|
on Dynamic General Equilibrium |
| By: | Solikin M. Juhro; Denny Lie; Aryo Sasongko |
| Abstract: | This paper builds and estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model suitable for the evaluation of central bank policy mix, with a particular application on the Indonesian economy. The model has a rich array of shocks and frictions, including banking and financial frictions. We illustrate how the estimated model can be used to investigate the source of aggregate fluctuations in Indonesia and to evaluate and simulate a policy mix involving monetary and macroprudential policies. Our Bayesian estimation identifies the COVID-19 pandemic shocks as being mainly a combination of adverse supply-side (technology) and demand-side (preference and foreign-output) shocks. We show that a countercyclical capital requirement rule could be a potent addition to Bank Indonesia's policy mix arsenal. Despite its rich features, the model is scalable and can be readily extended for evaluating other types of central bank policy mix. |
| Keywords: | central bank policy mix; integrated policy framework; countercyclical macroprudential policy rule; DSGE model for Indonesia; COVID-19 pandemic; capital requirement; |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2022-01&r= |
| By: | Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott |
| Abstract: | We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll- over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). In comparison to existing models, we show that a model which accounts for the maturity of debt and its distribution across firms implies larger aggregate effects of monetary policy. |
| Keywords: | monetary policy, investment, corporate debt, debt maturity |
| JEL: | E32 E44 E52 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_360&r= |
| By: | Richard Jaimes; Ed Westerhout; Ed Westerhout |
| Abstract: | We analyze optimal social security in a two-period overlapping generations model with endogenous retirement and demographic change. In this model, households choose to spend the second period of their lives in full retirement if the tax rate on labor income exceeds a certain threshold. We find that this threshold is increasing in life expectancy and decreasing in the fertility rate, which implies that both types of demographic change increase the relevance of the partial retirement case in which households participate on the labor market. Related, both an increase in life expectancy and a drop in fertility imply that retirement is delayed in the partial retirement case. We also show that when the government decides about the retirement age, the command optimum can be replicated through social security policies as long as the laissez-faire equilibrium features an overaccumulation of capital. When households decide about their retirement age themselves, however, replication of the command optimum is not possible, even if overaccumulation of capital applies. In both cases, it is optimal to expand social security when longevity increases and to reduce it when fertility drops. |
| Keywords: | Aging, Retirement, Optimal taxation. |
| JEL: | J11 J26 H21 |
| Date: | 2022–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:col:000416:020316&r= |
| By: | Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Patrizio Pagano; Massimiliano Pisani (Bank of Italy) |
| Abstract: | We assess the transmission of a monetary policy shock in a two-country New Keynesian model featuring a global private stablecoin and a central bank digital currency (CBDC). In the model, cash and digital currencies are imperfect substitutes that differ as to the liquidity services they provide. We find that in a digital-currency economy, where the stablecoin is a significant means of payment, the domestic and international macroeconomic effects of a monetary policy shock can be smaller or larger than in a (benchmark) mainly-cash economy, depending on how the assets backing the stablecoin supply respond to the shock. The benchmark transmission of the monetary policy shock can nonetheless substantially be restored in the digital-currency economy 1) if the stablecoin is fully backed by cash or 2) if the CBDC is a relevant means of payment. |
| Keywords: | digital currency, CBDC, monetary policy, international finance. |
| JEL: | E51 E52 F30 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1366_22&r= |
| By: | Díaz, Antonia; Jerez, Belén; Rincón-Zapatero, Juan Pablo |
| Abstract: | This paper shows that, when utility is imperfectly transferable and the search process is competitive (or directed), wealthier buyers pay higher prices to speed up transactions. This result is established in a dynamic model of the housing market where households save both to smooth consumption and to build a down payment. "Block recursivity" is ensured by the existence of risk-neutral housing intermediaries. The calibrated version of our benchmark economy features greater indebtedness and higher housing prices in the long run compared to aWalrasian model, especially when the elasticity of new housing supply is low. We also show that the long-run effect of greater credit availability on housing prices depends crucially on whether or not rental and real estate housing stocks are segmented. Under full segmentation, price effects are much larger, with and without search frictions. But, even if there is no segmentation, these effects are substantial in our search model when supply elasticity is low, being larger than in the Walrasian version of the model. The last result is reversed with full segmentation, when search frictions dampen the price effect of the credit expansion. |
| Keywords: | Competitive Search; Wealth Effects; Housing Prices; Credit Constraints; Housing Supply Elasticity; Rental Market |
| JEL: | D31 D83 E21 R21 R30 |
| Date: | 2022–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:35536&r= |
| By: | Bernardino Adão; Borghan N. Narajabad; Ted Temzelides |
| Abstract: | We develop a dynamic general equilibrium integrated assessment model that incorporates costs due to new technology adoption in renewable energy as well as externalities associated with carbon emissions and renewable technology spillovers. We use world economy data to calibrate our model and investigate the effects of the technology adoption channel on renewable energy adoption and on the optimal energy transition. Our calibrated model implies several interesting connections between technology adoption costs, the two externalities, policy, and welfare. We investigate the relative effectiveness of two policy instruments-Pigouvian carbon taxes and policies that internalize spillover effects-in isolation as well as in tandem. Our findings suggest that renewable technology adoption costs are of quantitative importance for the energy transition. We find that the two policy instruments are better thought of as complements rather than substitutes. |
| Keywords: | Technology adoption; Scrapping; Energy transition; Climate; Dynamic taxation |
| JEL: | H21 O14 O33 Q54 Q55 |
| Date: | 2022–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-45&r= |
| By: | Daniel Jonas Schmidt (University of Amsterdam) |
| Abstract: | In this paper, I develop an overlapping generations model to analyze the effects of property transfer taxes on homeownership, residential mobility, and welfare in the Netherlands. A revenue-neutral abolition of the 2% transfer tax increases the likelihood that homeowners sell their old house and buy a new one by about 40%. It also leads to a rise of the homeownership rate by 1-5 percentage points (depending on how revenue neutrality is achieved). Newborns prefer to live in an economy without property transfer taxes if the forgone tax revenues are replaced with higher annual property taxes, but not if revenue neutrality is achieved with higher income taxes. I also consider a partial reform that only exempts young first-time homebuyers from the transfer tax and is financed with higher annual property taxes. The resulting welfare gains are approximately one half of the welfare gains from the complete reform. |
| Keywords: | Property transfer tax, transaction tax, stamp duty, first-time buyers, residential mobility, OLG model |
| JEL: | R28 E60 R21 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20220042&r= |
| By: | Patrick Pintus (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université); Yi Wen (Antai College of Economics and Management, Shanghai Jiao Tong University); Xiaochuan Xing (Department Economics - Yale University - Yale University [New Haven]) |
| Abstract: | The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling belief shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium. |
| Keywords: | Multiple Equilibria,Redistribution Shocks,Endogenous Collateral Constraints,State-Contingent Interest Rate |
| Date: | 2022–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03669938&r= |
| By: | Christopher J. Erceg; Andrea Prestipino; Andrea Raffo |
| Abstract: | Fiscal devaluations—an increase in import tariffs and export subsidies (IX) or an increase in value-added taxes and payroll subsidies (VP)—have been shown to provide as much stimulus under fixed exchange rates as a currency devaluation. We find that if agents expect policies to be reversed and the tax pass-through is large, VP is contractionary and IX provides a modest boost. In our medium-scale DSGE model, both features are crucial in accounting for Germany’s underperformance in response to VP in 2007. These findings cast doubt on fiscal devaluations as a cyclical stabilization tool when monetary policy is constrained. |
| Keywords: | Trade Policy; Fiscal Policy; Exchange Rates; Fiscal Devaluation |
| JEL: | E32 F30 H22 |
| Date: | 2022–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1347&r= |
| By: | Boissay, Frédéric; Collard, Fabrice; Galí, Jordi; Manea, Cristina |
| Abstract: | We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course. |
| Keywords: | financial crisis,monetary policy |
| JEL: | E1 E3 E6 G01 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:212022&r= |
| By: | Minesso, Massimo Ferrari; Pagliari, Maria Sole |
| Abstract: | This paper presents DSGE Nash, a toolkit to solve for pure strategy Nash equilibria of global games in macro models. Although primarily designed to solve for Nash equilibria in DSGE models, the toolkit encompasses a broad range of options including solutions up to the third order, multiple players/strategies, the use of user-de_ned objective functions and the possibility of matching empirical moments and IRFs. When only one player is selected, the problem is re-framed as a standard optimal policy problem. We apply the algorithm to an open-economy model where a commodity importing country and a monopolistic commodity producer compete on the commodities market with limits to entrance. If the commodity price becomes relevant in production, the central bank in the commodity importing economy deviates from the _rst best policy to act strategically. In particular, the monetary authority tolerates relatively higher commodity price volatility to ease barriers to entry in commodity production and to limit the market power of the dominant exporter. JEL Classification: C63, E32, E61 |
| Keywords: | computational economics, DSGE model, optimal policies |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222678&r= |
| By: | Javier Garcia-Cicco |
| Abstract: | We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy rules: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, highlighting specially the role of exchange-rate volatility in shaping medium- and long-term inflation forecasts, and its consequences for policy design. |
| Keywords: | monetary policy rules, credibility, inflation expectations |
| JEL: | E52 E31 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1020&r= |
| By: | Rodnyansky, Alexander; Van der Ghote, Alejandro; Wales, Daniel |
| Abstract: | This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and amplifies the economy’s response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence. JEL Classification: E31, E32, E52, E58 |
| Keywords: | inflation indexes, monetary policy, product quality |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222680&r= |
| By: | Andrew Binning (The Treasury) |
| Abstract: | Recent experience with interest rates hitting the effective lower bound and agents facing binding borrowing constraints has emphasised the importance of understanding the behaviour of an economy in which some variables may be restricted at times. The extended path algorithm is a commonly used and fairly general method for solving dynamic nonlinear models with rational expectations. This algorithm can be used for a wide range of cases, including for models with occasionally binding constraints, or for forecasting with models in which some variables must satisfy a certain path. In this paper I propose computational improvements to the algorithm that speed up the calculations via vectorisations of the Jacobian matrix and residual equations. I illustrate the advantages of the method with a number of policy relevant applications: conditional forecasting with both exactly identified and underidentified shocks, occasionally binding constraints on interest rates, anticipated shocks, calendar-based forward guidance, optimal monetary policy with a binding constraint and transition paths. |
| Keywords: | interest rates; monetary policy; shocks; Keynesian; stochastic |
| JEL: | C53 C61 C63 E37 E47 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:nzt:nztwps:22/02&r= |
| By: | Sondès Kahouli (UMR AMURE – Université de Bretagne Occidentale); Xavier Pautrel (GRANEM & TEPP) |
| Abstract: | This paper shows that accounting for the growing interdisciplinary literature supporting the causality between energy efficiency and health and the empirical evidence re-assessing the importance of health in workforce productivity, could explain a part of the paradoxal relationship found between energy efficiency and energy consumption. We build a 3-period overlapping generations model where we assume that residential energy inefficiency induces chronic disease for adults and bad health for elderly. We also assume that workers’ health has an effect of their labor productivity. Our results suggest, in particular, that if mostly old (respectively young) people health is affected, the health impact of residential energy efficiency should have a backfire (resp. rebound) influence on residential energy consumption, by promoting precautionary saving (resp. by rising labor productivity). In policy terms, by showing that the link between energy efficiency and energy consumption is far from being just associated with technical conditions about preferences and/or production technology, our research emphasizes how crucial and complex are for governments the discussion and policy action dealing with the connection between energy conservation policies, health insurance system and growth. |
| Keywords: | Energy, Health, Precautionary saving, Labor productivity, Overlapping generations model |
| JEL: | D58 Q43 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2022.04&r= |
| By: | Ernst, Anne; Hinterlang, Natascha; Mahle, Alexander; Stähler, Nikolai |
| Abstract: | In a dynamic, three-region environmental multi-sector general equilibrium model (called EMuSe), we find that carbon pricing generates a recession initially as production costs rise. Benefits from lower emissions damage materialize only in the medium to long run. A border adjustment mechanism mitigates but does not prevent carbon leakage, but it 'protects' dirty domestic production sectors in particular. From the perspective of a region that introduces carbon pricing, the downturn is shorter and long-run benefits are larger if more regions levy a price on emissions. However, for non-participating regions, there is no incremental incentive to participate as they forego trade spillovers from carbon leakage and face higher production costs along the transition. In the end, they may be better off not participating. Because of the costly transition, average world welfare may fall as a result of global carbon pricing unless 'the rich' assist 'the poor'. |
| Keywords: | Carbon Pricing,Border Adjustment,Climate Clubs,International Dynamic General Equilibrium Model,Sectoral Heterogeneity,Input-Output Matrix |
| JEL: | E32 E50 E62 H32 Q58 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:252022&r= |
| By: | Vaziri, M.; |
| Abstract: | In this paper, I study firms' strategic and anticompetitive behaviour, and the consequent role of antitrust law as a macroeconomic policy in promoting business dynamism. Over the past few decades, business dynamism has been declining in the US: firm entry has fallen, accompanied by a slowdown in the rate of productivity growth. Additionally, enforcement of antitrust law has been at historically low levels. Using firm-level and sector-level data from the US, I find that stronger antitrust enforcement is associated with higher entry and higher productivity growth but lower R&D investments. Next, I develop and structurally estimate a dynamic general equilibrium model with innovation and oligopolistic product market competition. The dynamic structure of the model allows rms to eliminate competition through strategic decision making. The model is calibrated to the recent US experience and quantitative exercises show that strengthening antitrust policies results in: (1) a higher firm entry rate, (2) a higher rate of productivity growth, (3) a larger labour share of GDP, and (4) a decline in the innovation rate. Overall, the model indicates that stronger antitrust policies are effective at restoring business dynamism and can deliver up to 16% higher welfare in consumption-equivalent terms. The improvement in welfare is mainly driven by an increase in the welfare of workers, without affecting the capitalists, suggesting that antitrust law has distributional implications, and therefore, has a potential role in reducing inequality. |
| Date: | 2022–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2219&r= |
| By: | Chiara Dal Bianco; Andrea Moro |
| Abstract: | We generate a continuous measure of health to estimate a non-parametric model of health dynamics, showing that adverse health shocks are highly persistent when suffered by people in poor health, a pattern that cannot be accounted for by canonical models. We incorporate this health measure into a life-cycle model of consumption, savings, and labor force participation. After estimating the model parameters, we simulate the effects of health shocks on economic outcomes. We find that bad health shocks have persistent adverse economic effects that are more dramatic for poor individuals starting in bad health. Bad health shocks also increase the dispersion of asset accumulation within this category of individuals. A canonical model of health dynamics would not uncover these effects. |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2207.03816&r= |
| By: | Jan Sun |
| Abstract: | The consumer finance literature has emphasized the importance of income and ex pense risk for the evaluation of bankruptcy regimes. Single and married households differ in the risks they face. In this paper, I build the first quantitative consumer default model that explicitly models singles and couples. I calibrate my model to the United States in 2019 and estimate (medical) expense shocks separately for single and married individuals. My calibrated model generates large differences in bankruptcy rates across marital status as in the data. I examine how the preferred degree of bankruptcy leniency differs between singles and couples. There are several channels at work: Differences on the income side between singles and couples cause couples to prefer a stricter bankruptcy regime due to the intra-household insurance channel. However, increased risk for couples due to divorce and on the expense side outweigh the first channel. The net effect is that couples prefer more lenient bankruptcy than singles. My findings suggest that marital status is important to take into account for the evaluation of bankruptcy regimes. |
| Keywords: | Consumer Credit, Bankruptcy, Default, Bankruptcy Regulation, Marital Status |
| JEL: | D13 D14 D15 E21 E49 G18 G51 J12 K35 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_361&r= |
| By: | Ngah Ntiga, Louis Henri |
| Abstract: | Cette étude met en lumière les effets de la politique budgétaire sur l’activité économique du Cameroun tout en s’intéressant aux chocs et aux fluctuations du cycle économique. Pour cela, nous utilisons un modèle DSGE en faisant recours à l’estimation Bayésienne sur les données trimestrielles couvrant la période 1995q2 - 2020q1. Les données proviennent de diverses sources notamment de la Banque Mondiale, de l’Institut National de la Statistique et du Tableau des Opérations Financières de l’État. Les résultats montrent que le PIB, les dépenses publiques et la consommation sont expliqués majoritairement par les investissements publics et la taxe sur la consommation. Aussi, une baisse de la taxe sur la consommation induit une augmentation du PIB et de la consommation des ménages. Cependant, une politique monétaire restrictive ne permet pas de stimuler la consommation et les investissements privés. Enfin, réduire les impôts sur le capital revient à augmenter la production, la consommation et les investissements publics. L’une des mesures que pourraient envisager les autorités publiques, surtout dans cette période de crise, est l’augmentation continuelle des investissements publiques, une certaine diminution de la taxe sur la consommation et des impôts sur le capital pour booster l’économie camerounaise. |
| Keywords: | Politique budgétaire; Modèle DSGE; Estimation Bayésienne |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:076&r= |
| By: | Sondès Kahouli; Xavier Pautrel (GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - Institut Agro Rennes Angers - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement) |
| Abstract: | This paper shows that accounting for the growing interdisciplinary literature supporting the causality between energy efficiency and health and the empirical evidence reassessing the impor tance of health in workforce productivity, could explain a part of the paradoxal relationship found between energy efficiency and energy consumption. We build a 3-period overlapping generations model where we assume that residential energy inefficiency induces chronic disease for adults and bad health for elderly. We also assume that workers' health has an effect of their labor productivity. Our results suggest, in particular, that if mostly old (respectively young) people health is affected, the health impact of residential energy efficiency should have a backfire (resp. rebound) influence on residential energy consumption, by promoting precautionary saving (resp. by rising labor productivity). In policy terms, by showing that the link between energy efficiency and energy consumption is far from being just associated with technical conditions about preferences and/or production technology, our research emphasizes how crucial and complex are for governments the discussion and policy action dealing with the connection between energy conservation policies, health insurance system and growth. |
| Keywords: | Energy efficiency,Health,Precautionary saving,Labor productivity,Overlapping generations model. JEL classification D58,Q43 |
| Date: | 2022–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03652352&r= |
| By: | Michael Dotsey; Wenli Li; Fang Yang |
| Abstract: | We build a unified framework to quantitatively examine the demographic transition and industrial policies in contributing to China’s economic growth between 1976 and 2015. We find that the demographic transition and industrial policy changes by themselves account for a large fraction of the rise in household and corporate savings relative to total output and the rise in the country’s per capita output growth. Importantly, their interactions also lead to a sizable fraction of the increases in savings since the late 1980s and reduce growth after 2010. A novel and important factor that drives these dynamics is endogenous human capital accumulation, which depresses household savings between 1985 and 2010 but leads to substantial gains in per capita output growth after 2005. |
| Keywords: | Aging; Credit policy; Household saving; Output growth; China |
| JEL: | E21 J11 J13 L52 |
| Date: | 2022–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:94497&r= |
| By: | Tsendsuren Batsuuri |
| Abstract: | The success of the 2015 Paris Agreement in achieving its main temperature goal depends on its ability to increase the ambitions of individual countries to reduce their carbon emissions through effort comparison and peer pressure. Despite the empirical relevance of demographic changes in affecting factor prices, economic growth, and capital flows across countries, most comparisons of countries’carbon emissions reduction efforts are based on models that cannot capture demographic effects. Overlooking future demographic changes is problematic given the profound yet asymmetric demographic changes that countries are undergoing. This paper uses a two-country life-cycle model to show that comparing carbon emissions mitigation efforts can be misleading if countries’baseline emissions trajectories do not account for demographic dividends and spillovers from one country to another from unsynchronized demographic changes and asymmetric institutions. Through capital flows, differences in the timing, speed, and magnitude of demographic changes can reduce the emissions baseline in one country while increasing it in another country relative to the baseline with no spillovers — an effect which is amplified by differences in institutions such as pension and social security systems. Models that do not consider the effect of demographic changes and the institutions on the economy and emissions may underestimate one country’s carbon emissions reduction effort while overestimating that of another. Consequently, neglecting demographic changes when comparing countries’carbon emissions mitigation efforts can undermine the successful implementation of the Paris Agreement. |
| Keywords: | Global imbalances, Demographic transition, Carbon emissions, Lifecycle model, Energy dependent production function. |
| JEL: | E2 F32 F41 J11 J13 J14 O13 Q43 C6 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-42&r= |
| By: | Mariano Croce; Mohammad R. Jahan-Parvar; Samuel Rosen |
| Abstract: | We develop a new small open economy model (SONOMA) in which domestic corporate debt and equities are affected by shocks to both external credit and equity markets. In a novel empirical analysis of several small-but-developed economies, we show that both external debt and equity shocks are important determinants of domestic economic fluctuations, corporate leverage, and net foreign asset positions. SONOMA replicates our empirical facts about asset prices, financial flows, and economic activity. |
| Keywords: | External Positions; Credit and Equity Shocks; Asset Pricing |
| JEL: | F30 F40 G15 |
| Date: | 2022–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1349&r= |
| By: | Marco Flaccadoro (Bank of Italy); Valerio Nispi Landi (Bank of Italy) |
| Abstract: | We estimate the response of domestic inflation to a US interest rate shock in a sample of 27 emerging economies, using local projection methods. Our results point out that the sign of the inflation response crucially depends on the monetary policy framework: after a US monetary policy tightening, inflation decreases in peggers; inflation increases in floaters that do not target inflation; the inflation response is not statistically different from zero in floaters that are committed to an inflation target. We rationalize this outcome using a standard DSGE model. We show that pegging the exchange rate yields larger welfare losses compared to the other two monetary policy frameworks, even assuming dominant currency pricing. |
| Keywords: | inflation stabilization, inflation targeting, monetary policy, open economy macroeconomics |
| JEL: | E31 E52 F41 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1365_22&r= |
| By: | Max Fuchs (University of Kassel) |
| Abstract: | This paper examines whether a central bank digital currency (CBDC) reinforces inefficiencies in transactions with cash. In this case, the gap between the traded quantity and the welfare-maximizing one, which arises due to discounting or a suboptimal amount of money, increases further. To get some answers, the monetary search model of Trejos and Wright (1995) is extended by a CBDC. We show that an interest-bearing CBDC reinforces inefficiencies in transactions with cash since opportunity costs for cash holders and money supply increase. Nevertheless, a CBDC is able to increase welfare as long as the share of CBDC holders is limited. |
| Keywords: | CBDC, inefficiencies, welfare analysis |
| JEL: | E31 E41 E51 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202228&r= |
| By: | Góes, Carlos; Bekkers, Eddy |
| Abstract: | Geopolitical conflicts have increasingly been a driver of trade policy. We study the potential effects of global and persistent geopolitical conflicts on trade, technological innovation, and economic growth. In conventional trade models the welfare costs of such conflicts are modest. We build a multi-sector multi-region general equilibrium model with dynamic sector-specific knowledge diffusion, which magnifies welfare losses of trade conflicts. Idea diffusion is mediated by the input-output structure of production, such that both sector cost shares and import trade shares characterize the source distribution of ideas. Using this framework, we explore the potential impact of a "decoupling of the global economy," a hypothetical scenario under which technology systems would diverge in the global economy. We divide the global economy into two geopolitical blocs -East and West -based on foreign policy similarity and model decoupling through an increase in iceberg trade costs (full decoupling) or tariffs (tariff decoupling). Results yield three main insights. First, the projected welfare losses for the global economy of a decoupling scenario can be drastic, as large as 12% in some regions and are largest in the lower income regions as they would benefit less from technology spillovers from richer areas. Second, the described size and pattern of welfare effects are specific to the model with diffusion of ideas. Without diffusion of ideas the size and variation across regions of the welfare losses would be substantially smaller. Third, a multi-sector framework exacerbates diffusion inefficiencies induced by trade costs relative to a single-sector one. |
| Keywords: | Innovation,International trade,international relations |
| JEL: | F12 F13 O33 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wtowps:ersd20229&r= |
| By: | Fernando E. Alvarez; Francesco Lippi; Takis Souganidis |
| Abstract: | We study the propagation of monetary shocks in a sticky-price general-equilibrium economy where the firms’ pricing strategy feature a complementarity with the decisions of other firms. In a dynamic equilibrium the firm’s price-setting decisions depend on aggregates, which in turn depend on firms’ decisions. We cast this fixed-point problem as a Mean Field Game and establish several analytic results. We study existence and uniqueness of the equilibrium and characterize the impulse response function (IRF) of output following an aggregate “MIT” shock. We prove that strategic complementarities make the IRF larger at each horizon, in a convex fashion. We establish that complementarities may give rise to an IRF with a hump-shaped profile. As the complementarity becomes large enough the IRF diverges and at a critical point there is no equilibrium. Finally, we show that the amplification effect of the strategic interactions is similar across models. For instance, the Calvo model and the Golosov-Lucas model display a comparable amplification, in spite of the fact that the non-neutrality in Calvo is much larger. |
| JEL: | E3 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30193&r= |