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on Dynamic General Equilibrium |
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Issue of 2022‒10‒10
seventeen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Cars Hommes; Kostas Mavromatis; Tolga Özden; Mei Zhu |
| Abstract: | We introduce behavioral learning equilibria (BLE) into a multi-variate linear framework and apply it to New Keynesian DSGE models. In a BLE, boundedly rational agents use simple but optimal first-order autoregressive (AR(1)) forecasting rules whose parameters are consistent with the observed sample mean and autocorrelation of past data. We study the BLE concept in a standard three-equation New Keynesian model and develop an estimation methodology for the canonical Smets and Wouters (2007) model. A horse race between rational expectations equilibrium (REE), BLE and constant gain learning models shows that the BLE model outperforms the REE benchmark and is competitive with constant gain learning models in terms of in-sample and out-of-sample fitness. Sample autocorrelation learning of optimal AR(1) beliefs provides the best fit when short-term survey data on inflation expectations are considered in the estimation. As a policy application, we show that optimal Taylor rules under AR(1) expectations inherit history dependence, requiring a lower degree of interest rate smoothing than REE. |
| Keywords: | Business fluctuations and cycles; Inflation and prices; Economic models; Monetary policy |
| JEL: | C11 E62 E3 D83 D84 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-42&r= |
| By: | Leland Farmer; Roger Farmer |
| Abstract: | We construct a perpetual youth DSGE model with aggregate uncertainty in which there are dynamically complete markets and agents have Epstein-Zin preferences. We prove that, when endowments have a realistic hump-shaped age-profile, our model has three steady-state equilibria. One of these equilibria is dynamically inefficient and displays real price indeterminacy. We estimate the parameters of our model and we find that a fourth-order approximation around the indeterminate steady-state provides the best fit to U.S. data. Our work interprets the large and persistent generational inequality that has been observed in western economies over the past century as the result of uninsurable income shocks to birth cohorts. |
| JEL: | E44 G12 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30419&r= |
| By: | Uchida, Yuki; Ono, Tetsuo |
| Abstract: | We demonstrate the interaction between short-lived governments’ decisions on education and pension policies and parents’ decisions on fertility in an overlapping generations growth model. Our analysis shows that increased life expectancy lowers fertility, decreases the ratio of education expenditure to GDP, and increases the ratio of pension benefits to GDP as well as per capita GDP growth rate. We also consider a reform that reduces pension benefits designed by a long-lived planner and show that the reduction is optimal from a social welfare perspective when the planner gives a large weight to future generations. |
| Keywords: | Public Pension; Public Education; Probabilistic Voting; Overlapping Generations |
| JEL: | D70 E62 H52 H55 |
| Date: | 2022–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:114543&r= |
| By: | Yahong Zhang (Department of Economics, University of Windsor) |
| Abstract: | To mitigate the job and income loss due to COVID-19, the Canadian government implemented a variety of programs. Among them, the most significant initiatives include the Canada Emergency Response Benefit (CERB) and Canada Emergency Wage Subsidy (CEWS). In this paper, I use a dynamic general equilibrium model with labour market frictions to examine the effect of these two programs. In the model, a pandemic shock is captured by a combination of an exogenous rise in the separation rate and a decline in matching efficiency. I show that the shock generates a large rise in the unemployment rate and a steep decline in employment, output and consumption. I then use the model to quantify the effect of the two programs, showing that compared to the CERB program, the CEWS program is more effective in mitigating the loss of employment, output and consumption. |
| Keywords: | unemployment, labour market, pandemic |
| JEL: | J65 J68 H2 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:2203&r= |
| By: | Valeriu Nalban; Andra Smadu |
| Abstract: | How should policymakers respond to uncertainty shocks? To analyze the macroeconomic effects of uncertainty shocks associated with various conventional structural shocks, we develop a New Keynesian model with financial frictions and time-varying volatility, which features a monetary- acroprudential policy mix. We find that it matters whether the economy experiences heightened demand, supply or financial uncertainty. More specifically, the underlying source of uncertainty matters for the shocks’ propagation, aggregate economic outcomes and appropriate policy responses. Financial uncertainty shocks appear to generate stronger effects and a broad complementarity between the interest rate response and the macroprudential policy stance. Supply-side and demand-side uncertainty shocks reveal important trade-offs between price stability and financial stability objectives, despite their quantitative effects being overall modest. Importantly, simulating a financial turmoil scenario reveals that heightened financial uncertainty exacerbates the negative macroeconomic effects triggered by a first-moment financial shock. Our results underscore the importance of timely and accurate identification of uncertainty surges, which is crucial for the appropriate design and calibration of the monetary-macroprudential policy mix. |
| Keywords: | Uncertainty shocks, financial frictions, monetary policy, macroprudential policy |
| JEL: | E30 E32 E44 E47 E50 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:739&r= |
| By: | Eric Jondeau; Grégory Levieuge; Jean-Guillaume Sahuc; Gauthier Vermandel |
| 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 world GDP each year by 2060. |
| Keywords: | Climate change, E-DSGE model, Bayesian estimation, stochastic growth, endogenous market structure, environment-related products |
| JEL: | E32 H23 Q50 Q55 Q58 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2022-21&r= |
| 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)) |
| Abstract: | We study the evolution of income and wealth inequality in an economy undergoing endogenous structural change with imperfect labor mobility. Our economy features two sectors: services and manufacturing. With faster TFP growth in manufacturing, labor reallocates from manufacturing to services. This reallocation is slower due to labor mobility frictions, which in turn, raises relative wages in services. As a result, income inequality is higher. Moreover, we study the impact of structural change on wealth inequality. Its economic intuition is more ambiguous. On the one hand, increased income dispersion implies increased dispersion in the ability to accumulate wealth across individuals. On the other hand, younger workers who hold the least assets are the most mobile across sectors. Their incomes are improved, which boosts their savings, which works towards equalizing wealth distribution. The consequence of these changes can by only verified with a computational model. To this end we construct and an overlapping generations model with two sectors: manufacturing and services. Our model also features heterogeneous individuals. With our model we are able to show how structural change affected the evolution of income and wealth inequality in Poland as of 1990. |
| Keywords: | structural change, inequality |
| JEL: | L16 E20 D63 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:68&r= |
| By: | Jorge Durán; Omar Licandro |
| Abstract: | This paper shows that, for a general family of dynamic general equilibrium models, the rate of real output growth as measured by National Income and Product Accounts (NIPA) reflects changes in welfare in the precise sense of equivalent variation. The main argument is straightforward. In a two-sector dynamic general equilibrium model of heterogeneous households, recursive preferences, and quasiconcave technology, the Bellman equation provides a representation of household preferences over current consumption and investment. When applied to this representation of preferences, a Fisher-Shell true quantity index turns out to be equal to the Divisia index, closely approximated by the Fisher ideal chain index used in NIPA. |
| Keywords: | growth measurement, dynamic General Equilibrium, welfare, quantity indexes, equivalent variation, NIPA, Fisher-Shell index, divisia index, embodied technical change |
| JEL: | C43 D91 O41 O47 |
| Date: | 2022–08 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1357&r= |
| By: | Marie Claude Kamar; Riccardo Magnani |
| URL: | http://d.repec.org/n?u=RePEc:awm:wpaper:3&r= |
| By: | Nicolas Caramp; Julian Kozlowski; Keisuke Teeple |
| Abstract: | This paper studies the implications of trading frictions in financial markets for firms' investment and dividend choices and their aggregate consequences. When equity shares trade in frictional asset markets, the firm's problem is time-inconsistent, and it is as if it faces quasi-hyperbolic discounting. The transmission of trading frictions to the real economy crucially depends on the firms' ability to commit. In a calibrated economy without commitment, larger trading frictions imply lower capital and production. In contrast, if firms can commit, trading frictions affect asset prices but have no effect on capital and production. Our findings rationalize several empirical regularities on liquidity and investment. |
| Keywords: | liquiditiy; investment; Present bias |
| JEL: | E44 G32 G12 |
| Date: | 2022–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:94765&r= |
| By: | Giovanni Angelini (Università di Bologna); Luca Fanelli (Università di Bologna); Marco M. Sorge (Università di Salerno, University of Göttingen, and CSEF-DISES) |
| Abstract: | Recently developed models of the business cycle exhibit a recursive timing structure, which enforces delayed propagation of exogenous shocks driving short-run dynamics. We propose a simple empirical strategy to test for the relevance of timing restrictions and ensuing shock transmission delays in general DSGE environments. Based on a bootstrap maximum likelihood estimator, our approach mitigates over-rejection concerns typically arising from conventional tests of non-linear hypotheses that exploit first-order asymptotic approximations. We showcase the empirical usefulness of the testing procedure by means of numerical simulations of a workhorse model of the monetary transmission mechanism. |
| Keywords: | DSGE models; Timing restrictions; Transmission delays. |
| JEL: | C1 C3 E3 E5 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:653&r= |
| By: | Ponthiere, Gregory |
| Abstract: | Phelps's (1961) Golden Rule states an unambiguous relationship be- tween optimal capital intensity and fertility: a rise in fertility decreases the optimal capital intensity, because a higher fertility increases the in- vestment required to sustain a given capital to labour ratio (i.e., the cap- ital dilution effect). Using a matrix population model embedded in a two-period OLG setting, we examine the robustness of that relationship to the partitioning of the population into 2 subpopulations having dis- tinct fertility behaviors. We derive the optimal accumulation rule in that framework, and we show that, unlike what prevails under a homogeneous population, a rise in fertility does not necessarily reduce the Golden Rule capital intensity, but increases it when the composition effect induced by the fertility change outweighs the standard capital dilution effect pre- vailing under a fixed partition of the population. We also explore the robustness of these results to a finer description of heterogeneity, that is, a partitioning of the population into a larger number of subpopulations. |
| Keywords: | Golden Rule,capital accumulation,fertility,OLG models,matrix population models,heterogeneity |
| JEL: | E13 E21 E22 J13 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:1165&r= |
| By: | Kateryna Savolchuk (National Bank of Ukraine); Anton Grui (National Bank of Ukraine) |
| Abstract: | In this paper, authors introduce endogenous monetary policy credibility into a semi-structural New Keynesian model. The model is estimated based on data for Ukraine, which de facto adopted inflation-targeting at the end of 2015. Authors model credibility as a nonlinear function of two gaps – actual and expected deviations of inflation from its target. Credibility is asymmetric as above-target inflation reduces it more than below-target. Authors show how low policy credibility can make economic stabilization more costly, and expansionary policy – counterproductive. It can also generate the price puzzle. Furthermore, we estimate the historical path of monetary policy credibility in Ukraine. |
| Keywords: | New Keynesian model, monetary policy credibility, inflation expectations |
| JEL: | C51 E52 E58 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:ukb:wpaper:02/2022&r= |
| By: | Florio, Erminia; Kharazi, Aicha |
| Abstract: | The worrying combination of the labor market tightness and the wage inflation in the US since the pandemic raises a question on how the business closure orders affected the fragile segments of the labor force and contributed to mounting inflationary wage pressure. We develop a macroeconomic model with heterogeneous labor and a nested CES production function. We estimate the model using the newly collected data from the CPS and the BEA. The recent crisis leads to a contraction in total hours worked, makes wages more volatile, and sustains wage inflation. The model also generates differential effects of the business closure orders on productivity and the labor market in the US. The earning rates and hours responses to the crisis differ by age, skills, and origin of the worker. |
| Keywords: | productivity shock,labor inequalities,heterogeneous labor,business closure orders |
| JEL: | E20 E24 J01 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:1166&r= |
| By: | Garrett Anstreicher (University of Wisconsin-Madison); Joanna Venator (Boston College) |
| Abstract: | Women in the United States frequently rely on childcare from extended family but can only do so if they live in the same location as them. This paper studies how child care costs, the location of extended family, and fertility events influence both the labor force attachment and labor mobility of women in the United States. We begin by empirically documenting strong patterns of women returning to their home locations in anticipation of fertility events, indicating that the desire for intergenerational time transfers is an important motivator of home migration. Moreover, women who reside in their parent’s location experience a substantial long-run reduction in their child earnings penalty. Next, we build a dynamic model of labor force participation and migration to assess the incidence of counterfactual scenarios and childcare policies. We find that childcare subsidies increase lifetime earnings and labor mobility for women, with particularly strong effects for women who are ever single mothers and Blacks. Ignoring migration can understate the welfare benefits of these policies by a meaningful extent. |
| Keywords: | Migration, childcare, female labor supply, human capital |
| JEL: | J13 J22 J61 |
| Date: | 2022–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:1051&r= |
| By: | Sadegh Eshaghnia; James J. Heckman; Rasmus Landersø; Rafeh Qureshi |
| Abstract: | This paper studies intergenerational mobility—the transmission of family influence. We develop and estimate measures of lifetime resources (income and wealth) motivated by economic theory that account for generational differences in life-cycle trajectories, uncertainty, and credit constraints. These measures of lifetime resources allow us to estimate the transmission of welfare and lifetime resources at different stages of the life cycle. We compare these measures with traditional ones such as wage income and disposable income measured over narrow windows of age that are used to proxy lifetime wealth. The performance of proxy measures is poor. Parents’ expected lifetime resources are stronger predictors of many important child outcomes (including children’s own expected lifetime resources and education) than the income measures traditionally used in the literature on social mobility. Changes in patterns of educational attainment across generations explain most of the intergenerational change in life-cycle dynamics. While relative mobility is overstated by the traditional income measures, absolute upward mobility is understated. Recent generations have higher welfare and are better off compared to their parents. |
| JEL: | D31 I24 I30 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30412&r= |
| By: | Emmanuel Dhyne; Ayumu Ken Kikkawa; Toshiaki Komatsu; Magne Mogstad; Felix Tintelnot |
| Abstract: | We quantify and explain the firm responses and worker impacts of foreign demand shocks to domestic production networks. To capture that firms can be indirectly exposed to such shocks by buying from or selling to domestic firms that import or export, we use Belgian data with information on both domestic firm-to-firm sales and foreign trade transactions. Our estimates of firm responses suggest that Belgian firms pass on a large share of a foreign demand shock to their domestic suppliers, face upward-sloping labor supply curves, and have sizable fixed overhead costs in labor. Motivated and guided by these findings, we develop and estimate an equilibrium model that allows us to study how idiosyncratic and aggregate changes in foreign demand propagate through a small open economy and affect firms and workers. Our results suggest that the way the labor market is typically modeled in existing research on foreign demand shocks—with no fixed costs and perfectly elastic labor supply—would grossly understate the decline in real wages due to an increase in foreign tariffs. |
| JEL: | E1 F1 F12 J31 J42 L11 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30447&r= |