nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒04‒04
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. ifo DSGE Model 2.0 By Radek Šauer
  2. Technology Choice, Externalities in Production, and Chaotic Middle-Income Traps By Takao Asano; Akihisa Shibata; Masanori Yokoo
  3. Abstract By Yasuo Hirose; Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
  4. Environment, public debt and epidemics * By Marion Davin; Mouez Fodha; Thomas Seegmuller
  5. Fiscal Multipliers and Evidence on Effectiveness of Fiscal Policy in Malawi By Kumwenda, Thomson Nelson
  6. Dividend Imputation, Investment and Capital Accumulation in Open Economies By Chung Tran; Sebastian Wende
  7. Attention and Fluctuations in Macroeconomic Uncertainty By Yu-Ting Chiang
  8. How Constant is Constant Elasticity of Substitution? Endogenous Substitution between Clean and Dirty Energy By Ara Jo; Alena Miftakhova
  9. Occupational safety in a frictional labor market By Kerndler, Martin
  10. Aggregate Health Shock and Retirement Decision By Hyunduk Suh; SeEun Jung
  11. Consumer Bankruptcy, Mortgage Default and Labor Supply By Wenli Li; Costas Meghir; Florian Oswald
  12. Cross-border regulatory spillovers and macroprudential policy coordination By Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva
  13. Modeling Bank Panics: Challenges By Lawrence Christiano; Husnu Dalgic; Xiaoming Li
  14. Lower for longer under endogenous technology growth By Elfsbacka Schmöller, Michaela; Spitzer, Martin

  1. By: Radek Šauer
    Abstract: This documentation concisely describes the dynamic stochastic general-equilibrium model that the ifo Institute currently uses for simulations and business-cycle analysis. The model consists of three countries and contains a wide range of rigidities. The model is regularly estimated by quarterly macroeconomic data.
    Keywords: DSGE, simulations, forecasting, business-cycle analysis
    JEL: E17
    Date: 2022
  2. By: Takao Asano (Okayama University); Akihisa Shibata (Kyoto University); Masanori Yokoo (Okayama University)
    Abstract: We incorporate external effects of capital on production and endogenous technology choice into the standard overlapping generations model. We demonstrate that our model can exhibit poverty traps, middle-income traps, and perpetual growth paths. We also show that these three phenomena coexist for some set of parameters and the economy caught in the middle-income trap can exhibit chaotic fluctuations in the long run. In obtaining these results in the standard overlapping generations model, the combination of technology choice and externalities in production plays a crucial role.
    Keywords: External effect; Technology choice; Overlapping generations model, Middle-income trap; Chaos
    Date: 2022–03
  3. By: Yasuo Hirose (Keio University); Hirokuni Iiboshi (Tokyo Metropolitan University); Mototsugu Shintani (The University of Tokyo); Kozo Ueda (Waseda University)
    Abstract: We estimate a New Keynesian model incorporating two notable features: bounded rationality and the zero lower bound on the nominal interest rate. Our Bayesian estimation of a fully nonlinear model shows that the model with bounded rationality better fits the US data than its rational expectations counterpart and that both households and firms exhibit a substantial degree of bounded rationality. Moreover, we demonstrate that bounded rationality expands a parameter region in which the model can be estimated and weakens the power of forward guidance.
    Date: 2022–03
  4. 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 (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université)
    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
  5. By: Kumwenda, Thomson Nelson
    Abstract: This study sheds light on the effects of fiscal policy on the Malawian economy by measuring the value of different Keynesian multipliers and identifying the possible origins of GDP fluctuation. The quantitative method adopted is the Bayesian estimation of a Dynamic and Stochastic General Equilibrium (DSGE) model based on data from the National Statistic Office and Reserve Bank of Malawi over the period 2004Q1-2020Q2. The Keynesian multiplier for government expenditure has been estimated at -0.81 and -1.50 at impact and remains negatively strong in subsequent periods for Output and positive for subsequent period for private investments or aggregate demand; (iii) an decrease in consumption taxes has a positive impact on national production, private investments and negative impact on general consumption, the consumption tax multiplier has been estimated at 1.22 for GDP, 0.69 for private investments and -0.64 for consumption for Ricardians households. (iii) the decrease of employment tax has a negative impact on GDP, private investments and positive impact on consumption for Non Ricardians households. This study shows that overall, the variability of production and private consumption is due in large part to public investment and monetary policy shocks, and this effect is persistent and significant over time. The effects of the public investment shock diminish over time, while those relating to the consumption tax are increases over time.
    Keywords: DSGE; Bayesian; Ricardian; Non-Ricardian households; multiplier; Fiscal policy
    JEL: E17 E32 E62
    Date: 2022–02
  6. By: Chung Tran; Sebastian Wende
    Abstract: A dividend imputation system is designed to address double taxation of capital income by allowing companies to pass on profit taxes paid at the corporate level to shareholders in form of franking tax credits. In this paper, we study implications of dividend imputation in a small open economy model with firm heterogeneity and an internationally integrated capital market. Our analysis indicates that dividend imputation has opposing effects on investment and capital accumulation. On one hand, it mitigates the adverse effects of double taxation and induces more saving and investment; on other hand, it raises the cost of investment for firms that are not fully imputed, which subsequently results in less investment. Moreover, different tax treatments for resident and foreign investors amplify frictions in reallocation of capital across firms, which prevents inflows of foreign capital from fully offsetting the shortage of domestic savings. International investors are not marginal investors in our small open economy setting. Overall, the net effect on capital accumulation is analytically ambiguous, depending on which force is dominant. Our quantitative results indicate that the positive force is dominant and removing dividend imputation leads to decreases in domestic savings, aggregate capital and output. Interestingly, the overall welfare effect is positive as low income households benefit more from additional government transfers, while tax burdens are shifted towards high income households and foreign investors.
    Keywords: Double taxation; Franking tax credit; Fiscal policy; Firm heterogeneity; Overlapping generations; Open economy; Dynamic general equilibrium; Welfare.
    JEL: D21 E62 H21 H22 H25
    Date: 2022–03
  7. By: Yu-Ting Chiang
    Abstract: This paper studies a dispersed information economy in which agents can exert costly attention to learn about an unknown aggregate state of the economy. Under certain conditions, attention and four measures of uncertainty are countercyclical: Agents pay more attention when they expect the economy to be in a bad state, and their reaction generates higher (i) aggregate output volatility, (ii) cross-sectional output dispersion, (iii) forecast dispersion about aggregate output, and (iv) subjective uncertainty about aggregate output faced by each agent. All these phenomena are prominent features of the U.S. data. When attention cost is calibrated to forecast survey data, the model generates countercyclical fluctuations in attention and uncertainty, consistent with untargeted moments from the data. Fluctuations in attention and uncertainty are higher-order properties of the model. A new method is developed to solve higher-order dynamics of the equilibrium under an infinite regress problem.
    Keywords: business cycles; macroeconomic uncertainty; dispersed information; rational inattention
    JEL: D8 E1 E3 E7
    Date: 2022–03–08
  8. By: Ara Jo (Center of Economic Research (CER-ETH), ETH Zürich, Zürichbergstrasse 18, 8032 Zürich, Switzerland); Alena Miftakhova (Center of Economic Research (CER-ETH), ETH Zürich, Zürichbergstrasse 18, 8032 Zürich, Switzerland)
    Abstract: The degree of substitutability between clean and dirty energy plays a central role in leading economic analyses of optimal environmental policy. Despite the importance, a constant and exogenous elasticity of substitution has been a dominant theoretical approach. We challenge this assumption by developing a dynamic general equilibrium model with an endogenous elasticity of substitution that interacts with the relative share of clean inputs in the economy. We find strong dynamic feedback effects arising from endogenous substitution capacity that amplifies the impact of directed technical change and accelerates the transition to a green economy
    Keywords: Elasticity of substitution, directed technical change, climate change
    JEL: Q40 Q55 Q54 O33
    Date: 2022–03
  9. By: Kerndler, Martin
    Abstract: This paper studies the provision of occupational safety when the labor market is subject to search frictions. While safety measures are costly for firms, they reduce workers' mortality. We show that the presence of search frictions decreases the socially optimal level of occupational safety relative to a frictionless labor market, leading to excess mortality. In a decentralized setting where wages and safety measures are bargained at the firm level, matching externalities and a labor supply externality may further reduce safety provision. We obtain conditions under which these externalities are internalized by firms and workers, and discuss the role of policy for promoting occupational safety. Calibrating the model to the US, we find that search frictions explain 8%-14% of the work-related mortality rate, which indirectly makes them the third largest cause of work-related death.
    Keywords: occupational safety,mortality,search frictions,Nash bargaining
    JEL: J17 J28 J32 J38 J64
    Date: 2022
  10. By: Hyunduk Suh (Inha University); SeEun Jung (Inha University)
    Abstract: The retirement of old workers increased during the COVID-19 pandemic, and health concerns are considered as a critical factor. To isolate the effect of pure health concerns during the pandemic, we analyze the impact of the aggregate health shock on retirement decisions using a life-cycle model. The aggregate health shock changes the economy from the normal state to the pandemic state, where the probability of adverse idiosyncratic health shock increases, especially if agents are working. Simulation results suggest that the shock accelerates the retirement of agents aged between 60 and 64. Its impact is quantitatively greater than the effect of a five percent reduction in labor income. The retirement response is heterogeneous across agent types, influenced by various factors, including preference, income, health status, and health expenditure. The negative effect of the aggregate health shock is significant even though the shock is expected to be temporary. Also, the effect hinges on the assumption that working poses a greater risk of receiving a negative health shock than retiring.
    Keywords: Retirement, Health shock, COVID-19, Life-cycle model
    JEL: J26 I18 E24
    Date: 2022–03
  11. By: Wenli Li (Federal Reserve Bank of Philadelphia); Costas Meghir (Cowles Foundation, Yale University, NBER, IZA, CEPR and IFS); Florian Oswald (SciencesPo, Paris)
    Abstract: We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic consumption events, while bankruptcy is governed by the basic institutional framework in the US as implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and mortgages combined with data from the American Community Survey. We use the model to understand the relative importance of the two chapters (7 and 13) for each of our two education groups that differ in both preferences and wage profiles. We also provide an evaluation of the BAPCPA reform. Our paper demonstrates importance of distributional effects of Bankruptcy policy.
    Keywords: Lifecycle, Bankruptcy, Housing, Mortgage Default, Labor Supply, Consumption, Education, Insurance, Moral hazard
    JEL: G33 K35 J22 J31 D14 D18 D52 D53 E21
    Date: 2022–03
  12. By: Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva
    Abstract: A core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the magnitude of regulatory spillovers and the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks in both regions are subject to risk-sensitive capital regulation. Following an expansionary monetary policy in the core, a countercyclical response in capital requirements induces the global bank to engage in regulatory arbitrage. The magnitude of the resulting cross-border capital flows depends on the degree of economies of scope in lending. Welfare gains associated with countercyclical capital buffers are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity---a regime in which capital ratios set in the core are imposed on branches operating in the periphery. If regulators set policies on the basis of a narrow financial stability mandate, and these policies are evaluated in terms of household welfare, reciprocity may perform better than Nash, and as well as coordination for all parties, when regulatory leakages are strong.
    Keywords: global banking, financial spillovers, regulatory leakages, macroprudential policy coordination.
    JEL: E58 F42 F62
    Date: 2022–03
  13. By: Lawrence Christiano; Husnu Dalgic; Xiaoming Li
    Abstract: Our primary finding is that surprisingly small changes in assumptions which determine the amount of net worth available in a bank panic have an important impact on the nature of the equilibria: there may not be a bank panic at all, or there may be several di erent panics of di erent severity. The economic reasons for this sensitivity are clarified by transforming the market economy into a game and studying banker best response functions. To establish robustness to model details, we report similar quantitative results across three di erent model specifications and calibrations. A second, additional result, is displayed in a three-period version of the panic model of Gertler and Kiyotaki (2015). That model naturally suggests the idea that welfare can be improved by imposing a restriction on bank leverage. We compute the Ramsey-optimal leverage restriction, but find that there is an implementation problem: the restriction can be associated with more than one equilibrium, not just the desired one. We discuss one way to address the implementation problem.
    Keywords: Bank runs, financial crises, macroprudential policy
    JEL: E44 G01 G21
    Date: 2022–03
  14. By: Elfsbacka Schmöller, Michaela; Spitzer, Martin
    Abstract: This paper studies monetary policy strategies under endogenous technology dynamics and low r∗. Endogenous growth strengthens the gains from make-up strategies relative to inflation targeting, especially if policy space is reduced. This result is due to the long-run non-neutrality of money and the hysteresis effects in TFP through which ELB episodes generate permanent scars on long-run aggregate supply. Make-up strategies not only foster the alignment of inflation with target but also support productivity-improving investment in R&D and technology adoption and hence the long-run trend path, provided that the inherent make-up element is sufficiently pronounced. Inflation is less responsive to monetary policy due to the interaction with productivity dynamics. As a result, additional stimulus is required at the ELB and the degree of subsequent overshooting is alleviated. Endogenous growth also generates novel monetary policy trade-offs, most notably credibility challenges, which can be mitigated by confining make-up elements to ELB episodes.
    JEL: E24 E31 E32 E52 O30
    Date: 2022–03–31

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