nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒05‒23
twelve papers chosen by

  1. Housing market dynamics in Kazakhstan: An estimated DSGE model By Akbobek Akhmediyarova
  2. Business cycle asymmetries and the labor market By Kohlbrecher, Britta; Merkl, Christian
  3. Capital income taxation and public debt in an endogenous fertility model By Minoru Watanabe
  4. Optimal Taxation of Risky Entrepreneurial Capital By Corina Boar; Matthew P. Knowles
  5. Spread Too Thin: The Impact of Lean Inventories By Julio L. Ortiz
  6. Benefit Salience and Labour Supply By Peter Spittal
  7. Stubborn Beliefs in Search Equilibrium By Guido Menzio
  8. The economic effects of stopping Russian energy Import in Poland By Jakub Sokolowski; Marek Antosiewicz; Piotr Lewandowski
  9. Exploring the Role of Exchange Rate in Inflation Targeting: Evidence from Thailand By Pongsak Luangaram; Nipit Wongpunya
  10. Fertility and Family Labor Supply By Katrine M. Jakobsen; Thomas H. Jørgensen; Hamish Low
  11. The JobKeeper payment: How good are wage subsidies? By Timothy Watson; Juha Tervala; Tristram Sainsbury
  12. Price Level Targeting with Imperfect Rationality: A Heuristic Approach By Vojtech Molnar

  1. By: Akbobek Akhmediyarova (NAC Analytica, Nazarbayev University)
    Abstract: In this paper we analyse the drivers of housing price fluctuations in Kazakhstan using a dynamic stochastic general equilibrium (DSGE) model with the housing market. We estimate the model with Bayesian methods using the data for the period from 2010Q1 to 2020Q4. We find that housing prices are primarily driven by housing preference shocks, rather than by price mark up disturbances or monetary policy shocks. We identify strong housing wealth effects and show that housing preference shocks of borrowers explain a vast part of the consumption volatility. Besides, we find that pension withdrawal policy plays a small role in determining the business-cycle fluctuations of Kazakhstan in the long-term period. Overall, the technology shock is key in explaining the variance in GDP of Kazakhstan, while the variation in inflation rate is mainly explained by monetary policy and foreign demand shocks.
    Keywords: DSGE; Housing market; Bayesian estimation; Kazakhstan.
    JEL: C11 E30 E32 R21
    Date: 2021–12
  2. By: Kohlbrecher, Britta; Merkl, Christian
    Abstract: This paper shows that a search and matching model with idiosyncratic training cost shocks can explain the asymmetric movement of the job-finding rate over the business cycle and the decline of matching efficiency in recessions. Large negative aggregate shocks move the hiring cutoff into a part of the training cost distribution with higher density. The position of the hiring cutoff in the distribution is disciplined by the empirical elasticity of the job-finding rate with respect to market tightness. Our model explains a large fraction of the matching efficiency decline during the Great Recession and generates state-dependent effects of policy interventions.
    Keywords: Business cycle asymmetries,matching function,Beveridge curve,job-finding rate,unemployment,effectiveness of policy
    JEL: E24 E32 J63 J64
    Date: 2022
  3. By: Minoru Watanabe (Hokusei Gakuen University / Research Fellow, Graduate School of Economics, Kobe University)
    Abstract: This study constructs an overlapping generations model with fertility choice and unemployment caused by a constant minimum wage and incorporating public debt. It shows that a higher capital income tax reduces the public debt burden and hence promot es capital accumulation, which leads to an improvement in unemployment and fertility rates.
    Date: 2022–04
  4. By: Corina Boar; Matthew P. Knowles
    Abstract: We study optimal taxation in a model with endogenous financial frictions, risky investment and occupational choice, where the distribution of wealth across entrepreneurs affects how efficiently capital is used. The planner chooses linear taxes on wealth, capital and labor income to maximize the steady state utility of a newborn agent. Most agents in the model are poor, leading to a redistributive motive for taxation. Optimal tax rates can be written as a closed-form function of the size of the tax bases and their elasticities with respect to tax rates. We find that it is optimal to tax capital income because financial frictions reduce the elasticity of capital income with respect to taxes and because capital income taxes prevent excessive entry into entrepreneurship. Optimal wealth taxes are positive but close to zero, since they strongly discourage capital accumulation.
    JEL: E2 E6 H2
    Date: 2022–04
  5. By: Julio L. Ortiz
    Abstract: Widespread adoption of just-in-time (JIT) production has reduced inventory holdings. This paper finds that JIT creates a trade-off between firm profitability and vulnerability to large shocks. Empirically, JIT adopters experience higher sales and less volatility while also exhibiting heightened cyclicality and sensitivity to natural disasters. I explain these facts in a structurally estimated general equilibrium model where firms can adopt JIT. Relative to a no-JIT economy, the estimated model implies a 1.3% increase in firm value. At the same time, an unanticipated shock results in a roughly 15% deeper output contraction. This occurs because firms "stock out" or hoard materials.
    Keywords: Inventory investment; Firm dynamics; Just-in-time production
    JEL: D25 E22 G30
    Date: 2022–04–20
  6. By: Peter Spittal
    Abstract: I study the salience of dynamic incentives provided by the welfare system, as revealed by labour supply responses to foreseeable reductions in benefit income. I show that claimants fail to anticipate a large lump-sum reduction in benefit entitlement, arising predictably from children ageing out of eligibility for the UK’s Child Tax Credit. I show also that the salience of the rules increases with experience. I then develop a structural life-cycle labour supply model incorporating potential non-salience of eligibility rules. The model estimates suggest that 82 percent of claimants initially fail to anticipate the benefit reduction. The resulting optimisation errors have substantial welfare costs—equivalent to a 14 percent reduction in income from the programme, with no offsetting benefits to the government. The findings reveal a previously undocumented source of inefficiency in the welfare system, arising from non-salient policy features with significant financial consequences.
    Date: 2022–03–31
  7. By: Guido Menzio
    Abstract: I study a search equilibrium model of the labor market in which workers have stubborn beliefs about their labor market prospects, i.e. beliefs about their probability of finding a job and the wage they will earn that do not respond to aggregate fluctuations in fundamentals. I show that, when workers have stubborn beliefs, the response of the wage bargained by a firm and a worker to aggregate shocks is dampened. As a result, the response of labor market tightness, job-finding probability, unemployment and vacancies to aggregate fluctuations is amplified. I show that stubborn beliefs generate cyclical inefficiencies in the labor market that can be corrected with countercyclical employment subsidies. I find that the response of the labor market to negative shocks is the same even if only a small fraction of workers has stubborn beliefs. In contrast, if the fraction of workers with stubborn beliefs is small, the response of the labor market to positive shocks is approximately the same as under rational expectations.
    JEL: E03 E32
    Date: 2022–04
  8. By: Jakub Sokolowski; Marek Antosiewicz; Piotr Lewandowski
    Abstract: We estimate the macroeconomic and distributional effects that a ban on fuel imports from Russia would have in Poland. We simulate the embargo as a hike in oil, gas and coal prices, and evaluate the macroeconomic effects with a dynamic general equilibrium model. We soft-link it with a microsimulation model based on Household Budget Survey data to assess the impacts on various income groups. We find that the effects of an embargo on Russian fuels would be substantial but manageable. Depending on the severity of the price hikes, we expect Poland’s GDP to be lower by 0.2–3.3% by the end of 2022, and by 2.1–5.7% by 2025. Furthermore, depending on the price increases, high-income households would spend an additional 0.2–1.3% of their incomes on energy in 2022 and 0.7–1.6% in 2025, and low-income households would spend 0.3–4.7% more of their incomes on energy in 2022 and 2.6–4.8% in 2025. We suggest direct money transfers to less affluent households, and investments in alternative gas and oil supplies, energy efficiency, renewable energy and nuclear power as instruments that could ease the negative economic impacts of the embargo.
    Keywords: embargo; distributional effects; microsimulation; general equilibrium
    JEL: H23 P18 O15
    Date: 2022–05
  9. By: Pongsak Luangaram; Nipit Wongpunya
    Abstract: This paper develops a small-scale, structural general equilibrium model for the Thai economy. Using Bayesian estimation, we evaluate the conduct of monetary policy under inflation targeting regime. Specifically, we focus on three main issues. First, we investigate whether exchange rate movements are incorporated in the monetary policy formulation. Second, we conduct welfare evaluation under alternative monetary policy settings. Third, we explore how the varying degree of openness could affect the transmission mechanism. Using data over the past 20 years, we find that the Bank of Thailand adjusted policy interest rate in response to exchange rate movements and this helped to reduce both output and inflation fluctuations from global shocks and improves welfare. While higher degree of openness is found to flatten the slope of the Phillips curve, it does not necessarily reduce monetary policy effectiveness. This is because openness also affects the policy coefficients in the central bank’s endogenous reaction function.
    Keywords: Small open economy models; Monetary policy rules; Exchange rates; Bayesian analysis; Thai economy
    JEL: C32 E52 F41
    Date: 2022–05
  10. By: Katrine M. Jakobsen (Department of Economics, University of Oxford); Thomas H. Jørgensen (CEBI, Department of Economics, University of Copenhagen); Hamish Low (Department of Economics, University of Oxford and IFS)
    Abstract: We study the role of fertility adjustments for the labor market responsiveness of men and women. First, we use longitudinal Danish register data and tax reforms from 2009 to provide new empirical evidence on asymmetric fertility adjustments to tax changes of men and women. Second, we quantify the importance of these fertility adjustments for understanding the labor supply responsiveness of couples through a life-cycle model of family labor supply and fertility. Allowing fertility adjustments increases the labor supply responsiveness of women by 28%. These adjustments affect human capital accumulation and has permanent implications for the gender wage gap within couples.
    Keywords: Fertility, Labor supply, Human capital accumulation, Gender inequality, Tax reform, Life-Cycle
    JEL: J22 J13 D15 H24
    Date: 2022–05–18
  11. By: Timothy Watson; Juha Tervala; Tristram Sainsbury
    Abstract: We estimate the effect of the Australian JobKeeper Payment COVID-19 wage subsidy on payroll jobs and wages at the employer-level using novel administrative datasets. We find a cost per job-year saved of around $112,819 ($US80,959) over the program period, implying around 812,000 jobs were saved over this time. Weekly payroll wages were almost $1.1 billion ($US761 million) higher on average during the program period, implying wage benefits equivalent to around 60 per cent of program spending. Program effects are persistent, suggesting cumulative benefits will be larger over time. A medium-scale business cycle model featuring heterogeneous households and learning-by-doing in the production technology is derived to map estimates of costs per job-year saved to approximate output multipliers. The model generates plausible output multipliers centred around 1.3, and identifies the extent to which wage subsidies support liquidity constrained workers as a key determinant of program effectiveness.
    Keywords: Employment, fiscal policy, study of particular macroeconomic policy episodes.
    JEL: E24 E62 E65
    Date: 2022–05
  12. By: Vojtech Molnar
    Abstract: The paper compares price level targeting and inflation targeting regimes in a New Keynesian model with bounded rationality. Economic agents form their expectations using heuristics - they choose between a few simple rules based on their past forecasting performance. In the paper, two main specifications of the price level targeting model are examined - the agents form expectations either about the price level or about inflation, which is ex ante not equivalent because of the sequential nature of the model. In addition, several formulations of the forecasting rules are considered. Both regimes are assessed by performing a loss function comparison. According to the results, price level targeting is slightly preferable in case where expectations are created about the price level under the baseline calibration. It is, however, sensitive to some model parameters and there is a risk of instability. Furthermore, when expectations are created about inflation, price level targeting loses credibility over time and leads to divergence of the economy. On the other hand, inflation targeting model functions in a stable manner. Therefore, while the potential benefits of price level targeting have been confirmed under certain assumptions, the results suggest that inflation targeting constitutes a more robust choice for monetary policy.
    Keywords: Bounded rationality, heuristics, inflation targeting, monetary policy, price level targeting
    JEL: E31 E37 E52 E58 E70
    Date: 2022–04

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