nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒04‒11
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A Tractable Overlapping Generations Structure for Quantitative DSGE Models By Robert Kollmann
  2. Introducing an Austrian Backpack in Spain By João Brogueira de Sousa; Julián Díaz-Saavedra; Ramon Marimon
  3. The economy-wide effects of mandating private retirement incomes By George Kudrna
  4. Job Ladder and Business Cycles By Felipe Alves
  5. Optimal Monetary Policy with r* By Roberto M. Billi; Jordi Galí; Anton Nakov
  6. On the design of a european unemployment insurance system By Árpád Ábrahám; João Brogueira de Sousa; Ramon Marimon; Lukas Mayr
  7. Central bank digital currency with heterogeneous bank deposits By Remo Nyffenegger
  8. Pareto-Improving Optimal Capital and Labor Taxes By Katharina Greulich; Sarolta Laczó; Albert Marcet
  9. Why Do Couples and Singles Save During Retirement? By Mariacristina De Nardi; Eric French; John Bailey Jones; Rory McGee
  10. On the optimal design of a financial stability fund By Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon
  11. Household Heterogeneity and the Performance of Monetary Policy Frameworks By Edouard Djeutem; Mario He; Abeer Reza; Yang Zhang
  12. Monetary policy trade-offs at the zero lower bound By Stefano Eusepi; Christopher G. Gibbs; Bruce Preston
  13. Resolution of Final Crises By Sebastián Fanelli; Martín Gonzalez-Eiras
  14. Asset pricing with costly short sales By Theodoros Evgeniou; Julien Hugonnier; Rodolfo Prieto
  15. Central Bank Digital Currency in a Developing Economy: A Dynamic Stochastic General Equilibrium Analysis By Rivera Moreno, Pablo Nebbi; Triana Montaño, Karol Lorena
  16. How do Workers Learn? Theory and Evidence on the Roots of Lifecycle Human Capital Accumulation By Xiao Ma; Alejandro Nakab; Daniela Vidart
  17. Simple Models and Biased Forecasts By Pooya Molavi
  18. Making sovereign debt safe with a financial stability fund By Yan Liu; Ramon Marimon; Adrien Wicht
  19. 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
  20. Migrant Smuggling to Europe: a Matching Model By Olivier CHARLOT; Claire NAIDITCH; Radu VRANCEANU
  21. China’s Demographic Transition: A Quantitative Analysis By Yongkun Yin
  22. Equilibrium Defaultable Corporate Debt and Investment By Hong Chen; Murray Zed Frank
  23. Drivers of Inflation: The New York Fed DSGE Model’s Perspective By Marco Del Negro; Aidan Gleich; Shlok Goyal; Alissa Johnson; Andrea Tambalotti
  24. Disinflation Policies with a Flat Phillips Curve By Marco Del Negro; Aidan Gleich; Shlok Goyal; Alissa Johnson; Andrea Tambalotti
  25. High-Dimensional Dynamic Stochastic Model Representation By Aryan Eftekhari; Simon Scheidegger
  26. Optimal Nonlinear Savings Taxation By Brendon, C.

  1. By: Robert Kollmann
    Abstract: This paper develops a novel tractable overlapping generations (OLG) structure that is suitable for use in rich quantitative dynamic stochastic general equilibrium (DSGE) models. The OLG structure assumes that newborn agents receive a wealth transfer such that equilibrium consumption during the first period of life represents a time-invariant share of aggregate consumption. Under efficient risk sharing across contemporaneous cohorts, this implies that aggregate consumption obeys a (quasi-)Euler equation that is isomorphic to the Euler equation of an infinitely-lived representative agent. As a result, DSGE models, with the proposed OLG structure, can be solved as conveniently as standard DSGE models with infinitely-livedrepresentative agents. The great tractability of the OLG structure here constitutes an important advantage over conventional OLG models, especially when agents are long-lived. While highly tractable, the present OLG structure maintains key predictions of standard OLG models, namely the possibility of low (even negative) real interest rates and of equilibrium indeterminacy.
    Keywords: overlapping generations; dynamic stochastic general equilibrium models; Euler equation; subjective discount factor; transversality condition; multiple equilibria
    Date: 2022–03
  2. By: João Brogueira de Sousa; Julián Díaz-Saavedra; Ramon Marimon
    Abstract: In an overlapping generations economy with incomplete insurance markets, the introduction of an employment fund -akin to the one introduced in Austria in 2003, also known as 'Austrian backpack'- can enhance production efficiency and social welfare. It complements the two classical systems of public insurance: pay-as-you-go (PAYG) pensions and unemployment insurance (UI). We show this in a calibrated dynamic general equilibrium model with heterogeneous agents of the Spanish economy in 2018. A `backpack' (BP) employment fund is an individual (across jobs) transferable fund, which earns a market interest rate as a return and is financed with a payroll tax (a BP tax). The worker can use the fund while unemployed or retired. Upon retirement, backpack savings can be converted into an (actuarially fair) retirement pension. To complement the existing PAYG pension and UI systems with a welfare maximising 6% BP tax would raise welfare by 0.96% of average consumption at the new steady state, if we model Spain as an open economy. As a closed economy, there are important general equilibrium effects and, as a result, the social value of introducing the backpack is substantially greater: 16.14%, with a BP tax of 18%. In both economies, the annuity retirement option is an important component of the welfare gains.
    Keywords: computable general equilibrium, welfare state, social security reform, Retirement
    JEL: C68 H55 J26
    Date: 2022–03
  3. By: George Kudrna
    Abstract: This paper investigates the economy-wide effects of mandating private (employment-related) pensions. It draws on the Australian experience with its Superannuation Guarantee legislation which mandates contributions to private retirement (superannuation) accounts. Our key objective is to quantify the long-run implications of alternative mandatory superannuation contribution rates for household economic decisions over the life cycle, household welfare, and macroeconomic and fiscal aggregates. To that end, we develop a stochastic, overlapping generations (OLG) model with labor choice and endogenous retirement, which distinguishes between (i) ordinary private (liquid) assets and (ii) superannuation (illiquid) assets. The benchmark model is calibrated to the Australian economy, fitted to Australian demographic, household survey and macroeconomic data, and accounting for a detailed representation of Australia’s government policy, including its mandatory superannuation system. The model is then applied to simulate the effects of alternative mandatory superannuation contribution rates, with a specific focus on the counterfactual of a legislated future rate of 12% of gross wages. Based on the model simulations, we show that in the long run, this increased mandate generates larger average household wealth, output and consumption per capita and (rational) household welfare across income distribution.
    Keywords: Private Pension, Social Security, Income Taxation, Labor Supply, Endogenous Retirement, Stochastic General Equilibrium
    JEL: J32 H55 H31 J22 J26 C68
    Date: 2022–03
  4. By: Felipe Alves
    Abstract: I build a Heterogeneous Agents New Keynesian model with rich labor market dynamics. Workers search both off- and on-the-job, giving rise to a job ladder, where employed workers slowly move toward more productive and better paying jobs through job-to-job transitions, while negative shocks occasionally throw them back into unemployment. The state of the economy includes the distribution of workers over wealth, labor earnings and match productivities. In the wake of an adverse financial shock calibrated to mimic the US Great Recession unemployment dynamics, firms reduce hiring, causing the job ladder to all but “stop working.” This leaves wages stagnant for several years, triggering a sharp contraction and slow recovery in consumption and output. On the supply side, the slow pace in worker turnover leaves workers stuck at the bottom of the ladder, effectively cutting labor productivity growth in the aggregate. The interaction between weak demand and low productivity leads to inflation dynamics that resemble the missing disinflation of that period.
    Keywords: Business fluctuations and cycles; Inflation and prices; Labour markets; Productivity
    JEL: D31 D52 E24 E32
    Date: 2022–03
  5. By: Roberto M. Billi; Jordi Galí; Anton Nakov
    Abstract: We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, and in which the steady state natural rate (r*) is negative. We show that the optimal policy aims to approach gradually a steady state with positive average inflation. Around that steady state, inflation and output fluctuate optimally in response to shocks to the natural rate. The central bank can implement that optimal outcome by means of an appropriate state-contingent rule, even though in equilibrium the nominal rate remains at zero most (or all) of the time. In order to establish that result, we derive sufficient conditions for local determinacy in a more general model with endogenous regime switches.
    Keywords: zero lower bound, New Keynesian model, decline in r*, equilibrium determinacy, regime switching models, secular stagnation
    JEL: E32 E52
    Date: 2022–03
  6. By: Árpád Ábrahám; João Brogueira de Sousa; Ramon Marimon; Lukas Mayr
    Abstract: We study the welfare effects of both existing and counter-factual European unemployment insurance policies using a rich multi-country dynamic general equilibrium model with labour market frictions. The model successfully replicates several salient features of European labor markets, in particular the cross-country differences in the flows between employment, unemployment and inactivity. We find that mechanisms like the recently introduced European instrument for temporary support to mitigate unemployment risks in an emergency (SURE), which allows national governments to borrow at low interest rates to cover expenditures on unemployment benefits, yield sizable welfare gains, contradicting the conventional classical view that costs of business cycles are small. Furthermore, we find that a harmonized benefit system that features a one-time payment of around three quarters of income upon separation is welfare improving in all Eurozone countries relative to the status quo.
    Keywords: labour markets, Unemployment Insurance, job creation, job destruction, risk-sharing, Economic Monetary Union
    JEL: J6 E2
    Date: 2022–03
  7. By: Remo Nyffenegger
    Abstract: This paper analyses the effects of an introduction of a retail central bank digital currency (CBDC) on bank intermediation in a general equilibrium model with heterogeneous bank deposits and an imperfectly competitive loan market. I find that the impacts of a CBDC strongly differ depending on whether it is used as a medium of exchange or as a saving vehicle. A calibration of the model to the US economy from 1987-2006 shows that if a CBDC is only used as a medium of exchange, a 10% increase in the fraction of people who hold central bank money as a medium of exchange decreases bank lending only by 0.2%. The effect is four times stronger if CBDC is only used as a saving vehicle.
    Keywords: Central bank digital currency, bank lending, new monetarism, overlapping generations
    JEL: E42 E50 E58
    Date: 2022–03
  8. By: Katharina Greulich; Sarolta Laczó; Albert Marcet
    Abstract: We study optimal Pareto-improving fiscal policy in a model where agents are heterogeneous in their labor productivity and wealth and markets are complete. We first argue that recent results that find positive optimal long-run capital taxes in standard models obtain only if the government is allowed to immiserate the economy or if the government would prefer to waste consumption. Excluding these possibilities the Chamley-Judd result reemerges. We find that the long-run optimal tax mix is the opposite of theci shortand medium-run. For a Pareto improvement the length of the transition is very long, more so for policies that benefit the poor. Therefore the traditional focus on long-run optimal taxes is unwarranted. An initial labor tax cut causes early deficits leading to a positive level of government debt in the long run. Welfare weights need to be found endogenously for a Pareto improvement, a Benthamite policy that weighs equally all agents is often not Pareto improving. The optimal fiscal policy is time-consistent if reoptimization requires consensus and heterogeneity is high. We address the sufficiency of first-order conditions for the Ramsey optimum and provide a solution algorithm.
    Keywords: fiscal policy, factor taxation, Pareto-improving tax reform, redistribution
    JEL: E62 H21
    Date: 2022–01
  9. By: Mariacristina De Nardi (College of Liberal Arts, University of Minnesota); Eric French (University of Cambridge); John Bailey Jones (Federal Reserve Bank of Richmond); Rory McGee (University of Western Ontario)
    Abstract: While the savings of retired singles tend to fall with age, those of retired couples tend to rise. We estimate a rich model of retired singles and couples with bequest motives and uncertain longevity and medical expenses. Our estimates imply that while medical expenses are an important driver of the savings of middle-income singles, bequest motives matter for couples and high-income singles, and generate transfers to non-spousal heirs whenever a household member dies. The interaction of medical expenses and bequest motives is a crucial determinant of savings for all retirees. Hence, to understand savings, it is important to model household structure, medical expenses, and bequest motives.
    Date: 2021
  10. By: Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon
    Abstract: We develop a model of a Financial Stability Fund (Fund) for a union of sovereign countries. By contract design, the Fund never has expected undesired losses while, being default-free, a participant country has greater ability to borrow and share risks than using sovereign debt financing. The Fund contract also provides better incentives for the country to reduce endogenous risks. These efficiency gains arise from the ability of the Fund to offer long-term contingent financial contracts, subject to limited enforcement (LE) and moral hazard (MH) constraints as part of the contingencies. We develop the theory (welfare theorems, with a new price decentralization) and quantitatively compare the constrained-efficient Fund economy with an incomplete markets economy with default. In particular, we characterize how prices and allocations differ, when the two economies are subject to exogenous productivity and endogenous government expenditure shocks. In our economies, calibrated to the euro area 'stressed countries', substantial welfare gains are achieved, particularly in times of crisis. The Fund is, in fact, a risk-sharing, crisis prevention and resolution mechanism, which transforms participant countries’ defaultable sovereign debts into union’s safe assets. In sum, our theory can help to improve current official lending practices and, eventually, to design an European Fiscal Fund.
    Keywords: fiscal unions, recursive contracts, Debt Contracts, partnerships, limited enforcement, moral hazard, debt restructuring, Debt Overhang, sovereign fund
    JEL: E43 E44 E47 E63 F34 F36
    Date: 2022–03
  11. By: Edouard Djeutem; Mario He; Abeer Reza; Yang Zhang
    Abstract: We compare the performance of alternative monetary policy frameworks (inflation targeting, average inflation targeting, price level targeting and nominal GDP level targeting) in a tractable HANK model where incomplete financial markets and idiosyncratic earnings risk introduce precautionary savings and consumption inequality. Financial market incompleteness generates an additional source of societal welfare loss due to cyclical fluctuations in inequality on top of those from inflation and output volatility. We find that history-dependent policies are preferred in this framework. However, if central banks put a high weight on curbing inequality, AIT and IT can be preferred over PLT.
    Keywords: Monetary policy framework; Monetary policy transmission; Monetary policy and uncertainty; Economic models
    JEL: D31 D52 E21 E31 E58
    Date: 2022–03
  12. By: Stefano Eusepi; Christopher G. Gibbs; Bruce Preston
    Abstract: We study zero interest-rate policy in response to a large negative demand shock when long-run inflation expectations can fall over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal forward guidance policy makes large front-loaded promises to stabilize expectations. Policy is too stimulatory in the event of transitory shocks, but provides insurance against persistent shocks. Optimal policy is well-approximated by a constant calendar-based forward guidance, independent of the shock’s realized persistence. This insurance principle qualitatively and quantitatively distinguishes our paper from other recent research on bounded rationality and the forward guidance puzzle.
    Keywords: Optimal Monetary Policy, Learning Dynamics, Expectations Stabilization, Forward Guidance
    JEL: E32 D83 D84
    Date: 2022–03
  13. By: Sebastián Fanelli (CEMFI, Centro de Estudios Monetarios y Financieros); Martín Gonzalez-Eiras (University of Copenhagen)
    Abstract: A financial crisis creates substantial wealth losses. How these losses are allocated determines the magnitude of the crisis and the path to recovery. We study how institutions and technological factors that shape default and debt restructuring decisions affect the amplification of aggregate shocks. For sufficiently large shocks, agents renegotiate. This limits the losses borne by borrowers, shutting the amplification mechanism via asset prices. The range of shocks that trigger renegotiation is decreasing in repossession costs and increasing in default costs, if the latter are public information. Private information may induce equilibrium default but, by allowing agents with high default costs to extract a larger haircut, facilitates the recovery. The model is consistent with evidence from real estate markets in the U.S. during the Great Recession; and rationalizes recent changes in U.S. Bankruptcy Code in the wake of the COVID-19 crisis.
    Keywords: Financial crises, balance sheet recessions, default, renegotiation
    JEL: E32 E44 G01
    Date: 2021–12
  14. By: Theodoros Evgeniou (INSEAD); Julien Hugonnier (Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute); Rodolfo Prieto (INSEAD)
    Abstract: We study a dynamic general equilibrium model with costly-to-short stocks and heterogeneous beliefs. The closed-form solution to the model shows that costly short sales drive a wedge between the valuation of assets that promise identical cash flows but are subject to different trading arrangements. Specifically, we show that the price of an asset is given by the risk-adjusted present value of future cash flows which include both dividends and an endogenous lending yield. This pricing formula implies that returns satisfy a modified capital asset pricing model with an adjustment for the lending yield and sheds light on recent findings about the explanatory power of lending fees in the cross-section of returns. In particular, we show empirically that once returns are appropriately adjusted for lending fees, stocks with low and high shorting costs offer similar risk-return tradeoffs.
    Keywords: Shorting fees, Securities lending, Heterogeneous beliefs, Dynamic equilibrium.
    JEL: D51 D52 G11 G12
    Date: 2022–03
  15. By: Rivera Moreno, Pablo Nebbi; Triana Montaño, Karol Lorena
    Abstract: Central Bank Digital Currency (CBDC) has been in the center of discussion of many monetary policy research agendas. We explore how the business cycle behavior of a developing economy is affected by the introduction of this type of money as a second monetary policy tool. We emphasize on the characteristic dual formal and informal labor markets that are present in most developing economies, given its relevance on explaining the business cycle dynamics. Our main contribution is the building of a model that encompasses such characteristics and features the relevance of monetary balances to macroeconomic fluctuations. We find that CBDC has the ability to improve the monetary policy effectiveness, and the response of relevant variables may be amplified or dampened, depending on the nature of the shock. Also the magnitude of the new dynamics introduced by CBDC are also profoundly dependant on its structural parameters. The main transmission mechanisms that are affected by CBDC are the dynamics of distortions generated by transaction costs.
    Date: 2022–04
  16. By: Xiao Ma (Peking University); Alejandro Nakab (Universidad Torcuato Di Tella); Daniela Vidart (University of Connecticut)
    Abstract: How do the sources of worker learning change over the lifecycle, and how do these changes a˙ect on-the-job human capital accumulation? We use detailed worker quali-fication data from Germany and the US to document that internal learning (learning through colleagues) decreases with worker experience, while external learning (on-the-job training) has an inverted U-shape in worker experience. To shed light on these findings, we build an analytical model where the incentives to engage in each type of skill acquisition evolve throughout the lifecycle due to shifts in the relative position of the worker in the human capital distribution. We embed this two-source learning mechanism in a quantitative Burdett and Mortensen search framework where firms and workers jointly fund learning investments. The model equilibrium replicates our em-pirical lifecycle results, as well as several key findings in the literature on the e˙ects of firm matching and coworker quality in the formation of human capital. Counterfactual analyses imply that aggregate human capital decreases by approximately 30% in the absence of either learning source, and that the two sources are highly complementary in the aggregate. We conduct a policy analysis that highlights key ineÿciencies to learning investments stemming from firms’ role in learning, and shows that subsidizing learning can generate sizeable increases to human capital and aggregate output.
    Keywords: On-the-Job Training, Human Capital Accumulation, Lifecycle Wage Growth
    JEL: J24 E24 M53 O15 J62
    Date: 2022–04
  17. By: Pooya Molavi
    Abstract: This paper proposes a general framework in which agents are constrained to use simple time-series models to forecast economic variables and characterizes the resulting bias in the agents' forecasts. It considers agents who can only entertain state-space models with no more than d states, where d measures the agents' cognitive abilities. Agents' models are otherwise unrestricted a priori and disciplined endogenously by maximizing the fit to the true process. When the true process does not have a d-state representation, agents end up with misspecified models and biased forecasts. If the true process satisfies an ergodicity assumption, the bias manifests itself as persistence bias: a tendency to attend to the most persistent observables at the expense of less persistent ones. The bias causes agents' foreword-looking decisions to mimic the dynamics of backward-looking, persistent variables in the economy. It also dampens the response of agents' actions to shocks and leads to additional co-movements between various choices. The paper then proceeds to study the implications of the theory in the context of three calibrated workhorse macro models: the new-Keynesian, real business cycle, and Diamond--Mortensen--Pissarides models. In each case, constraining agents to use simple models brings the model's predictions more in line with the data, without adding any parameters other than the integer d.
    Date: 2022–02
  18. By: Yan Liu; Ramon Marimon; Adrien Wicht
    Abstract: We develop an optimal design of a Financial Stability Fund that coexists with the international debt market. The sovereign can borrow long-term defaultable bonds on the private international market, while having with the Fund a long-term contingent contracts subject to limited enforcement constraints. There is a contract that minimizes the debt absorbed by the Fund, guaranteeing full debt stabilization. In equilibrium, the seniority of the Fund contract, with respect to the privately held debt, is irrelevant. We calibrate our model to the Italian economy and show it would have been a more efficient path of debt accumulation with the Fund.
    Keywords: recursive contracts, limited enforcement, debt stabilisation, Debt Overhang, safe assets, seniority structure
    JEL: E43 E44 E47 E62 F34 F36 F37
    Date: 2022–03
  19. 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 data set of administrative data that merges Spanish credit register loan data, quasi-census 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: 2022–02–01
  20. By: Olivier CHARLOT; Claire NAIDITCH; Radu VRANCEANU (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper develops a matching model à la Pissarides (2000) to analyze the migrant smuggling market, building on the empirical evidence related to the smuggling of migrants from the Horn of Africa and the Middle East to the European region in the last decade. The model allows us to determine the equilibrium numbers of smugglers and of incoming irregular migrants as well as the total migrant welfare. Most of the coercion-based measures targeting the smugglers achieve the reduction in the number of irregular migrants and smugglers at the expense of migrants’ overall welfare. Slightly increasing legal migration opportunities has the interesting feature of drastically reducing irregular flows, without deteriorating migrants’ welfare nor increasing the total number of migrants. The model reveals that an extremely restrictive asylum policy has similar effects in terms of the flows of irregular migrants as a quite loose one, with the largest flows of irregular migrants reached for a "middle-range" policy. Finally, the stay-home incentive of generous humanitarian policies might be partially offset by higher profits and a higher smuggling activity.
    Keywords: Migrant smuggling, Irregular migration, Matching model, Migrant welfare, Europe.
    JEL: F22 J46
    Date: 2022
  21. By: Yongkun Yin (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: China’s fertility decline was very fast. But the drivers of this decline are not well understood. The common wisdom attributes it to the strict population control policies, particularly the One-Child Policy. Yet, fertility decline might also be due to the spectacular economic transformation and substantial mortality decline. To quantify the effects of different factors on China’s demographic and economic transition, I develop a two-sector overlapping-generation model with workers’ movement from rural to urban areas and endogenous fertility and education choices. Quantitative analysis shows that even without any population policy, the total fertility rate (TFR) would decline from 6.40 children around 1950 to 2.85 children around 2010. However, the population policies were critical for TFR to fall below the replacement level and do so very quickly after the 1980s. By around 2010, the cumulative effect of population policies reduced fertility from 2.85 to 1.34 children. The baseline model is also extended to incorporate the hukou system, considering that different hukou types are linked to different child quotas under the One-Child Policy and government transfers. The extended model suggests that the impact of the hukou system on fertility decisions was minor.
    Keywords: Demographic transition, structural transformation, population policies, productivity growth, mortality, China.
    JEL: D1 J13 O41
    Date: 2022–02
  22. By: Hong Chen; Murray Zed Frank
    Abstract: In dynamic capital structure models with an investor break-even condition, the firm's Bellman equation may not generate a contraction mapping, so the standard existence and uniqueness conditions do not apply. First, we provide an example showing the problem in a classical trade-off model. The firm can issue one-period defaultable debt, invest in capital and pay a dividend. If the firm cannot meet the required debt payment, it is liquidated. Second, we show how to use a dual to the original problem and a change of measure, such that existence and uniqueness can be proved. In the unique Markov-perfect equilibrium, firm decisions reflect state-dependent capital and debt targets. Our approach may be useful for other dynamic firm models that have an investor break-even condition.
    Date: 2022–02
  23. By: Marco Del Negro; Aidan Gleich; Shlok Goyal; Alissa Johnson; Andrea Tambalotti
    Abstract: After a sharp decline in the first few months of the COVID-19 pandemic, inflation rebounded in the second half of 2020 and surged through 2021. This post analyzes the drivers of these developments through the lens of the New York Fed DSGE model. Its main finding is that the recent rise in inflation is mostly accounted for by a large cost-push shock that occurred in the second quarter of 2021 and whose inflationary effects persist today. Based on the model’s reading of historical data, this shock is expected to fade gradually over the course of 2022, returning quarterly inflation to close to 2 percent only in mid-2023.
    Keywords: inflation; DSGE; macroeconomics
    JEL: E2
    Date: 2022–03–01
  24. By: Marco Del Negro; Aidan Gleich; Shlok Goyal; Alissa Johnson; Andrea Tambalotti
    Abstract: Yesterday’s post analyzed the drivers of the surge in inflation over the course of 2021 through the lens of the New York Fed DSGE model. In today’s post, we use the model to study how alternative monetary policy strategies might contribute to bringing inflation back down to 2 percent. Our main finding is that there is no monetary silver bullet. Due to a flat Phillips curve—a well–documented feature of the economic environment of the last three decades—monetary policy can only achieve faster disinflation at a considerable cost in terms of forgone economic activity. This is true regardless of the systematic approach followed by the central bank in the model to pursue its objective.
    Keywords: DSGE; inflation; macroeconomics; monetary policy
    JEL: E2 E52
    Date: 2022–03–02
  25. By: Aryan Eftekhari; Simon Scheidegger
    Abstract: We propose a scalable method for computing global solutions of nonlinear, high-dimensional dynamic stochastic economic models. First, within a time iteration framework, we approximate economic policy functions using an adaptive, high-dimensional model representation scheme, combined with adaptive sparse grids to address the ubiquitous challenge of the curse of dimensionality. Moreover, the adaptivity within the individual component functions increases sparsity since grid points are added only where they are most needed, that is, in regions with steep gradients or at nondifferentiabilities. Second, we introduce a performant vectorization scheme for the interpolation compute kernel. Third, the algorithm is hybrid parallelized, leveraging both distributed- and shared-memory architectures. We observe significant speedups over the state-of-the-art techniques, and almost ideal strong scaling up to at least $1,000$ compute nodes of a Cray XC$50$ system at the Swiss National Supercomputing Center. Finally, to demonstrate our method's broad applicability, we compute global solutions to two variates of a high-dimensional international real business cycle model up to $300$ continuous state variables. In addition, we highlight a complementary advantage of the framework, which allows for a priori analysis of the model complexity.
    Date: 2022–02
  26. By: Brendon, C.
    Abstract: This paper analyses the design of optimal nonlinear savings taxation, in a multi-period consumption-savings economy where consumers face persistent, uninsurable shocks to the marginal value that they place on consuming. Its main contributions are: (a) to show that shocks of this kind generically justify positive marginal savings taxes, and (b) to characterise these taxes by reference to a limited number of sufficient statistics. The method for obtaining this characterisation is generalisable, and provides a roadmap for reconnecting ‘Mirrleesian’ and ‘sufficient statistics’ approaches to dynamic taxation. Intuitively, dynamic asymmetric information problems imply significant restrictions on intertemporal consumption elasticities. These restrictions keep sufficient statistics representations manageable, despite the multi-dimensional choice setting.
    Keywords: Nonlinear Taxation, Sufficient Statistics, Mirrleesian Taxation, New Dynamic Public Finance
    JEL: D82 E21 E61 H21 H24 H30
    Date: 2022–03–25

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