nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒02‒28
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Aggregate and Intergenerational Implications of School Closures: A Quantitative Assessment By Youngsoo Jang; Minchul Yum
  2. How do transfers and universal basic income impact the labor market and inequality? By Rauh, C.; Santos, M. R.
  3. A Medium-Scale DSGE Model for the Integrated Policy Framework By Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
  4. Partnership Dissolution in a Search Market With On-The-Match Learning By Finn Schmieter
  5. Inflationary redistribution, trading opportunities and consumption inequality By Timothy Kam; Junsang Lee
  6. Investment-Specific Technological Change and Universal Basic Income in the U.S. By Vedor, Bernardo
  7. Idiosyncratic Income Risk and Aggregate Fluctuations By Davide Debortoli; Jordi Galí
  8. Public Debt and Welfare in a Quantitative Schumpeterian Growth Model With Incomplete Markets By Marco Cozzi
  9. Worker-Firm Screening and the Business Cycle By Bradley, Jake
  10. Two-Sided Search in International Markets By Jonathan Eaton; David Jinkins; James R. Tybout; Daniel Xu
  11. Political Constraints and Sovereign Default By Marina Azzimonti; Nirvana Mitra
  12. Loss-of-Learning and the Post-Covid Recovery in Low-Income Countries By Mr. Edward F Buffie; Mr. Christopher S Adam; Mr. Kangni R Kpodar; Luis-Felipe Zanna
  13. Socially Optimal Crime and Punishment By Ferraz, Eduardo; Soares, Rodrigo R.
  14. Inflation and Welfare in a Competitive Search Equilibrium with Asymmetric Information By Lorenzo Carbonari; Fabrizio Mattesini; Robert J. Waldmann
  15. Credit Cards, Credit Utilization, and Consumption By Scott Fulford; Scott Schuh
  16. Economic Winners Versus Losers and the Unequal Pandemic Recession By Fernando Cirelli; Mark Gertler
  17. Mind the Gap! The (unexpected) impact of COVID-19 pandemic on VAT revenue in Italy By Francesco Berardini; Fabrizio Renzi
  18. Complete Markets with Bankruptcy Risk and Pecuniary Default Penalties By Victor Filipe Martins da Rocha; Rafael Mouallem Rosa
  19. Currency Undervaluation and Comparative Advantage By Paul Bergin
  20. Business Cycle Accounting for the COVID-19 Recession By Fernandes, Daniel
  21. Zero-Hours Contracts in a Frictional Labor Market By Dolado, Juan J.; Lalé, Etienne; Turon, Hélène
  22. Firm-to-Firm Trade: Imports, Exports, and the Labor Market By Jonathan Eaton; Samuel S. Kortum; Francis Kramarz
  23. Asserting Independence: Optimal Monetary Policy When the Central Bank and Political Authority Disagree By Justin Svec; Daniel L. Tortorice
  24. Employment Effects of Restricting Fixed-Term Contracts: Theory and Evidence By Cahuc, Pierre; Carry, Pauline; Malherbet, Franck; Martins, Pedro S.
  25. Income and wealth distribution in macroeconomics: a continuous-time approach By Achdou, Yves; Han, Jiequn; Lasry, Jean Michel; Lions, Pierre Louis; Moll, Ben
  26. Learning about profitability and dynamic cash management By Décamps, Jean-Paul; Villeneuve, Stéphane

  1. By: Youngsoo Jang; Minchul Yum
    Abstract: A majority of governments around the world unprecedentedly closed schools in response to the COVID-19 pandemic. This paper quantitatively investigates the macroeconomic and distributional consequences of school closures through intergenerational channels in the medium- and long-term. The model economy is a dynastic overlapping generations general equilibrium model in which schools, in the form of public education investments, complement parental investments in producing children's human capital. We calibrate the stationary equilibrium of the model to the U.S. economy and compute the equilibrium responses following unexpected school closure shocks. We find that school closures have moderate long-lasting adverse effects on macroeconomic aggregates such as output. In addition, we find that school closures reduce intergenerational mobility, especially among older children. Finally, we find that lower substitutability between public and parental investments induces larger damages in the aggregate economy and overall lifetime incomes of the affected children, while mitigating negative impacts on intergenerational mobility. In all findings, heterogeneous parental responses to school closures play a key role. Our results provide a quantitatively relevant dimension to consider for policymakers assessing potential costs of school closures.
    Keywords: Intergenerational mobility, lifetime income, parental investments, aggregate loss, substitutability
    JEL: E24 I24 J22
    Date: 2020–11
  2. 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
  3. By: Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
    Abstract: This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.
    Keywords: Monetary Policy, Foreign Exchange Intervention, Fiscal Policy, Macroprudential Policy, Capital Flow Management, Dynamic Stochastic General Equilibrium Model, Small Open Economy
    Date: 2022–01–28
  4. By: Finn Schmieter
    Abstract: We construct a frictional search-and-matching model with on-the-match learning and rematching. Agents are ex-ante homogeneous, have idiosyncratic preferences, and receive news about the profitability of their current match following a Poisson process. We provide an infinite number of pointwise balance conditions and a finite number of aggregate balance conditions and prove their equivalence. We show that agents follow cutoff strategies in the unique steady-state equilibrium. If the profitability types inside a match have a strong positive (negative) correlation, then a faster learning rate is ex-ante welfare-increasing (decreasing) for the agents.
    Keywords: Search frictions, matching, on-the-job search, learning
    JEL: C78 D83 J64
    Date: 2022–01
  5. By: Timothy Kam; Junsang Lee
    Abstract: We study competitive search in goods markets in a heterogeneous-agent monetary model. The model accounts for three stylized facts connecting inflation to consumption inequality, to price dispersion, and to the speed of monetary payments. With competitive search, individuals’ endogenous probabilities on trading events give rise to a trading-opportunity (extensive-margin) force that works in opposite direction to well-known redistributive (intensive-margin) effect of inflation. This implies a new trade-off in response to long run inflation targets. Welfare falls but liquid-wealth inequality falls and then rises with inflation as an extensive margin of trade dominates the redistributive intensive margin, when inflation is sufficiently high.
    Keywords: Competitive Search, Inflation, Policy Trade-offs, Redistribution, Computational Geometry
    JEL: E0 E4 E5 E6 C6
    Date: 2022–02
  6. By: Vedor, Bernardo
    Abstract: Since 1980, income and wealth inequality increased gradually in the U.S.. Several solutions have been proposed, namely the introduction of a Universal Basic Income (UBI) system. In order to assess whether a UBI financed by a progressive labor tax is a viable solution to reduce inequality, we develop an overlapping generations model, with multiple sources of technological change and four different occupations. Calibrating the model to the U.S. we find that the welfare-maximizing level of UBI is actually quite low, 0.5% of GDP. Even though a higher UBI would decrease income and wealth inequality, it would negatively affect economic efficiency and make all types of agents worse off. The main mechanism is the distortionary effect of higher labor income taxation on capital accumulation which prevents the economy from incorporating the gains from investment-specific technological progress.
    Keywords: Macroeconomics, Income Inequality, Technological Change, Universal Basic Income
    JEL: E21 H21 J31
    Date: 2022–01–25
  7. By: Davide Debortoli; Jordi Galí
    Abstract: We study the role of idiosyncratic income shocks for aggregate fluctuations within a simple heterogeneous household framework with no binding borrowing constraints. We show that the presence of idiosyncratic income shocks affects the economy’s response to an aggregate shock in a way that can be captured by a consumption weighted average of the changes in uncertainty generated by the shock. We apply this framework to two example economies —an endowment economy and a New Keynesian economy— and show that under plausible calibrations the impact of idiosyncratic income shocks on aggregate fluctuations is quantitatively small, since most of the changes in uncertainty are concentrated among poorer (low consumption) households.
    JEL: E21 E32
    Date: 2022–01
  8. By: Marco Cozzi (Department of Economics, University of Victoria)
    Abstract: This paper quantifies the welfare effects of counterfactual public debt policies using an endogenous growth model with incomplete markets. The economy features public debt, Schumpeterian growth, infinitely-lived agents, uninsurable income risk, and discount factor heterogeneity. Two versions of the model are specified, one allowing for households to hold equity in the group of innovating firms. The model is calibrated to the U.S. economy to match the degree of wealth inequality, the share of R&D expenditure in GDP, the firms exit rate, the average growth rate, and other standard long-run targets. When comparing balanced growth paths, I find large long-run welfare gains in equilibria characterized by governments accumulating public wealth. In some parameterizations, the equilibrium response of the growth rate is modest. However, welfare effects decompositions show that the growth component is still an important determinant of the welfare gains in the equilibria characterized by public wealth. The version of the model without equity is easier to solve computationally, allowing to consider transitional dynamics. Taking into account the dynamic adjustment to the new long-run equilibrium shows that the transitional welfare costs are not large enough to change the sign of the welfare effects stemming from a change in public debt. I find that eliminating public debt would lead to a 1.7 increase in welfare, while moving to a debt/GDP ratio of 100% would entail a welfare loss of 0.8%
    Keywords: Public debt, Heterogeneous Agents, Incomplete Markets, Endogenous Growth, Welfare
    Date: 2022–02–15
  9. By: Bradley, Jake (University of Nottingham)
    Abstract: There has been a substantial body of work modeling the co-movement of employment, vacancies, and output over the business cycle. This paper builds on this literature, and informed by empirical investigation, models worker and firm search and hiring behavior in a manner consistent with recent micro-evidence. Consistent with empirical findings, for a given vacancy, a firm receives many applicants, and chooses their preferred candidate amongst the set. Similarly, workers in both unemployment and employment, can evaluate many open vacancies simultaneously and choose to which they make an application. Business cycles are propagated through turbulence in the economy. Structural parameters of the model are estimated on U.S. data, targeting aggregate time series. The model can generate large volatility in unemployment, vacancies, and worker flows across jobs and employment state. Further, it provides a theoretical mechanism for the shift in the Beveridge curve after the 2008 recession - a phenomenon often referred to as the jobless recovery. That is, persistently low employment after the recession, despite output per worker and vacancies having returned to pre-crisis levels.
    Keywords: Beveridge curve, screening, jobless recovery
    JEL: J63 J64
    Date: 2022–01
  10. By: Jonathan Eaton; David Jinkins; James R. Tybout; Daniel Xu
    Abstract: We develop a dynamic model of international business-to-business transactions in which sellers and buyers search for each other, with the probability of a match depending on both individual and aggregate search effort. Fit to customs records on U.S. apparel imports, the model captures key cross-sectional and dynamic features of international buyer-seller relationships. We use the model to make several quantitative inferences. First, we calculate the search costs borne by heterogeneous importers and exporters. Second, we provide a structural interpretation for the life cycles of importers and exporters as they endogenously acquire and lose foreign business partners. Third, we pursue counterfactuals that approximate the phaseout of the Agreement on Textiles and Clothing (the “China shock”) and the IT revolution. Lower search costs can significantly improve consumer welfare, but at the expense of importer profits. On the other hand, an increase in the population of foreign exporters can congest matching to the extent of dampening or even reversing the gains consumers enjoy from access to extra varieties and more retailers.
    JEL: F12 F14
    Date: 2022–01
  11. By: Marina Azzimonti; Nirvana Mitra
    Abstract: We study how political constraints, characterized by the degree of flexibility to choose fiscal policy, affect the probability of sovereign default. To that end, we relax the assumption that policymakers always repay their debt in the dynamic model of fiscal policy developed by Battaglini and Coate (2008). In our setup, legislators bargain over taxes, general spending, debt repayment, and a local public good that can be targeted to the region they represent. Under tighter political constraints, more legislators have veto power, implying that local public goods need to be provided to a larger number of regions. The resources that are freed after a default have to be shared with a higher number of individuals, which reduces the benefits from defaulting in per-capita terms. This lowers the incentive to default compared to the case with lax political constraints. The model is calibrated to Argentina and the results conform to robust empirical evidence. An event study for the 2001/2002 sovereign debt crisis shows that political constraints had an important role in the buildup that led to the crisis.
    JEL: D72 E43 E62 E65 F34 F41 F44 H2 H4 H63
    Date: 2022–01
  12. By: Mr. Edward F Buffie; Mr. Christopher S Adam; Mr. Kangni R Kpodar; Luis-Felipe Zanna
    Abstract: We analyze the medium-term macroeconomic impact of the Covid-19 pandemic and associated lock-down measures on low-income countries. We focus on the impact over the medium-run of the degradation of health and human capital caused by the pandemic and its aftermath, exploring the trade-offs between rebuilding human capital and the recovery of livelihoods and macroeconomic sustainability. A dynamic general equilibrium model is calibrated to reflect the structural characteristics of vulnerable low-income countries and to replicate key dimensions of the Covid-19 shock. We show that absent significant and sustained external financing, the persistence of loss-of-learning effects on labor productivity is likely to make the post-Covid recovery more attenuated and more expensive than many contemporary analyses suggest.
    Keywords: Covid-19, Public Investment, Growth, Debt, Fiscal Policy Human Capital, Labor Markets, Welfare
    Date: 2022–02–04
  13. By: Ferraz, Eduardo (Universidad del Rosario); Soares, Rodrigo R. (Insper, São Paulo)
    Abstract: This paper develops a dynamic life-cycle equilibrium model of crime with hetero-geneous agents and human capital accumulation. Agents decide at each point in time whether to commit crimes by comparing potential gains from crime to the expected cost of punishment (determined from the probability of apprehension, the utility cost of incarceration, and reduced future wages in the legal labor market). Public security policies are defined as pairs of a size of the police force and an average length of sentences. We propose an original micro-founded police production function linking the level of police expenditures to the probability of apprehension. The structural model, estimated using 2000s US data and causal parameters from the empirical literature, allows us to evaluate the global optimality of policies in a way that would not be possible with reduced form estimates or traditional partial equilibrium, static models of crime. Equilibrium effects can be particularly relevant when studying crime, given the interactions across individuals' decisions and policies. We also extend the model to include investments in schooling and explore the potential complementarities across public security and educational policies.
    Keywords: crime, welfare, police, sentence length, socially optimal policy
    JEL: K42 I38
    Date: 2022–01
  14. By: Lorenzo Carbonari (Università di Roma “Tor Vergata”, Italy); Fabrizio Mattesini (Università di Roma “Tor Vergata”, Italy; EIEF); Robert J. Waldmann (Università di Roma “Tor Vergata”, Italy)
    Abstract: We study an economy characterized by competitive search and asymmetric information. Money is essential. Buyers decide their cash holdings after observing the contracts posted by firms and experience match-specific preference shocks which remain unknown to sellers. Firms are allowed to post general contracts. In the baseline model with indivisible goods, we show that, when the number of potential buyers is fixed, inflation decreases markups. This, in turn, increases aggregate output and ex ante welfare. When goods are divisible the negative effect of inflation on markups holds for unconstrained agents but is ambiguous for constrained agents. Still, optimal monetary policy implies a positive nominal rate. When there is buyers' free entry, asymmetric information causes a congestion effect that can be corrected by monetary policy.
    Date: 2022–02
  15. By: Scott Fulford (Consumer Financial Protection Bureau); Scott Schuh (West Virginia University)
    Abstract: Credit bureau data show remarkably stable consumer utilization of unsecured debt over the business cycle, life cycle, and individually quarter-to-quarter, despite massive variation in available credit. To explain these new findings, we propose a life-cycle consumption model with heterogeneous preferences, endogenous payment choice, and the option to revolve debt for consumption smoothing. Using diary data to identify payment use, the estimated model matches consumption and credit use at every frequency and suggests that around half the population has an endogenously high marginal propensity to consume. The results suggest understanding credit availability and heterogeneous use may lead to richer counter-cyclical policies.
    Keywords: Credit cards, life cycle, consumption, saving, precaution, buffer-stock, payments
    JEL: D14 D15 E21 E27
    Date: 2020–12–20
  16. By: Fernando Cirelli; Mark Gertler
    Abstract: As is well known, during the pandemic recession firms directly exposed to the virus, i.e. the “contact” sector, contracted sharply and recovered slowly relative to the rest of the economy. Less understood is how firms that “won” by offering safer substitutes for contact sector goods have affected this unequal downturn. Using both firm and industry data, we first construct disaggregated measures of revenue growth that distinguish between contact sector losers, contact sector winners, and the non-contact sector. We show that contact sector losers contracted roughly fifty percent more than the sector average, while winners grew. Further, forecast data suggests that the gap between winners and losers will persist at least through 2022. To explain this evidence, we then develop a simple three sector New Keynesian model with (i) a sector of firms that offers safe substitutes for risky contact sector goods and (ii) learning by doing. Overall, the model captures the unequal sectoral recession. It also accounts for inflation, including the sharp runup in 2021.
    JEL: E3 E4
    Date: 2022–01
  17. By: Francesco Berardini (Bank of Italy); Fabrizio Renzi (Bank of Italy)
    Abstract: Policy evaluation based on the estimation of dynamic stochastic general equilibrium models with aggregate macroeconomic time series rests on the assumption that a representative agent can be identified, whose behavioural parameters are independent of the policy rules. Building on earlier work by Geweke, the main goal of this paper is to show that the representative agent is in general not structural, in the sense that its estimated behavioural parameters are not policyindependent. The paper identifies two different sources of nonstructurality. The latter is shown to be a fairly general feature of optimizing representative agent rational expectations models estimated on macroeconomic data.
    Keywords: Covid-19, value added tax, vat compliance, vat gap, cashless payments, payment habits, household behavior, consumer preferences.
    JEL: H21 H26 E21 E32
    Date: 2022–02
  18. By: Victor Filipe Martins da Rocha (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique, EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro]); Rafael Mouallem Rosa (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro])
    Abstract: For an infinite horizon economy with complete contingent markets, bankruptcy risk, and linear utility penalties for default, Araujo and Sandroni (1999) and Araujo, Da Silva, and Faro (2016) show that if agents have heterogeneous beliefs, then a competitive equilibrium without bankruptcy does not exist. The first contribution of this paper is to show that even if all agents have homogenous beliefs, the existence of an equilibrium is guaranteed only under stringent conditions on default penalty rates. In order to discourage agents from making promises that they know in advance they will not be able to honor, default penalty rates must be large enough. Are the "real-life" default penalties sufficiently harsh? Since utility penalties are difficult to measure in practice, we propose to address this question by replacing the "reduced-form" linear default penalties with pecuniary punishments in the line of Kehoe and Levine (1993). We show that, independently of the severity of the pecuniary punishment, an equilibrium without bankruptcy never exists.
    Date: 2022
  19. By: Paul Bergin
    Abstract: This paper highlights a tradeoff implied by a policy of export-led growth through currency undervaluation. While undervaluation can foster domestic manufacturing in countries like China by sustaining trade surplus, it also can harm a country’s comparative advantage by altering the composition of exports. Undervaluation may discourage specializing in high-value added manufacturing and instead favor specialization in non-differentiated goods with higher price elasticity. A dynamic general equilibrium model of two traded good sectors and capital account restrictions shows that undervaluation can either raise or lower welfare depending on two competing effects on comparative advantage: agglomeration versus an elasticity effect.
    JEL: F41
    Date: 2022–01
  20. By: Fernandes, Daniel
    Abstract: We apply the Business Cycle Accounting framework to the COVID-19 recession in the Euro Area and the United States. We conclude that the efficiency wedge had the most important role in the Euro Area, followed by the labor and investment wedges. In the United States, the labor wedge was most crucial, with the investment wedge taking a second place. We present hypotheses, supported by our theoretical framework, for the dichotomy of the role of the efficiency wedge between the studied regions.
    Keywords: Economics COVID-19 Business Cycle Accounting Macroeconomics Financial Crises Financial Frictions Wedges
    JEL: E3 E32 F4 F44
    Date: 2022–01–17
  21. By: Dolado, Juan J. (Universidad Carlos III de Madrid); Lalé, Etienne (University of Québec at Montréal); Turon, Hélène (University of Bristol)
    Abstract: We propose a model to evaluate the U.K.'s zero-hours contract (ZHC) – a contract that exempts employers from the requirement to provide any minimum working hours, and allows employees to decline any workload. We find quantitatively that ZHCs improve welfare by enabling firms with more volatile business conditions to create additional jobs. While weaker than job creation, substitution effects – some jobs that are otherwise viable under regular contracts are advertised as ZHCs – are sizable and likely explain negative reactions against ZHCs. Our model also assesses increased labor-force participation from ZHCs which appeal to individuals who prefer flexible work schedules.
    Keywords: zero-hours contracts, working hours, gig economy, flexibility
    JEL: E24 J22 J23 J63 L84
    Date: 2021–12
  22. By: Jonathan Eaton; Samuel S. Kortum; Francis Kramarz
    Abstract: Customs data reveal heterogeneity and granularity of relationships among buyers and sellers. A key insight is how more exports to a destination break down into more firms selling there and more buyers per exporter. We develop a quantitative general equilibrium model of firm-to-firm matching that builds on this insight to separate the roles of iceberg costs and matching frictions in gravity. In the cross section, we find matching frictions as important as iceberg costs in impeding trade, and more sensitive to distance. Because domestic and imported intermediates compete directly with labor in performing production tasks, our model also fits the heterogeneity of labor shares across French producers. Applying the framework to the 2004 expansion of the European Union, reduced iceberg costs and reduced matching frictions contributed equally to the increase in French exports to the new members. While workers benefitted overall, those competing most directly with imports gained less, even losing in some countries entering the EU.
    JEL: F12 F14 F16
    Date: 2022–01
  23. By: Justin Svec (College of the Holy Cross); Daniel L. Tortorice (College of the Holy Cross)
    Abstract: A central bank has preferences that differ from the political authority. While the central bank is independent, i.e. it maximizes its own preferences, households do not know this. Instead, households observe the interest rate choices of the central bank and update their beliefs regarding central bank independence using Bayesian learning. We solve for the optimal interest rate policy in a New-Keynesian model where the central bank considers the effect of its policy decision on the households’ beliefs that it is independent. The model provides a theoretical measure of central bank independence and a mapping from this level of independence to expected future losses for the central bank. Because the central bank suffers large losses when it is not perceived as independent, the central bank may choose a policy that is quite distant from its rational expectations counterpart to bolster the perception of its independence. We show that productivity shocks provide greater scope for the central bank to demonstrate its independence than do demand shocks, leading the central bank to deviate more aggressively from the benchmark rational expectations policy choice for the former shock than for the latter. Finally, varying perceptions of independence over time generate time varying volatility in interest rate policy and macroeconomic outcomes.
    Keywords: Monetary Policy, Central Bank Independence, Learning
    JEL: E52 E58 D83
    Date: 2022–02
  24. By: Cahuc, Pierre (Sciences Po, Paris); Carry, Pauline (CREST (ENSAE)); Malherbet, Franck (CREST (ENSAE)); Martins, Pedro S. (Nova School of Business and Economics)
    Abstract: This paper examines a labor law reform implemented in Portugal in 2009 which restricted the use of fixed-term contracts to reduce labor market segmentation. The reform targeted establishments created by large firms above a specific size threshold, covering about 15% of total employment. Drawing on linked employer-employee longitudinal data and regression discontinuity methods, we find that, while the reform was successful in reducing the number of fixed-term jobs, it did not increase the number of permanent contracts and decreased employment in large firms. However, we find evidence of positive spillovers to small firms that may bias reduced form estimates. To evaluate general equilibrium effects, we build and estimate a directed search and matching model with endogenous number of establishments and jobs. We find spillover effects that induce small biases on reduced form estimates but that significantly change the evaluation of the overall impact of the reform because they diffuse to the whole economy. We estimate that the reform slightly reduced aggregate employment and had negative effects on the welfare of employees and unemployed workers.
    Keywords: directed search and matching, labor market segmentation, regression discontinuity
    JEL: J23 J41 J63
    Date: 2022–01
  25. By: Achdou, Yves; Han, Jiequn; Lasry, Jean Michel; Lions, Pierre Louis; Moll, Ben
    Abstract: We recast the Aiyagari–Bewley–Huggett model of income and wealth distribution in continuous time. This workhorse model—as well as heterogeneous agent models more generally—then boils down to a system of partial differential equations, a fact we take advantage of to make two types of contributions. First, a number of new theoretical results: (1) an analytic characterization of the consumption and saving behaviour of the poor, particularly their marginal propensities to consume; (2) a closed-form solution for the wealth distribution in a special case with two income types; (3) a proof that there is a unique stationary equilibrium if the intertemporal elasticity of substitution is weakly greater than one. Second, we develop a simple, efficient and portable algorithm for numerically solving for equilibria in a wide class of heterogeneous agent models, including—but not limited to—the Aiyagari–Bewley–Huggett model.
    Keywords: wealth distribution; heterogeneous a; consumption; inequality; continuous time; OUP deal
    JEL: D14 D31 E21 C61 C63
    Date: 2022–01–10
  26. By: Décamps, Jean-Paul; Villeneuve, Stéphane
    Abstract: We study a dynamic model of a rm whose shareholders learn about its profitability, face costs of external nancing and costs of holding cash. The shareholders' problem involves a notoriously challenging singular stochastic control problem with a two-dimensional degenerate diffusion process. We solve it by means of an explicit construction of its value function, and derive a corporate life-cycle with two stages: a "probation stage" where it is never optimal for the firm to issue new shares, and a "mature stage" where the firm resorts to the market whenever needed. The cash target level is non-monotonic in the belief about the profitability and reaches its highest value on the edge between the two stages. It follows new insights on the firm's volatility and its payout ratio which depend on the firm's stage in its life cycle.
    Keywords: Corporate cash management; Corporate life cycle; Learning; Singular control
    JEL: C02 C11 C61 G32 G33 G35
    Date: 2022–02

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