nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒03‒07
eighteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  2. The Aggregate and Distributional Effects of Fiscal Stimuli By Paweł Kopiec
  3. Minimum Wage Shocks in an Estimated DSGE Model with Underreporting By Alisher Tolepbergen
  4. Lifestyle Behaviors and Wealth-Health Gaps in Germany By Lukas Mahler; Minchul Yum
  5. Monetary policy and endogenous financial crises By José Frederic Boissay; Fabrice Collard; Jordi Galí; Cristina Manea
  6. The Matching Function and Nonlinear Business Cycles By Joshua Bernstein; Alexander W. Richter; Nathaniel A. Throckmorton
  7. Mis-specified Forecasts and Myopia in an Estimated New Keynesian Model By Ina Hajdini
  8. Are government spending shocks inflationary at the zero lower bound? New evidence from daily data By Sangyup Choi; Junhyeok Shin; Seung Yong Yoo
  9. A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality By Joel Wagner; Tudor Schlanger; Yang Zhang
  10. Dynamic Spatial General Equilibrium By Benny Kleinman; Ernest Liu; Stephen J. Redding
  11. Money markets, collateral and monetary policy By Fiorella De Fiore; Marie Hoerova; Harald Uhlig
  12. Is Marriage for White People? Incarceration, Unemployment, and the Racial Marriage Divide By Caucutt, E. M.; Guner, N.; Rauh, C.
  13. The Environment, Life Expectancy and Growth in Overlapping Generations Models: A Survey By Dugan, Anna; Prskawetz, Alexia; Raffin, Natacha
  14. The fiscal and welfare effects of policy responses to the Covid-19 school closures By Nicola Fuchs-Schündeln; Dirk Krueger; André Kurmann; Ãtienne Lalé; Irina Popova; Alexander Ludwig
  15. Financial Factors, Firm size and Firm Potential By Ferreira, M.; Haber, T.; Rörig, C.
  16. Economic Effects of Five Illustrative Single-Payer Health Care Systems: Working Paper 2022-02 By Jaeger Nelson
  17. Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth By Nittai Bergman; David A. Matsa; Michael Weber
  18. Minimum Wages, Efficiency and Welfare By David W. Berger; Kyle F. Herkenhoff; Simon Mongey

  1. By: Arnita Rishanty (Bank Indonesia Institute, Bank Indonesia); Sekar Utami Setiastuti (Department of Economics, Universitas Gadjah Mada.); Nur M. Adhi Purwanto (Bank Indonesia)
    Abstract: This study aims to develop an environmental dynamic stochastic general equilibrium (E-DSGE) model with heterogeneous production sectors and evaluate possible central bank and fiscal policies towards green and sustainable production. We estimate the model for the Indonesian economy and assess the effects of macroeconomic uncertainty in terms of productivity, monetary, macroprudential, fiscal policy, and financial shocks in a setup that includes policies supporting green firms. We find that aggregate output, consumption, and investment react negatively to a positive monetary policy and government spending shock. Further, we show that emission tax may dampen the contraction of green output due to contractionary monetary and fiscal policy. The effect of green financing subsidy, however, looks trivial
    Keywords: DSGE model, Bayesian estimation, Monetary policy, Fiscal policy, Environ- mental policy
    JEL: E32 E50 Q58
  2. By: Paweł Kopiec
    Abstract: This paper compares the aggregate and distributional effects of three fiscal policy instruments: government expenditures, unemployment benefits and transfers. To this end, the Diamond-Mortensen-Pissarides model of frictional labor market is embedded into an otherwise standard Heterogeneous Agent New Keynesian framework. The model calibrated to match the moments characterizing the US economy successfully replicates the empirical distributions of households across: disposable income, consumption expenditures and net worth. The solution method developed by Reiter (2009) is applied to quantify the aggregate and distributional responses to changes in the analyzed fiscal measures. Moreover, the stabilizing role of government expenditures, unemployment benefits and transfers is assessed.
    Keywords: Heterogeneous Agents, Frictional Markets, Fiscal Stimulus
    JEL: D30 E62 H23 H30 H31
    Date: 2022–01
  3. By: Alisher Tolepbergen (NAC Analytica, Nazarbayev University)
    Abstract: We build and estimate a New Keynesian DSGE model to analyze the macroeconomic effects of minimum wage shocks in an economy characterized by a high degree of wage underreporting. The estimation results suggest that the effect of the minimum wage shocks to all economic aggregates but employment is not significant. The impulse response analysis shows that a higher degree of underreporting results in less responsive dynamics to the minimum wage shocks. In addition, the magnitude of the responses is also affected by the share of Non-Ricardian households in the economy. Overall, we find that an increase in the minimum wage in the economy with a high degree of underreporting does not significantly affect the dynamics of macroeconomic variables.
    Keywords: DSGE; Minimum Wage; Underreporting; Non-Ricardian; Bayesian Estimation.
    JEL: C11 E24 E26 E64
    Date: 2021–10
  4. By: Lukas Mahler; Minchul Yum
    Abstract: We document significant gaps in wealth across health status over the life cycle in Germany—a country with a universal healthcare system and negligible out-of-pocket medical expenses. To investigate the underlying sources of the empirical patterns in wealth-health gaps, we build a heterogeneous-agent life-cycle model in which health and wealth evolve endogenously. In the model, agents exert efforts to lead a healthy lifestyle, which helps maintain good health status in the future. Effort choices, or lifestyle behaviors, are subject to adjustment costs to capture various aspects of micro-level effort adjustment behaviors in the data. We find that our calibrated model generates around half of the wealth gaps by health observed in the German micro data, and that variations in health-related lifetime outcomes are largely explained by uncertainty realizations over the life cycle, rather than initial conditions at age 25. Our counterfactual experiments indicate that variations in individual health efforts account for over half of the model-generated wealth gaps by health status. Their importance is due not only to the fact that they affect labor income and savings rates, both of which influence wealth accumulation, but also because they act as an amplification device since richer households exert relatively more efforts to maintain a healthy lifestyle.
    Keywords: Health Inequality, Wealth Inequality, Healthy Lifestyle, Germany
    JEL: E2 D3 I1
    Date: 2022–02
  5. By: José Frederic Boissay; Fabrice Collard; Jordi Galí; Cristina Manea
    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.
    JEL: E1 E3 E6 G01
    Date: 2022–01
  6. By: Joshua Bernstein; Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: The Cobb-Douglas matching function is ubiquitous in search and matching models, even though it imposes a constant matching elasticity that is unlikely to hold empirically. Using a general constant returns to scale matching function, this paper first derives analytical conditions that determine how the cyclicality of the matching elasticity amplifies or dampens the nonlinear dynamics of the job finding and unemployment rates. It then demonstrates that these effects are quantitatively significant and driven by plausible variation in the matching elasticity.
    Keywords: Matching Function; Matching Elasticity; Nonlinear; Finding Rate; Unemployment
    JEL: E24 E32 E37 J63 J64
    Date: 2022–02–09
  7. By: Ina Hajdini
    Abstract: The paper considers a New Keynesian framework in which agents form expectations based on a combination of mis-specified forecasts and myopia. The proposed expectations formation process is found to be consistent with all three empirical facts on consensus inflation forecasts, namely, that forecasters under-react to ex-ante forecast revisions, that forecasters over-react to recent events, and that the response of forecast errors to a shock initially under-shoots but then over-shoots. The paper then derives the general equilibrium solution consistent with the proposed expectations formation process and estimates the model with likelihood-based Bayesian methods, yielding three novel results: (i) The data strongly prefer the combination of autoregressive mis-specified forecasting rules and myopia over other alternatives; (ii) The best fitting expectations formation process for both households and firms is characterized by high degrees of myopia and simple AR(1) forecasting rules; (iii) Frictions such as habit in consumption, which are typically necessary for models with Full-information Rational Expectations, are significantly less important, because the proposed expectations generate substantial internal persistence and amplification to exogenous shocks. Simulated inflation expectations data from the estimated general equilibrium model reflect the three empirical facts on forecasting data.
    Keywords: Myopia; Survey of Professional Forecasters; Bayesian Estimation; Internal Propagation
    JEL: C11 C53 D84 E13 E30 E50 E70 E52
    Date: 2022–02–16
  8. By: Sangyup Choi; Junhyeok Shin; Seung Yong Yoo
    Abstract: Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying government spending multipliers at the ZLB, empirical studies have not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline in response to positive government spending shock at the ZLB. Government spending shocks are also more deflationary at the ZLB than during normal times. While our finding is difficult to reconcile with standard New Keynesian models, which predict a larger fiscal multiplier following fiscal expansion at the ZLB - driven by rising inflation and a falling real interest rate - a model with credit constraints can explain this anomaly.
    Keywords: Zero lower bound, High-frequency data, Government spending, Online price index, New Keynesian model, Credit constraints
    JEL: E31 E32 E62 F31 F41
    Date: 2022–02
  9. By: Joel Wagner; Tudor Schlanger; Yang Zhang
    Abstract: We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to provide a quantitative assessment of the macroeconomic impact of flexible inflation targeting and some alternative m2netary policy regimes. These alternative monetary policy regimes are average-inflation targeting, price-level targeting and nominal gross domestic product level targeting. We consider these regimes’ performance with and without an effective lower bound constraint. Our results suggest that the performance of history-dependent frameworks is sensitive to departures from rational expectations. The benefits of adopting history-dependent frameworks over flexible inflation targeting gradually diminish with a greater degree of bounded rationality. This finding is in line with laboratory experiments that show flexible inflation targeting remains a robust framework to stabilize macroeconomic fluctuations.
    Keywords: Central bank research; Economic models; Monetary policy framework; Monetary policy transmission
    JEL: E E27 E3 E4 E58
    Date: 2022–02
  10. By: Benny Kleinman (Princeton University); Ernest Liu (Princeton University); Stephen J. Redding (Princeton University and CEPR and NBER)
    Abstract: We develop a dynamic spatial model with forward-looking investment and migration. We characterize the existence and uniqueness of the steady-state equilibrium; generalize existing dynamic exact-hat algebra techniques to incorporate investment; and linearize the model to provide an analytical characterization of the economy’s transition path using spectral analysis. We show that U.S. states are closer to steady-state at the end of our sample period in 2015 than during the prior five decades. We !nd that much of the observed decline in the rate of income convergence across US states is explained by gradual adjustment given initial conditions, rather than by shocks to fundamentals, and that both capital and labor dynamics contribute to this gradual adjustment. We show that capital and labor dynamics interact with one another to generate slow and heterogeneous rates of convergence to steady-state.
    Keywords: spatial dynamics, economic geography, trade, migration
    JEL: F14 F15 F50
    Date: 2021–10
  11. By: Fiorella De Fiore; Marie Hoerova; Harald Uhlig
    Abstract: Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.
    Keywords: money markets, collateral, monetary policy, balance sheet policies.
    JEL: E44 E52 E58
    Date: 2022–02
  12. By: Caucutt, E. M.; Guner, N.; Rauh, C.
    Abstract: The difference in marriage rates between black and white Americans is striking. Wilson (1987) suggests that a skewed sex ratio and higher rates of incarceration and unemployment are responsible for lower marriage rates among the black population. In this paper, we take a dynamic look at the Wilson Hypothesis. Incarceration rates and labor market prospects of black men make them riskier spouses than white men. We develop an equilibrium search model of marriage, divorce, and labor supply in which transitions between employment, unemployment, and prison differ by race, education, and gender. The model also allows for racial differences in how individuals value marriage and divorce. We estimate the model and investigate how much of the racial divide in marriage is due to the Wilson Hypothesis and how much is due to differences in preferences for marriage. We find that the Wilson Hypothesis accounts for more than three quarters of the model's racial-marriage gap. This suggests policies that improve employment opportunities and/or reduce incarceration for black men could shrink the racial-marriage gap.
    Keywords: Marriage, Race, Incarceration, Inequality, Unemployment
    JEL: J12 J J64
    Date: 2021–09–06
  13. By: Dugan, Anna; Prskawetz, Alexia; Raffin, Natacha
    Abstract: It is widely accepted that environmental and demographic changes will significantly influence the future of our society. In recent years, an increasing number of studies has analyzed the interlinkages among economic growth, environmental factors and a specific demographic variable, namely life expectancy, applying an overlapping generations framework. The aim of this survey is threefold. First, we review the role of life expectancy and pollution for sustainable growth. Second, we discuss the role of intervening factors like health investment and technological progress as well as institutional settings including government expenditures, tax structures and inequality. Finally, we summarize policy implications obtained in different models and compare them to each other.
    Keywords: Environmental quality,Pollution,Longevity,Endogenous growth,Government policy
    JEL: O11 O44 Q56 Q58 J10
    Date: 2022
  14. By: Nicola Fuchs-Schündeln; Dirk Krueger; André Kurmann; Ãtienne Lalé; Irina Popova; Alexander Ludwig
    Abstract: Using a structural life-cycle model and data on school visits from Safegraph and school closures from Burbio, we quantify the heterogeneous impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. Our data suggests that secondary schools were closed for in-person learning for longer periods than elementary schools (implying that younger children experienced less school closures than older children), and that private schools experienced shorter closures than public schools, and schools in poorer U.S. counties experienced shorter school closures. We then extend the structural life cycle model of private and public schooling investments studied in Fuchs-Schündeln, Krueger, Ludwig, and Popova (2021) to include the choice of parents whether to send their children to private schools, empirically discipline it with data on parental investments from the PSID, and then feed into the model the school closure measures from our empirical analysis to quantify the long-run consequences of the Covid-19 school closures on the cohorts of children currently in school. Future earnings- and welfare losses are largest for children that started public secondary schools at the onset of the Covid-19 crisis. Comparing children from the topto children from the bottom quartile of the income distribution, welfare losses are ca. 0.8 percentage points larger for the poorer children if school closures were unrelated to income. Accounting for the longer school closures in richer counties reduces this gap by about 1/3. A policy intervention that extends schools by 3 months (6 weeks in the next two summers) generates signicant welfare gains for the children and raises future tax revenues approximately sufficient to pay for the cost of this schooling expansion. À l'aide d'un modèle structurel de cycle de vie et de données sur les visites d'écoles provenant de Safegraph et sur les fermetures d'écoles provenant de Burbio, nous quantifions l'impact hétérogène des fermetures d'écoles pendant la crise de la COVID-19 sur les enfants affectés à différents âges et provenant de ménages ayant des caractéristiques parentales différentes. Nos données suggèrent que les écoles secondaires ont été fermées pendant des périodes plus longues que les écoles élémentaires (ce qui implique que les enfants plus jeunes ont reçu davantage d’enseignement en présentiel que les enfants plus âgés), et que les écoles privées ont connu des fermetures plus courtes que les écoles publiques, et que les écoles des comtés américains plus pauvres ont connu des fermetures d'écoles plus courtes. Nous étendons ensuite le modèle structurel du cycle de vie des investissements dans l'enseignement privé et public étudié par Fuchs Schundeln, Krueger, Ludwig et Popova (2021) pour inclure le choix des parents d'envoyer ou non leurs enfants dans des écoles privées ; nous le disciplinons empiriquement avec des données sur les investissements parentaux provenant du PSID ; puis nous introduisons dans le modèle les mesures de fermeture d'écoles de notre analyse empirique afin de quantifier les conséquences à long terme des fermetures d'écoles sur les cohortes d'enfants scolarisés pendant la pandémie de la COVID-19. Les pertes futures de revenus et de bien-être sont les plus importantes pour les enfants qui ont commencé l'école secondaire publique au début de la crise de la COVID-19. Si l'on compare les enfants du quartile supérieur aux enfants du quartile inférieur de la distribution des revenus, les pertes de bien-être sont d'environ 0,8 point de pourcentage supérieures pour les enfants les plus pauvres. La prise en compte des fermetures d'écoles plus longues dans les comtés plus riches réduit cet écart d'environ 1/3. Une intervention politique qui prolongerait la scolarité de 3 mois (6 semaines au cours des deux étés à venir) génère des gains de bien-être significatifs pour les enfants et dégage des recettes fiscales futures qui permettraient approximativement de financer cette extension de la scolarité.
    Keywords: , Covid-19,fermetures d'écoles,inégalité,persistance intergénérationnelle
    JEL: D15 D31 E24 I24
    Date: 2021–11–12
  15. By: Ferreira, M.; Haber, T.; Rörig, C.
    Abstract: Using a unique dataset covering the universe of Portuguese firms and their credit situation we show that financially constrained firms are found across the entire firm size distribution, account for a larger total asset share compared to standard heterogeneous firms models, and exhibit a higher cyclical sensitivity, conditional on size. In light of these findings we reassess the importance of the firm distribution in shaping aggregate outcomes in the canonical model of heterogeneous firms with financial frictions. We augment the productivity process with ex-ante heterogeneity of firms, allowing us to match the distribution of constrained firms conditional on size. This, together with the fact that constrained firms have a higher capital elasticity, leads to up to four times larger aggregate fluctuations and capital misallocation.
    Keywords: Firm size, business cycle, financial accelerator
    JEL: E62 E22 E23
    Date: 2021–11–03
  16. By: Jaeger Nelson
    Abstract: This paper builds on previous studies published by the Congressional Budget Office about single-payer health care systems. It uses a general-equilibrium, overlapping-generations model to analyze the economic and distributional implications of five illustrative single-payer health care systems. The systems vary by their payment rates to providers, degree of cost sharing, and inclusion of benefits for long-term services and supports (LTSS). The economic effects of financing a single-payer system are beyond the scope of this paper. However, the results can be paired with some
    JEL: E62 H31 I10
    Date: 2022–02–23
  17. By: Nittai Bergman; David A. Matsa; Michael Weber
    Abstract: This paper analyzes the heterogeneous effects of monetary policy on workers with differing levels of labor force attachment. Exploiting variation in labor market tightness across metropolitan areas, we show that the employment of populations with lower labor force attachment—Blacks, high school dropouts, and women—is more responsive to expansionary monetary policy in tighter labor markets. The effect builds up over time and is long lasting. We develop a New Keynesian model with heterogeneous workers that rationalizes these results. The model shows that expansionary monetary shocks lead to larger increases in the employment of less attached workers when the central bank follows an average inflation targeting rule and when the Phillips curve is flatter. These findings suggest that, by tightening labor markets, the Federal Reserve's recent move from a strict to an average inflation targeting framework especially benefits workers with lower labor force attachment.
    JEL: E12 E24 E31 E43 E52 E58 J24
    Date: 2022–01
  18. By: David W. Berger; Kyle F. Herkenhoff; Simon Mongey
    Abstract: It has long been argued that a minimum wage could alleviate efficiency losses from monopsony power. In a general equilibrium framework that quantitatively replicates results from recent empirical studies, we find higher minimum wages can improve welfare, but most welfare gains stem from redistribution rather than efficiency. Our model features oligopsonistic labor markets with heterogeneous workers and firms and yields analytical expressions that characterize the mechanisms by which minimum wages can improve efficiency, and how these deteriorate at higher minimum wages. We provide a method to separate welfare gains into two channels: efficiency and redistribution. Under both channels and Utilitarian social welfare weights the optimal minimum wage is $15, but alternative weights can rationalize anything from $0 to $31. Under only the efficiency channel, the optimal minimum wage is narrowly around $8, robust to social welfare weights, and generates small welfare gains that recover only 2 percent of the efficiency losses from monopsony power.
    JEL: E2 J2 J42
    Date: 2022–01

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