nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒06‒27
eleven papers chosen by



  1. Monetary Policy and Homeownership: Empirical Evidence,Theory, and Policy Implications By Daniel A. Dias; Joao B. Duarte
  2. Durable Consumption, Limited VAT Pass-Through and Stabilization Effects of Temporary VAT Changes By Marius Clemens; Werner Röger
  3. PRODUCTIVITY AND FIRM DYNAMICS OVER THE BUSINESS CYCLE PANDEMIC By Abraham Assefa; Darya Lapitskaya; Lenno Uusküla
  4. Forecasting a commodity-exporting small open developing economy using DSGE and DSGE-BVAR By Erlan Konebayev
  5. The Use and Mis-Use of SVARs for Validating DSGE Models By Paul Levine; Joseph Pearlman; Alessio Volpicella; Bo Yang
  6. Dynamic spatial general equilibrium By Benny Kleinman; Ernest Liu; Stephen J. Redding
  7. Bubbles and Stagnation By Inês Xavier
  8. Preference for Wealth and Life Cycle Portfolio Choice By Campanale Claudio; Fugazza Carolina
  9. Private Overborrowing under Sovereign Risk By Arce, Fernando
  10. Numerical Methods for Macroeconomists By Jeremy Greenwood; Ricardo Marto
  11. Private Information and Optimal Infant Industry Protection By B. Ravikumar; Raymond G. Riezman; Yuzhe Zhang

  1. By: Daniel A. Dias; Joao B. Duarte
    Abstract: We show that monetary policy affects homeownership decisions and argue that this effect is an important and overlooked channel of monetary policy transmission. We first document that monetary policy shocks are a substantial driver of fluctuations in the U.S. homeownership rate and that monetary policy affects households' housing tenure choices. We then develop and calibrate a two-agent New Keynesian model that can replicate the estimated transmission of monetary policy shocks to homeownership rates and housing rents. We find that the calibrated model provides an explanation to the "price puzzle" and delivers two important results with policy implications. First, the homeownership decision channel amplifies the redistributive effects of monetary policy, with contractionary shocks benefiting more outright homeowners and disadvantaging more renters and homeowners with a mortgage. Second, a monetary authority that reacts to a price index that includes housing rents generates excess house price, rents, and output volatility and larger real effects.
    Keywords: Monetary policy; Homeownership; Housing rents and housing prices; Inflation dynamics; Housing tenure choice; “Price puzzle
    JEL: E31 E43 R21
    Date: 2022–05–19
    URL: http://d.repec.org/n?u=RePEc:fip:fedgif:1344&r=
  2. By: Marius Clemens; Werner Röger
    Abstract: This paper revives the question of whether a temporary VAT change is an adequate instrument for crisis stabilization. In empirical assessments, we find that durable goods consumption fluctuates strongly over the business cycle and that VAT rate changes affect durable goods in particular. Therefore, we build a dynamic stochastic general equilibrium (DSGE) model that is capable of addressing this major channel through which temporary VAT changes affect the economy. Furthermore, we allow for an imperfect pass-through of VAT measures to consumer prices via VAT-specific price adjustment costs. We compare the general VAT policy in the crisis with alternative stabilization policies, such as interest rate cuts, spending policies and a VAT cut only for durable goods. First, we find that considering durable goods in the model generates sizeable stabilization effects of VAT changes on consumption over a broad set of parameter ranges. Second, we find that the VAT policy can mimic monetary policy with minor exceptions. Third, the VAT rate cut has the highest short-term multiplier compared with government spending policies, but not in the medium-term. Fourth, a VAT rate reduction only on durable goods will generate strong GDP effects and even be self-financing in the first year. In contrast, a VAT reduction only on non-durables has small effects on GDP and is not self-financing. In view of our results, we conclude that a temporary VAT cut, when applied to durable goods, is an effective stabilization instrument.
    Keywords: Value added tax, durable consumption, multiplier, business cycle, zero lower bound
    JEL: E62 E63 H21
    Date: 2022
    URL: http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2004&r=
  3. By: Abraham Assefa; Darya Lapitskaya; Lenno Uusküla
    Abstract: The paper studies the effects of technology shocks on the creation and destruction of firms. Using US data and a VAR model the paper finds Schumpeterian creative destruction for investment-specific technology shocks. A positive investment-specific technology shock increases the number of firms opening, but also leads to a higher number of firms closing. In contrast, labour-neutral technology shocks also benefit old firms. An increase in overall productivity leads to an increase in the number of new firms and a drop in the number of failures. Both margins contribute to an increase in the number of firms in the economy. A medium-scale DSGE model with endogenous entry and exit that is that is augmented with additional features is able to capture these stylised facts.
    Keywords: VAR, DSGE, Firm dynamics, Productivity, Firm turnover, Technology shocks, Investment specific technology shocks
    Date: 2022
    URL: http://d.repec.org/n?u=RePEc:mtk:febawb:141&r=
  4. By: Erlan Konebayev (NAC Analytica, Nazarbayev University)
    Abstract: In this paper, we assess the forecasting performance of three types of structural models - DSGE, BVAR with Minnesota priors, and DSGE-BVAR - in the context of a commodity-exporting small open developing economy using the data for Kazakhstan. We find that BVAR and DSGE-BVAR models generally produce point forecasts that are more accurate and less biased compared to those of DSGE in the short term, and that BVAR forecasts rapidly deteriorate in quality as the length of the forecast horizon increases. The density forecast analysis shows that when all variables are considered, one of the BVAR models performs better than DSGE at the one quarter horizon, and when financial sector variables are omitted, one DSGE-BVAR and both BVAR models demonstrate superior performance in the short term.
    Keywords: DSGE; DSGE-BVAR; Bayesian estimation; forecasting; small open economy
    JEL: C11 E17 E32 E37
    Date: 2022–04
    URL: http://d.repec.org/n?u=RePEc:ajx:wpaper:24&r=
  5. By: Paul Levine (University of Surrey); Joseph Pearlman (City University); Alessio Volpicella (University of Surrey); Bo Yang (Swansea University)
    Abstract: This paper studies the potential ability of an SVAR to match impulse response functions of a well-established estimated DSGE model. We study the invertibility (fundamentalness) problem setting out conditions for the RE solution of a linearized Gaussian NK-DSGE model to be invertible taking into account the information sets of agents. We then estimate an SVAR by generating artificial data from the theoretical model. A measure of approximate invertibility, where information can be imperfect, is constructed. Based on the VAR(1) representation of the DSGE model, we compare three forms of SVAR-identification restrictions; zero, sign and bounds on the forecast error variance, for mapping the reduced form residuals of the empirical model to the structural shocks of interest. Separating out two reasons why SVARs may not recover the impulse responses to structural shocks of the DGP, namely non-invertibility and inappropriate identification restrictions, is then the main objective of the paper.
    JEL: C11 C18 C32 E32
    Date: 2022–06
    URL: http://d.repec.org/n?u=RePEc:sur:surrec:0522&r=
  6. By: Benny Kleinman; Ernest Liu; Stephen J. Redding
    Abstract: We develop a dynamic spatial general equilibrium model with forward-looking investment and migration decisions. We characterize analytically the transition path of the spatial distribution of economic activity in response to shocks. We apply our framework to the re-allocation of US economic activity from the Rust Belt to the Sun Belt from 1965-2015. We find slow convergence to steady-state, with US states closer to steady-state at the end of our sample period than at its beginning. We find substantial heterogeneity in the effects of local shocks, which depend on capital and labor dynamics, and the spatial and sectoral incidence of these shocks.
    Keywords: spatial dynamics, economic geography, trade, migration
    Date: 2021–07–28
    URL: http://d.repec.org/n?u=RePEc:cep:cepdps:dp1785&r=
  7. By: Inês Xavier
    Abstract: This paper studies the consequences of asset bubbles for economies that are vulnerable to persistent stagnation. Stagnation is the result of a shortage of assets that creates an oversupply of savings and puts downward pressure on the level of interest rates. Once the zero lower bound on the nominal interest rate binds, the real rate cannot fully adjust downward, forcing output to fall instead. In such context, bubbles are useful as they expand the supply of assets, absorb excess savings and raise the natural interest rate - the real rate that is compatible with full employment - crowding in consumption and raising welfare. While safe bubbles are more likely to expand economic activity, riskier bubbles command a risk premium that, in equilibrium, lowers the real interest rate. A lower rate loosens borrowing constraints, potentially improving welfare when financing conditions are especially tight. Finally, fiscal policy that promises a bail-out transfer in case of a bubble collapse can support an existing bubble and improve welfare.
    Keywords: Bubbles; Secular stagnation; Liquidity traps
    JEL: E31 E32 E43 E44 G11
    Date: 2022–05–31
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-33&r=
  8. By: Campanale Claudio (Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) and CERP (CCA) University of Torino, Italy); Fugazza Carolina (Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) and CERP (CCA) University of Torino, Italy)
    Abstract: Do participation and investment in risky assets increase with wealth? Do the wealthiest households save at higher rates than the median households and is wealth more concentrated than earnings? Based on survey data, this paper shows that this is the case. Moreover, the paper provides a theoretical framework based on an extended version of the life-cycle model of consumption and portfolio choice that enables to explain differences in behavior between the wealthiest and others.
    Keywords: Life-cycle, Portfolio Choice, Preference over Wealth, Wealth Inequality
    JEL: D15 E21 G11
    Date: 2022–06
    URL: http://d.repec.org/n?u=RePEc:tur:wpapnw:075&r=
  9. By: Arce, Fernando
    Abstract: This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy.
    Keywords: Bailouts; credit frictions; financial crises; macroprudential policy; sovereign default
    JEL: E32 E44 F41 G01 G28
    Date: 2021–12–09
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:113176&r=
  10. By: Jeremy Greenwood (University of Pennsylvania); Ricardo Marto (University of Pennsylvania)
    Abstract: This primer will cover some of the numerical methods that are used in modern macroeconomics. You will learn how to: (1) solve nonlinear equations via bisection and Newton's method; (2) compute maximization problems via golden section search, discretization, and the particle swarm algorithm; (3) simulate difference equations using the extended path and multiple shooting algorithms; (4) differentiate and integrate functions numerically; (5) conduct Monte Carlo simulations by drawing random variables; (6) construct Markov chains; (7) interpolate functions and smooth data; (8) compute dynamic programming problems; (9) solve for policy functions using the Coleman, endogenous grid, and parameterized expectation algorithms; (10) study the Aiyagari heterogeneous agent model. This will be done while studying economic problems, such as the determination of labor supply, economic growth, and business cycle analysis. Calculus is an integral part of the primer and some elementary probability theory will be drawn upon. The MATLAB programming language will be used. It is time to move into the modern age and learn these techniques. Besides, using computers to solve economic models is fun. The primer is self contained so little prior knowledge is required.
    Keywords: Aiyagari model, calibration, Coleman algorithm, difference equations, dynamic programming, endogenous grid method, interpolating functions, linearization, Markov chains, maximization problems, Monte Carlo simulation, nonlinear equations, numerical differentiation and integration, parameterized expectations, random number generation
    JEL: E10 E17
    Date: 2022–06
    URL: http://d.repec.org/n?u=RePEc:eag:rereps:36&r=
  11. By: B. Ravikumar; Raymond G. Riezman; Yuzhe Zhang
    Abstract: We study infant industry protection using a dynamic model in which the industry’s cost is initially higher than that of foreign competitors. The industry can stochastically lower its cost via learning by doing. Whether the industry has transitioned to low cost is private information. We use a mechanism-design approach to induce the industry to reveal its true cost. We show that (i) the optimal protection, measured by infant industry output, declines over time and is less than that under public information, (ii) the optimal protection policy is time consistent under public information but not under private information, (iii) the optimal protection policy can be implemented with minimal information requirements, and (iv) a government with a limited budget can use a simple approach to choose which industries to protect.
    Keywords: protection, infant industry, private information, mechanism design, time consistency
    JEL: F10 F13 O25 D82
    Date: 2022
    URL: http://d.repec.org/n?u=RePEc:ces:ceswps:_9772&r=

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