the past 30 years implies that the effect of entry on the business cycle has become stronger over time.
    Keywords: Macroeconomics; Heterogeneous firms; Business dynamics; Variable markups
    JEL: E24 E32 J23 L20
    Date: 2021–12–02
  7. By: Ogawa, Toshiaki
    Abstract: This study examines how micro- and macro-prudential policies work and interact with each other over the credit cycles using a dynamic general equilibrium model of financial intermediaries. Micro-prudential policies restrict the excess risk-taking of individual institutions, while taking real interest rates (prices) as given. By contrast, macro prudential policies control the aggregate credit supplied (equilibrium outcome) by internalizing prices or the general equilibrium effect. The proposed model indicates that: (i) micro-prudential policy alone cannot completely remove inefficient credit cycles; (ii) when macro-prudential policy is conducted jointly with the micro-prudential one, policymakers can improve banks' credit quality and remove inefficient credit cycles completely without sacrificing the total credit supply; and (iii) the contributions of micro and macro-prudential policies to the improvement in social welfare are roughly comparable.
    Keywords: Micro-prudential policy; Macro-prudential policy; Moral hazard problem; General equilibrium; Inefficient credit cycles
    JEL: E0 E44 G01 G21 G28
    Date: 2022–01–05
  8. By: Juan C. Córdoba; Anni T. Isojärvi; Haoran Li
    Abstract: U.S. labor markets are increasingly diverse and persistently unequal between genders, races and ethnicities, skill levels, and age groups. We use a structural model to decompose the observed differences in labor market outcomes across demographic groups in terms of underlying wedges in fundamentals. Of particular interest is the potential role of discrimination, either taste-based or statistical. Our model is a version of the Diamond-Mortensen-Pissarides model extended to include a life cycle, learning by doing, a nonparticipation state, and informational frictions. The model exhibits group-specific wedges in initial human capital, returns to experience, matching efficiencies, and job separation rates. We use the model to reverse engineer group-specific wedges that we then feed back into the model to assess the fraction of various disparities they account for. Applying this methodology to 1998–2018 U.S. data, we show that differences in initial human capital, returns to experience, and job separation rates account for most of the demographic disparities; wedges in matching efficiencies play a secondary role. Our results suggest a minor aggregate impact of taste-based discrimination in hiring and an important role for statistical discrimination affecting particularly female groups and Black males. Our approach is macro, structural, unified, and comprehensive.
    Keywords: Search; Unemployment; Discrimination; Statistical Discrimination; Taste-Based Discrimination; Structural; Decomposition
    JEL: E20 J60 J70
    Date: 2021–12–17
  9. By: Farzad Pourbabaee
    Abstract: I introduce a dynamic model of random search where ex ante heterogeneous agents with unknown abilities match with a variety of projects. There is incomplete yet symmetric information about the agents' types. Interpreting the posterior belief about the agents' ability as their reputation, I study the outcomes of the economy (namely the endogenous matching sets and the steady-state distributions) when the success or failure of the projects create feedback effects: reputational externalities and spillovers in the population of projects. In the former case when the meeting rate of each agent is inversely impacted by the distribution of other agents' reputation, the proportion of agents who are both high ability and inactive is inefficiently high, and the projects suffer from early termination. When there are positive spillovers from the low-type to the high-type projects, increased levels of search frictions could save the market from breakdown caused by the rational neglect of spillover effect in the agents' matching decisions.
    Date: 2022–01
  10. By: Galip Kemal Ozhan
    Abstract: How does news about future economic fundamentals affect within-country and cross-country credit allocation? How effective is unconventional policy when financial crises are driven by unfulfilled favorable news? I study these questions by employing a two-sector, two-country macroeconomic model with a financial sector in which financial crises are associated with occasionally binding leverage constraints. In response to positive news on the valuation of non-traded sector capital that turns out to be incorrect at a later date, the model captures the patterns of financial flows and current account dynamics in Spain between 2000-2010, including the changes in the sectoral allocation of bank credit and movements in cross-country borrowing during the boom and the bust. When there are unconventional policies by a common authority in response to unfulfilled favorable news, liquidity injections perform better in ameliorating the downturn than direct assets purchases from the non-traded sector.
    Keywords: Central bank research; Digital currencies and fintech
    JEL: E44 F32 F41 G15 G21
    Date: 2021–12
  11. By: Enrique Alberola; Carlos Cantú; Paolo Cavallino; Nicola Mirkov
    Abstract: In this paper, we argue that the effect of monetary and fiscal policies on the exchange rate depends on the fiscal regime. A contractionary monetary (expansionary fiscal) shock can lead to a depreciation, rather than an appreciation, of the domestic currency if debt is not backed by future fiscal surpluses. We look at daily movements of the Brazilian real around policy announcements and find strong support for the existence of two regimes with opposite signs. The unconventional response of the exchange rate occurs when fiscal fundamentals are deteriorating and markets' concern about debt sustainability is rising. To rationalize these findings, we propose a model of sovereign default in which foreign investors are subject to higher haircuts and fiscal policy shifts between Ricardian and non-Ricardian regimes. In the latter, sovereign default risk drives the currency risk premium and affects how the exchange rate reacts to policy shocks.
    Keywords: Exchange rate, monetary policy, fiscal policy, fiscal dominance, sovereign default
    JEL: E52 E62 E63 F31 F34 F41 G15
    Date: 2022
  12. By: Goodhart, C. A. E.; Peiris, M. U.; Tsomocos, Dimitrios P; Wang, Xuan
    Abstract: The COVID-19 pandemic has coincided with a rapid increase in indebtedness. Although the rise in public debt and its policy implications have received much attention recently, the rise in corporate debt has received less so. We argue that high levels of corporate debt may impede the transmission mechanism of monetary policy and make it less effective in controlling inflation. In an environment with working capital financing requirements, when firms’ indebtedness is sufficiently high, the income effect of higher nominal interest rates offsets or even dominates its usual negative substitution effect on aggregate demand and is quantitatively important. This mechanism is independent of standard financial and nominal frictions and enhances the trade-off between inflation and output stabilisation.
    Keywords: coronavirus; covid-19
    JEL: E31 E44 E52 G33
    Date: 2021–12–10

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