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on Dynamic General Equilibrium |
| By: | Gregor Boehl; Felix Strobel |
| Abstract: | We use nonlinear Bayesian methods to evaluate the performance of financial frictions `a la Bernanke et al. (1999) during and after the Global Financial Crisis. We find that, despite the attention received in the literature, including these frictions in the canonical medium-scale DSGE model does not improve the model’s ability to explain macroeconomic dynamics in the US during the Great Recession. The reason is that in the estimated model with financial frictions, the firms’ leverage declines in response to the post-2008 collapse of investment, which in turn implies a narrowing of the credit spread. Hence, the estimated model predicts financial decelerator effects. Associated financial shocks play only a minor role for macroeconomic dynamics. Our estimates account for the binding effective lower bound on nominal interest rates, and confirm our findings independently for US and euro area data. |
| Keywords: | Financial Frictions, Great Recession, Business Cycles, Effective Lower Bound, Nonlinear Bayesian Estimation |
| JEL: | C11 C63 E31 E32 E44 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_353&r= |
| By: | Jesus Fernandez-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti |
| Abstract: | We document five novel facts about the role of search effort in forming trading relationships among firms by combining a variety of micro and macro datasets. These facts strongly suggest the presence of search complementarities. To study the implications of these facts for aggregate fluctuations, we build a dynamic general equilibrium model, disciplined by our new firm-level evidence on search effort. The model matches key aspects of the macro and micro data that have remained unaccounted for by standard models, including the time-varying bimodal distribution of output and the strong, nonlinear propagation of shocks. Also, changes to the volatility of shocks have nonlinear effects on macroeconomic fluctuations that advance a novel interpretation of the Great Moderation. Finally, we provide a new account of the state-dependent effects of fiscal policy. |
| Keywords: | Search complementarities, aggregate fluctuations, macroeconomic volatility, government spending. |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-40&r= |
| By: | Hirokuni Iiboshi; Daisuke Ozaki |
| Abstract: | We quantitatively explore the impact of social security reforms in Japan, facing rapid aging and the highest government debt among developed countries, using an overlapping generations model with four types of agents distinguished by gender and employment type. We find that social security reforms without extending the retirement age raise the welfare of future generations, while the reforms with raising copayment rates for medical and long-term care expenditures, in particular, significantly lower the welfare of low-income groups (females and part-timers) of the current retired and working generations. In contrast, the reform reducing the pension replacement rate lead to a greater decline in the welfare of full-timers. The combination of these reforms and the extension of the retirement age is expected to improve the welfare of the current working generations by 2--9\% over the level without reforms. |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2205.08042&r= |
| By: | Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang |
| Abstract: | We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a quantitative model with capital-skill complementarity and household heterogeneity. Such a tax reform leads to expansionary long-run aggregate output and investment effects, but those are coupled with increases in wage, consumption, and income inequality. The tax reform is not self-financing and its effects depend crucially on whether the government cuts lump-sum transfers or raises distortionary labor or consumption tax rates for financing. The former results in a larger aggregate expansion, but at the expense of a greater rise in inequality. As a result, the latter is relatively more beneficial for unskilled households. We find that the tax reform, when the consumption tax rate adjusts, leads to a Pareto improvement in terms of life-time welfare. For transition dynamics, monetary policy, in addition to the fiscal adjustments, matters. In particular, if monetary policy inflates away a portion of the public debt, the economy can avoid the short-run contraction that would arise otherwise. |
| Keywords: | Capital tax rate; Distortionary financing; Capital-skill complementarity; Inequality; Welfare implications |
| JEL: | E62 E63 E52 E58 E31 |
| Date: | 2022–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-27&r= |
| By: | Eric Jondeau (University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute); Gregory Levieuge (Banque de France); Jean-Guillaume Sahuc (Banque de France; Université Paris Ouest - Nanterre, La Défense - EconomiX); Gauthier Vermandel (Ecole Polytechnique; Department of Economics, Paris-Dauphine) |
| Abstract: | We explore the role of public subsidies in mitigating the transition risk associated with a climate-neutral objective by 2060. We develop and estimate an environmental dynamic stochastic general equilibrium model for the world economy featuring an endogenous market structure for green products. We show that public subsidies, financed by a carbon tax, are an efficient instrument to promote firm entry into the abatement goods sector by fostering competition and lowering the selling price of such products. We estimate that the subsidy, optimally distributed between startups at 60% and existing companies at 40%, will save nearly $2.9 trillion in GDP each year by 2060. |
| Keywords: | Climate change, E-DSGE model, bayesian estimation, stochastic growth, endogenous firms, environment-related products |
| JEL: | E32 H23 Q50 Q55 Q58 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2245&r= |
| By: | Lise Clain-Chamosset-Yvrard (Univ. Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Xavier Raurich (Departament d'Economia and CREB, Universitat de Barcelona); Thomas Seegmuller (Aix-Marseille Univ., CNRS, AMSE, Marseille France. 5 Boulevard Maurice Bourdet CS 50498 F-13205 Marseille cedex 1, France) |
| Abstract: | We provide a unified framework with demand for housing over the life cycle and financial frictions to analyze the existence and macroeconomic effects of rational housing bubbles. We distinguish a housing price bubble, defined as the difference between the housing market price and its fundamental value, from a housing demand bubble, which corresponds to a situation where a pure speculative housing demand exists. In an overlapping generation exchange economy, we show that no housing price bubble occurs. However, a housing demand bubble may occur, generating a boom in housing prices and a drop in the interest rate, when households face a binding borrowing constraint. Multiplicity of steady states and endogenous fluctuations can occur when credit market imperfections are moderate. These fluctuations involve transitions between equilibria with and without a housing demand bubble that generate large fluctuations in housing prices consistent with observed patterns. We finally extend the basic framework to a production economy and we show that a housing demand bubble increases the housing price, housing price to income ratio and economic growth. |
| Keywords: | Bubble; Housing; Self-fulfilling fluctuations |
| JEL: | E32 E44 R21 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:2207&r= |
| By: | Hajdini, Ina (Federal Reserve Bank of Cleveland); Kurmann, Andre (Drexel University) |
| Abstract: | This paper shows that in the presence of Markov regime shifts, Full Information Rational Expectations (FIRE) models lead to predictable, regime-dependent forecast errors. More generally, regime shifts imply that ex-post forecast error regressions display waves of over-and under-reaction to current information over rolling sample windows. Using survey-based forecast data of macroeconomic aggregates, we confirm the existence of such waves. We then estimate a medium-scale DSGE model with regime shifts in the aggressiveness of monetary policy on U.S. data to assess the quantitative importance of the proposed mechanism. Despite the assumption of FIRE, simulated data conditional on the estimated sequence of regime realizations generates ex-post forecast error predictability consistent with reduced-form regressions from the existing literature and large waves of over- and under-reaction across subsamples. Hence, predictabiliy of ex-post forecast errors is neither a sufficient condition to reject FIRE nor by itself a good metric to test alternative theories of expectations formation. |
| Keywords: | Full-information Rational Expectations; Markov Regime Shifts; Forecasting Errors; Waves of Over- and Under-Reaction; Survey of Professional Forecasters |
| JEL: | C53 E37 |
| Date: | 2022–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2022_005&r= |