nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒08‒22
five papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Modern Monetary Theory: the post-Crisis economy misunderstood? By Liu, Chunping; Minford, Patrick; Ou, Zhirong
  2. A Macro Financial Model for the Chilean Economy By Mauricio Calani; Benjamín García; Tomás Gómez; Mario González; Sebastián Guarda; Manuel Paillacar
  4. Dynamic Tax Evasion and Capital Misallocation in General Equilibrium By Francesco Menoncin; Andrea Modena; Luca Regis
  5. Unconventional credit policies during crises: A structural analysis of the Chilean experience during the COVID-19 pandemic By Benjamín García; Mario González; Sebastián Guarda; Manuel Paillacar

  1. By: Liu, Chunping (Nottingham Trent University); Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We set out Modern Monetary Theory (MMT) as a full DSGE model, and test it by indirect inference on post Financial Crisis US data, alongside a standard New Keynesian, NK, model. The MMT model is rejected, while the NK model has a high probability. We then evaluate replacing the fiscal and monetary policies within the NK model by MMT policies, and find that they imply a material loss of welfare
    Keywords: Modern Monetary Theory; DSGE model; fiscal activism; Wald test; indirect inference
    Date: 2022–07
  2. By: Mauricio Calani; Benjamín García; Tomás Gómez; Mario González; Sebastián Guarda; Manuel Paillacar
    Abstract: This paper presents a dynamic stochastic general equilibrium (DSGE) model built with a focus on frictional financial intermediation. The model, estimated for the Chilean economy, expands the quantitative analysis toolkit of the Central Bank of Chile, allowing for the study of how financial frictions shape the transmission mechanisms of several macroeconomic and financial shocks. The model builds on a simplified version of the Central Bank of Chile’s main DSGE model, described in Garcia et al. (2019), augmented to include a rich financial sector and financial frictions. The extensions include optimizing financial intermediaries, corporate and mortgage lending, long-term government bonds within a segmented bonds market, and the possibility for households, firms, and banks to default. The result is the Central Bank of Chile’s Macro Financial Model. The model captures many features of the Chilean economy and allows for a quantitative analysis of the financial system’s role in explaining the business cycle and of the interaction between the real and financial sides of the economy.
    Date: 2022–05
  3. By: Damián Pierri (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)
    Abstract: We present a new Generalized Markov Equilibrium (GME) approach to studying sudden stops and financial crises in emerging countries in the canonical small open economy model with equilib-rium price-dependent collateral constraints. Our approach to characterizing and computing stochastic equilibrium dynamics is global, encompasses recursive equilibrium as a special case, yet allows for a much more flexible approach to modeling memory in such models that are known to have multiple equilibrium. We prove the existence of ergodic GME selections from the set of sequential competitive equilibrium, and show that at the same time ergodic GME selectors can replicate all the observed phases of the macro crises associated with a sudden stop (boom, collapse, spiralized recession, recov-ery) while still being able to capture the long-run stylized behavior of the data. We also compute stochastic equilibrium dynamics associated with stationary and nonstationary GME selections, and we find that: a) the ergodic GME selectors generate stochastic dynamics that are less financially constrained with respect to stationary non-ergodic paths; and, b) non-stationary GME selections ex-hibit a great range of fluctuations in macroeconomic aggregates compared to the stationary selections. From a theoretical perspective, we prove the existence of both sequential competitive equilibrium and (minimal state space) recursive equilibrium, as well as provide a complete theory of robust recursive equilibrium comparative statics in deep parameters. Consistent with recent results in the literature, relative to the set of recursive equilibrium, we find 2 stationary equilibrium: one with high/over borrowing, the other with low/under borrowing. These equilibrium are extremal and “self-fulfilling” under rational expectations. The selection among these equilibria depend on observable variables and not on sunspots.
    Keywords: Financial Crises, Sudden Stops, Small Open Economies, Ergodicity, Recursive Equilibrium, Generalized Markov Equilibria
    JEL: C6 D52 F32
    Date: 2021–06
  4. By: Francesco Menoncin; Andrea Modena; Luca Regis
    Abstract: We study tax evasion in a tractable macroeconomic model with productive public expenditure financed by a fixed-rate income tax. Taxpayers are heterogeneous in their productivity and subject to borrowing constraints. They can lower their fiscal burden by evading taxes at the risk of being audited (and fined) by the government. We solve the model for its competitive equilibrium and characterize entrepreneurs’ optimal policies contingent on their individual productivity and the endogenous price levels. The model predicts that enforcing tax compliance stimulates the productivity of public expenditure, thus making less productive enterprises viable. At the same time, however, fewer evasion opportunities alleviate borrowing constraints by offsetting the advantage of low-productivity (and highly-evasive) entrepreneurs, thereby re-allocating capital to more productive users. On the demand side, decreasing tax evasion reduces consumption levels by curbing private capital accumulation. However, it fosters consumption rates by mitigating entrepreneurs’ precautionary motif against auditing risk.
    Keywords: Dynamic Tax Evasion; Financial Frictions; General Equilibrium; Misallocation
    Date: 2022
  5. By: Benjamín García; Mario González; Sebastián Guarda; Manuel Paillacar
    Abstract: With the economy facing an unprecedented hit due to the COVID-19 pandemic, the Central Bank of Chile and the Chilean government jointly implemented several programs aimed at increasing liquidity and maintaining the flow of funds in the economy. In this paper, we extend the model described in Calani et al. (2022), a structural large-scale DSGE model with a financial system and financial frictions, to assess the impact of the different credit programs implemented during the COVID-19 crisis. We find that the policies’ most significant impact was due to the FOGAPE program and from their joint ability to reduce credit risk. The quantitative analysis carried on in this paper shows that the contraction of GDP in 2020 was between 2.7 and 5.4 percentage points milder thanks to the implemented liquidity and credit policies.
    Date: 2022–05

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