nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒11‒21
eighteen papers chosen by

  2. Optimal Progressive Pension Systems in a Life-Cycle Model with Heterogeneity in Job Stability By Nam, Leanne
  3. How well do DSGE models with real estate and collateral constraints fit the data? By Alban Moura; Olivier Pierrard
  5. Crisis Propagation in a Heterogeneous Self-Reflexive DSGE Model By Federico Guglielmo Morelli; Michael Benzaquen; Jean-Philippe Bouchaud; Marco Tarzia
  6. Optimal fiscal policy in the automated economy By Nakatani, Ryota
  7. Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock By Andrés Rodríguez-Clare; Mauricio Ulate; Jose P. Vasquez
  8. Existence of Invariant Measure and Stationary Equilibrium in a Continuous-Time One-Asset Aiyagari Model:A Case of Regular Controls under Markov Chain Uncertainty By Yuki SHIGETA
  9. Cyclical Earnings, Career and Employment Transitions By Carlos Carrillo-Tudela; Ludo Visschers; David Wiczer
  10. Endogenous Technology, Scarring and Fiscal Policy By Elfsbacka Schmöller, Michaela
  11. Climate uncertainty, financial frictions and constrained efficient carbon taxation By Felix K\"ubler
  12. Employment Effects of Restricting Fixed-Term Contracts: Theory and Evidence By Pierre Cahuc; Pauline Carry; Franck Malherbet; Pedro S Martins
  13. A Continuous-Time Utility Maximization Problem with Borrowing Constraints in Macroeconomic Heterogeneous Agent Models:A Case of Regular Controls under Markov Chain Uncertainty By Yuki SHIGETA
  14. Gender Inequality, Social Capital, and Economic Growth in Turkey By Barış Alpaslan; Brendan Burchell
  15. Consumption Insurance and Credit Shocks By Wöhrmüller, Stefan
  16. The Central Bank, the Treasury, or the Market: Which One Determines the Price Level? By Guillaume Plantin; Eric Mengus; Jean Barthelemy
  17. Endogenous Money, Excess Reserves and Unconventional Monetary Policy By Böhl, Gregor
  18. Asset Bubbles and Inflation as Competing Monetary Phenomena By Guillaume Plantin

  1. By: Arnita Rishanty (Bank Indonesia); Sekar Utami Setiastuti (Universitas Gadjah Mada); Nur M. Adhi Purwanto (Bank Indonesia)
    Abstract: This study aims to develop an environmental dynamic stochastic general equilibrium (E-DSGE) model with heterogeneous production sectors and evaluate possible central bank and fiscal policies towards green and sustainable production. We estimate the model for the Indonesian economy and assess the effects of macroeconomic uncertainty in terms of productivity, monetary, macroprudential, fiscal policy, and financial shocks in a setup that includes policies supporting green firms. We find that aggregate output, consumption, and investment react negatively to a positive monetary policy and government spending shock. Further, we show that emission tax may dampen the contraction of green output due to contractionary monetary and fiscal policy. The effect of green financing subsidy, however, looks trivial
    Keywords: DSGE model, Bayesian estimation, Monetary policy, Fiscal policy, Environ- mental policy
    JEL: E32 E50 Q58
    Date: 2021
  2. By: Nam, Leanne
    JEL: E24 H21 H55 J64
    Date: 2022
  3. By: Alban Moura; Olivier Pierrard
    Abstract: Not so well. We reach this conclusion by evaluating the empirical performance of a benchmark DSGE model with real estate and collateral constraints. We estimate the model from U.S. data using Bayesian methods and assess its fit along various dimensions. We find that the model is strongly rejected when tested against unrestricted Bayesian VARs and cannot replicate the persistence of real estate prices and various comovements between aggregate demand, real estate prices, and debt. Performance does not improve with alternative definitions of real estate prices, estimation samples, or detrending approaches. Our results raise doubts about the ability of current DSGE models with real estate and collateral constraints to deliver credible policy insights and identify the dimensions in need of improvement.
    Keywords: real estate; housing; DSGE models; collateral constraints; model evaluation
    JEL: C52 E32 E44
    Date: 2022–10
  4. By: Ferry Syarifuddin (Bank Indonesia); Toni Bakhtiar
    Abstract: With their various motivations, many central banks still develop CBDC to explore its potentials and the drawback of implementation. This research examines the macroeconomic and monetary policy consequences, then determine optimal CBDC design to support monetary policy strategy. First, this research wants to develop DSGE model to quantify macroeconomic and monetary policy consequences in implementing CBDC. The DSGE model is consist of seven sectors namely households, retail firms, wholesale firms, capital producing firms, banks, central bank, and government. Shock generator that used in this model is technology shock and the shock on Taylor rule of interest rate. Second, as we know the outcome of the consequences, we continue to determine optimal CBDC design using SWOT with purposive sampling meta-analysis approach and its implementation strategies. According to the simulation, CBDC could effectively maintain inflation through CBDC rate. Meanwhile, optimal CBDC design that could support monetary policy is retail and wholesale coverage, interest bearing (wholesale) and non-interest bearing (retail) remuneration, account-based and tokenbased payment system, traceable degree of anonymity, hybrid architecture, DLT ledger system, and domestic and cross-border scope.
    Keywords: CBDC, Optimal design, DSGE, SWOT, Monetary policy
    JEL: E42 E44 E52 E58 G21
    Date: 2021
  5. By: Federico Guglielmo Morelli; Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique); Jean-Philippe Bouchaud; Marco Tarzia
    Abstract: We study a self-reflexive DSGE model with heterogeneous households, aimed at characterising the impact of economic recessions on the different strata of the society. Our framework allows to analyse the combined effect of income inequalities and confidence feedback mediated by heterogeneous social networks. By varying the parameters of the model, we find different crisis typologies: loss of confidence may propagate mostly within high income households, or mostly within low income households, with a rather sharp crossover between the two. We find that crises are more severe for segregated networks (where confidence feedback is essentially mediated between agents of the same social class), for which cascading contagion effects are stronger. For the same reason, larger income inequalities tend to reduce, in our model, the probability of global crises. Finally, we are able to reproduce a perhaps counter-intuitive empirical finding: in countries with higher Gini coefficients, the consumption of the lowest income households tends to drop less than that of the highest incomes in crisis times.
    Date: 2021
  6. By: Nakatani, Ryota
    Abstract: Adding (1) the endogenous labor supply of workers, (2) fiscal policy instruments, and (3) monopolistic competition to Berg et al.’s (2018) general equilibrium model of automation, we study how automation (i.e., robots and artificial intelligence) affects the efficacy of redistribution policy. Using the consumption equivalent welfare gain developed by Domeij and Heathcote (2004) and assuming a 50 percent increase in robot-augmented technology shock, we derive the optimal tax rates for various tax policy instruments in the steady state of the model economy calibrated for the United States. We find that the optimal capital income tax rate is 20 percent. Another finding is that the zero tax rate on the wage income of unskilled workers is an optimal tax policy. We also find that the optimal tax rates on robots and consumption are dependent on the preference of the government. Finally, we find that the Pareto-efficient optimal tax system is characterized as a combination of a 15.9 percent rate on capital income tax and a zero tax rate on unskilled workers’ income. Our analysis contributes to the literature on optimal taxation in the automated age.
    Keywords: Automation; Fiscal Policy; Optimal Taxation; Capital Income Tax; Labor Income Tax; Consumption Tax; Robot Tax; Social Welfare; Dynamic General Equilibrium
    JEL: C68 E25 H21 H24 H25 H30 O30 O40
    Date: 2022–10–16
  7. By: Andrés Rodríguez-Clare; Mauricio Ulate; Jose P. Vasquez
    Abstract: We present a dynamic quantitative trade and migration model that incorporates downward nominal wage rigidities and show how this framework can generate changes in unemployment and labor participation that match those uncovered by the empirical literature studying the “China shock.” We find that the China shock leads to average welfare increases in most U.S. states, including many that experience unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by around one fourth. In addition, there are seven states that experience welfare losses in the presence of downward nominal wage rigidity that would have experienced gains without it.
    Keywords: trade, unemployment, China shock, downward nominal wage rigidity
    JEL: F10 J20
    Date: 2022
  8. By: Yuki SHIGETA
    Abstract: This paper is concerned with the existence of the invariant measure and sta- tionary equilibrium in a continuous-time Aiyagari model with an endogenous labor supply. First, I demonstrate that the value function, optimal consumption, optimal labor supply, optimal saving rate, and optimally controlled liquid asset process are jointly continuous in parameters such as the interest rate and wage. Second, I show the existence of the ergodic invariant measure of the optimally controlled liquid asset process. Finally, I demonstrate the existence of the stationary equilibrium in a continuous-time one-asset Aiyagari model.
    Keywords: Macroeconomic Mean Field Game, Borrowing Constraint, Hamilton–Jacobi–Bellman Equation, Viscosity Solution, Continuity in Parameters, Existence of Invariant Measure
    JEL: C62 E21 G11
    Date: 2022–10
  9. By: Carlos Carrillo-Tudela; Ludo Visschers; David Wiczer
    Abstract: This paper studies the cyclical behaviour of earnings risk and career changes. We document that the procyclical skewness of the earnings growth distribution arises mostly from the earnings changes of employer and occupation switchers. To uncover their relative importance in driving cyclical earnings changes and whether this arises from changes in the returns to mobility or mobility shocks, we propose a multi-sector business cycle model with on-the-job search and endogenous occupational mobility. Idiosyncratic occupational mobility is the main driver of cyclical earnings risk, mainly due to cyclical shifts in the returns to this mobility. This is the main reason why the sullying effects of recessions are long-lasting. These effects manifest themselves through a collapse of the job ladder and forgone lifetime earnings gains, especially for low-paid workers, and through large lifetime earnings losses among high-paid workers who experience forced occupational mobility and poor re-employment outcomes.
    Keywords: earnings, unemployment, business cycle, search, occupational mobility
    JEL: E24 E30 J62 J63 J64
    Date: 2022
  10. By: Elfsbacka Schmöller, Michaela
    JEL: E62 E63 E52 E32 E24
    Date: 2022
  11. By: Felix K\"ubler
    Abstract: In this paper, I consider a simple heterogeneous agents model of a production economy with uncertain climate change and examine constrained efficient carbon taxation. If there are frictionless, complete financial markets, the simple model predicts a unique Pareto-optimal level of carbon taxes and abatement. In the presence of financial frictions, however, the optimal level of abatement cannot be defined without taking a stand on how abatement costs are distributed among individuals. I propose a simple linear cost-sharing scheme that has several desirable normative properties. I use calibrated examples of economies with incomplete financial markets and/or limited market participation to demonstrate that different schemes to share abatement costs can have large effects on optimal abatement levels and that the presence of financial frictions can increase optimal abatement by a factor of three relative to the case of frictionless financial market.
    Date: 2022–10
  12. By: Pierre Cahuc (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics, CEPR - Center for Economic Policy Research - CEPR); Pauline Carry (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique); Franck Malherbet (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique); Pedro S Martins (NOVA SBE - NOVA - School of Business and Economics - NOVA - Universidade Nova de Lisboa = NOVA University Lisbon)
    Abstract: This paper examines a labor law reform implemented in Portugal in 2009 which restricted the use of fixed-term contracts to reduce labor market segmentation. The reform targeted establishments created by large firms above a specific size threshold, covering about 15% of total employment. Drawing on linked employer-employee longitudinal data and regression discontinuity methods, we find that, while the reform was successful in reducing the number of fixed-term jobs, it did not increase the number of permanent contracts and decreased employment in large firms. However, we find evidence of positive spillovers to small firms that may bias reduced form estimates. To evaluate general equilibrium effects, we build and estimate a directed search and matching model with endogenous number of establishments and jobs. We find spillover effects that induce small biases on reduced form estimates but that significantly change the evaluation of the overall impact of the reform because they diffuse to the whole economy. We estimate that the reform slightly reduced aggregate employment and had negative effects on the welfare of employees and unemployed workers.
    Keywords: Directed search and matching,Labor market segmentation,Regression discontinuity
    Date: 2022–01–05
  13. By: Yuki SHIGETA
    Abstract: This paper is concerned with the verification of a continuous-time utility max- imization problem frequently used in recent macroeconomics. By focusing on Markov chain uncertainty, the problem in this paper can feature many charac- teristics of a typical consumer’s problem in macroeconomics, such as borrowing constraints, endogenous labor supply, unhedgeable labor income, multiple asset choice, stochastic changes in preference, and others. I show that the value func- tion of the problem is actually a constrained viscosity solution to the associated Hamilton–Jacobi–Bellman equation. Furthermore, the value function is continu- ously differentiable in the interior of its domain. Finally, the candidate optimal control is admissible, unique, and actually optimal.
    Keywords: Continuous-Time Utility Maximization, Borrowing Constraints, Hamilton–Jacobi–Bellman Equation, Viscosity Solution
    JEL: C61 E21 G11
    Date: 2022–10
  14. By: Barış Alpaslan; Brendan Burchell
    Abstract: Although sociologists have already recognised the gender aspect of social capital, to date it has not yet been systematically investigated in an endogenous growth model. In pursuing this objective theoretically, we draw on Agénor and Canuto (2015) that has offered a three-period (childhood, adulthood, and old age) gender-based Overlapping Generations (OLG) framework, but we explore a different mechanism through which social capital may explain gender equality and prospects for economic growth in Turkey. This paper contributes in several ways to understanding the pivotal role of social capital in the process of economic development. First, social capital gives individuals a great sense of community and feelings of pleasure, and therefore we consider social capital as a possible driving factor of labour productivity. Second, in our model setting, survival rate for adults is determined by the average social capital level of men and women because individuals who are less socially integrated are more likely to have high mortality rates than people with strong ties to their community. Third, we elucidate an important, but understudied, trade-off between time allocated by women to market work and social capital-enhancing activities, and show that these two components of time allocation have opposite effects on intra-household bargaining power.
    Keywords: social capital, three-period gender-based OLG model, Turkey
    JEL: J16 O41
    Date: 2022–09
  15. By: Wöhrmüller, Stefan
    JEL: D12 D31 D52 E21 E44
    Date: 2022
  16. By: Guillaume Plantin (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Eric Mengus (HEC Paris - Ecole des Hautes Etudes Commerciales); Jean Barthelemy (Centre de recherche de la Banque de France - Banque de France)
    Abstract: This paper studies a model in which the price level is the outcome of dynamic strategic interactions between a fiscal authority, a monetary authority, and investors in government bonds and reserves. The "unpleasant monetarist arithmetic", whereby aggressive fiscal expansion forces the monetary authority to chicken out and to lose control of inflation, occurs only if the public sector lacks fiscal space, in the sense that public debt along the optimal fiscal path gets sufficiently close to the threshold above which the fiscal authority would find default optimal. Otherwise, monetary dominance prevails even though the central bank has neither commitment power nor fiscal backing.
    Date: 2022–06–25
  17. By: Böhl, Gregor
    JEL: E63 C63 E58 E32
    Date: 2022
  18. By: Guillaume Plantin (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Abstract. In a model with multiple price-setting equilibria with varying price rigidity a` la Ball and Romer (1991), a central bank using a Taylor rule may inadvertly create asset bubbles instead of reaching its inflation target regardless of the value of the natural rate. These monetary bubbles differ from natural ones in three important ways: i) They do not push up the interest rate no matter their size and thus earn low returns themselves; ii) They burst when inflation picks up; iii) They always crowd out investment by draining resources from the most financially constrained agents.
    Date: 2021–10–23

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