nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒11‒07
sixteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Retrieving the state-space representation from Dynare By João Costa-Filho
  2. Optimal fiscal and monetary policy with preference over safe assets By Guillermo Santos
  3. Zero-Knowledge Optimal Monetary Policy under Stochastic Dominance By David Cerezo S\'anchez
  4. The Neoclassical Model and the Welfare Costs of Selection By Fabrice Collard; Omar Licandro
  5. Optimal fiscal policy and the Fiscal Theory of the Price Level By Guillermo Santos
  6. Education Quality, Green Technology, and the Economic Impact of Carbon Pricing By Macdonald,Kevin Alan David; Patrinos,Harry Anthony
  7. Seigniorage Channel and Monetary Effectiveness in Flexible Price Economy By Huang, Guangming
  8. International Reserves and Central Bank Independence By Samano Penaloza,Agustin
  9. Career and Non-Career Jobs: Dangling the Carrot By Andri Chassamboulli; Demetris Koursaros
  10. La estructura lógica de la teoría del equilibrio general dinámico estocástico By Tobón Arias, Alexander
  11. A Dynamic Model of Fiscal Decentralization and Public Debt Accumulation By Guo,Si; Pei,Yun; Xie,Leiyu
  12. Trend Inflation in the Japanese pre-2000s: A Markov-Switching DSGE Estimation By Ryo Kato; Junior Maih; Shin-Ichi Nishiyama
  13. Macroeconomic Consequences of Natural Disasters : A Modeling Proposal and Application to Floodsand Earthquakes in Turkey By Hallegatte,Stephane; Jooste,Charl; Mcisaac,Florent John
  14. Accounting for Wealth Concentration in the United States By Barış Kaymak; David Leung; Markus Poschke
  15. Economic Effects of Covid-19 and Non-Pharmaceutical Interventions: applying a SEIRD-RBC Model to Italy By Giuli, Francesco; Maugeri, Gabriele
  16. Full-Information Estimation of Heterogeneous Agent Models Using Macro and Micro Data By Laura Liu; Mikkel Plagborg-Møller

  1. By: João Costa-Filho
    Abstract: How is it possible to recover the state-space representation after solving a DSGE model in Dynare? This note presents how to simulate impulse-response functions and the dynamics of a system after a series of exogenous shocks after solving the model with Dynare. I present a step-by-step framework and apply it to a simple Real Business Cycles model and a basic New Keynesian model. Nevertheless, the same structure can be used in large DSGE models.
    Keywords: DSGE; Dynare; State-Space
    JEL: C61 C63
    Date: 2022–09
  2. By: Guillermo Santos (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper investigates optimal fiscal and monetary policy in a New-Keynesian model with preferences over safe assets (POSA). Relative to a model with standard preferences, a Ramsey planner facing POSA uses inflation more actively to absorb the effects of fiscal and demand shocks despite inflation being costly. The optimal response of inflation to the shocks thus departs from the traditional prescription observed in standard New-keynesian models with sticky prices in which inflation volatility is near zero. Moreover, under POSA taxes are not as smooth as under standard preferences and are more frontloaded, an outcome that brings the model closer to optimal policy under flexible prices. With POSA, debt issuance depresses the liquidity premium, reducing revenues collected by the government and tightening the budget constraint. Therefore the planner is much less willing to issue debt in response to (say) a fiscal shock, which explains the excess tax volatility observed. These results do not dramatically change when private capital is introduced to the economy, the planner stills finds optimal to use inflation to absorb the shocks. Moreover in spite of the fact that debt issuance is lower private investment is still crowded out under POSA due to the higher distortionary taxes. Finally, the planner faced with POSA outperforms the New-Keynesian planner (with standard preferences) in terms of stabilizing the economy to a negative demand disturbance, but underperforms in terms of managing the government spending shock. The negative demand shock increases the demand for government debt and relaxes the tradeoff facing the planner. The opposite holds in the case of a spending shock.
    Keywords: optimal fiscal and monetary policy, bonds in the utility function, distortionary taxes, liquidity premium
    JEL: E31 E52 E62 H21
    Date: 2022–10–12
  3. By: David Cerezo S\'anchez
    Abstract: Optimal simple rules for the monetary policy of the first stochastically dominant crypto-currency are derived in a Dynamic Stochastic General Equilibrium (DSGE) model, in order to provide optimal responses to changes in inflation, output, and other sources of uncertainty. The optimal monetary policy stochastically dominates all the previous crypto-currencies, thus the efficient portfolio is to go long on the stochastically dominant crypto-currency: a strategy-proof arbitrage featuring a higher Omega ratio with higher expected returns, inducing an investment-efficient Nash equilibrium over the crypto-market. Zero-knowledge proofs of the monetary policy are committed on the blockchain: an implementation is provided.
    Date: 2022–10
  4. By: Fabrice Collard; Omar Licandro
    Abstract: This paper embeds firm dynamics into the Neoclassical model and provides a simple framework to solve for the transitional dynamics of economies moving towards more selection. As in the Neoclassical model, markets are perfectly competitive, there is only one good and two production factors (capital and labor). At equilibrium, aggregate technology is Neoclassical, but the average quality of capital and the depreciation rate are both endogenous and positively related to selection. At steady state, output per capita and welfare both raise with selection. However, the selection process generates transitional welfare losses that may reduce in around 60% long term (consumption equivalent) welfare gains. The same property is shown to be true in a standard general equilibrium model with entry and fixed production costs.
    Keywords: firm dynamics and selection, Neoclassical model, capital irreversibility, investment distortions, transitional dynamics, welfare gains
    JEL: E13 E23 D6 O4
    Date: 2021–08
  5. By: Guillermo Santos (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper studies optimal fiscal policy in the context of a DSGE model in which the optimizing government can issue nominal non-contingent debt and is subject to an independent monetary policy setting the nominal interest rate according to an inflation targeting rule. The fiscal authority can stabilize the economy having several tools at its disposal, including government consumption, public investment and distortionary taxes. We focus on the case where the monetary authority sets the nominal interest rate to respond weakly to inflation, the so called passive money regime Leeper (1991). We compare the outcome of optimal fiscal policy in that case with the polar opposite, when the monetary authority aggressively responds to inflation. It is well known that in standard DGSE models (without an optimizing government and when fiscal policy follows ad hoc rules) switching from an active to a passive monetary regime, brings about a considerable increase in macroeconomic volatility, mainly due to inflation fluctuations reflect debt sustainability. We ask whether optimal fiscal policy would choose to set fiscal variables irresponsibly when inflation fiscal debt in the passive money case. We find that the answer is no. The differences in the optimal policy allocation under active/passive monetary policies are small when the fundamental disturbances that hit the economy are standard demand shocks. We show that this result holds both under full commitment and in the case where time-consistent policy cannot commit to the future path of its fiscal variables. In both cases changing the monetary regime from active to passive only has a small effect on equilibrium outcomes.
    Keywords: passive monetary policy, optimal fiscal policy, time-consistent equilibrium, public investment
    JEL: E31 E52 E62 H21 H54
    Date: 2022–10–12
  6. By: Macdonald,Kevin Alan David; Patrinos,Harry Anthony
    Abstract: Carbon pricing is increasingly used by governments to reduce emissions. The effect of carbonpricing on economic outcomes as well as mitigating factors has been studied extensively since the early 1990s. Onemitigating factor that has received less attention is education quality. If technological change that reduces thereliance of production on emissions is skill-biased, then carbon pricing may increase the skill premium of earningsand subsequent wage inequality; however, a more elastic skill supply through better education quality may mitigateadverse economic outcomes, including wage inequality, and enhance the effect of carbon pricing on technological changeand subsequently emissions. A general equilibrium, overlapping-generations model is proposed, with endogenousskill investment in which the average skill level of the workforce can affect the need for emissions in an aggregateproduction function. This study uses data on industrial emissions linked to the Organisation for EconomicCo-operation and Development’s Programme for International Assessment of Adult Competencies dataset for European Unioncountries. The findings show that, within countries, cognitive skills are positively associated with employmentin industries that rely less on emissionsfor production and in industries that, over time, have been able to reducetheir reliance on emissions for production. In the estimated general equilibrium model, higher cognitive skills reduce aneconomy’s reliance on emissions for production. Having higher quality education—defined as the level of cognitiveskills attained by workers per unit of cost—increases the elasticity of skill supply and, as a result, mitigates acarbon tax’s economic costs including output loss and wage inequity, and enhances its effect on emissions reduction.The implication is that investments in education quality are needed for better enabling green technological innovationand adaptation and reducing inequality that results from carbon pricing.
    Keywords: Educational Sciences,Climate Change Mitigation and Green House Gases,Education for Development (superceded),Educational Populations,Education For All
    Date: 2021–10–14
  7. By: Huang, Guangming
    Abstract: Replacing government lump-sum transfers in the household budget by the seigniorage channel in a modified RBC economy, this paper finds that the monetary shocks can impact the real economy effectively in the Neoclassical flexible price condition. The mechanism of the effectiveness is the resource reallocation triggered by monetary shocks. There are three outstanding characteristics of the seigniorage channeled monetary economy—integrality, interactive pricing, and Pareto optimality of the unique equilibrium—all of which are found to be incompatible with the existing dynamic general equilibrium monetary economics. Many vexing issues in macroeconomics are clarified through the lens of the seigniorage channeled monetary economy, including the price puzzle, missing of the liquidity effect, cause of the hump in the impulse-response curves, nonneutrality of growth rate of money and inflation, origin of the money market interest rate, choosing of reactive monetary policy rule, and negative movement of hours under a positive technology shock. The simulation shows that the seigniorage channeled monetary economy matches the empirical results in the literature well.
    Keywords: Effectiveness of Monetary Shock, Seigniorage Channel, Flexible Price, Nonneutrality of Inflation, Liquidity Effect, Price Puzzle, Monetary Transmission Mechanism, Money Market Interest Rate, Reactive Monetary Policy, Tax, Public Goods, Neoclassical Macroeconomics E13, E3, E4, E52, E6
    JEL: E13 E3 E4 E5 E6
    Date: 2021–01–09
  8. By: Samano Penaloza,Agustin
    Abstract: This paper proposes a novel theory of reserve accumulation that emphasizes the role of anindependent central bank. Motivated by a positive correlation between reserve accumulation and central bankindependence in Latin America, the paper develops a quantitative sovereign default model with an independentcentral bank that can accumulate a risk-free foreign asset. The findings show that if the central bank is more patientthan the government and as patient as households are, in equilibrium, the government issues more debt than what issocially optimal, and the central bank accumulates reserves to undo government over-borrowing. A key insight is that thegovernment can issue more debt for any level of reserves but chooses not to because doing so would increase sovereignspreads, making it more costly to borrow. Quantitatively, the analysis finds that the central bank independencechannel accounts for 75 percent of the average reserve levels observed in Mexico from 1994 to 2017. Finally, thepaper shows that accumulating reserves improves social welfare. Welfare gains come from reducing the costs offront-loading public spending.
    Keywords: Financial Structures,Inflation,Services & Transfers to Poor,Economic Assistance,Disability,Access of Poor to Social Services,International Trade and Trade Rules,Public Financial Management,Public Sector Economics,Public Finance Decentralization and Poverty Reduction
    Date: 2021–11–02
  9. By: Andri Chassamboulli; Demetris Koursaros
    Abstract: We develop a model of the labor market with career and non-career jobs. Workers in career jobs start at the low rank and can be promoted to a higher rank. Non-career jobs have the typical single-rank structure. We show that it is optimal for career firms to incentivize their employees through the option value of a promotion. By increasing the wage spread between low and top positions they can elicit more effort from the mass of the workers in low ranks, while rewarding handsomely only the very few that get promoted. We explore the macroeconomic implications of this hierarchical payment structure. We show how our model can provide interesting insights into various puzzles such as the wage gap between men and women, the cyclicality of the labor wedge and the low volatility of the real wage relative to hours and output along the business cycle, without imposing ad-hoc nominal wage rigidities.
    Keywords: career-jobs; promotions; job hierarchy; labor wedge; gender wage gap
    JEL: J31 J33 J64 E24
    Date: 2022–10–07
  10. By: Tobón Arias, Alexander
    Abstract: Resumen: El objetivo de este documento de trabajo es proponer una estructuración lógica de la teoría del equilibrio general dinámico estocástico o teoría DSGE. Para tal fin, se presentan las seis fases que configuran su evolución, buscando responder al paradigma de las fluctuaciones económicas o business cycle. Se muestra que existen dos linajes en dicha evolución: por un lado, aquel que proviene de Brock y Mirman (1972) y, por otro lado, aquel que proviene de Dixit y Stiglitz (1977). Sobre la base de esta distinción, se discute la naturaleza de la teoría del equilibrio general dinámico estocástico en su versión actual llamada “nueva síntesis neoclásica†o “modelo nuevo keynesiano†. Si bien esta versión reivindica una adhesión al pensamiento de Keynes, se aporta evidencia para rechazar tal pretensión. Se concluye que la teoría del equilibrio general dinámico estocástico es esencialmente una metodología empírica, cuyo contenido teórico se reduce a los principios tradicionales de la teoría neoclásica walrasiana. Abstract: The aim of this working paper is to propose a logical structure of the dynamic stochastic general equilibrium theory or DSGE theory. To this end, the six phases of its evolution are presented, aiming to address the paradigm of economic fluctuations or business cycle. It is shown that there are two lineages in this evolution: the one from Brock and Mirman (1972), and that which comes from Dixit and Stiglitz (1977). Based on this distinction, the dynamic stochastic general equilibrium theory is discussed, known in its current version as “new neoclassical synthesis†or “new Keynesian model†. While this version claims an adherence to Keynes’s thought, evidence is provided to reject such a claim. It is concluded that dynamic stochastic general equilibrium theory is essentially an empirical methodology, whose theoretical content is reduced to the traditional principles of the Walrasian neoclassical theory.
    Keywords: Historia de la macroeconomía, nuevos clásicos, nuevos keynesianos, DSGE, nueva síntesis neoclásica
    JEL: B22 E13 E32 E50
    Date: 2022–07–12
  11. By: Guo,Si; Pei,Yun; Xie,Leiyu
    Abstract: This paper develops a dynamic infinite-horizon model with two layers of governments tostudy theoretically and quantitatively how fiscal decentralization affects local and central government debtaccumulation and spending. In the model, the central government makes transfers to local governments to offsetvertical and horizontal fiscal imbalances. But the anticipation of transfers lowers local governments’ expectedcost of borrowing and leads to overborrowing ex ante. Absent commitment, the central government over-transfers to reducelocal governments’ future need to borrow, and in the equilibrium both local and central debts are inefficientlyhigh. Consistent with empirical evidence, when fiscal decentralization widens vertical fiscal imbalances, localgovernments become more reliant on transfers, and both local and central debts rise. Applied to Spain, the model explains39 percent of the rise in total government debt when the vertical fiscal imbalances widened during 1988–1996, and 18percent of the fall in debt when the imbalances narrowed during 1996–2006.
    Keywords: Democratic Government,Public Sector Administrative and Civil Service Reform,Public Sector Administrative & Civil Service Reform,De Facto Governments,Economic Adjustment and Lending,Public Finance Decentralization and Poverty Reduction,Public Sector Economics,Macro-Fiscal Policy,Financial Sector Policy,Public Financial Management
    Date: 2022–02–07
  12. By: Ryo Kato (Faculty of Economics, Asia University); Junior Maih (Norges Bank); Shin-Ichi Nishiyama (Graduate School of Economics, Kobe University)
    Date: 2022–09
  13. By: Hallegatte,Stephane; Jooste,Charl; Mcisaac,Florent John
    Abstract: Turkey is vulnerable to natural disasters that can generate substantial damages to publicand private sector infrastructure capital. Earthquakes and floods are the most frequent hazards today, and flood risksare expected to increase with climate change. To ensure stability and growth and minimize the welfare impact ofthese disasters, these shocks need to be managed and accounted for in macro-fiscal and monetary policy. Tosupport this process, the World Bank Macrostructural Model is adapted to assess the macroeconomic effects of natural(geophysical or climate-related) disasters. The macroeconomic model is extended on several fronts: (1) adistinction is made between infrastructure and non-infrastructure capital, with complementary orsubstitutability between the two categories; (2) the production function is adjusted to account for short-termcomplementarity across capital assets; (3) the reconstruction process is modeled in a way that accounts forpost-disaster constraints, with distinct processes for the reconstruction of public and private assets. The resultsshow that destroyed infrastructure capital makes the remaining non-infrastructure capital less productive, whichmeans that disasters reduce the total stock of capital, but also its productivity. The welfare impact of adisaster—proxied by the discounted consumption loss—is found to increase non-linearly with direct asset losses.Macroeconomic responses reduce the welfare impact of minor disasters but magnify it when direct asset losses exceed theeconomy’s absorption capacity. The welfare impact also depends on the pre-existing economic situation, the abilityof the economy to reallocate resources toward reconstruction, and the response of the monetary policy.Appropriate macro-fiscal and monetary policies offer cost-effective opportunities to mitigate the welfare impactof major disasters.
    Keywords: Natural Disasters,Macroeconomic Management,Inflation
    Date: 2022–02–22
  14. By: Barış Kaymak; David Leung; Markus Poschke
    Abstract: We assess the empirical relevance of different macroeconomic modeling approaches to wealth concentration, using the joint distribution of earnings, capital income and net worth in combination with an OLG model of household heterogeneity. We find large earnings disparities to be the primary source of US wealth concentration. This reflects the fact that labor income, from salaries but also from entrepreneurship, is a major income source for top income and wealth groups in the data. Bequests and differences in rates of return on capital together explain about half the holdings of the wealthiest of households, but much less for the rest.
    Keywords: Wealth Inequality; Income and Earnings Distribution; Factor Share of Income; Bequests; Rate of Return Heterogeneity
    JEL: D31 D33 E21
    Date: 2022–10–20
  15. By: Giuli, Francesco; Maugeri, Gabriele
    Abstract: We study the economic effects generated by the proliferation of the Covid-19 epidemic and the implementation of non-pharmaceutical interventions by developing a SEIRD-RBC model, where the outbreak and policy interventions shape the labor input dynamic. We microfoundan Epidemic-Macro model grounded on the RBC tradition, useful for epidemic and economic analysis at business cycle frequency, which is able to reproduce the highly debated health-output trade-off. Assuming a positive approach, we show the potential of our model by matching the epidemic and macroeconomic empirical evidence of the Italian case.
    Keywords: Covid-19 pandemic; SIR-Macro model;
    JEL: E23 E32 I18
    Date: 2022–07–28
  16. By: Laura Liu (Indiana University); Mikkel Plagborg-Møller (Princeton University)
    Abstract: We develop a generally applicable full-information inference method for heterogeneous agent models, combining aggregate time series data and repeated cross sections of micro data. To handle unobserved aggregate state variables that affect cross-sectional distributions, we compute a numerically unbiased estimate of the model-implied likelihood function. Employing the likelihood estimate in a Markov Chain Monte Carlo algorithm, we obtain fully efficient and valid Bayesian inference. Evaluation of the micro part of the likelihood lends itself naturally to parallel computing. Numerical illustrations in models with heterogeneous households or firms demonstrate that the proposed full-information method substantially sharpens inference relative to using only macro data, and for some parameters micro data is essential for identification.
    Keywords: Bayesian inference, data combination, heterogeneous agent models
    JEL: C11 C32 E1
    Date: 2022–06

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