nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒05‒16
six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. An Equilibrium Analysis of the Effects of Neighborhood-based Interventions on Children By Eric Chyn; Diego Daruich
  2. Politics of Public Education and Pension Reform with Endogenous Fertility By Uchida, Yuki; Ono, Tetsuo
  3. Monetary Policy in Disaster-Prone Developing Countries By Mr. Chris Papageorgiou; Mr. Giovanni Melina; Mr. Alessandro Cantelmo; Nikos Fatouros
  4. The Natural Rate of Interest Through a Hall of Mirrors By Phurichai Rungcharoenkitkul; Fabian Winkler
  5. The Savings Glut of the Old: Population Aging, the Risk Premium, and the Murder-Suicide of the Rentier By Joseph Kopecky; Alan M. Taylor
  6. Consumer Bankruptcy, Mortgage Default and Labor Supply By Wenli Li; Costas Meghir; Florian Oswald

  1. By: Eric Chyn; Diego Daruich
    Abstract: To study the effects of neighborhood and place-based interventions, this paper incorporates neighborhood effects into a general equilibrium (GE) heterogeneous-agent overlapping-generations model with endogenous location choice and child skill development. Importantly, housing costs as well as neighborhood effects are endogenously determined in equilibrium. Having calibrated the model based on U.S. data, we use simulations to show that predictions from the model match reduced form evidence from experimental and quasi-experimental studies of housing mobility and urban development programs. After this validation exercise, we study the long-run and large-scale impacts of vouchers and place-based subsidies. Both policies result in welfare gains by reducing inequality and generating improvements in average skills and productivity, all of which offset higher levels of taxes and other GE effects. We find that a voucher program generates larger long-run welfare gains relative to place-based policies. Our analysis of transition dynamics, however, suggests there may be more political support for place-based policies.
    JEL: H53 I31 J13 R13 R23
    Date: 2022–04
  2. By: Uchida, Yuki; Ono, Tetsuo
    Abstract: We demonstrate the interaction between short-lived governments’ decisions on education and pension policies and parents’ decisions on fertility in an overlapping generations growth model. Our analysis shows that increased expected life expectancy lowers fertility, decreases the ratio of education expenditure to GDP, and increases the ratio of pension benefits to GDP as well as per capita GDP growth rate. We also consider a reform that reduces pension benefits designed by a long-lived planner and show that the reduction is optimal from a social welfare perspective when the planner gives a large weight to future generations.
    Keywords: Fertility; Public Pension; Public Education; Probabilistic Voting; Overlapping Generations
    JEL: D70 E62 H52 H55
    Date: 2022–04–14
  3. By: Mr. Chris Papageorgiou; Mr. Giovanni Melina; Mr. Alessandro Cantelmo; Nikos Fatouros
    Abstract: This paper analyzes monetary policy regimes in emerging and developing economies where climate-related natural disasters are major macroeconomic shocks. A narrative analysis of IMF reports published around the occurrence of natural disasters documents their impact on important macroeconomic variables and monetary policy responses. While countries with at least some degree of monetary policy independence typically react by tightening the monetary policy stance, in a sizable number of cases monetary policy was accommodated. Given the lack of consensus on best practices in these circumstances, a small-open-economy New-Keynesian model with disaster shocks is leveraged to evaluate welfare under alternative monetary policy rules. Results suggest that responding to inflation while allowing temporary deviations from its target is the welfare maximizing policy. Alternative regimes such as strict inflation targeting, exchange rate pegs, or Taylor rules explicitly responding to economic activity or the exchange rate would be welfare-detrimental. With climate change projected to expand the list of disaster-prone countries, these findings are likely to be soon relevant also for richer or larger economies.
    Keywords: Natural Disasters, Climate Change, DSGE, Monetary Policy, Exchange Rate Regimes.
    Date: 2022–04–01
  4. By: Phurichai Rungcharoenkitkul; Fabian Winkler
    Abstract: Prevailing explanations of persistently low interest rates appeal to a secular decline in the natural interest rate, or r-star, due to factors outside monetary policy's control. We propose informational feedback via learning as an alternative explanation for persistently low rates, where monetary policy plays a crucial role. We extend the canonical New Keynesian model to an incomplete information setting where the central bank and the private sector learn about r-star and infer each other's information from observed macroeconomic outcomes. An informational feedback loop emerges when each side underestimates the effect of its own action on the other's inference, possibly leading to large and persistent changes in perceived r-star disconnected from fundamentals. Monetary policy, through its influence on the private sector's beliefs, endogenously determines r-star as a result. We simulate a calibrated model and show that this `hall-of-mirrors' effect can explain much of the decline in real interest rates since 2008.
    Keywords: Natural rate of interest; Learning; Misperception; Overreaction; Dispersed information; Long-term rates; Demand shocks; Monetary policy shocks
    JEL: E43 E52 E58 D82 D83
    Date: 2022–03–18
  5. By: Joseph Kopecky; Alan M. Taylor
    Abstract: Population aging has been linked to a global savings glut and a decline in safe real interest rates. Conversely, risky real returns have not fallen as much, if at all, with equity risk premia on the rise. An existing literature can explain changes in safe rates using demographics. We go further to account for divergent returns on different assets as well as the underlying surge in the wealth-income ratio and its asset composition. Empirical evidence from historical panel data shows that demographic shifts are correlated with asset returns and risk premia. We build a heterogeneous agent life-cycle model with two assets (a safe bond and equity) and with aggregate risk. Aging demographics can help to simultaneously explain three key trends: the rising wealth-income ratio, the falling risk free rate, and an increasing risk premium. The shifts exert less pressure on risky returns as high-wealth elderly reallocate away from equities: aging makes retirement saving a “crowded trade” but more so for bonds. Projecting our model to 2050, aging pushes the safe rate below zero, but the risk premium remains elevated, as post-boomer demographics push asset returns to unprecedented and persistently low levels.
    JEL: E21 E43 G11 J11
    Date: 2022–04
  6. By: Wenli Li; Costas Meghir; Florian Oswald
    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 BACPCA reform. Our paper demonstrates importance of distributional effects of Bankruptcy policy.
    JEL: D14 D18 D52 D53 E21 G33 J22 J31 K35
    Date: 2022–03

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