nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒04‒18
twenty papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The impact of active aggregate demand on utilisation-adjusted TFP By Gantert, Konstantin
  2. The cost of disinflation in a small open economy vis-à-vis a closed economy By Faryna, Oleksandr; Jonsson, Magnus; Shapovalenko, Nadiia
  3. Covid-19 in Unequal Societies By Constantino Hevia; Manuel Macera; Pablo Andrés Neumeyer
  4. Seemingly Irresponsible but Welfare Improving Fiscal Policy at the Lower Bound By Billi , Roberto M.; Walsh, Carl E.
  5. Inflation Targeting or Fiscal Activism? By Billi, Roberto M.
  6. Secular Drivers of the Natural Rate of Interest in the United States: A Quantitative Evaluation By Josef Platzer; Marcel Peruffo
  7. Real Exchange Rates and Primary Commodity Prices: Mussa Meets Backus-Smith* By Juan Pablo Nicolini; Constantino Hevia; Joao Ayres
  8. A Real-Business-Cycle Model with Financial Liberalization: Lessons for Bulgaria (1999-2020) By Aleksandar Vasilev
  9. A TNT Model for Chile: Explaining the ERPT By Mariana García-Schmidt; Javier García-Cicco
  10. Pension reform and wealth inequality: evidence from Denmark By Andersen, Torben M.; Bhattacharya, Joydeep; Grodecka-Messi, Anna; Mann, Katja
  11. Dollar Invoicing, Global Value Chains, and the Business Cycle Dynamics of International Trade By Nikhil Patel; Mr. David Cook
  12. Dynamic Macroeconomic Implications of Immigration By Olovsson, Conny; Walentin, Karl; Westermark, Andreas
  13. Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration By Javier García-Cicco
  14. Why Women Work the Way They Do in Japan: Roles of Fiscal Policies By KITAO Sagiri; MIKOSHIBA Minamo
  15. Fix vs. Float: Evaluating the Transition to a Sustainable Equilibrium in Bolivia By Mr. Etibar Jafarov; Andres Gonzalez; Chris Walker; Diego Rodriguez Guzman
  16. Sequential Monte Carlo With Model Tempering By Marko Mlikota; Frank Schorfheide
  17. Households, Auctioneers, and Aggregation By Karsten O. Chipeniuk; Nets Hawk Katz; Todd Bruce Walker
  18. Labour market skills, endogenous productivity and business cycles By Abbritti, Mirko; Consolo, Agostino
  19. CBDC as Competitor for Bank Deposits and Cryptocurrencies By Max Fuchs
  20. RBTC and Human Capital: Accounting for Individual-Level Responses By Daniil Kashkarov

  1. By: Gantert, Konstantin
    Abstract: Non-clearing goods markets are an important driver of capacity utilisation and total factor productivity (TFP). The trade-off between goods prices and household search effort is central to goods market matching and therefore drives TFP over the business cycle. In this paper, I develop a New-Keynesian DSGE model with capital utilisation, worker effort, and expand it with goods market search-and-matching (SaM) to model non-clearing goods markets. I conduct a horse-race between the different capacity utilisation channels using Bayesian estimation and capacity utilisation survey data. Models that include goods market SaM improve the data fit, while the capital utilisation and worker effort channels are rendered less important compared to the literature. It follows that TFP fluctuations increase for demand and goods market mismatch shocks, while they decrease for technology shocks. This pattern increases as goods market frictions increase and as prices become stickier. The paper shows the importance of non-clearing goods markets in explaining the difference between technology and TFP over the business cycle.
    Keywords: Bayesian estimation,capacity utilisation,non-clearing goods markets,search-and-matching,total factor productivity
    JEL: E22 E23 E3 J20
    Date: 2022
  2. By: Faryna, Oleksandr (National Bank of Ukraine and National University of Kyiv-Mohyla Academy); Jonsson, Magnus (Monetary Policy Department, Central Bank of Sweden); Shapovalenko, Nadiia (National Bank of Ukraine)
    Abstract: We use a standard new Keynesian model to evaluate the cost of disinflation – measured by the sacrifice ratio, the central bank’s loss function, and the welfare cost – in a small open economy vis-à-vis a closed economy. Disinflation is either more costly or less beneficial in the small open economy, but the results vary quantitatively depending on the measure and the economic environment. Optimised simple monetary policy rules imply that the relative weight on inflation stabilisation should be lower in the small open economy if the central bank minimises the loss function, but higher if it maximises welfare.
    Keywords: Disinflation; sacrifice ratio; central bank’s loss function; welfare cost; small open economy; new Keynesian model; optimised rules; imperfect credibility
    JEL: E31 E50 F41
    Date: 2021–11–01
  3. By: Constantino Hevia (UTDT); Manuel Macera (UTDT); Pablo Andrés Neumeyer ((UTDT/Harvard Kennedy School of Government)
    Abstract: We document the heterogeneous effect of covid-19 on health and economic outcomes across socioeconomic strata in Bogot´a. We assess its distributional impact and evaluate policy counterfactuals in an heterogeneous agent quantitative dynamic general equilibrium model intertwined with a behavioral epidemiological model.
    Date: 2022–01
  4. By: Billi , Roberto M. (Research Department, Central Bank of Sweden); Walsh, Carl E. (University of California, Santa Cruz)
    Abstract: In this paper, we evaluate the consequences of super-active Öscal policy rulesó that is, rules that call for tax cuts and/or spending increases as the governmentís debt level risesó in a standard New Keynesian model subject to an occasionally-binding zero lower bound on the monetary policy interest rate. We show that such seemingly irresponsible, debt-Önanced Öscal stimulus at the ZLB, unbacked by any promise of future tax increases or spending cuts, not only improves economic stability by acting as an automatic stabilizer, but also, somewhat paradoxically, reduces government debt accumulation. When evaluated using a model-consistent measure of welfare, Öscal rules calibrated to the U.S. response during both the Great Recession and COVID recession, combined with a weak monetary policy response to ináation, outperform a monetary policy that responds strongly to ináation and reduce the frequency of episodes at the ZLB.
    Keywords: automatic stabilizers; Öscal and monetary interactions; government debt
    JEL: E31 E52 E63
    Date: 2022–02–01
  5. By: Billi, Roberto M. (Research Department, Central Bank of Sweden)
    Abstract: I study the welfare performance of a policy regime of fiscal activism in which fiscal policy acts as an automatic stabilizer and controls inflation, while monetary policy pegs the nominal interest rate. When evaluated through the lens of a standard New Keynesian model, accounting for price and wage rigidities and for a zero lower bound (ZLB) on the nominal interest rate, fiscal activism can substantially outperform inflation targeting in the face of both demand shocks and technology shocks. Fiscal activism can also eliminate the occurrence of ZLB episodes.
    Keywords: automatic stabilizers; Öscal and monetary interactions; government debt
    JEL: E24 E31 E52 E63
    Date: 2022–03–01
  6. By: Josef Platzer; Marcel Peruffo
    Abstract: We develop a heterogeneous agent, overlapping generations model with nonhomothetic preferences that nests several explanations for the decline in the natural rate of interest (r∗) suggested in the literature: demographic change, a slowdown in productivity growth, a rise in income inequality, and public policy. The model can account for a 2.2 percentage point (pp) decline in r∗ between 1975 and 2015, which is within the range of empirical estimates. Rising income inequality is an important driver (-0.70 pp), and together with demographic change (-0.71 pp) and the slowdown in productivity growth (-1.0 pp) explains most of the decline. Growing public debt is the major counteracting force (+0.31 pp). Permanent income inequality is of greater importance than inequality due to uninsurable income risk, and matching the degree of nonhomotheticity in consumption and savings behavior to empirical estimates is essential for this result. We predict that r∗ will reach a low of 0.38% by 2030, after which a slow reversal will begin. The natural rate will stabilize at 1% in the long run, a low level when compared with the postwar path of r∗ implied by the model. This remains true even if we take into account soaring public debt levels due to the COVID-19 pandemic. Policy can have considerable impact on the level of r∗ through the tax and transfer system.
    Keywords: Demographic Change, Inequality, Life-cycle, Natural Rate of Interest, Nonhomothetic Preferences, Secular Stagnation; transition path; baseline transition-path; labor income; uninsurable income risk; implied path; path of r; Nonhomothetic consumption preference; Income inequality; Income; Productivity; Consumption; Europe; Global
    Date: 2022–02–11
  7. By: Juan Pablo Nicolini; Constantino Hevia; Joao Ayres
    Abstract: We show that explicitly modeling primary commodities in an otherwise totally standard incomplete markets open economy model can go a long way in explaining the Mussa puzzle and the Backus-Smith puzzle, two of the main puzzles in the international economics literature.
    Keywords: primary commodity prices, Mussa puzzle, Backus-Smith puzzle.
    JEL: F31 F41
    Date: 2021–09
  8. By: Aleksandar Vasilev (Lincoln International Business School, UK.)
    Abstract: Financial openness is introduced into a real-business-cycle setup augmented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2020). The quantitative importance of financial openness is investigated for the stabilization of cyclical fluctuations in Bulgaria. The computational experiment performed in this paper reveals that greater financial openness increases the impact of technology shocks on output, investment, consumption, labor hours, and net exports. This amplification effect is due to the following mechanism: openness provides a cheap access to foreign funds. Unfortunately, the new results come at odds with a major empirical observation, i.e. that consumption and net exports are strongly pro-cyclical; the model, however, produces a countercyclical consumption, as well as net exports. Thus, such a setup is not yet ready to be used for policy analysis.
    Keywords: business cycles, progressive capital taxation, Bulgaria
    JEL: E24 E32
    Date: 2022–04
  9. By: Mariana García-Schmidt (Banco Central de Chile); Javier García-Cicco (Universidad del CEMA)
    Abstract: We present a fully-edged dynamic stochastic general equilibrium (DSGE) model for the Chilean economy to explain the economy’s adjustments to external shocks, explicitly separating between tradable and non-tradable sectors (TNT). The model was built to explain Chile’s linkages with the external sector, to recognize that the sectors of the economy have particular price dynamics that are affected differently by shocks that move the nominal exchange rate, and to study different measures of exchange rate pass through (ERPT). We show unconditional and conditional ERPT measures. The former measures are comparable with the empirical literature, while the latter are defined after a particular shock hit the economy. We highlight important differences in their magnitudes and in their effect on different prices. While a shock to international prices has a transitory and low ERPT, one that affects the uncovered interest rate parity condition has a very high and persistent ERPT for all price indexes. In addition, the prices that are more rapidly affected are those of tradable sectors, while non-tradable prices are affected with a lag, but for longer. We use the model to show that the conditional ERPT measures could have helped to anticipate a great part of the inflationary effects of the depreciation following the tapering announcements of the US in 2013-2015, which was not possible using unconditional ERPT measures of the empirical literature.
    Date: 2022–01
  10. By: Andersen, Torben M. (University of Aarhus); Bhattacharya, Joydeep (Iowa State University); Grodecka-Messi, Anna (Research Department, Central Bank of Sweden); Mann, Katja (Copenhagen Business School)
    Abstract: A growing literature explores reasons for rising wealth inequality, but disregards the role of pension systems despite their well-understood influence on life-cycle saving. In theory and according to available evidence, both pay-as-you-go (PAYG) and fully-funded (FF) pension schemes crowd out voluntary retirement saving. They differ because aggregate savings decrease in the former but increase under the latter system. Unlike most nations, Denmark has seen a decline in wealth inequality in recent decades. This paper studies a calibrated life-cycle model of Denmark and employs unique registry data to argue that a Danish pension system transition, from a mostly PAYG to a dominant, mandated FF scheme, explains much of this decline.
    Keywords: Wealth inequality; pension systems; crowding out; life-cycle savings
    JEL: D31 E01 E21 G51 H55 J32
    Date: 2022–02–01
  11. By: Nikhil Patel; Mr. David Cook
    Abstract: Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the relationship between monetary policy, exchange rates and international trade flows. Using a dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both domestic and foreign shocks depending on the origin and ultimate destination of value added and the intermediate shipments involved. For example, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand, and exports to the US decline much more when measured in gross as opposed to value added terms. We use granular data on GVCs at the sector level to document empirical evidence in favor of these key predictions of the model.
    Keywords: Dollar invoicing, global value chains, exchange rates, monetary policy; business cycle dynamics; dollar invoicing; EU importer; EU exporter; goods trade; Exports; Global value chains; Currencies; Trade balance; Imports; Global
    Date: 2022–02–11
  12. By: Olovsson, Conny (Research Department, Central Bank of Sweden); Walentin, Karl (Research Department, Central Bank of Sweden); Westermark, Andreas (Research Department, Central Bank of Sweden)
    Abstract: International immigration flows are large, volatile and have recently increased. This paper is the first to study the dynamic effects of immigration shocks on the economy within a search and matching framework. Since the microdata indicates that some of the key macroeconomic effects of immigration are largest in the short run, a steady state analysis would be insufficient. To construct a quantitatively relevant general equilibrium framework, we use extensive Swedish microdata. We then study the effect of a large immigration shock on various macroeconomic aggregates. Due to compositional effects, there is a substantial negative effect on GDP per capita and the employment rate on impact that then decreases over time.
    Keywords: Immigration; dynamics; search and matching
    JEL: J21 J31 J61
    Date: 2021–10–01
  13. By: Javier García-Cicco (Universidad del CEMA)
    Abstract: We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy rules: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative merits of each of them is indeed influenced by how agents form inflation-related expectations.
    Date: 2022–02
  14. By: KITAO Sagiri; MIKOSHIBA Minamo
    Abstract: Women work less often and earn significantly less than men in Japan. We use panel data to investigate employment and earnings dynamics of single and married women over the life cycle and build a structural model to study the roles of fiscal policies in accounting for their behavior. We show that eliminating spousal deductions, social insurance premium exemptions and survivors' pension benefits for low-income spouses would significantly raise the labor supply of women and their earnings. More women would opt for regular jobs rather than contingent jobs, accumulate more human capital, and enjoy higher income growth. The government would earn higher net revenues and there is a welfare gain when additional taxes are transferred back.
    Date: 2022–03
  15. By: Mr. Etibar Jafarov; Andres Gonzalez; Chris Walker; Diego Rodriguez Guzman
    Abstract: Bolivia has achieved noteworthy success over the past 15 years in raising incomes, reducing poverty, and maintaining macroeconomic stability by deploying commodity revenues to finance transfers, public investment, and state-led development, using an exchange rate peg as a policy anchor. However, with the end of the commodity boom in 2014, fiscal deficits have grown and reserves have fallen. One route to restoring long-run sustainability would be to combine fiscal consolidation with a switch to a floating exchange rate. However, a preference for maintaining the peg could be accommodated with adjustments elsewhere in the policy framework. Employing a detailed dynamic stochastic general equilibrium model of the Bolivian economy, this study assesses the long-run sustainability and relative benefits of alternative policy combinations, and calculates optimal adjustment paths for the transition from the present situation to the steady state. It concludes that continued adherence to a fixed-rate regime, while not optimal, is feasible, if supported by a larger fiscal effort.
    Keywords: Bolivia, inflation target, fixed exchange rate, speculative attack, transition path, linear time iteration, time consistency.
    Date: 2022–02–25
  16. By: Marko Mlikota; Frank Schorfheide
    Abstract: Modern macroeconometrics often relies on time series models for which it is time-consuming to evaluate the likelihood function. We demonstrate how Bayesian computations for such models can be drastically accelerated by reweighting and mutating posterior draws from an approximating model that allows for fast likelihood evaluations, into posterior draws from the model of interest, using a sequential Monte Carlo (SMC) algorithm. We apply the technique to the estimation of a vector autoregression with stochastic volatility and a nonlinear dynamic stochastic general equilibrium model. The runtime reductions we obtain range from 27% to 88%.
    Date: 2022–02
  17. By: Karsten O. Chipeniuk (Reserve Bank of New Zealand); Nets Hawk Katz (California Institute of Technology); Todd Bruce Walker (Indiana University Department of Economics)
    Abstract: We examine aggregation in the neoclassical growth model with aggregate shocks and uninsurable employment risk, as well as related environments. We introduce a Walrasian auctioneer whose job is to report to households all possible state-contingent future prices. Households take these as given when forming expectations and making optimal consumption / savings decisions, and the auctioneer adjusts her forecasts until markets clear. This natural dichotomy between the households and the auctioneer allows us to study each problem in isolation as well as to discuss the intersection. On the household side, we separate an explicit expression for the linear permanent income component of savings from a well-behaved nonlinear adjustment arising from precautionary behavior and incomplete markets. Equipped with this decomposition, we then study how economies aggregate in the presence of various auctioneer types that are popular in the literature. The steady-state auctioneer of Huggett (1997) and Aiyagari (1994) ffers a paper-and-pencil analysis of aggregation that provides a bound on more complex environments. We provide an economic interpretation of the regression coefficients and explain the lack of time variation in the auctioneer of Krusell and Smith (1998). We also introduce a new numerical method which uses the empirical distribution of auctioneer forecasts to substantially improve solution accuracy in cases where the standard coefficient of determination and other well-known statistics prove to be misleading.
    Keywords: Aggregation, Heterogeneous Agents, Incomplete Markets
    Date: 2022–04
  18. By: Abbritti, Mirko; Consolo, Agostino
    Abstract: This paper analyses how labour market heterogeneity affects unemployment, productivity and business cycle dynamics that are relevant for monetary policy. The model matches remarkably well the short and long run dynamics of skilled and unskilled workers. Skill mismatch and skill-specific labour market institutions have three main effects on business cycles and growth dynamics. First, as the composition of labour market skills leads to supply segmentation, the relative scarcity of skilled workers increases the natural rate of unemployment and reduces total factor productivity with long-run effects on the growth rate of output. Second, skill heterogeneity in the labour market generates asymmetric outcomes and measures of employment, wages and consumption inequality. Finally, the model provides important insights for the Phillips and Beveridge curves. Skill-specific labour market heterogeneity leads to a flattening of the Phillips curve as wages and unemployment are affected differently across skill types. Also, the model generates sideward shifts of the Beveridge curve following business cycle shocks that are related to the degree of skill heterogeneity. JEL Classification: E24, E3, E5, O41, J64
    Keywords: Beveridge curve, consumption inequality, endogenous growth, labour market, monetary policy, Phillips curve, skill heterogeneity, unemployment fluctuations
    Date: 2022–02
  19. By: Max Fuchs (University of Kassel)
    Abstract: Private cryptocurrencies allow for payments without the need for a financial institution. These institutions, the central bank and retail banks, may thus observe a decline in the demand for their payments systems, i.e. cash and deposits. Using the monetary search model of Lagos and Wright (2005), we show that the central bank is able to tilt the playing field until it wins. By introducing an interest-bearing central bank digital currency (CBDC), the central bank is able to provide a payment system which is superior to cryptocurrencies. Miners cannot match the CBDC rate and go bankrupt. Retail banks, on the other hand, face lower profits but survive in the equilibrium. In addition, it can be welfare-improving to kick out cryptocurrencies by an interest-bearing CBDC.
    Keywords: CBDC, cryptocurrencies, welfare analysis
    JEL: E41 E42 E51 E52 E58
    Date: 2022
  20. By: Daniil Kashkarov
    Abstract: I test the contribution of individual human capital responses to earnings inequality arising in the process of the routine-biased technological change (RBTC). I develop a lifecycle model of human capital and occupational choice, calibrate it to the NLSY79 data, using the price series for human capital in abstract and routine occupations estimated from the cross-sectional CPS data with the “flat spot” approach. I then use the model to quantify the effect of a change in human capital prices on earnings inequality. I find that an increase in the price for human capital in abstract occupations and a fall in its price in routine occupations associated with RBTC has a modest contribution to the evolution of variance of log-earnings — up to 10.8 per cent by the end of the working life cycle. However, the contribution of RBTC to an increase in the abstract wage premium over the lifetime of the NLSY79 cohorts is up to 28.6 per cent. The growth of the abstract wage premium is significantly dampened by the human capital responses of workers switching from routine occupations.
    Keywords: RBTC; human capital; life-cycle modelling; NLSY79; AFQT;
    JEL: J24 J31 D15 O33
    Date: 2022–03

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