nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒03‒21
sixteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Procyclical Productivity in New Keynesian Models By Zhesheng Qiu; José-Víctor Ríos-Rull
  2. Financial frictions in a commodity exporting small open economy: the Case of Kazakhstan By Erlan Konebayev
  3. Indebted Demand By Atif Mian; Ludwig Straub; Amir Sufi
  4. Un modelo estocástico de equilibrio general para la economía uruguaya con producción de commodities By Serafín Frache; Helena Rodríguez
  5. Self-Fulfilling Debt Crises, Revisited By Mark Aguiar; Satyajit Chatterjee; Harold Cole; Zachary Stangebye
  6. Labor Market and Fiscal Policy During and After the Coronavirus By Paul Gomme
  7. Growth in an OLG Economy with Polluting Non-Renewable Resources By Nicolas Clootens
  8. The decision to move house and aggregate housing-market dynamics By Ngai, L. Rachel; Sheedy, Kevin D.
  9. Land Speculation and Wobbly Dynamics with Endogenous Phase Transitions By Tomohiro Hirano; Joseph E. Stiglitz
  10. Exchange Rate Pass-Through Conditional on Shocks and Monetary Policy Credibility. The Case of Uruguay By Fernanda Cuitiño; Juan Pablo Medina; Laura Zacheo
  11. Credit Booms, Financial Crises and Macroprudential Policy By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
  12. State Dependent Effects of Monetary Policy: the Refinancing Channel By Martin Eichenbaum; Sergio Rebelo; Arlene Wong
  13. Dampening General Equilibrium: Incomplete Information and Bounded Rationality By George-Marios Angeletos; Chen Lian
  14. Land is back, it should be taxed, it can be taxed By Odran Bonnet; Guillaume Chapelle; Alain Trannoy; Etienne Wasmer
  15. Is Fiscal Austerity Really Self-Defeating? By Piergallini, Alessandro
  16. The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States By Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri

  1. By: Zhesheng Qiu; José-Víctor Ríos-Rull
    Abstract: We propose an easy-to-use search friction in the goods markets in medium-sized New Keynesian models. This friction allows increases in measured productivity in response to increases in expenditures via higher search effort from households. As a result markups can become procyclical and labor share countercyclical. Unlike in models that pose variable capital utilization and fixed costs to generate procyclical productivity, firms do not have to spend more to achieve it. We estimate the model matching impulse responses with Bayesian techniques and show superior performance of models with search frictions relative to the state of the art alternative models in the literature. Our estimates also display low fixed costs of production and lower Frisch elasticities.
    JEL: E01 E32 E52
    Date: 2022–02
  2. By: Erlan Konebayev (NAC Analytica, Nazarbayev University)
    Abstract: This paper adds the banking sector to a commodity-exporting small open economy DSGE model and estimates it using the data for Kazakhstan between 2001 and 2019. The resulting model produces one-step-ahead predictions that are a good fit for the banking sector variables. We find that the oil price and risk premium shocks are the drivers of much of the economic activity in Kazakhstan - they explain a large part of the variation in most of the macro variables considered. A comparison with the baseline model that has no banking sector shows that the influence of the risk premium shock on real variables can be overestimated when financial frictions are excluded. The above-mentioned two shocks, along with the fiscal policy shock, have also significantly contributed to historical fluctuations in real GDP growth, although with no particular trend in the direction or magnitude of their effects.
    Keywords: DSGE; Bayesian analysis; small open economy; Kazakhstan
    JEL: C11 E30 E32 E37
    Date: 2021–12
  3. By: Atif Mian (Princeton University); Ludwig Straub (Harvard University); Amir Sufi (Chicago Booth and NBER)
    Abstract: We propose a theory of indebted demand, capturing the idea that large debt burdens by households and governments lower aggregate demand, and thus natural interest rates. At the core of the theory is the simple yet under-appreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent overlapping-generations model, we find that recent trends in income inequality and financial liberalization lead to indebted household demand, pushing down natural interest rates. Moreover, popular expansionary policies—such as accommodative monetary policy and deficit spending—generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less standard macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
    Keywords: aggregate demand, debt, interest rates, inequality, secular stagnation
    JEL: D31 E21 E32 E43 E44 E52 E62 G51
    Date: 2021–01
  4. By: Serafín Frache (Universidad de Montevideo, Facultad de Ciencias Empresariales y Economía); Helena Rodríguez (Banco Central del Uruguay)
    Abstract: In this paper we analyze the main results obtained in the estimation of a DSGE model with commodity production, which was constructed as an extension of the baseline model used in the Central Bank of Uruguay. We model the production for three relevant sectors in the Uruguayan economy such as pulp, agricultural and dairy and meat production. In the baseline model these sectors are introduced as endowments that evolve exogenously over time and thus are not able to capture in a satisfactory way the real effects of some shocks. With this extension we try to adjust the baseline model in order to obtain better impulse-response functions that improve the description of the transmission mechanisms of the sectoral shocks to the rest of the economy.
    Keywords: DSGE, monetary policy, commodity prices, Uruguay
    JEL: E52 F41
    Date: 2021
  5. By: Mark Aguiar (Princeton University); Satyajit Chatterjee (Federal Reserve Bank of Philadelphia); Harold Cole (University of Pennsylvania); Zachary Stangebye (University of Notre Dame)
    Abstract: We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues more debt because of the crisis, albeit at depressed prices. Another possible outcome is a "sudden stop" (or forced austerity) in which the government sharply curtails debt issuance. Both outcomes stem from the government's incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. In an otherwise standard quantitative version of the one-period debt model, including such crises increase the default probabilities by a factor of five and the spread volatility by a factor of twenty-five.
    Keywords: self-fulfilling debt crises, rollover crises
    JEL: F10 G30
    Date: 2020–12
  6. By: Paul Gomme (Concordia University, CIREQ and CIRANO)
    Abstract: COVID-related government outlays will increase the level of government debt. A macroeconomic model, calibrated to the U.S., quantitatively assesses potential responses to this higher debt. In terms of economic welfare, reducing debt through capital incomes tax hikes is the least desirable option considered: the associated tax base is small, and anticipating such a tax increase reduces capital accumulation. There is little to choose between fiscal austerity through government spending cuts versus raising labor income tax rates. Accommodating higher government debt is welfare-improving, but still requires substantial fiscal austerity owing to higher debt servicing costs.
    Keywords: COVID-19, fiscal policy, government debt
    JEL: E62 H31 E24 H63 H62
    Date: 2021–05–05
  7. By: Nicolas Clootens (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 analyses the effects of flow pollution implied by the use of necessary non-renewable resources, fossil fuel for example, on overlapping generations (OLG) economies. Notably, it shows that, on the balanced growth path, flow pollution reduces the (negative) resources contribution to growth and increases resources conservation, capital accumulation, and growth. Flow pollution thus increases the ability of an economy to sustain a non-decreasing consumption path. Some of the results are due to (or magnified by) the OLG structure of the economy. In addition, the paper highlights the need for public intervention and shows that the optimal allocation may be decentralized using a tax on resources use and transfers.
    Keywords: Non-renewable Resources,Growth,Pollution,Overlapping Generations
    Date: 2021–03
  8. By: Ngai, L. Rachel; Sheedy, Kevin D.
    Abstract: Using data on house sales and inventories, this paper shows that housing transactions are driven mainly by listings and less so by transaction speed, thus the decision to move house is key to understanding the housing market. The paper builds a model where moving house is essentially an investment in match quality, implying that moving depends on macroeconomic developments and housing-market conditions. The number of transactions has implications for welfare because each transaction reduces mismatch for homeowners. The quantitative importance of the decision to move house is shown in understanding the U.S. housing-market boom during 1995–2003.
    Keywords: housing market; search and matching; endogenous moving; match quality investment; mismatch
    JEL: D83 E22 R31
    Date: 2020–10–01
  9. By: Tomohiro Hirano; Joseph E. Stiglitz
    Abstract: This paper examines the global macro-dynamics of an OLG model with capital and land with rational expectations. Through the interactions between capital accumulation and land prices, the economy experiences phase transitions, endogenously moving back and forth from situations with unique and multiple momentary equilibria. Consequently, there can be a plethora of rational expectation equilibria trajectories, without any smooth convergence properties, neither converging to a steady state or even to a limit cycle—what we call “wobbly” macro-dynamics. The price of land and other key macro variables (wages, interest rates, output, consumption, wealth, capital stock) endogenously fluctuate within a well-identified range with repeated boom-bust cycles. The key disturbance to the economy is endogenous; even with rational expectations, there can be real estate booms, with increasing land prices increasingly crowding out productive investments; but such unsustainable land price booms inevitably are followed by a crash. We analyze the set of parameter values for which wobbly fluctuations occur, show that with some parameter values, the only r.e. trajectories involve such wobbly dynamics, demonstrate how changes in parameters affect global macro-dynamics, and show how policy interventions can affect stability and social welfare.
    JEL: C61 E22 E32 G12 G18 H21 O11
    Date: 2022–02
  10. By: Fernanda Cuitiño (Banco Central del Uruguay); Juan Pablo Medina (Business School, Universidad Adolfo Ibáñez, Chile); Laura Zacheo (Banco Central del Uruguay)
    Abstract: The estimation of exchange rate pass-through (ERPT) is critical for understanding and forecasting the inflation dynamics in open economies. In this work, we estimate a medium scale New-Keynesian model for the Uruguayan economy to analyze the ERPT. We compute the ERPT with the estimated model conditional on specific external shocks and on whether the monetary policy has perfect or imperfect credibility. The results show that the empirical fit is better under imperfect credibility. The estimated degree of imperfect credibility is quite significant and it shows substantial variation across shocks and over time. We find that the ERPT tends to be lower for a shock that has a higher offsetting effect in aggregate demand and when monetary policy is more credible in keeping the inflation target constant. Finally, adding the exchange rate stabilization in the monetary policy rule in the case of Uruguay has a stronger empirical role once we allow for imperfect credibility.
    Keywords: exchange rate pass-through, emerging economy, imperfect credibility, bayesian estimation
    JEL: E12 E58 F31 F41
    Date: 2021
  11. By: Mark Gertler (New York University); Nobuhiro Kiyotaki (Princeton University); Andrea Prestipino (Federal Reserve Board)
    Abstract: We develop a model of banking crises which Is consistent with two important features of the data: First, banking crises are usually preceded by credit booms. Second, credit booms often do not result in a crisis. That is, there are “good†booms as well as “bad†booms in the language of Gorton and Ordonez (2019). We then consider how the optimal macroprudential policy weighs the benefits of preventing a crisis against the costs of stopping a good boom. We show that countercyclical capital buffers are a critical feature of a successful macropudential policy.
    Keywords: banking crisis, credit booms
    JEL: E00 G21
    Date: 2020–03
  12. By: Martin Eichenbaum (Northwestern University); Sergio Rebelo (Northwestern University); Arlene Wong (Princeton University)
    Abstract: This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic lifecycle model that accounts for our findings and use it to study how the response of consumption to a change in mortgage rates depends on the distribution of savings from refinancing. These effects are strongly state dependent. We also use the model to study the impact of a long period of low interest rates on the potency of monetary policy. We find that this potency is substantially reduced both during the period and for a substantial amount of time after interest rates renormalize.
    Keywords: monetary policy, state dependency, refinancing
    JEL: E52 G21
    Date: 2020–08
  13. By: George-Marios Angeletos; Chen Lian
    Abstract: We review how realistic frictions in information and/or rationality arrest general equilibrium (GE) feedbacks. In one specification, we maintain rational expectations but remove common knowledge of aggregate shocks. In another, we replace rational expectations with Level-k Thinking or a smooth variant thereof. Two other approaches, heterogeneous priors and cognitive discounting, capture the same essence while offering a gain in tractability. Relative to the full-information rational-expectation (FIRE) benchmark, all these modifications amount to attenuation of GE effects, especially in the short run. This in turn translates to either under- or over-reaction in aggregate outcomes, depending on whether GE feedbacks are positive or negative in the first place. We review a few applications, with emphasis on monetary and fiscal policy. We finally discuss how the available evidence on expectations, along with other considerations, can help guide the choice among the various alternatives, as well as between them and FIRE.
    JEL: D8 E1 E3 E7
    Date: 2022–02
  14. By: Odran Bonnet (CREST-INSEE - Centre de Recherche en Economie et en Statistique - Institut national de la statistique et des études économiques (INSEE)); Guillaume Chapelle (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Alain Trannoy (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); Etienne Wasmer (Department of Economics, Social Science Div. NYU-Abu Dhabi)
    Abstract: Land is back. The increase in wealth in the second half of 20th century arose from housing and land. It should be taxed. We introduce land and housing structures in Judd's standard setup: first best optimal taxation is achieved with a property tax on land and requires no tax on capital. With positive taxes on housing rents, a first best is still possible but with subsidies to rental housing investments, and either with differential land tax rates or with a tax on imputed rents. It can be taxed. Even absent land taxes, one can tax it indirectly and reach a Ramsey-second best still with no tax on capital and positive housing rent taxes in the steady-state. This result extends to the dynamics under restrictions on parameters.
    Keywords: Capital,Wealth,Housing,Land,Optimal tax,First best,Second best
    Date: 2021–05
  15. By: Piergallini, Alessandro
    Abstract: This paper analyzes local and global equilibrium dynamics in an optimizing endogenous growth model under expenditure-based fiscal austerity feedback policies expressed relative to the private capital stock — prescribing spending cuts in reaction to public debt accumulation. Because the present value of equilibrium primary surpluses turns to be a nonlinear function of debt, two steady state equilibria are shown to emerge, one exhibiting low debt and high growth, one exhibiting high debt and low growth. Local analysis reveals that the low-debt/high-growth steady state is saddle-path stable while the high-debt/low-growth steady state is unstable — the latter thus indicating the possibility of self-defeating austerity, characterized by off-equilibrium upward spirals in debt because of persistent policy-induced adverse effects on growth dividends and fiscal revenues. However, when global nonlinear dynamics are taken into account, it is demonstrated that the two steady states are endogenously connected. In particular, global analysis reveals that even if the high-debt/low-growth steady state is locally unstable, there exists a unique and possibly non-monotonic saddle connection making the economy converge to the low-debt/high-growth steady state. The existence of the saddle connection guarantees global determinacy of perfect foresight equilibrium should the high-debt/low-growth steady state be a node, ruling out multiple explosive paths incompatible with the government's intertemporal budget constraint and the private agents' transversality condition. The foregoing results are robust with respect to the adoption of an output-based — rather than a capital-based — policy function as long as the rule is nonlinear and sufficiently reactive to debt changes.
    Keywords: Fiscal Austerity; Feedback Policy Rules; Endogenous Growth; Multiple Equilibria; Local Dynamics; Global Dynamics.
    JEL: C62 E62 H63 O40
    Date: 2020–11–14
  16. By: Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri
    Abstract: The US net foreign asset position has deteriorated sharply in the years following the Global Financial Crisis and is currently negative 65 percent of US GDP. This deterioration primarily reflects changes in the relative values of large gross international equity positions, as opposed to net new borrowing. In particular, a sharp increase in equity prices that has been US specific has inflated the value of US foreign liabilities. We develop an international macro finance model to interpret these trends, and argue that the rise in equity prices in the United States likely reflects rising profitability of domestic firms rather than a substantial accumulation of unmeasured capital by those firms. Under that interpretation, the revaluation effects that have driven down the US net foreign asset position are associated with large unanticipated transfers of US output to foreign investors.
    JEL: F30 F40
    Date: 2022–02

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