nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒09‒12
25 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Risk and State-Dependent Financial Frictions By Martin Harding; Rafael Wouters
  2. Procyclical fiscal policy and asset market incompleteness By Andrés Fernández; Daniel Guzmán; Ruy E. Lama; Carlos A. Vegh
  3. Unconventional Monetary Policy According to HANK By Eric R. Sims; Jing Cynthia Wu; Ji Zhang
  4. The Ararat Fiscal Strategy Model: A Structural Framework for Fiscal Policy Analysis in Armenia By Luis-Felipe Zanna; Mr. Martin Fukac; Garik Petrosyan; Daniel Baksa; Victoria Babajanyan; Eduard Hakobyan; Arshaluys Harutyunyan; Narek Karapetyan; Babken Pashinyan
  5. Inflation-based fiscal consolidation: a DSGE approach By Busato, Francesco; Albanese, Marina; Varlese, Monica
  6. Macroprudential regulation of investment funds By di Iasio, Giovanni; Kaufmann, Christoph; Wicknig, Florian
  7. Structural change and inequality in general equilibrium By Krzysztof Makarski; Joanna Tyrowicz; Jan Lutynski
  8. The current account and monetary policy in the euro area By Schuler, Tobias; Sun, Yiqiao
  9. Priors and the Slope of the Phillips Curve By Callum Jones; Mariano Kulish; Juan Pablo Nicolini
  10. The Macroeconomic Consequences of Natural Rate Shocks: An Empirical Investigation By Stephanie Schmitt-Grohé; Martín Uribe
  11. Macroprudential policy and the role of institutional investors in housing markets By Muñoz, Manuel A.; Smets, Frank
  12. Portfolio shocks and the financial accelerator in a small open economy By Ortiz, Marco; Miyahara, Ken
  13. The optimal quantity of CBDC in a bank-based economy By Burlon, Lorenzo; Montes-Galdón, Carlos; Muñoz, Manuel A.; Smets, Frank
  14. Rational Sentiments and Financial Frictions By Paymon Khorrami; Fernando Mendo
  15. Preferred habitat and monetary policy through the looking-glass By Carboni, Giacomo; Ellison, Martin
  16. Is there cross-fertilization in macroeconomics? . Version 2 By Muriel Dal-Pont Legrand; Martina Cioni; Eugenio Petrovich; Alberto Baccini
  17. Enjeux du projet de monnaie unique CEDEAO By Diagne, Youssoupha Sakrya
  18. Optimal Fiscal and Monetary Policy with Distorting Taxes By Christopher A. Sims
  19. The trade-off between public health and the economy in the early stage of the COVID-19 pandemic By Jaccard, Ivan
  20. Asset Holdings, Information Aggregation in Secondary Markets and Credit Cycles By Henrique S. Basso
  21. Decomposing the Grey Economy in Bulgaria - A General-Equilibrium Analysis By Aleksandar Vasilev
  22. Climate change mitigation: how effective is green quantitative easing? By Abiry, Raphael; Ferdinandusse, Marien; Ludwig, Alexander; Nerlich, Carolin
  23. Health, Health Insurance, and Inequality By Chaoran Chen; Zhigang Feng; Jiaying Gu
  24. Coherence without Rationality at the Zero Lower Bound By Guido Ascari; Sophocles Mavroeidis; Nigel McClung
  25. Climate Change Around the World By Per Krusell; Anthony A. Smith Jr.

  1. By: Martin Harding; Rafael Wouters
    Abstract: We augment a standard New Keynesian model with a financial accelerator mechanism and show that financial frictions generate large state-dependent amplification effects. We fit the model to US data and show that show that, when shocks drive the model far away from the steady state, the nonlinear model produces much stronger propagation of shocks than the linearized model. We document that these amplification effects are due to endogenous variation in financial conditions and not due to other nonlinearities in the model. Motivated by these findings, we propose a regime-switching dynamic stochastic general equilibrium framework where financial frictions endogenously fluctuate between moderate (low risk) and severe (high risk), depending on the state of the economy. This framework allows for efficient estimation with many state variables and improves fit with respect to the linear model.
    Keywords: Central bank research; Credit and credit aggregates; Financial stability; Monetary policy
    JEL: E52 E58
    Date: 2022–08
  2. By: Andrés Fernández; Daniel Guzmán; Ruy E. Lama; Carlos A. Vegh
    Abstract: To explain the fact that government spending and tax policy are procyclical in emerging and developing countries, we develop a model for the joint behavior of optimal tax rates and government spending over the business cycle. Our set-up relies on financial frictions, which have been shown to be critical features of emerging markets, captured by various degrees of asset market incompleteness as well as varying levels of debt-elastic interest rate spreads. We first uncover a novel theoretical result within a simple static framework: incomplete markets can account for procyclical government spending but not necessarily procyclical tax policy. Explaining procyclical tax policy also requires that the ratio of private to public consumption comoves positively with the business cycle, which leads to larger fluctuations in the tax base. We then show that the procyclicality of tax policy holds in a more realistic DSGE model calibrated to emerging markets. Finally, we illustrate how larger financial frictions which amplify the business cycle through more procyclical fiscal policies, have sizeable Lucas-type welfare costs.
    Date: 2021–09
  3. By: Eric R. Sims; Jing Cynthia Wu; Ji Zhang
    Abstract: This paper studies the implications of household heterogeneity for the effectiveness of quantitative easing (QE). We consider a heterogeneous agent New Keynesian (HANK) model with uninsurable household income risk. Financial intermediaries are subject to an endogenous leverage constraint that allows QE to matter. We find that macro aggregates react very similarly to a QE shock in the HANK model compared to a representative agent (RANK) version of the model. This finding is robust across different micro- and macro- distributions of wealth.
    JEL: E12 E52
    Date: 2022–08
  4. By: Luis-Felipe Zanna; Mr. Martin Fukac; Garik Petrosyan; Daniel Baksa; Victoria Babajanyan; Eduard Hakobyan; Arshaluys Harutyunyan; Narek Karapetyan; Babken Pashinyan
    Abstract: This paper presents an overview of the Ararat Fiscal Strategy Model (AFSM), which is a structural, New-Keynesian, DSGE, small open economy model with a rich fiscal block that includes several expenditure and revenue instruments, and types of debt. The AFSM is now a formal part of the Ministry of Finance analytical toolkit to do macroeconomic fiscal policy scenario analysis, which feeds into policy discussions, budget planning, and the Medium-Term Expenditure Framework. The model was applied to assses the macroeconomic impact of the “first wave” of the Covid-19 pandemic on the Armenian economy, including the mitigating effects of policy responses. AFSM simulations revealed a potential severe impact in 2020, with declines in GDP and consumption of 12.9 and 11.7 percent, respectively, and a cumulative loss of GDP of 38 percent for the period 2020-2023. They also highlighted a significant fiscal outlook deterioration that would increase public debt-to-GDP ratios by 18.8 percentage points over 2020-23. The package of counter-cyclical fiscal measures of 3.6 percent of GDP, however, was estimated to cushion the 2020 GDP decline by almost 2 percentage points, as well as protect jobs. A second AFSM application related to the 2018 public investment under-execution showed the importance of improving the efficiency of public investment to have positive macroeconomic and fiscal effects.
    Keywords: Structural model; DSGE model; fiscal rules; scenario analysis; financial programming; Armenia; Covid-19; AFSM simulation; shock decomposition; fiscal policy multiplier; AFSM application; overview of the Ararat Fiscal Strategy Model; Consumption; Public investment spending; Current spending; Global
    Date: 2022–06–10
  5. By: Busato, Francesco; Albanese, Marina; Varlese, Monica
    Abstract: This paper investigates under which conditions a permanent increase in inflation target might entail public debt reduction, in a Two Agents New Keynesian model with sticky prices and distortionary taxation. In light of that, this paper contributes to the more recent lively debate among economists and policymakers regarding whether an increase in inflation could contribute to a public debt reduction without damaging macroeconomic stability. Real and welfare effects caused by changes in the inflation target from 2% to 5% are discussed. Overall, results show that an increase in inflation affects the economy positively in the short run but negatively in the long term. Consistently, higher inflation worsens households’ welfare. Moreover, a sensitivity analysis of the model’s key parameters is carried out. Quite interestingly, it emerges that fiscal consolidation through an increase in inflation is far from obvious. A more sluggish inflation adjustment path influences households’ expectations, entailing debt-to-GDP ratio increases rather than decreases.
    Keywords: Inflation, Public debt-to-GDP ratio, Monetary policy, Welfare effects
    JEL: D6 E31 E44 E58 H63
    Date: 2022–07–16
  6. By: di Iasio, Giovanni; Kaufmann, Christoph; Wicknig, Florian
    Abstract: The investment fund sector, the largest component of the non-bank financial system, is growing rapidly and the economy is becoming more reliant on investment fund financial intermediation. This paper builds a dynamic stochastic general equilibrium model with banks and investment funds. Banks grant loans and issue liquid deposits, which are valuable to households. Funds invest in corporate bonds and may hold liquidity in the form of bank deposits to meet investor redemption requests. Without regulation, funds hold insufficient deposits and must sell bonds when hit by large redemptions. Bond liquidation is costly and eventually reduces investment funds’ intermediation capacity. Even when accounting for side effects due to a reduction of deposits held by households, a macroprudential liquidity requirement improves welfare by reducing bond liquidation and by increasing the economy’s resilience to financial shocks akin to March 2020. JEL Classification: E44, G18, G23
    Keywords: liquidity regulation, macroprudential policy, non-bank financial intermediation
    Date: 2022–08
  7. By: Krzysztof Makarski (Group for Research in Applied Economics (GRAPE); Warsaw School of Economics); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw; Institute of Labor Economics (IZA)); Jan Lutynski (Group for Research in Applied Economics (GRAPE))
    Abstract: We study the evolution of wealth inequality in an economy undergoing structural change. Economic intuition hints that structural change should imply increased income inequality, at least transiently. Economic intuition is more ambiguous for the effects on wealth inequality. On the one hand, increased dispersion in incomes implies increased dispersion in the ability to accumulate wealth across individuals. On the other hand, workers experience greater uncertainty, which may push them to more precautionary savings, which works towards equalizing wealth distribution. The net effect of these two opposing forces is essentially an empirical question. We build an overlapping generations model which features heterogeneous sectors and workers. Using this model, we quantify the role of demographics and the structural change in the evolution of wealth inequality in Poland as of 1990.
    Keywords: structural change, demographic change, inequality
    JEL: L16 E20 D63
    Date: 2022
  8. By: Schuler, Tobias; Sun, Yiqiao
    Abstract: We investigate the factors driving current account and monetary policy developments in the euro area. We estimate an open-economy structural vector autoregression (VAR) model with zero and sign restrictions derived from a multi-country dynamic stochastic general equilibrium (DSGE) model to identify relevant shocks and analyse their impact on the current account and interest rate. Examining the VAR impulse responses for Germany, Italy and Spain we find that investment shocks and preference shocks drive the current account and interest rates in the opposite directions. By contrast, external demand shocks and productivity shocks cause both the current account balance and interest rate to move in the same direction. We also provide evidence for spillovers to the euro area from US preference shocks and US interest rate policy shocks. JEL Classification: E32, F32, F45
    Keywords: current account, macroeconomic shocks, monetary policy
    Date: 2022–08
  9. By: Callum Jones (Board of Governors of the Federal Reserve System); Mariano Kulish (University of Sydney); Juan Pablo Nicolini (Federal Reserve Bank of Minneapolis/Universidad Di Tella)
    Abstract: The slope of the Phillips curve in New Keynesian models is difficult to estimate using aggregate data. We show that in a Bayesian estimation, the priors placed on the parametersgoverning nominal rigidities significantly influence posterior estimates and thus inferences about the importance of nominal rigidities. Conversely, we show that priors play a negligible role in a New Keynesian model estimated using state-level data. An estimation with state-level data exploits a relatively large panel dataset and removes the influence of endogenous monetary policy
    Keywords: Slope of the Phillips curve, priors, Bayesian estimation, state-level data
    JEL: E52 E58
    Date: 2022–08
  10. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: Much of the empirical literature on the natural rate of interest has focused on estimating its path. This paper addresses the question of how exogenous movements in the natural rate of interest affect aggregate activity and inflation in the short and long runs. To this end it proposes a semi-structural model of output, inflation, and the policy interest rate inspired by the DSGE literature but with fewer identification and cross-equation restrictions. It then estimates it on U.S. data over the period 1900 to 2021. We find that a permanent decline in the natural rate of interest has a large negative effect on the trend of output and is contractionary and deflationary in the short run. When the economy is constrained by the zero lower bound (ZLB), these results are consistent with the secular stagnation hypothesis. However, we find that negative natural rate shocks depress the trend of output even when the economy is away from the ZLB. Thus, the results of this paper call for a more general theory of the trend effects of natural rate shocks.
    JEL: E30 E4
    Date: 2022–08
  11. By: Muñoz, Manuel A.; Smets, Frank
    Abstract: Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment •rms leverage large-scale buy-to-rent real estate investments that enable them to set prices in rental markets. A significant fraction of this funding is being provided in the form of non-bank lending - which is not subject to regulatory LTV ratios - and REIFs are generally not constrained by leverage limits. We develop a quantitative DSGE model that incorporates the main features of the REIF industry and identify leakages of existing macroprudential policy: (i) already existing countercyclical LTV rules on residential mortgages trigger a credit reallocation towards the REIF sector that can amplify financial and business cycles; while (ii) "non-existent" countercyclical LTV rules on lending to REIFs are particularly effective in taming such cycles. Due to the different mechanisms through which they operate, both types of LTV rules complement each other and jointly yield larger welfare gains (for savers and borrowers) than in isolation. JEL Classification: E44, G23, G28
    Keywords: leakages, leverage, loan-to-value ratios, real estate funds, rental housing
    Date: 2022–08
  12. By: Ortiz, Marco; Miyahara, Ken
    Abstract: We study a small open economy with two salient properties: an entrepreneurial sector that borrows in foreign currency and is subject to costly state-verification and risk averse FX market intermediaries. This economy thus features a financial accelerator, an endogenous expected cost of capital, and foreign exchange dynamics dependent on the open position of financial intermediaries. we aim to quantitatively assess the extent to which portfolio shocks can reproduce contractionary depreciations and how central bank's optimal simple rules can improve welfare in a stylized economy.
    Keywords: Exchange rate dynamics, exchange rate intervention, financial accelerator, incomplete financial markets
    JEL: F3 F31 F34 F41 G15
    Date: 2022–08–15
  13. By: Burlon, Lorenzo; Montes-Galdón, Carlos; Muñoz, Manuel A.; Smets, Frank
    Abstract: We provide evidence on the estimated effects of digital euro news on bank valuations and lending and find that they depend on deposit reliance and design features aimed at calibrating the quantity of CBDC. Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e., central bank collateral requirements and imperfect substitutability across CBDC, cash and deposits), the issuance of CBDC yields non-trivial trade-offss and effects through an expansion of the central bank balance sheet and profits. The issuance of CBDC exerts a smoothing effect on lending and real GDP by stabilizing deposit holdings. Such "stabilization effect" improves the well-known liquidity services/disintermediation trade-off induced by CBDC and permits to rank different types of CBDC rules according to individual and social preferences. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. JEL Classification: E42, E58, G21
    Keywords: bank intermediation, central bank digital currency, DSGE models
    Date: 2022–07
  14. By: Paymon Khorrami; Fernando Mendo
    Abstract: We provide a complete analysis of previously undocumented sunspot equilibria in a canonical dynamic economy with imperfect risk sharing. Methodologically, we employ stochastic stability theory to establish existence of this broad class of sunspot equilibria. Economically, self-fulfilling fluctuations are characterized by uncertainty shocks: changing beliefs about volatility trigger asset trades, which impacts productive efficiency and justifies the degree of uncertainty. We show how rational sentiment helps resolve two puzzles in the macro-finance literature: (i) financial crises emerge suddenly, featuring (quantitatively) hard-to-explain volatility spikes and asset-price declines; (ii) asset-price booms, with below-average risk premia, predict busts and financial crises.
    Date: 2021–10
  15. By: Carboni, Giacomo; Ellison, Martin
    Abstract: The ability of monetary policy to influence the term structure of interest rates and the macroeconomy depends on the extent to which financial market participants prefer to hold bonds of different maturities. We microfound such preferred-habitat demand in a fully-specified dynamic stochastic general equilibrium model of the macroeconomy where the term structure is arbitrage-free. The source of preferred habitat demand is an insurance fund that issues annuities and adopts a liability-driven strategy to minimise the duration risk on its balance sheet. The optimising behaviour of the insurance fund implies a preferred-habitat demand function that is upward-sloping in bond prices and downward-sloping in bond yields, especially when interest rates are low. This supports the operation of a recruitment channel at low interest rates, whereby long-term interest rates react strongly to short-term policy rates because of complementary changes in term premia induced by preferred-habitat demand. The strong reaction extends to inflation and output in general equilibrium, a through-the-looking-glass result that challenges conventional wisdom that preferred habitat weakens the transmission of monetary policy. JEL Classification: E43, E44, E52, G21, G22
    Keywords: general equilibrium, interest rates, preferred habitat, term structure
    Date: 2022–08
  16. By: Muriel Dal-Pont Legrand; Martina Cioni (University of Sienna); Eugenio Petrovich (University of Sienna); Alberto Baccini (University of Sienna)
    Abstract: This paper compares Dynamic Stochastic General Equilibrium (DSGE) and Macro Agent-Based Models (MABMs) by adopting mainly a distant reading perspective. A set of 2,299 papers is retrieved from Scopus by using keywords related to MABM and DSGE domains. The interactions between the two streams of DSGE and MABM literature are explored by considering a social axis (co-authorship network), and an intellectual axis (cited references and bibliographic coupling). The analysis gave results that are neither consistent with a unitary structure of macroeconomics, nor with a simple dichotomic structure of alternative paradigms and separated academics communities. Indeed, the co-authorship network shows that DSGE and MABM form fragmented communities still belonging to two different larger MABM and DSGE communities rather neatly separated. Collaboration insists mainly inside the smaller groups and inside each of the two larger DSGE and MABM communities. Moreover, the co-authorship network analysis does not show evidence of systematic collaboration between MABM and DSGE authors. From an intellectual point of view, data show that DSGE and MABM articles refer to two different sets of bibliographic references. When a measure of paper-similarity is adopted, it appears that DSGE literature is fragmented in 4 groups while the MABM articles are clustered together in a unique group. Hence, DSGE approach is less monolithic than at the time of the New Synthesis: indeed, a large and a growing literature has developed at the margins of the core DSGE approach which includes elements of heterogeneous agent modelling, social interactions, experiments, expectations formation, learning etc.. The analysis gave no evidence of cross-fertilization between DSGE and MABM literature whilst it rather suggests a totally dissymmetric influence of DSGE over MABM literature, i.e. only MABM modelers look at DSGE but not vice-versa. The paper questions the capacity of the current dominant approach to benefit from cross-fertilization.
    Keywords: Macroeconomics,DSGE,macro agent-based models,heterogeneity,New Synthesis,crossfertilization,hybrid models,co-authorship network,co-citation analysis,bibliographic coupling,paper similarity
    Date: 2022–07–01
  17. By: Diagne, Youssoupha Sakrya
    Abstract: This paper deals with challenges surrounding the upcoming single currency in the ECOWAS area. After suffering many postponements due to insufficient preparation and lack of political will, significant progress has been made recently with important decisions such as the name and symbol of the future currency being chosen and monetary policy framework for the future central bank as well as the exchange rate regime. ECOWAS shows a high degree of heterogeneity in the economic structures of its member states. Moreover, there are discrepancies between countries regarding their performances in meeting the convergence criteria. To that extent, WAEMU countries do better than WAMZ members. In order to assess the opportunity of joining a monetary union, a new Keynesian model is used to compare countries’ welfare losses as members of the future union to their current situation. Results show that ECOWAS is not an optimal monetary area confirming conclusions drawn by previous studies, shocks being highly asymmetric. Furthermore welfare losses are limited to 0.03% for the future union against 1.69% for Nigeria, 0.51% for Ghana, and 0.52% for the Gambia. WAEMU member states and Cabo Verde do better individually with respectively 0.003% and 0.002. WAMZ countries would benefit more from the future union though the welfare loss associated with single currency area is still reasonable. The single currency objective should be still pursued in light of the region’s strong potential and the important benefits from transaction costs reduction. To that extent, convergence criteria constraints should be relaxed while compensating the losers to enable a rapid entry into force.
    Keywords: Single currency, new Keynesian model, optimal currency area, welfare
    JEL: E12 E58 F36 I31
    Date: 2021–08–08
  18. By: Christopher A. Sims (Princeton University)
    Abstract: When the interest rate on government debt is low enough, it becomes possible to roll it over indefinitely, never taxing to retire it, without producing a growing debt to GDP ratio. This has been called a situation with zero "fiscal cost" to debt. But when low interest on debt arises from its providing liquidity services, zero fiscal cost is equivalent to finance through seigniorage. Some finance through seigniorage is generally optimal, however, despite results in the literature seeming to show that this is not so.
    Keywords: monetary policy, fiscal policy
    JEL: E52 E62
    Date: 2022–02
  19. By: Jaccard, Ivan
    Abstract: How does contagion risk affect the business cycle? We find that the presence of contagion risk significantly alters the transmission of standard macroeconomic shocks. Relative to the first-best equilibrium, the contagion externality significantly reduces the response of output to a technology shock. We also argue that the magnitude of the trade-off between health and the economy crucially depends on how the probability of infection is specified. If the probability of infection only depends on agents’ endogenous choices, a weaker trade-off emerges. In such a framework, and relative to the laissez-faire equilibrium, suboptimal policies such as zero COVID strategies, health insurance, or mandatory testing substantially attenuate recessions that are caused by epidemics. Therefore, policies primarily aimed at preserving public health do not necessarily come at the cost of deeper recessions. JEL Classification: E1, H0, I1
    Keywords: Contagion Externality, Incomplete Markets, Lockdown Policies, Risk Sharing
    Date: 2022–07
  20. By: Henrique S. Basso (Banco de España)
    Abstract: Imperfect information aggregation in secondary credit markets has significant consequences for economic cycles. As banks put more weight on mark-to-market gains, they find it optimal to refrain from revealing information about adverse shocks. Consequently, default risk is mispriced, and loan volumes, and thus investment, are not appropriately reduced. Overinvestment lowers the price of capital, leading households to increase consumption without decreasing labour supply, generating a boom. Due to mispricing, banks subsequently face bigger losses and capital depletion. Output then decreases sharply due to credit supply shortages. In a model calibrated to the US economy, these instances of market dysfunction are crucial in amplifying credit cycles.
    Keywords: information revelation, credit markets, mark-to-market, mispricing, bank compensation
    JEL: E32 E50 G01 G14
    Date: 2022–03
  21. By: Aleksandar Vasilev (Lincoln International Business School, UK)
    Abstract: This paper attempts to assess the size of the grey economy, and provide a decomposition by evasion type. The modelling approach utilizes a standard micro-founded general-equilibrium setup, which is augmented with a revenue-extraction mechanism and a government sector. The model is calibrated to Bulgaria after the introduction of the currency board (1999-2018). A computational experiment performed within this setup estimates that on average, the size of total evasion is a bit more than one-fourth of output, an estimate which is in line with the figures provided in both Philip (2014) and the European Commission (2014). Two-thirds of the model-predicted evasion is a combined result of income- and social security evasion, while the rest is due to VAT evasion.
    Keywords: tax evasion, general equilibrium, Bulgaria
    JEL: D58 E26 H26 K42
    Date: 2022–08
  22. By: Abiry, Raphael; Ferdinandusse, Marien; Ludwig, Alexander; Nerlich, Carolin
    Abstract: We develop a two-sector incomplete markets integrated assessment model to analyze the effectiveness of green quantitative easing (QE) in complementing fiscal policies for climate change mitigation. We model green QE through an outstanding stock of private assets held by a monetary authority and its portfolio allocation between a clean and a dirty sector of production. Green QE leads to a partial crowding out of private capital in the green sector and to a modest reduction of the global temperature by 0.04 degrees of Celsius until 2100. A moderate global carbon tax of 50 USD per tonne of carbon is 4 times more effective. JEL Classification: E51, E62, Q54
    Keywords: 2-sector model, carbon taxation, climate change, green quantitative easing, integrated assessment model
    Date: 2022–08
  23. By: Chaoran Chen; Zhigang Feng; Jiaying Gu
    Abstract: This paper identifies a ''health premium" of insurance coverage that the insured is more likely to stay healthy or recover from unhealthy status. We introduce this feature into the prototypical macro-health model and estimate the baseline economy by matching the observed joint distribution of health insurance purchase, health status and income over the life cycle. Quantitative analysis reveals that an individual's insurance status has significant and persistent impact on health, which will be reinforced by and subsequently amplify the feedback effect of health on labor earnings and income inequality. Providing ''Universal Health Coverage" would narrow health and life expectancy gaps, with a mixed effect on income distribution in absence of any additional redistribution of income or wealth.
    Keywords: Health Insurance, Health Disparity, Income Distribution
    JEL: E21 E60 I14 O15
    Date: 2022–08–26
  24. By: Guido Ascari; Sophocles Mavroeidis; Nigel McClung
    Abstract: Standard rational expectations (RE) models with an occasionally binding zero lower bound (ZLB) constraint either admit no solutions (incoherence) or multiple solutions (incompleteness). This paper shows that deviations from full-information RE mitigate concerns about incoherence and incompleteness. Models with no RE equilibria admit self-confirming equilibria involving the use of simple mis-specified forecasting models. Completeness and coherence is restored if expectations are adaptive or if agents are less forward-looking due to some information or behavioral friction. In the case of incompleteness, the E-stability criterion selects an equilibrium.
    Date: 2022–08
  25. By: Per Krusell; Anthony A. Smith Jr.
    Abstract: The economic effects of climate change vary across both time and space. To study these effects, this paper builds a global economy-climate model featuring a high degree of geographic resolution. Carbon emissions from the use of energy in production increase the Earth's (average) temperature and local, or regional, temperatures respond more or less sensitively to this increase. Each of the approximately 19,000 regions makes optimal consumption-savings and energy-use decisions as its climate (or regional temperature) and, consequently, its productivity change over time. The relationship between regional temperature and regional productivity has an inverted U-shape, calibrated so that the high-resolution model replicates estimates of aggregate global damages from global warming. At the global level, then, the high-resolution model nests standard one-region economy-climate models, while at the same time it features realistic spatial variation in climate and economic activity. The central result is that the effects of climate change vary dramatically across space---with many regions gaining while others lose---and the global average effects, while negative, are dwarfed quantitatively by the differences across space. A tax on carbon increases average (global) welfare, but there is a large disparity of views on it across regions, with both winners and losers. Climate change also leads to large increases in global inequality, across both regions and countries. These findings vary little as capital markets range from closed (autarky) to open (free capital mobility).
    JEL: H23 Q54 R13
    Date: 2022–08

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