nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒02‒21
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A Behavioral Heterogeneous Agent New Keynesian Model By Oliver Pfäuti; Fabian Seyrich
  2. Monetary policy transmission, the labour share and HANK models By Lenney, Jamie
  3. State-Contingent Forward Guidance By Valentin Jouvanceau; Julien Albertini; Stéphane Moyen
  4. Extending Pension Policy in Emerging Asia: An Overlapping-Generations Model Analysis for Indonesia By George Kudrna; John Piggott; Phitawat Poonpolkul
  5. The financial accelerator mechanism: does frequency? By Foroni, Claudia; Gelain, Paolo; Marcellino, Massimiliano
  6. Bank Runs, Fragility, and Credit Easing By Manuel Amador; Javier Bianchi
  7. Mainly employment: survey-based news and the business cycle By Masolo, Riccardo M
  8. Why Does Risk Matter More in Recessions than in Expansions? By Martin M. Andreasen; Giovanni Caggiano; Efrem Castelnuovo; Giovanni Pellegrino
  9. TANK meets Diaz-Alejandro: Household heterogeneity, non-homothetic preferences & policy design By Santiago Camara
  10. Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework By Barnett, William A.; Eryilmaz, Unal
  11. Infrequent Random Portfolio Decisions in an Open Economy Model By Philippe Bacchetta; Eric van Wincoop; Eric R. Young
  12. Controlling Chaos in New Keynesian Macroeconomics By Barnett, William A.; Bella, Giovanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice
  13. Wealth in the Utility Function and Consumption Inequality By Yulei Luo; Jun Nie; Heng-fu Zou
  14. A Job Worth Waiting for: Parental Wealth and Youth Unemployment in Ghana By Stephanie de Mel
  15. Real Exchange Rates and Primary Commodity Prices: Mussa Meets Backus-Smith By Joao Luiz Ayres; Constantino Hevia; Juan Pablo Nicolini
  16. The Macroeconomic Effects of Funding U.S. Infrastructure By James Malley; Apostolis Philippopoulos
  17. Toward a green economy: the role of central bank's asset purchases By Alessandro Ferrari; Valerio Nispi Landi
  18. How should central banks react to household inflation heterogeneity? By Neyer, Ulrike; Stempel, Daniel
  19. Multi-Product Establishments and Product Dynamics By Masashige Hamano; Keita Oikawa
  20. On the Inefficiency of Non-Competes in Low-Wage Labor Markets By Bart Hobijn; Andre Kurmann; Tristan Potter
  21. COVID-19 and the GDP fall in Germany: A Business Cycle Accounting Approach By Scholl, Christoph
  22. Estimating temptation and commitment over the life-cycle By Agnes Kovacs; Hamish Low; Patrick Moran
  23. Money, Credit and Imperfect Competition Among Banks By Allen Head; Timothy Kam; Sam Ng; Isaac Pan
  24. The Downward Spiral By Jeremy Greenwood; Nezih Guner; Karen A. Kopecky
  25. Optimal Age-Based Vaccination and Economic Mitigation Policies for the Second Phase of the COVID-19 Pandemic By Andrew Glover; Jonathan Heathcote; Dirk Krueger; Jose-Victor Rios-Rull
  26. Gauging the gravity of the situation: The use and abuse of expertise in estimating the economic costs of Brexit By Semken, Christoph; Hay, Colin

  1. 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
  2. By: Lenney, Jamie (Bank of England)
    Abstract: I analyse the role of capital income in the transmission of demand shocks, such as monetary policy shocks, in a medium scale DSGE model that produces an empirically consistent counter-cyclical response of the labour share to monetary policy shocks. This is achieved by augmenting the one sector New Keynesian model with an alternate form of labour that seeks to expand the measure of goods available to consumers. I compare and contrast the transmissions of monetary policy shocks in the one sector ‘textbook’ model relative to the augmented model in both a representative agent (RANK) and heterogeneous agent (HANK) setting that includes a fully endogenous wealth distribution. The comparison highlights the role of capital income in the transmission of monetary policy shocks in these models. When the labour share moves counter-cyclically partial equilibrium decomposition’s of monetary policy transmission show a significant contractionary role for capital income.
    Keywords: DSGE; DCT; expansionary labour; HANK; inequality; intangible; New Keynesian; perturbation
    JEL: D31 E12 E21 E52 L29
    Date: 2022–01–07
  3. By: Valentin Jouvanceau (Bank of Lithuania); Julien Albertini (GATE, University of Lyon); Stéphane Moyen (Deutsche Bundesbank)
    Abstract: This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation.
    Keywords: New Keynesian model, Search and matching, ZLB, Forward guidance.
    JEL: E30 J60
    Date: 2022–01–25
  4. By: George Kudrna; John Piggott; Phitawat Poonpolkul
    Abstract: This paper examines the economy-wide effects of government policies to extend public pensions in emerging Asia particularly pertinent given the region’s large informal sector and rapid population ageing. We first document stylized facts about Indonesia’s labour force, drawing on the Indonesian Family Life Survey (IFLS). This household survey is then used to calibrate micro behaviours in a stochastic, overlapping-generations (OLG) model with formal and informal labour. The benchmark model is calibrated to the Indonesian economy (2000-2019), fitted to Indonesian demographic, household survey, macroeconomic and fiscal data. The model is applied to simulate pension policy extensions targeted to formal labour (contributory pension extensions to all formal workers with formal retirement age increased from 55 to 65), as well as to informal labour (introduction of non-contributory social pensions to informal 65+). First, abstracting from population ageing, we show that: (i) the first set of pension policy extensions (that have already been legislated and are being implemented in Indonesia) have positive effects on consumption, labour supply and welfare (of formal workers) (due largely to the formal retirement age extension); (ii) the introduction of social pensions targeted to informal workers at older age generates large welfare gains for currently living informal elderly; and (iii) the overall pension reform leads to higher welfare across the employment-skill distribution of households. We then extend the model to account for demographic transition, finding that the overall pension reform makes the contributory pension system more sustainable but the fiscal cost of non-contributory social pensions more than triples to 1:7% of GDP in the long run. As an alternative, we examine application of a means-tested social pension system within the overall pension reform. We show that this counterfactual reduces the fiscal cost (of social pensions) and further increases the welfare for both current and future generations.
    Keywords: Informal Labour; Population Ageing; Social Security; Taxation; Redistribution; Stochastic General Equilibrium
    JEL: E26 J1 J21 J26 H55 H24 C68
    Date: 2022–01
  5. By: Foroni, Claudia; Gelain, Paolo; Marcellino, Massimiliano
    Abstract: We use mixed-frequency (quarterly-monthly) data to estimate a dynamic stochastic general equilibrium model embedded with the financial accelerator mechanism à la Bernanke et al. (1999). We find that the financial accelerator can work very differently at monthly frequency compared to the quarterly frequency, i.e. we document its inversion. That is because aggregating monthly data into quarterly leads to large biases in the estimated quarterly parameters and, as a consequence, to a deep change in the transmission of shocks. JEL Classification: C52, E32, E52
    Keywords: DSGE models, financial accelerator, mixed-frequency data
    Date: 2022–02
  6. By: Manuel Amador; Javier Bianchi
    Abstract: We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors’ confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.
    Keywords: Bank runs; Financial crises; Credit easing
    JEL: E32 E44 E58 G01 G21 G33
    Date: 2021–10–15
  7. By: Masolo, Riccardo M (Bank of England)
    Abstract: Surprises in survey responses on perceived business conditions produce strong comovement in unemployment, consumption, investment, and output, and a muted response of inflation and measured total factor productivity (TFP). This suggests that news play an important role in explaining business cycle fluctuations, but also that attention should not be limited to TFP news. Employment news are the main driver of the overall index of reported business conditions. Vector autoregression impulse responses can be matched by a New Keynesian model in which individual risk, a positive supply of liquid funds, and complementarity between labour and capital inputs are modelled explicitly and the assumption of free entry of vacancies is done away with.
    Keywords: News; unemployment; business cycles; search frictions; individual risk
    JEL: C30 E31 E32
    Date: 2022–01–07
  8. By: Martin M. Andreasen (Aarhus University, CREATES, and the Danish Finance Institute); Giovanni Caggiano (Monash University and University of Padova); Efrem Castelnuovo (University of Padova); Giovanni Pellegrino (Aarhus University)
    Abstract: This paper uses a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences and approximated to third order around its risky steady state replicates these state-dependent responses. The key mechanism behind this result is that firms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions.
    Keywords: New Keynesian Model, Nonlinear SVAR, Non-recursive identification, State-dependent uncertainty shock, Risky steady state
    Date: 2021–08
  9. By: Santiago Camara
    Abstract: This paper studies the role of households' heterogeneity in access to financial markets and the consumption of commodity goods in the transmission of foreign shocks. First, I use survey data from Uruguay to show that low income households have poor to no access to savings technology while spending a significant share of their income on commodity-based goods. Second, I construct a Two-Agent New Keynesian (TANK) small open economy model with two main features: (i) limited access to financial markets, and (ii) non-homothetic preferences over commodity goods. I show how these features shape aggregate dynamics and amplify foreign shocks. Additionally, I argue that these features introduce a redistribution channel for monetary policy and a rationale for "fear-of-floating" exchange rate regimes. Lastly, I study the design of optimal policy regimes and find that households have opposing preferences a over monetary and fiscal rules.
    Date: 2022–01
  10. By: Barnett, William A.; Eryilmaz, Unal
    Abstract: We analyze determinacy in the baseline open-economy New Keynesian model developed by Gali and Monacelli (2005). We find that the open economy structure causes multifaceted behaviors in the system creating extra challenges for policy making. The degree of openness significantly affects determinacy properties of equilibrium under various forms and timing of monetary policy rules. Conditions for the uniqueness and local stability of equilibria are established. Determinacy diagrams are constructed to display the regions of unique and multiple equilibria. Numerical analyses are performed to confirm the theoretical results. Limit cycles and periodic behaviors are possible, but in some cases only for unrealistic parameter settings. Complex structures of open economies require rigorous policy design to achieve optimality.
    Keywords: bifurcation; determinacy; dynamic systems; New Keynesian; stability; open economy; Taylor Principle
    JEL: C14 C22 C52 C61 C62 E32 E37 E61 L16
    Date: 2022–01–12
  11. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Eric van Wincoop (University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)); Eric R. Young (University of Virginia)
    Abstract: We introduce a portfolio friction in a two-country DSGE model where investors face a constant probability to make new portfolio decisions. The friction leads to a more gradual portfolio adjustment to shocks and a weaker portfolio response to changes in expected excess returns. We apply the model to monthly data for the US and rest of the world for equity portfolios. We show that the model is consistent with a broad set of evidence related to portfolios, equity prices and excess returns for an intermediate level of the friction. The evidence includes portfolio inertia, limited sensitivity to expected excess returns, a significant impact of financial shocks, excess return predictability, and asset price momentum and reversal.
    Keywords: portfolio frictions, infrequent portfolio decisions, international portfolio allocation, excess return predictability, financial shocks.
    JEL: F30 F41 G11 G12
    Date: 2022–01
  12. By: Barnett, William A.; Bella, Giovanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice
    Abstract: In a New Keynesian model, it is believed that combining active monetary policy using a Taylor rule with a passive fiscal rule can achieve local equilibrium determinacy. However, even with such policies, indeterminacy can occur from the emergence of a Shilnikov chaotic attractor in the region of the feasible parameter space. That result, shown by Barnett et al. (2021), implies that the presence of the Shilnikov chaotic attractor can cause the economy to drift towards and finally become stuck in the vicinity of lower-than-targeted inflation and nominal interest rates. The result can become the source of a liquidity trap phenomenon. We propose policy options for eliminating or controlling Shilnikov chaotic dynamics to help the economy escape from the liquidity trap or avoid drifting into it in the first place. We consider ways to eliminate or control the chaos by replacing the usual Taylor rule by an alternative policy design without interest rate feedback, such as a Taylor rule with monetary quantity feedback, an active fiscal policy rule with passive monetary rule, or an open loop policy without feedback. We also consider approaches that retain the Taylor rule with interest rate feedback and the associated Shilnikov chaos, while controlling the chaos through a well-known engineering algorithm using a second policy instrument. We find that a second instrument is needed to incorporate a long-run terminal condition missing from the usual myopic Taylor rule.
    Keywords: Shilnikov chaos criterion, global indeterminacy, long-term un-predictability, liquidity trap, long run anchor.
    JEL: C61 C62 E12 E52 E63
    Date: 2022–01–11
  13. By: Yulei Luo; Jun Nie; Heng-fu Zou
    Abstract: Wealth in the utility function (WIU) has been increasingly used in macroeconomic models and this specification can be justified by a few theories such as Max Weber’s (1904-05, German; 1958) theory on “spirit of capitalism.” We incorporate the WIU into a general equilibrium consumption-portfolio choice model to study the implications of the WIU for consumption inequality, equilibrium interest rate, and equity premium—an unexplored area in the literature. Our general equilibrium framework features recursive exponential utility, uninsurable labor risks, and multiple assets and can deliver closed-form solutions to help disentangle the effects of the WIU in driving the key results. We show a stronger preference for wealth lowers the risk-free rate but increases the consumption inequality and equity premium in the equilibrium. We show these properties improve the model’s performance in explaining the data. We also compare the WIU with a closely related hypothesis, habit formation, and find that they have opposite effects on equilibrium asset returns and consumption inequality.
    Keywords: Wealth; Spirit of Capitalism; Risk free rates; Risk premia; Savings; Consumption inequality; Wealth inequality
    JEL: C61 D81 E21
    Date: 2021–12–22
  14. By: Stephanie de Mel (Institute for Fiscal Studies)
    Abstract: Youth unemployment in Ghana increases in parental wealth. This occurs because, without unemployment insurance, only workers with sufficiently high parental wealth can afford to remain unemployed, and do so to search for scarce, high-productivity jobs. I estimate a structural model of endogenous education, employment and occupational choice to quantify this effect; I demonstrate that it leads to low educational attainment, high income inequality, and low match efficiency among workers of heterogeneous ability. I decompose the effect of wealth on average lifetime earnings into education and unemployment channels, and show that the latter accounts for 37% of the total effect. Further, I compare the effectiveness of two alternative policy interventions: an education subsidy and unemployment insurance. I find that the former is most effective at increasing aggregate productivity, but comes at the cost of increasing income inequality, while the later has a smaller effect on aggregate productivity, but also decreases inequality.
    Date: 2020–07–09
  15. By: Joao Luiz Ayres; Constantino Hevia; Juan Pablo Nicolini
    Abstract: We show that explicitly modeling primary commodities in an otherwise totally standard incomplete markets open economy model can go a long way in explaining the Mussa puzzle and the Backus-Smith puzzle, two of the main puzzles in the international economics literature.
    Keywords: Primary commodity prices; Mussa puzzle; Backus-Smith puzzle
    JEL: F31 F41
    Date: 2021–09–24
  16. By: James Malley; Apostolis Philippopoulos
    Abstract: This paper quantitatively assesses the macroeconomic effects of the recently agreed U.S. bipartisan infrastructure spending bill in a neoclassical growth model. We add to the literature by considering a more detailed tax structure, different types of infrastructure spending and linkages between the final and intermediate goods sectors. We find that infrastructure spending cannot fully pay for itself despite public and private capital being underprovided. We further find long-run output multipliers above unity if infrastructure spending and rising public debt are financed by consumption, dividend and labour income taxes and below one for corporate taxes. We also show that except for the consumption tax, the size of the multipliers critically depends on the Frisch labour supply elasticity. Finally, when we compute differences in welfare across different public financing regimes, the net welfare gains and losses are relatively minor.
    Keywords: Infrastructure investment, public capital, fiscal multipliers, taxation
    JEL: E62 H41 H54
    Date: 2022–01
  17. By: Alessandro Ferrari (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: In a DSGE model, we study the effectiveness of a Green QE, i.e. a program of green-asset purchases by the central bank, along the transition to a carbon-free economy. The model is characterized by green firms that produce using a clean technology and brown firms that pollute but they can pay a cost to abate emissions. The transition is driven by an emission tax. We analyze the evolution of macroeconomic variables along the transition and we compare different versions of Green QE. We show two main findings, in our baseline calibration, where the green and the brown goods are imperfect substitutes. First, Green QE helps to further reduce emissions along the transition, but its quantitative impact on the stock of pollution is small. Second, we find the largest effects when the central bank invests in green assets in the early stage of the transition. Moreover, we highlight that the elasticity of substitution between the green and the brown good is a crucial parameter: if the goods are imperfect complements (an elasticity lower than one), Green QE raise emissions.
    Keywords: central bank, monetary policy, quantitative easing, climate change
    JEL: E52 E58 Q54
    Date: 2022–02
  18. By: Neyer, Ulrike; Stempel, Daniel
    Abstract: Empirical evidence suggests that considerable differentials in inflation rates exist across households. This paper investigates how central banks should react to household inflation heterogeneity in a tractable New Keynesian model. We include two households that differ in their consumer price inflation rates after adverse shocks. The central bank reacts to either an average of the households' consumer price inflation rates or their individual rates, respectively. After a negative demand shock, the consumer price inflation rates of both households diverge less from their steady states when the central bank only considers the individual inflation rate of the household experiencing the higher inflation rate. Furthermore, output fluctuates less under that regime. After a negative supply shock, a central bank only considering the household experiencing the higher inflation rate mitigates the immediate effects of the shock on both consumer price inflation rates more effectively. Our results imply that central banks, which react discretionarily to differing inflation experiences in an economy, lead to a more efficient attainment of an economy-wide inflation target and to lower fluctuations of all inflation rates.
    Keywords: Business cycles,inflation,inequality,household heterogeneity,New Keynesian models
    JEL: E31 E32 E52
    Date: 2022
  19. By: Masashige Hamano; Keita Oikawa
    Abstract: The current paper builds a general equilibrium model based on heterogeneous productivities of establishments and heterogeneous tastes at the product level. Establishments choose endogenously their product mix over the business cycle given different income elasticities across products in consumer preferences. We calibrate and estimate the model's shock processes with Japanese data and find that (de)regulation policy at entry, incumbent firms or establishments and each product level provide substantially different outcomes, thereby providing a caveat for policy debate.
    Date: 2022–02
  20. By: Bart Hobijn; Andre Kurmann; Tristan Potter
    Abstract: We study the efficiency of non-compete agreements (NCAs) in an equilibrium model of labor turnover. The model is consistent with empirical studies showing that NCAs reduce turnover, average wages, and wage dispersion for low-wage workers. But the model also predicts that NCAs, by reducing turnover, raise recruitment and employment. We show that optimal NCA policy: (i) is characterized by a Hosios like condition that balances the benefits of higher employment against the costs of inefficient congestion and poaching; (ii) depends critically on the minimum wage, such that enforcing NCAs can be efficient with a sufficiently high minimum wage; and (iii) alone cannot always achieve efficiency, also true of a minimum wage-yet with both instruments efficiency is always attainable. To guide policy makers, we derive a sufficient statistic in the form of an easily computed employment threshold above which NCAs are necessarily inefficiently restrictive, and show that employment levels in current low-wage U.S. labor markets are typically above this threshold. Finally, we calibrate the model to show that Oregon's 2008 ban of NCAs for low-wage workers increased welfare, albeit modestly (by roughly 0.1%), and that if policy makers had also raised the minimum wage to its optimal level (a 30% increase), welfare would have increased more substantially-by over 1%.
    Keywords: Non-compete agreements; low-wage labor markets; minimum wage
    JEL: J62 J63 E24
    Date: 2022–01–18
  21. By: Scholl, Christoph
    Abstract: The Business Cycle Accounting method by Chari, Kehoe, and McGrattan (2007) helps identify theories that have quantitative promise in explaining economic fluctuations. In this paper, it will be applied to Germany to study the impact of the COVID-19 pandemic. The efficiency wedge primarily drove Germany’s recession. The extensive lockdowns that prevented existing production factors such as labor and capital from producing at their full potential can explain the productivity loss. This suggests that the lockdowns are well identified as significant drivers of the reduction in economic activity and that their end would predict a sharp recovery in Germany.
    Keywords: Macroeconomics, Business Cycles, Business Cycle Accounting, COVID-19, Germany, GDP Drop, Recession, Productivity,
    JEL: C0 E0 F0
    Date: 2022–01–16
  22. By: Agnes Kovacs (Institute for Fiscal Studies and University of Manchester); Hamish Low (Institute for Fiscal Studies and University of Oxford & Nuffield College); Patrick Moran (Institute for Fiscal Studies and University of Copenhagen)
    Abstract: This paper estimates the importance of temptation (Gul and Pesendorfer, 2001) for consumption smoothing and asset accumulation in a structural life-cycle model. We use two complementary estimation strategies: ?rst, we estimate the Euler equation of this model; and second we match liquid and illiquid wealth accumulation using the Method of Simulated Moments. We ?nd that the utility cost of temptation is one-quarter of the utility bene?t of consumption. Further, we show that allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution: estimates of the EIS are substantially higher than without temptation. Finally, our Method of Simulated Moments estimation is able to match well the life-cycle accumulation pro?les for both liquid and illiquid wealth only if temptation is part of the preference speci?cation. Our ?ndings on the importance of temptation are robust to the di?erent estimation strategies.
    Date: 2020–07–27
  23. By: Allen Head; Timothy Kam; Sam Ng; Isaac Pan
    Abstract: Using micro-level data for the U.S., we provide new evidence—at national and state levels—of a positive (negative) relationship between the standard deviation (coefficient of variation) and the average in bank lending-rate markups. In a quantitative theory consistent with these empirical observations, banks’ lending market power is determined in equilibrium and is a novel channel of monetary policy. At low inflation, banks tend to extract higher markups from existing loan customers rather than competing for additional loans. As a result, banking activity need not be welfare-improving if inflation is sufficiently low. This result speaks to concerns regarding market power in the banking sectors of low-inflation countries. Normatively, under a given inflation target, welfare gains arise if a central bank can use additional liquidity-provision (or tax-and-transfer) instruments to offset banks’ market-power incentives.
    Keywords: Banking and Credit; Markups Dispersion; Market Power; Stabilization Policy; Liquidity
    JEL: E41 E44 E51 E63 G21
    Date: 2022–02
  24. By: Jeremy Greenwood (University of Pennsylvania); Nezih Guner (Centro de Estudios Monetarios y Financieros (CEMFI)); Karen A. Kopecky (Federal Reserve Bank of Atlanta)
    Abstract: There have been more than 500,000 opioid overdose deaths since 2000. To analyze the opioid epidemic, a model is constructed where individuals, with and without pain, choose whether to abuse opioids knowing the probabilities of addiction and dying. These odds are functions of opioid use. Markov chains are estimated from the US data for the college and non-college educated that summarize the transitions into and out of opioid addiction as well as to a deadly overdose. A structural model is constructed that matches the estimated Markov chains. The epidemic's drivers, and the impact of medical interventions, are examined.
    Keywords: addiction, college/non-college educated, deaths, fentanyl, Markov chain, medical interventions, opioids, OxyContin, pain, prices, structural model
    JEL: D11 D12 E13 I12 I14 I31 J11 J17
    Date: 2022–02
  25. By: Andrew Glover; Jonathan Heathcote; Dirk Krueger; Jose-Victor Rios-Rull
    Abstract: In this paper we ask how to best allocate a given time-varying supply of vaccines during the second phase of the Covid-19 pandemic across individuals of different ages. Building on the heterogeneous household model of optimal economic mitigation and redistribution developed by Glover et al. (2021), we contrast the actual vaccine deployment path that prioritized older individuals with one that first vaccinates younger workers. Vaccinating older adults first saves more lives but slows the economic recovery relative to inoculating younger adults first. Vaccines carry large welfare benefits in both scenarios (relative to a world without vaccines), but the older-first policy is optimal under a utilitarian social welfare function.
    Keywords: COVID-19; Vaccination paths
    JEL: E21 E63
    Date: 2021–12–17
  26. By: Semken, Christoph; Hay, Colin
    Abstract: HM Treasury's estimation of the economic consequences of Brexit - using standard macroeconomic models - during the EU referendum campaign represents a remarkable intervention in a highly politicized public debate. It raises a series of questions about the use of economic expertise. Through a detailed theoretical and empirical critique of the Treasury's methodology - and a reassessment of the likely effects of Brexit in light of this - we cast doubt on the utility of their approach, highlighting methodological issues, unrealistic assumptions, and misrepresentations of established facts. In the process we seek to identify some of the wider implications for the use and potential abuse of economic expertise in highly charged political contexts, such as the EU referendum debate.
    Keywords: Brexit,DSGE model,economic consequences,economic expertise,gravity model,HM Treasury,methodology
    Date: 2021

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