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on Dynamic General Equilibrium |
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Issue of 2022‒08‒08
thirteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Gregor Boehl |
| Abstract: | This paper develops an adaptive differential evolution Markov chain Monte Carlo (ADEMC) sampler. The sampler satisfies five requirements that make it suitable especially for the estimation of models with high-dimensional posterior distributions and which are computationally expensive to evaluate: (i) A large number of chains (the "ensemble") where the number of chains scales inversely (nearly one-to-one) with the number of necessary ensemble iterations until convergence, (ii) fast burn-in and convergence (thereby superseding the need for numerical optimization), (iii) good performance for bimodal distributions, (iv) an endogenous proposal density generated from the state of the full ensemble, which (v) respects the bounds of prior distribution. Consequently, ADEMC is straightforward to parallelize. I use the sampler to estimate a heterogeneous agent New Keynesian (HANK) model including the micro parameters linked to the stationary distribution of the model. |
| Keywords: | Bayesian Estimation, Monte Carlo Methods, DSGE Models, Heterogeneous Agents |
| JEL: | C11 C13 C15 E10 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_355&r= |
| By: | Kamalyan, Hayk; Davtyan, Vahagn |
| Abstract: | What is the impact of heightened exchange rate uncertainty on business cycle dynamics? This question is particularly important for emerging economies where exchange rate uncertainty is substantially higher and time-varying. Using data from emerging countries, we show that exchange rate uncertainty is essential for business cycle fluctuations. We find that heightened exchange rate uncertainty yields a drop in economic activity, an increase in prices, and an exchange rate depreciation. We rationalize our empirical findings in a small open economy model augmented with time-varying volatility of exchange rate shocks. In the structural model, the main ingredient of the transmission mechanism is the households’ precautionary behavior. We also show that no other shocks, often featured in the literature, can produce the reported co-movement pattern among the macro variables. |
| Keywords: | DSGE, Stochastic Volatility, Nominal Exchange Rate |
| JEL: | E32 F41 F44 |
| Date: | 2022–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:113443&r= |
| By: | Gregor Boehl, Felix Strobel |
| Abstract: | We propose a set of tools for the efficient and robust Bayesian estimation of medium- and large-scale DSGE models while accounting for the effective lower bound on nominal interest rates. We combine a novel nonlinear recursive filter with a computationally efficient piece-wise linear solution method and a state-of-the-art MCMC sampler. The filter allows for fast likelihood approximations, in particular of models with large state spaces. Using artificial data, we demonstrate that our methods accurately capture the true model parameters even with very long lower bound episodes. We apply our approach to analyze post-2008 US business cycle properties. |
| Keywords: | Effective Lower Bound, Bayesian Estimation, Great Recession, Business Cycles |
| JEL: | C11 C63 E31 E32 E44 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_356&r= |
| By: | Jay Hyun; Ryan Kim; Byoungchan Lee |
| Abstract: | We study business cycles with cyclical returns to scale. Contrary to tightly parameterized production functions (Cobb-Douglas and Constant Elasticity of Substitution), we empirically identify strong input complementarity that leads to procyclical returns to scale. We therefore propose a flexible translog production function that allows complementarity-induced procyclical returns to scale, and we integrate this function into a standard medium-scale dynamic stochastic general equilibrium (DSGE) model. The estimated model with the procyclical returns to scale (i) features procyclical price markups, (ii) better matches the cyclicality of factor shares, and (iii) decreases by nearly half the contribution of markup shocks to output fluctuations. |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1178&r= |
| By: | Vladimir Skavysh; Sofia Priazhkina; Diego Guala; Thomas Bromley |
| Abstract: | Computational methods both open the frontiers of economic analysis and serve as a bottleneck in what can be achieved. Using the quantum Monte Carlo (QMC) algorithm, we are the first to study whether quantum computing can improve the run time of economic applications and challenges in doing so. We identify a large class of economic problems suitable for improvements. Then, we illustrate how to formulate and encode on quantum circuit two applications: (a) a bank stress testing model with credit shocks and fire sales and (b) a dynamic stochastic general equilibrium (DSGE) model solved with deep learning, and further demonstrate potential efficiency gain. We also present a few innovations in the QMC algorithm itself and in how to benchmark it to classical MC. |
| Keywords: | Business fluctuations and cycles; Central bank research; Econometric and statistical methods; Economic models; Financial stability |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-29&r= |
| By: | Luiz Brotherhood (Universitat de Barcelona, BEAT, FGV); Bernard Herskovic (UCLA Anderson, NBER); Joao Ramos (University of Southern California) |
| Abstract: | We study whether college admissions should implement quotas for lower-income applicants. We develop an overlapping-generations model and calibrate it to data from Brazil, where such a policy is widely implemented. In our model, parents choose how much to investin their child’s education, thereby increasing both human capital and likelihood of college admission. We find that, in the long run, the optimal income-based affirmative action increases welfare and aggregate output. It improves the pool of admitted students but distorts pre-college educational investments. The welfare-maximizing policy benefits lower- to middle-income applicants with income-based quotas, while higher-income applicants face fiercer competition in college admissions. The optimal policy reduces intergenerational persistence of earnings by 5.7% and makes nearly 80% of households better off. |
| Keywords: | Affirmative action, intergenerational mobility, educational investment |
| JEL: | I2 E24 J62 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ewp:wpaper:425web&r= |
| By: | Luca Marchiori; Julien Pascal; Olivier Pierrard |
| Abstract: | We develop a monocentric urban search-and-matching model in which workers can choose to commute or to migrate within the region. The equilibrium endogenously allocates the population into three categories: migrants (relocate from their hometown to the city), commuters (traveling to work in the city) and home stayers (remaining in their hometown). We prove that the market equilibrium is usually not optimal: a composition externality may generate under- or over-migration with respect to the central planner’s solution, which in all cases results in under-investment in job vacancies and therefore production. We calibrate the model to the Greater Paris area to reproduce several gradients observed in the data, suggesting over-migration. We show how policy interventions can help to reduce inefficiencies. |
| Keywords: | Migration, Commuting, Urban search-and-matching, Efficiency, Policy. |
| JEL: | E24 J68 R13 R23 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp159&r= |
| By: | Rishabh Aggarwal; Adrien Auclert; Matthew Rognlie; Ludwig Straub |
| Abstract: | We study the effects of debt-financed fiscal transfers in a general equilibrium, heterogeneous-agent model of the world economy. In the long run, increases in government debt anywhere raise the world interest rate and increase private wealth everywhere. In the short run, a country with a larger-than-average fiscal deficit experiences both a large increase in private savings (“excess savings”) and a small but persistent current account deficit (a slow-motion “twin deficit”). These patterns are consistent with the evolution of the world’s balance of payments since the beginning of the Covid pandemic. |
| JEL: | E21 E62 F32 F41 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30185&r= |
| By: | Stéphane Auray (CREST-ENSAI, Campus de Kerlann, Bruz); Aurélien Eyquem (Univ Lyon, Université Lumière Lyon 2, GATE-LSE UMR 5824, F-69130 Ecully, France, and Institut Universitaire de France); Bertrand Garbinti (CREST-ENSAE-Institut Polytechnique Paris, Palaiseau); Jonathan Goupille-Lebret (Univ Lyon, CNRS, GATE-LSE UMR 5824, F-69130 Ecully, France, and ENS de Lyon) |
| Abstract: | We build an original heterogeneous-agent model with three assets (deposits, housing and equity), labor-income risk, entrepreneurs, and a rich and realistic set of flat and progressive taxes and transfers. Using France as an illustration, the model fits the level and dynamics of wealth and income inequalities, the aggregate and distributional tax structure, the composition of wealth along the distribution as well as key macroeconomic aggregates over the 1984-2018 period. Rising markups account for the bulk of rising income inequality. Wealth inequality dynamics result mostly from changes in saving rate inequality but only in response to the exogenous changes in taxation and markups. Our results point to the critical importance of endogenous saving decisions in response to exogenous shocks as a key driver of wealth inequality. |
| Keywords: | Heterogeneous Agents, Taxes, Market Power, Income Inequality, Wealth Inequality |
| JEL: | D4 E2 H2 O4 O52 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:2210&r= |
| By: | Rafael Dix-Carneiro; Sharon Traiberman |
| Abstract: | We investigate the role of trade imbalances for the distributional consequences of globalization. We do so through the lens of a quantitative, general equilibrium, multi-country, multi-sector model of trade with four key ingredients: (a) workers with different levels of skills are organized into separate representative households; (b) endogenous trade imbalances arise from households' consumption and saving decisions; (c) production exhibits capital-skill complementarity; (d) labor market frictions across sectors and non-employment. We conduct a series of counterfactual experiments that illustrate the quantitative importance of both trade imbalances and capital-skill complementarity for the dynamics of the skill premium. We show that modelling trade imbalances can lead to stark differences between short- and long-run consequences of globalization shocks for the skill premium. |
| JEL: | F1 F16 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30188&r= |
| By: | Amaral, Pedro |
| Abstract: | This paper examines the macroeconomic consequences of a demographic transition in an environment where a producer's capital structure is relevant, thereby introducing an asset supply channel. Producers are heterogeneous with respect to how productive they are in different states of the world and may pursue different combinations of safe and/or risky securities issuance when financing projects. I simulate a demographic transition calibrated to replicate the US experience starting in 1880. This transition results in modest increases in output, larger increases in saving as a whole, and particularly, in a relative increase in saving in the form of safe assets. Lower capital costs lead to producer entry (and more issuance) and to a tilt towards safe issuance. I show that omitting this asset supply channel, as standard representative firm models do, results in a quantitatively important overestimation of the transmission effects of the demographic transition, with larger output gains despite smaller interest rate reductions. |
| Keywords: | Demographic Transition; Overlapping Generations; Asset supply; Financing Policy |
| JEL: | E21 E43 E44 G32 J11 |
| Date: | 2022–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:113613&r= |
| By: | Cynthia Balloch; Yann Koby; Mauricio Ulate |
| Abstract: | Several advanced economies implemented negative nominal interest rates in the middle of the last decade, seeking to provide further monetary accommodation once cuts in positive territory had been exhausted. Negative rates affect banks in novel ways, mostly because during times of negative policy rates the interest rate that banks pay households on their deposits usually remains close to zero. In this review, we analyze the large literature that studies the impact of negative nominal interest rates, proceeding in four steps. First, we explain the theoretical channels through which negative rates affect banks. Second, we discuss the empirical findings about bank outcomes under negative rates. Third, we describe the aggregate transmission channels that influence the macroeconomic implications of a policy rate cut in negative territory. Finally, we compare the general-equilibrium models that have been used to quantify the effectiveness of negative rates and highlight why they have obtained mixed results. We conclude that, if properly implemented, negative rates are a valuable tool that central banks should not discard outright. However, negative rates can have quantifiable costs for the financial sector, and their effectiveness is likely to decline if implemented for long periods. |
| Keywords: | negative nominal interest rates; Negative Interest Rates; ZLB; ELB; Monetary Policy; Bank Profitability; Central Banking |
| JEL: | E32 E44 E52 E58 G21 |
| Date: | 2022–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:94465&r= |
| By: | Ugochi Emenogu; Brian Peterson |
| Abstract: | Macroprudential policies are often aimed at the traditional banking sector while non-depository financial institutions or shadow banks have limited or no prudential regulations. This paper studies the macroeconomic impact of household-side macroprudential tightening in the presence of unregulated lenders. Our result shows that the presence of unregulated lenders dampens the impact of the policies on house prices and household debt. We also find that leakage to the unregulated sector increases when monetary policy is tightened. |
| Keywords: | Financial institutions; Financial system regulation and policies; Monetary policy transmission |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-28&r= |