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on Dynamic General Equilibrium |
| By: | Oliver Pfäuti; Fabian Seyrich |
| Abstract: | We propose a behavioral heterogeneous agent New Keynesian model in which monetary policy is amplified through indirect general equilibrium effects, fiscal multipliers can be larger than one and which delivers empirically-realistic intertemporal marginal propensities to consume. Simultaneously, the model resolves the forward guidance puzzle, remains stable at the effective lower bound and determinate under an interest-rate peg. The model is analytically tractable and nests a wide range of existing models as special cases, none of which can produce all the listed features within one model. We extend our model and derive an equivalence result of models featuring bounded rationality and models featuring incomplete information and learning. This extended model generates hump-shaped responses of aggregate variables and a novel behavioral amplification channel that is absent in existing HANK models. |
| Keywords: | Behavioral Macroeconomics, Heterogeneous Households, Monetary Policy, Forward Guidance, Fiscal Policy, New Keynesian Puzzles, Determinacy, Lower Bound |
| JEL: | E21 E52 E62 E71 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_334&r= |
| By: | Rauh, C.; Santos, M. R. |
| Abstract: | This paper studies the impact of existing and universal transfer programs on vacancy creation, wages, and welfare using a search-and-matching model with heterogeneous agents and on-the-job human capital accumulation. We calibrate the general equilibrium model to match key moments concerning unemployment, wage and wealth distributions, as well as the distribution of EITC and transfers. In addition, unemployment insurance benefits are related to pre-unemployment earnings and subject to exhaustion, after which agents can only rely on transfers and savings. First, we show that existing transfers hamper economic activity but provide sizeable welfare gains. Next, we show that a universal basic income of nearly $12,500 to each household per year, which replaces all existing transfer programs and unemployment benefits, can lead to small aggregate welfare gains. These welfare gains mostly accrue to less skilled individuals despite their sizable fall in wages, and the overall rise in skill premia and wage inequality. Albeit the extra burden of higher taxes to finance UBI, we show that the increased action in hiring is a key channel though which outcomes for low education groups improve with the reform. However, if we keep the UI benefits in place, the positive effects on job creation vanish and UBI does not improve upon the current system. |
| Keywords: | Transfer programs, EITC, Means-tested transfers, Welfare programs, Labor supply, On-the-job human capital accumulation, Life cycle, Inequality, Universal basic income, UBI, Unemployment, General equilibrium |
| Date: | 2022–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2208&r= |
| By: | Nurdaulet Abilov (NAC Analytica, Nazarbayev University) |
| Abstract: | We extend the literature on the role of uncertainty shocks in small open economies using a dynamic stochastic general equilibrium (DSGE) model with stochastic volatility for the economy of Kazakhstan. We build a small-scale DSGE model for Kazakhstan with non-linear time-varying volatility of shock processes. Due to the inherent non-linearity in the model we estimate the parameters of the volatility processes using the Particle filter, and then estimate structural parameters of the model via simulated method of moments (SMM) |
| Keywords: | DSGE model; Oil price uncertainty; Particle filter; Simulated method of moments; Kazakhstan. |
| JEL: | E20 E32 E43 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:ajx:wpaper:16&r= |
| By: | Jacopo Bonchi (Department of Economics and Finance and School of European Political Economy, LUISS Guido Carli); Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome) |
| Abstract: | Using a tractable New Keynesian model with heterogeneous agents, we analyze the interplay between households' heterogeneity and rational bubbles, and their normative implications for monetary policy. Households are infinitely-lived and heterogeneous because of two sources of idiosyncratic uncertainty, which makes them stochastically cycle in and out of segmented asset markets, and in and out of employment. We show that bubbles can emerge in equilibrium despite the fact that households are infinitely lived, because of the structural heterogeneity that affects their activity in asset and labor markets. The elasticity of an endogenous labor supply, the heterogeneity in asset-market participation and the level of long-run monopolistic distortions are shown to affect the size of equilibrium bubbles and their cyclical implications. We also show that a central bank concerned with social welfare faces an additional tradeoff implied by bubbly fluctuations which makes, in general, strict inflation targeting a suboptimal monetary-policy regime. |
| Keywords: | Inequality, Rational bubbles, Optimal monetary policy, HANK |
| JEL: | E21 E32 E44 E58 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:5/22&r= |
| By: | Philippe Andrade; Jordi Gali; Hervé Le Bihan; Julien Matheron |
| Abstract: | We address the question in this paper’s title using an estimated New Keynesian DSGE model of the euro area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r*, increases the probability of hitting the lower bound constraint, which entails significant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight-tenths the size of the drop in the real natural rate of interest is warranted. Absent an increase in the inflation target, and assuming the effective lower bound prevents the European Central Bank from implementing more aggressive negative interest rate policies, adjusting the monetary strategy requires considering alternative instruments or policy rules, such as a commitment to make up for recent, below-target inflation realizations. |
| Keywords: | inflation target; effective lower bound; monetary policy strategy; euro area |
| JEL: | E31 E52 E58 |
| Date: | 2021–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:93688&r= |
| By: | Xing Guo; Pablo Ottonello; Diego Perez |
| Abstract: | This paper examines how monetary policy affects the asymmetric effects of globalization. We build an open-economy heterogeneous-agent New Keynesian model (HANK) in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the effects of monetary policy and external shocks in open economies? And how do alternative exchange-rate regimes compare? Our analysis yields two main takeaways. First, heterogeneity in households’ international integration is a central dimension that drives the inequality in the consumption responses to external shocks more so than do income and wealth. Second, households’ heterogeneity reveals the presence of a stabilization-inequality trade-off for the conduct of monetary policy in open economies, with fixed exchange-rate regimes leading to amplified but less unequal consumption responses to external shocks. |
| Keywords: | Monetary policy; Exchange rate regimes |
| JEL: | E32 E52 F41 F44 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-6&r= |
| By: | Rafael Dix-Carneiro (Institute for Fiscal Studies and Duke University); Pinelopi Koujianou Goldberg (Institute for Fiscal Studies and Yale University); Costas Meghir (Institute for Fiscal Studies and Yale University); Gabriel Ulyssea (Institute for Fiscal Studies) |
| Abstract: | We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an “unemployment," but not a “welfare buffer" in the event of negative economic shocks. |
| Date: | 2021–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:21/02&r= |
| By: | Frédéric Boissay (Unknown); Fabrice Collard (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Jordi Galí (Unknown); Cristina Manea (Unknown) |
| 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: | 2022–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03509283&r= |
| By: | Mariacristina De Nardi (Institute for Fiscal Studies and University of Minnesota and Federal Reserve Bank of Minneapolis); Eric French (Institute for Fiscal Studies and University College London and University of Cambridge); John Bailey Jones (Institute for Fiscal Studies); Rory McGee (Institute for Fiscal Studies and University of Western Ontario) |
| Abstract: | While the savings of retired singles tend to fall with age, those of retired couples tend to rise. We estimate a rich model of retired singles and couples with bequest motives and uncertain longevity and medical expenses. Our estimates imply that while medical expenses are an important driver of the savings of middle-income singles, bequest motives matter for couples and high-income singles, and generate transfers to non-spousal heirs whenever a household mem-ber dies. The interaction of medical expenses and bequest motives is a crucial determinant of savings for all retirees. Hence, to understand savings, it is important to model household structure, medical expenses, and bequest motives. |
| Date: | 2021–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:21/12&r= |
| By: | Daniel R. Carroll; Sewon Hur |
| Abstract: | We provide a quantitative analysis of the distributional effects of the 2018 increase in tariffs by the U.S. and its major trading partners. We build a trade model with incomplete asset markets and households that are heterogeneous in their age, income, wealth and labor skill. When tariff revenues are used to reduce labor and capital income taxes and increase transfers, the average welfare loss from the trade war is equivalent to a permanent 0.1 percent reduction in consumption. Much larger welfare losses are concentrated among retirees and low-wealth and low-income workers, while only wealthy households experience a welfare gain. |
| Keywords: | tariffs; inequality; consumption; welfare; taxation |
| JEL: | E21 F10 F62 H21 |
| Date: | 2022–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:93663&r= |
| By: | Óscar Afonso (Faculty of Economics, University of Porto, CEF.UP and OBEGEF); Elena Sochirca (Department of Management and Economics, University of Beira Interior, NECE and NIPE); Pedro Cunha Neves (Faculty of Economics, University of Porto, CEF.UP and OBEGEF) |
| Abstract: | In this paper we develop a dynamic general equilibrium growth model in which robots can replace unskilled labor and: i) the government uses tax revenues to invest in social capital and compensate those who do not work; ii) there is monetary policy with cash-in-advance restrictions that impact, for example, wages; iii) social capital increases skilled-labor productivity and facilitates the technological-knowledge progress. Our results confirm that by reducing the unskilled-to-skilled-labor ratio, the robotization process increases the skill premium (and thus wage inequality between skilled and unskilled workers), stimulates economic growth and improves welfare. We also show that fiscal and monetary policies can have important roles in amplifying or mitigating these effects of the robotization process and that implementing specific policies can generate an important efficiency-equity trade-off. Despite the existence of this trade-off, the long-run economic growth is higher with than without the fiscal and monetary policies, which underlines their crucial role in attenuating the negative aspects of Industry 4.0. |
| Keywords: | Robots; Social Capital; Fiscal Policy; Monetary Policy; Growth |
| JEL: | E62 I31 I38 O30 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:cetedp:2201&r= |
| By: | David Lagakos; Mushfiq Mobarak; Michael E. Waugh |
| Abstract: | This paper studies the welfare effects of encouraging rural-urban migration in the developing world. To do so, we build and analyze a dynamic general-equilibrium model of migration that features a rich set of migration motives. We estimate the model to replicate the results of a field experiment that subsidized seasonal migration in rural Bangladesh, leading to significant increases in migration and consumption. We show that the welfare gains from migration subsidies come from providing better insurance for vulnerable rural households rather than correcting spatial misallocation by relaxing credit constraints for those with high productivity in urban areas that are stuck in rural areas. |
| Keywords: | Risk; Insurance; Rural-urban gaps; Field experiment; Rural-urban migration; Spatial misallocation |
| JEL: | J61 R23 O11 O15 |
| Date: | 2022–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:93606&r= |
| By: | Hinterlang, Natascha; Tänzer, Alina |
| Abstract: | This paper introduces a reinforcement learning based approach to compute optimal interest rate reaction functions in terms of fulfilling inflation and output gap targets. The method is generally flexible enough to incorporate restrictions like the zero lower bound, nonlinear economy structures or asymmetric preferences. We use quarterly U.S. data from1987:Q3-2007:Q2 to estimate (nonlinear) model transition equations, train optimal policies and perform counterfactual analyses to evaluate them, assuming that the transition equations remain unchanged. All of our resulting policy rules outperform other common rules as well as the actual federal funds rate. Given a neural network representation of the economy, our optimized nonlinear policy rules reduce the central bank's loss by over43 %. A DSGE model comparison exercise further indicates robustness of the optimized rules. |
| Keywords: | Optimal Monetary Policy,Reinforcement Learning,Artificial Neural Network,Machine Learning,Reaction Function |
| JEL: | C45 C61 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:512021&r= |
| By: | Marco Bassetto (Institute for Fiscal Studies and Federal Reserve Bank of Minneapolis); Wei Cui (Institute for Fiscal Studies) |
| Abstract: | We study optimal taxation in an economy with financial frictions, in which the government cannot directly redistribute towards the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. We establish a stark result. Provided this is feasible, optimal policy calls for the government to increase its debt, up to the point at which it provides sufficient liquidity to avoid financial constraints. In this case, capital-income taxes are zero in the long run, and the returns on government debt and capital are equalized. However, if the fiscal space is insufficient, a wedge opens between the rates of return on government debt and capital. In this case, optimal long-run tax policy is driven by a trade-off between the desire to mitigate financial frictions by subsidizing capital and the incentive to exploit the quasi-rents accruing to producers of capital by taxing capital instead. This latter incentive magnifies the wedge between rates of return on government debt and capital. It also makes it optimal to distort downward the interest rate on government debt in periods of high government spending. |
| Date: | 2021–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:21/05&r= |
| By: | Loria, Francesca; Matthes, Christian; Wang, Mu-Chun |
| Abstract: | Economic theories are often encoded in equilibrium models that cannot be directly estimated because they lack features that, while inessential to the theoretical mechanism that is central to the specific theory, would be essential to fit the data well. We propose an econometric approach that confronts such theories with data through the lens of a time series model that is a good description of macroeconomic reality. Our approach explicitly acknowledges misspecificationas well as measurement error. We highlight in two applications that household heterogeneity greatly helps to fit aggregate data, independently of whether or not nominal rigidities are considered. |
| Keywords: | Bayesian Inference,Misspecification,Heterogeneity,VAR,DSGE |
| JEL: | C32 C50 E30 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:562021&r= |
| By: | Javier García-Cicco |
| Abstract: | We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy rules: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative merits of each of them is indeed influenced by how agents form inflation-related expectations. |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:822&r= |
| By: | Jean-Guillaume Sahuc; Olivier de Bandt; Hibiki Ichiue; Bora Durdu; Yasin Mimir; Jolan Mohimont; Kalin Nikolov; Sigrid Roehrs; Valério Scalone; Michael Straughan |
| Abstract: | This paper (i) reviews the different channels of transmission of prudential policy highlighted in the literature and (ii) provides a quantitative assessment of the impact of Basel III reforms using "off-the-shelf" DSGE models. It shows that the effects of regulation are positive on GDP whenever the costs and benefits of regulation are both introduced. However, this result may be associated with a temporary economic slowdown in the transition to Basel III, which can be accommodated by monetary policy. The assessment of liquidity requirements is still an area for research, as most models focus on costs, rather than on benefits, in particular in terms of lower contagion risk. |
| Keywords: | Basel III reforms, DSGE models, solvency requirements, liquidity requirements |
| JEL: | E3 E44 G01 G21 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2022-3&r= |
| By: | Cristina Arellano; Yan Bai; Gabriel Mihalache |
| Abstract: | We study the COVID-19 epidemic in emerging markets that face financial frictions and its mitigation through social distancing and vaccination. We find that restricted vaccine availability in emerging markets, as captured by limited quantities and high prices, renders the pandemic exceptionally costly compared to economies without financial frictions. Improved access to financial markets enables better response to the delay in vaccine supplies, as it supports more stringent social distancing measures prior to wider vaccine availability. We show that financial assistance programs to such financially constrained countries can increase vaccinations and lower fatalities, at no present-value cost to the international community. |
| Keywords: | Fiscal space; Vaccination; Financial market conditions; COVID-19 |
| JEL: | I18 F41 F34 |
| Date: | 2021–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:93491&r= |
| By: | Luca Fornaro; Federica Romei |
| Abstract: | We study optimal monetary policy during times of exceptionally high global demand for tradable goods, relative to non-tradable services. The optimal monetary response entails a rise in inflation, which helps rebalance production toward the tradable sector. While the inflation costs are fully beared domestically, however, part of the gains in terms of higher supply of tradable goods spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy during tradable goodsdriven recoveries. |
| Keywords: | Asymmetric shocks, reallocation, monetary policy, international monetary cooperation, inflation, global supply shortages |
| JEL: | E32 E44 E52 F41 F42 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1814&r= |
| By: | Andrew Glover; Jonathan Heathcote; Dirk Krueger |
| Abstract: | In this paper, we ask how to best allocate a given time-varying supply of vaccines across individuals of different ages during the second phase of the Covid-19 pandemic . Building on our previous heterogeneous household model of optimal economic mitigation and redistribution (Glover et al., 2021), we contrast the actual vaccine deployment path, which prioritized older, retired individuals, with one that first vaccinates younger workers. Vaccinating the old first saves more lives but slows the economic recovery, relative to inoculating the young first. Vaccines deliver large welfare benefits in both scenarios (relative to a world without vaccines), but the old-first policy is optimal under a utilitarian social welfare function. The welfare gains from having vaccinated the old first are especially significant once the economy is hit by a more infectious Delta variant in the summer of 2021. |
| Keywords: | COVID-19; Vaccination paths |
| JEL: | E63 E21 |
| Date: | 2022–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:93646&r= |