nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒03‒14
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Comparing Monetary Policy Tools in an Estimated DSGE model with International Financial Markets By Gelfer, Sacha; Gibbs, Christopher
  2. What drives fluctuations of labor wedge and business cycles? Evidence from Japan By Masaru Inaba; Kengo Nutahara; Daichi Shirai
  3. Extending pension policy in emerging Asia: An overlapping-generations model analysis for Indonesia By George Kudrna; John Piggott; Phitawat Poonpolkul
  4. Optimal parental leave subsidization with endogenous fertility and growth By Siew Ling Yew; Shuyun May Li; Solmaz Mosleh
  5. Welfare costs of exchange rate fluctuations: Evidence from the 1972 Okinawa reversion By Kazuko Kano; Takashi Kano
  6. Migration, Remittances and Accumulation of Human Capital with Endogenous Debt Constraints By Nicolas Destrée; Karine Gente; Carine Nourry
  7. Opportunity and Inequality across Generations By Koeniger, Winfried; Zanella, Carlo
  8. Asymmetries in risk premia, macroeconomic uncertainty and business cycles By Christoph Görtz; Mallory Yeromonahos
  9. Devaluations, Deposit Dollarization, and Household Heterogeneity By Francesco Ferrante; Nils Gornemann
  10. Learning the HardWay: Expectations and the U.S. Great Depression By Pablo Aguilar; Luca Pensieroso
  11. The anatomy of small open economy trends By Christoph Görtz; Konstantinos Theodoridis; Christoph Thoenissen
  12. Environment, public debt and epidemics * By Marion Davin; Mouez Fodha; Thomas Seegmuller
  13. Refinancing and The Transmission of Monetary Policy to Consumption By Arlene Wong
  14. Stuck at Home: Housing Demand During the COVID-19 Pandemic By Gamber, William; Graham, James; Yadav, Anirudh
  15. Política monetaria y formación de expectativas en un modelo neokeynesiano By Patricia Carballo
  16. Standard Errors for Calibrated Parameters By Matthew D. Cocci; Mikkel Plagborg-Møller
  17. Credit Horizons By Nobuhiro Kiyotaki; John Moore; Shengxing Zhang
  18. The Marginal Propensity to Consume in Heterogeneous Agent Models By Greg Kaplan; Giovanni L. Violante
  19. Children matter: Global imbalances and the economics of demographic transition By Tsendsuren Batsuuri
  20. Government procurement and access to credit: firm dynamics and aggregate implications By Julian di Giovanni; Manuel García-Santana; Priit Jeenas; Enrique Moral-Benito; Josep Pijoan-Mas
  21. On the Inefficiency of Non-Competes in Low-Wage Labor Markets By Potter, Tristan; Hobijn, Bart; Kurmann, Andre
  22. Search, Technology Choice, and Unemployment By Angyridis, Constantine; Zhou, Haiwen
  23. Granular Search, Market Structure, and Wages By Gregor Jarosch; Jan Sebastian Nimczik; Isaac Sorkin
  24. Optimal Fiscal and Monetary Policy with Distorting Taxes By Christopher A. Sims
  25. A Goldilocks Theory of Fiscal Policy By Atif Mian; Ludwig Straub; Amir Sufi
  26. Universal Basic Income: Inspecting the Mechanisms By Jaimovich, Nir; Saporta-Eksten, Itay; Setty, Ofer; Yedid-Levi, Yaniv

  1. By: Gelfer, Sacha; Gibbs, Christopher
    Abstract: We evaluate the dynamics of conventional and unconventional monetary policy using an estimated two-region dynamic stochastic general equilibrium (DSGE) model. In addition to traditional nominal frictions the open-economy model also includes financial frictions, international portfolio balance effects, and correlated global financial shocks. We find that both conventional and unconventional monetary policy is effective in stimulating output and in inflation. However, the type of expansionary monetary policy used has heterogeneous effects on domestic investment, imports, exports and hours worked. Further, including a financial accelerator to the DSGE model significantly dampens the impact of aggregate investment that is expected to occur with quantitative easing. This is because unconventional monetary policy in the model is associated with an expansion in banking deposits and a minimal impact on loan demand, thus creating a fall in the loan to deposit ratio as was seen after the global financial crisis. Using historical decompositions, we find that unconventional monetary policy had a significant positive impact on output and hours worked during the global financial crisis and the preceding years after, but becomes negligible after 2014. Yet, its impact on equity and bond markets remained through 2019.
    Keywords: Unconventional Monetary Policy; Quantitative Easing; International Bond Portfolio; DSGE; Financial accelerator
    Date: 2021–12
  2. By: Masaru Inaba; Kengo Nutahara; Daichi Shirai
    Abstract: The literature has empirically shown that the labor wedge worsens during recessions. Taking this statement into consideration, this study poses two questions: First, what is the main driving force of the labor wedge, and second, is the main driver of the labor wedge the same as that of business cycles? In this study, we employ a commonly used medium-scale dynamic stochastic general equilibrium model with nominal and real frictions to analyze which structural shocks drive the fluctuation of the labor wedge and of business cycles. The model is estimated using Japanese data. Our estimation strategy is a particularly novel approach. In standard Bayesian estimation, the prior distribution of the parameters for the standard deviations of the structural shocks is the inverse gamma distribution, which does not support zero value and assumes the existence of structural shocks. By contrast, we employ a more flexible prior distribution of the parameters for the standard deviations of structural shocks and measurement errors to allow for the non-existence of structural shocks. Under the standard prior distribution, the estimation results imply that the labor wedge is mainly driven by preference and transitory technology shocks, whereas the investment adjustment cost shock is the most important for the business cycle fluctuations. However, under our relaxed prior distribution, which allows for the non-existence of structural shocks, the estimation results imply that both the labor wedge and business cycles are mainly driven by permanent technology and investment adjustment cost shocks. Keywords: Labor wedge; DSGE model; structural shocks; measurement error; prior distribution JEL codes: E32; E37
    Date: 2022–02
  3. 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
  4. By: Siew Ling Yew; Shuyun May Li; Solmaz Mosleh
    Abstract: In a life-cycle dynastic family model with endogenous fertility, labor-leisure, and accumulations of human and physical capital, this study examines the growth and welfare effects of parental leave subsidization when there is human capital externality. Compared with the social optimum, such externality causes higher fertility and less parental time and expenditure inputs in child human capital development, and thus lower growth and welfare in the laissez-faire equilibrium. Parental leave subsidization financed by a lump-sum tax (PLS_LS) promotes economic growth and welfare by improving the quantity-quality trade-off of children. There exists an optimal rate of parental leave subsidy but it cannot achieve the social optimum. Parental leave subsidization financed by a labor income tax (PLS_LI) increases the parental time input in child human capital and economic growth. It may improve welfare despite the distortionary effects of labor income taxes in exacerbating the problems of excessive fertility and under-investment of parental expenditure in child human capital. By calibrating the laissez-faire model economy to the U.S. data, our quantitative results show that for an empirically plausible degree of human capital externalities, the optimal parental leave subsidy under PLS_LI implies a fully-covered leave duration of 8.7 weeks per parent, which increases the annual growth rate of output per worker by 0.3 percentage points and welfare by 0.02 percent from the laissez-faire equilibrium.
    Keywords: Parental leave, Labor income tax, Fertility, Human capital, Welfare, Growth
    JEL: H2 J1 J22 O4
    Date: 2022–01
  5. By: Kazuko Kano; Takashi Kano
    Abstract: The main tenet of the New Keynesian (NK) paradigm is that price dispersion caused by nominal price stickiness is the primary source of allocative inefficiency. This study empirically evaluates the welfare implications of NK models by observing how internal and external price dispersion responds to two types of large aggregate shocks: high inflation and sharp currency depreciation. For this purpose, we consider the history of US military deployment on a small southern island in Japan called Okinawa following the Pacific War. We investigate unique data variations in micro-level retail prices surveyed in Okinawa and mainland Japan before and after the Okinawan reversion to Japanese sovereignty in May of 1972. By considering the Okinawan experience of three currency regimes during the high inflation period of the early 1970s as valid quasi-natural experiments, we identify statistically significant deteriorations of currency misalignment associated with the sudden exogenous large USD depreciation versus the JPY following the Nixon Shock. Furthermore, we observe that these massive aggregate shocks left the average absolute size of price changes mostly unchanged, but significantly increased the average frequency of price changes in Okinawa. Because a calibrated small open-economy menu cost model fits these empirical findings better than the Calvo model, the welfare costs of exchange rate fluctuations may be more elusive than suggested by the open economy NK literature.
    Keywords: Currency regime, Currency misalignment, Welfare cost, Okinawan reversion, Menu cost model
    JEL: F31 F41 F45
    Date: 2022–01
  6. By: Nicolas Destrée (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Karine Gente (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Carine Nourry (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper studies the impact of migration and workers' remittances on human capital and economic growth when young individuals face debt constraints to finance education. We consider an overlapping generations model à la de la Croix and Michel (2007). In this no-commitment setting, education is the engine of growth. Individuals may choose to default on their debt and be excluded from the asset market. We show that remittances tend to tighten the borrowing constraints for a given level of interest rate, but may enhance growth at the equilibrium. The model replicates both negative and positive impacts of migration and remittances on economic growth underlined by the empirical literature. We calibrate the model for 30 economies.
    Keywords: Migration,Remittances,Overlapping generations,Human capital,Borrowing constraints,Indeterminacy
    Date: 2021–07
  7. By: Koeniger, Winfried (University of St. Gallen); Zanella, Carlo (University of Zurich)
    Abstract: We analyze how intergenerational mobility and inequality would change relative to the status quo if dynasties had access to optimal insurance against low ability of future generations. Based on a dynamic, dynastic Mirrleesian model, we find that insurance against intergenerational ability risk increases in the social optimum relative to the status quo. This implies less intergenerational mobility in terms of welfare but no quantitatively significant change in earnings mobility. Earnings mobility is thus similar across economies with different incentives and welfare, illustrating that changes in earnings mobility cannot be interpreted readily in welfare terms without further analysis.
    Keywords: asymmetric information, intergenerational mobility, inequality, human capital, schooling, bequests
    JEL: E24 H21 I24 J24 J62
    Date: 2022–02
  8. By: Christoph Görtz; Mallory Yeromonahos
    Abstract: A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. Key for this result are endogenous fluctuations in uncertainty which induce procyclical variations in agent’s nowcast accuracy. In addition to matching moments of the risk premium, the model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data, and in matching the cyclical relation between quantities and the risk premium.
    Keywords: Risk Premium, Business cycles, Bayesian Learning, Asymmetry, Uncertainty, Nowcasting.
    JEL: E2 E3 G1
    Date: 2021–12
  9. By: Francesco Ferrante; Nils Gornemann
    Abstract: We study the aggregate and re-distributive effects of currency devaluations in a small open economy heterogeneous households model with leverage-constrained banks. Our framework captures three stylized facts about liability dollarization in emerging economies: i) banks and firms borrow in foreign currency; ii) households save in dollar-denominated local bank deposits; and iii) such deposits are mainly held by wealthier households. The resulting currency mismatch causes an erosion of banks' net worth during a devaluation, depressing credit supply. The ensuing macroeconomic downturn is amplified by a strong reduction of consumption among poorer households in response to rising borrowing costs and falling labor income. Richer households are partially insured, as they are holding a larger share of their wealth in foreign currency denominated assets. We show that a larger currency hedging by wealthier households deepens the recession and amplifies the negative spillovers for poorer agents. When deposit dollarization is high, welfare gains can arise if monetary policy dampens a depreciation.
    Keywords: Dollarization; Currency Depreciation; Household Heterogeneity; Redistribution
    JEL: E21 F32 F41
    Date: 2022–02–16
  10. By: Pablo Aguilar (Bank of Spain and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Luca Pensieroso (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: We introduce adaptive learning – a parsimonious, convenient way to model uncertainty – in a dynamic general equilibrium model of the U.S. Great Depression. We show that even the smallest departure from rational expectations increases significantly the data mimicking ability of the model, in particular for what concerns the lack of recovery in detrended GDP after 1933. We conclude that in the case of big, traumatic events like the Great Depression, uncertainty is particularly unfavourable to the recovery phase.
    Keywords: Learning, Great Depression, Dynamic general equilibrium, Bounded rationality
    JEL: E13 E32 N10
    Date: 2022–02–14
  11. By: Christoph Görtz; Konstantinos Theodoridis; Christoph Thoenissen
    Abstract: We estimate a novel state-space model to jointly identify international technology trend shocks originating in the US economy as well as shocks that are specific to the UK economy. We further differentiate between technological innovations arising from changes in total factor productivity (TFP) and changes in investment specific technology (IST). The long run restrictions used to identify the structural trends in the data are informed by a standard twocountry structural model. We find that international non-stationary technology shocks explain about 26% of the variance of UK GDP. About two thirds of this contribution is driven by the international IST shock. UK-specific disturbances account for the bulk of the volatility in the data. When estimating the effects of international IST and TFP shocks on the remaining G7 countries, we find results are consistent with those for the UK in that the international productivity shocks play a relevant role in explaining aggregate fluctuations. An impulse response function matching exercise shows that the structural model, which informed the long-run restrictions used in our empirical investigation, can generate dynamics consistent with those in the data.
    Keywords: Non-stationary productivity shocks, TFP, investment specific technology shocks, trend shocks, DSGE modelling, state space model
    JEL: E2 E3
    Date: 2022–01
  12. By: Marion Davin (CEE-M - Centre d'Economie de l'Environnement - Montpellier - UMR 5211 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Mouez Fodha (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We study whether fiscal policies, especially public debt, can help to curb the macroeconomic and health consequences of epidemics. Our approach is based on three main features: we introduce the dynamics of epidemics in an overlapping generations model to take into account that old people are more vulnerable; people are more easily infected when pollution is high; public spending in health care and public debt can be used to tackle the effects of epidemics. We show that fiscal policies can promote convergence to a stable disease-free steady state. When public policies are not able to permanently eradicate the epidemic, public debt, and income transfers could reduce the number of infected people and increase capital and GDP per capita. As a prerequisite, pollution intensity should not be too high. Finally, we define a household subsidy policy that eliminates income and welfare inequalities between healthy and infected individuals.
    Keywords: public debt,overlapping generations,pollution,Epidemics
    Date: 2021–12–06
  13. By: Arlene Wong (Princeton University)
    Abstract: This paper examines the role of the refinancing channel and the mortgage market structure for the transmission of monetary policy to consumption. First, I document heterogeneous consumption responses to monetary policy shocks. I find a large consumption response for homeowners who refinance or enter new loans, which is concentrated among younger people. Second, I develop a life-cycle model with fixed rate mortgages that explains these facts. Moving from a fixed to a variable rate mortgage structure reduces the heterogeneous effects of monetary policy on consumption by age. At the same time, the aggregate effects of monetary policy on consumption are increased substantially.
    Keywords: Consumption; monetary policy; refinancing; heterogeneous responses; age
    JEL: E52 E21
    Date: 2021–03
  14. By: Gamber, William; Graham, James; Yadav, Anirudh
    Abstract: The COVID-19 pandemic induced an increase in both the amount of time that households spend at home and the share of expenditures allocated to at-home consumption. These changes coincided with a period of rapidly rising house prices. We interpret these facts as the result of stay-at-home shocks that increase demand for goods consumed at home as well as the homes that those goods are consumed in. We first test the hypothesis empirically using US cross-county panel data and instrumental variables regressions. We find that counties where households spent more time at home experienced faster increases in house prices. We then study various pandemic shocks using a heterogeneous agent model with general equilibrium in housing markets. Stay-at-home shocks explain around half of the increase in model house prices in 2020. Lower mortgage rates explain around one third of the price rise, while unemployment shocks and fiscal stimulus have relatively small effects on house prices. We find that young households and first-time home buyers account for much of the increase in housing demand during the pandemic, but they are largely crowded out of the housing market by the equilibrium rise in house prices.
    Keywords: COVID-19; Pandemic; Stay at Home; Housing; House Prices; Consumption; Mortgage Interest Rates; Unemployment; Fiscal Stimulus
    Date: 2021–11
  15. By: Patricia Carballo (Banco Central del Uruguay)
    Abstract: This paper studies the relationship between expectation formation and monetary policy in a New Keynesian general equilibrium framework. To do this, a model that incorporates an equation for the formation of private sector inflation expectations, is developed. Based on the results obtained in the gap estimation and shock simulation exercises, the model constitutes an ideal tool for the analysis of monetary policy in Uruguay. The impulse response exercises illustrate the importance of formation of expectations and credibility for the design of monetary policy. Likewise, the results obtained in the decomposition of the variance of the forecast errors show the importance of shocks on the inflation target and private sector expectations to explain the behavior of inflation and the formation of expectations.
    Keywords: semi-structural model, monetary policy, expectations, Uruguay
    JEL: E37 E47 E52 E58 F41
    Date: 2022
  16. By: Matthew D. Cocci (Princeton University); Mikkel Plagborg-Møller (Princeton University)
    Abstract: Calibration, the practice of choosing the parameters of a structural model to match certain empirical moments, can be viewed as minimum distance estimation. Existing standard error formulas for such estimators require a consistent estimate of the correlation structure of the empirical moments, which is often unavailable in practice. Instead, the variances of the individual empirical moments are usually readily estimable. Using only these variances, we derive conservative standard errors and confidence intervals for the structural parameters that are valid even under the worst-case correlation structure. In the over-identified case, we show that the moment weighting scheme that minimizes the worst-case estimator variance amounts to a moment selection problem with a simple solution. Finally, we develop tests of over-identifying or parameter restrictions. We apply our methods empirically to a model of menu cost pricing for multi-product firms and to a heterogeneous agent New Keynesian model.
    Keywords: calibration, data combination, minimum distance, moment selection, semidefinite programming
    JEL: C12 C52
    Date: 2021–09
  17. By: Nobuhiro Kiyotaki (Princeton University); John Moore (The University of Edinburgh); Shengxing Zhang (London School of Economics)
    Abstract: Entrepreneurs appear to borrow largely against their near-term revenues, even when their investment has a longer horizon. In this paper, we develop a model of credit horizons. A question of particular concern to us is whether persistently low interest rates can stifle economic activity. With this in mind, our model is of a small open economy where the world interest rate is taken to be exogenous. We show that a permanent fall in the interest rate can reduce aggregate investment and growth, and even lead to a drop in the welfare of everyone in the domestic economy. We use our framework to examine how credit horizons interact with plant dynamics and the evolution of productivity. Finally, we speculate that the measurement of total investment may camouflage the true level of productive investment in plant and human capital, and give too rosy a picture of property-fuelled booms sparked by low interest rates.
    Keywords: financial markets
    JEL: E44
    Date: 2021–04
  18. By: Greg Kaplan (University of Chicago and NBER); Giovanni L. Violante (Princeton University)
    Abstract: We conduct a systematic analysis of heterogeneous agent consumption-saving models to understand whether and how they can generate a large average marginal propensity to consume (MPC). One-asset models without ex-ante heterogeneity feature a trade-off between a high average MPC and a realistic level of aggregate wealth. One-asset models with additional heterogeneity in preferences or rates of return, or behavioral features, can generate high MPCs with the right amount of total wealth, but at the cost of an excessively polarized wealth distribution that understates the wealth held by households in the middle of the distribution. Two-asset models that include both liquid and illiquid assets can resolve these trade-offs without ex-ante heterogeneity or behavioral elements, although these additional features can improve the fit of the model in other dimensions. Across all models, the share and type of hand-to-mouth households is the most important factor that determines the level of the average MPC.
    Keywords: Borrowing Constraints, Consumption, Income Risk, Hand-to-Mouth, Heterogeneity, Liquidity, Marginal Propensity to Consume, Market Incompleteness, Wealth Distribution
    JEL: D15 D31 D52 E21 E62 E71 G51
    Date: 2021–09
  19. By: Tsendsuren Batsuuri
    Abstract: This paper investigates the effect of child dependency on the economy and external imbalances under an asymmetric demographic and productivity transition within a lifecycle model. It embeds dependent children within a two-country model with lifecycle features to examine child dependency’s effect on the economy and external imbalances. Specifically, the paper compares the effects of the same fertility and mortality shocks across models with and without children. Simulations show that child dependency changes both the steady-state and the transition dynamics under a demographic shock. The paper finds that while child dependency changes the direction of the impact of the fertility transition on external imbalances in the short run, it changes the magnitude of the effects in the long run. Furthermore, the model comparison shows that parameters must be chosen differently across models with and without child dependency to start from the same interest rate in the steady-state. Different calibration affects the magnitude of the transition dynamics of different models. These findings illustrate the importance of considering child dependency in studies that seek to explain the historical contribution of demographic changes to external imbalances, and suggest to approach studies that use models without child dependency for this purpose with caution.
    Keywords: Global imbalances,Trade imbalances, Demographic transition, Life-cycle model
    JEL: D15 E21 E22 E43 E62 F21 F41 J11
    Date: 2022–01
  20. By: Julian di Giovanni; Manuel García-Santana; Priit Jeenas; Enrique Moral-Benito; Josep Pijoan-Mas
    Abstract: We provide a framework to study how different allocation systems of public procurement contracts affect firm dynamics and long-run macroeconomic outcomes. We start by using a newly created panel dataset of administrative data that merges Spanish credit register loan data, quasicensus firm-level data, and public procurement projects to study firm selection into procurement and the effects of procurement on credit growth and firm growth. We show evidence consistent with the hypotheses that there is selection of large firms into procurement, that procurement contracts provide useful collateral for firms -more so than sales to the private sector- and that procurement contracts facilitate firm growth beyond the contract duration. We next build a model of firm dynamics with both asset-based and earnings-based borrowing constraints and a government that buys goods and services from private sector firms. We use the calibrated model to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. We find that granting procurement contracts to small firms, either by directly targeting them or by slicing large contracts into smaller ones, helps these firms grow and overcome financial constraints in the long run. However, we also find that reducing the average size of contracts -or making it less likely for large firms to access them- removes saving incentives for large firms, whose negative effects on capital accumulation can overcome the expansionary consequences for small firms and hence generate a drop in aggregate output.
    Keywords: Government procurement, financial frictions, capital accumulation, aggregate productivity
    JEL: E22 E23 E62 G32
    Date: 2022–02
  21. By: Potter, Tristan (Drexel University); Hobijn, Bart (Arizona State University & Federal Reserve Bank of San Francisco); Kurmann, Andre (Drexel University)
    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: E24 J62 J63
    Date: 2022–01–18
  22. By: Angyridis, Constantine; Zhou, Haiwen
    Abstract: Technology variations among countries account for a significant part of their income differences. In this paper, a firm’s technology choice is embedded in a search theoretic framework for unemployment. A more advanced technology is assumed to have a higher set up cost, but it is more productive. The model is tractable and the following results are derived analytically. An increase in the unemployment benefit leads to an increase in the equilibrium wage rate, giving an incentive to firms to choose a more advanced technology. Thus, this result regarding unemployment insurance in models with wage posting carries through with Nash bargaining as well. As a consequence, the equilibrium unemployment rate increases. Furthermore, an increase in the bargaining power of workers increases the unemployment rate, but has an ambiguous impact on the equilibrium level of technology and the wage rate. Finally, an increase in the exogenous job separation rate or the interest rate increases the unemployment rate and decreases the wage rate but does not affect the equilibrium level of technology.
    Keywords: Job search, technology choice, unemployment
    JEL: E24 J64 O14
    Date: 2022–02–20
  23. By: Gregor Jarosch (Princeton University and NBER); Jan Sebastian Nimczik (ESMT Berlin and IZA); Isaac Sorkin (Stanford University and NBER)
    Abstract: We develop a model where labor market structure affects the division of surplus between firms and workers. In a model of random search and large employers, workers might apply to another job controlled by the same employer in the future. This possibility endows firms with size-based market power. The reason is that outside options are truly outside the firm: firms do not compete with their own vacancies. Hence, a worker’s outside option is worse when bargaining with a larger firm, and wages depend on market structure. We calibrate the model to Austrian data and find that such size-based market power depresses wages.
    Keywords: labor market, labor economics
    JEL: E20 J01
    Date: 2021–07
  24. By: Christopher A. Sims (Princeton University)
    Abstract: When the interest rate on government debt is low enough, it becomes possible to roll it over indefinitely, never taxing to retire it, without producing a growing debt to GDP ratio. This has been called a situation with zero "fiscal cost" to debt. But when low interest on debt arises from its providing liquidity services, zero fiscal cost is equivalent to finance through seigniorage. Some finance through seigniorage is generally optimal, however, despite results in the literature seeming to show that this is not so.
    Keywords: monetary policy, fiscal policy
    JEL: E52 E62
    Date: 2021–10
  25. By: Atif Mian (Princeton University and NBER); Ludwig Straub (Harvard University and NBER); Amir Sufi (Chicago Booth and NBER)
    Abstract: Fiscal policy in advanced economies faces a "Goldilocks dilemma": Fiscal consolidation risks prolonged episodes at the zero lower bound (ZLB), while fiscal expansion raises sustainability concerns. This paper proposes a dynamic fiscal policy framework to study fiscal space subject to this trade-off. At the core of our analysis is a deficit-debt diagram, which we use to measure how much fiscal expansion is necessary to avoid the ZLB, when fiscal policy can run deficits indefinitely, and at what debt level the interest rate rises above the growth rate. Rising inequality and weak aggregate demand expand fiscal space, allowing greater indefinite deficits, while slowing growth tightens the ZLB constraint, requiring greater and greater debt levels. We characterize the effects of various tax policies on fiscal space and provide a cross-country comparison.
    Keywords: fiscal policy, "Goldilocks dilemma"
    JEL: E62
    Date: 2021–07
  26. By: Jaimovich, Nir (University of Zurich); Saporta-Eksten, Itay (Tel Aviv University); Setty, Ofer (Tel Aviv University); Yedid-Levi, Yaniv (Interdisciplinary Center (IDC) Herzliya)
    Abstract: We consider the aggregate and distributional impact of Universal Basic Income (UBI). We develop a model to study a wide range of UBI programs and financing schemes and to highlight the key mechanisms behind their impact. The most crucial channel is the rise in distortionary taxation (required to fund UBI) on labor force participation. Second in importance is the decline in self-insurance due to the insurance UBI provides, resulting in lower aggregate capital. Third, UBI creates a positive income effect lowering labor force participation. Alternative tax-transfer schemes mitigate the impact on labor force participation and the cost of UBI.
    Keywords: universal basic income, labor force participation, inequality
    JEL: E2 E6 J08
    Date: 2022–02

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