nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒12‒05
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. MEDSEA-FIN: an estimated DSGE model with housing and financial frictions for Malta By William Gatt
  2. The financial accelerator mechanism: does frequency matter? By Claudia Foroni; Paolo Gelain; Massimiliano Marcellino
  3. Role of worker flows in the relationship between job offers and employment By Matsue, Toyoki
  4. Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity By Jose-Maria Da-Rocha; Diego Restuccia; Marina M. Tavares
  5. Long-Term Economic Implications of Demeny Voting: A Theoretical Analysis By Luigi Bonatti; Lorenza Alexandra Lorenzetti
  6. Interest Rate Shocks and the Composition of Sovereign Debt By Gonzalez-Aguado, Eugenia
  7. Quantitative Easing in the US and Financial Cycles in Emerging Markets By Marcin Kolasa; Grzegorz Wesołowski
  8. Disability Insurance and the Effects of Return-to-Work Policies By Dal Bianco, Chiara
  9. Computing Economic Chaos By Richard H. Day; Oleg V. Pavlov
  10. A Spanner in the Works: Restricting Labor Mobility and the Inevitable Capital-Labor Substitution By Bharadwaj Kannan; Roberto Pinheiro; Harry Turtle
  11. Selection, Patience, and the Interest Rate By Radoslaw Stefanski; Alex Trew
  12. Profit Shifting Frictions and the Geography of Multinational Activity By Alessandro Ferrari; Sébastien Laffitte; Mathieu Parenti; Farid Toubal
  13. The Fundamental Surplus Revisited By Bingsong Wang
  14. The Welfare Effects of Bank Liquidity and Capital Requirements By Skander J. Van den Heuvel

  1. By: William Gatt (Central Bank of Malta)
    Abstract: This paper uses Bayesian techniques and Maltese data over the period 2001–2019 to estimate the parameters of MEDSEA-FIN, one of the Central Bank of Malta’s DSGE models. The model captures linkages between the housing sector, banks and the rest of the economy via a borrowing collateral constraint. The paper shows that the data is informative on a subset of the parameters, and documents that the dynamic properties of the estimated model are in line with similar DSGE models estimated for other countries. The results corroborate recent empirical findings for Malta documented in other studies. The model is used to decompose recent macroeconomic data and shows that housing demand shocks were important drivers of house prices and credit. Shocks from the euro area also drove a significant share of macroeconomic fluctuations. The paper also shows that the model survives external validation tests. Although the model remains somewhat stylized along some dimensions, estimation makes it suitable for policy analysis related to housing and credit markets and associated macroprudential policies.
    JEL: C11 C32 C51 E21 E32
    Date: 2022
  2. By: Claudia Foroni; Paolo Gelain; Massimiliano Marcellino
    Abstract: We use mixed-frequency (quarterly-monthly) data to estimate a dynamic stochastic general equilibrium model embedded with the financial accelerator mechanism à la Bernanke et al. (1999). We find that the financial accelerator can work very differently at monthly frequency compared to quarterly frequency; that is, we document its inversion. That is because aggregating monthly data into quarterly data leads to large biases in the estimated quarterly parameters and, as a consequence, to a deep change in the transmission of shocks.
    Keywords: DSGE models; financial accelerator; mixed-frequency data
    JEL: C52 E32 E52
    Date: 2022–11–07
  3. By: Matsue, Toyoki
    Abstract: This study investigates the mechanism determining changes in job offers and analyzes the role of worker flows in the relationship between job offers and employment. It applies a queueing system to dynamic general equilibrium models and analyzes economic fluctuations. The queueing system helps in considering the relationship between job offers and employment and changes in job offers in response to shocks. The numerical simulations indicate that worker flows influence changes in job offers in response to a productivity shock. Although employment fluctuations remain constant, changes in job offers amplify when fewer workers join and/or more workers leave the firm, whereas they decrease when more workers join and/or fewer workers leave. The shock responses of other variables in each model are in line with the reactions of the standard dynamic general equilibrium models. These findings provide important insights into labor market dynamics.
    Keywords: Queueing system; Job offer; Employment fluctuation; Economic fluctuation; Efficiency wage
    JEL: E24 E32 J20 J33
    Date: 2022–11–09
  4. By: Jose-Maria Da-Rocha; Diego Restuccia; Marina M. Tavares
    Abstract: What accounts for income per capita and total factor productivity (TFP) differences across countries? We study resource misallocation across heterogeneous production units in a general equilibrium model where establishment productivity and size are affected by policy distortions. We solve the model in closed form and show that the effect of policy distortions on aggregate productivity is substantially magnified when the distribution of (relative) establishment sizes is constant across economies as supported by some empirical evidence. In this case, more distorted economies feature higher establishment lifespan, amplifying the negative effect of distortions on establishment productivity growth. Policy distortions in this environment substantially reduce aggregate productivity, an effect that is 2.8-fold larger than the model with unrestricted relative size distribution.
    Keywords: distortions, misallocation, investment, productivity, establishment size.
    JEL: O11 O3 O41 O43 O5 E0 E13 C02 C61
    Date: 2022–10–28
  5. By: Luigi Bonatti; Lorenza Alexandra Lorenzetti
    Abstract: This paper places itself at the intersection between the literature on “Demeny voting” (the proposal of letting custodial parents exercise their children’s voting rights until they come of age) and the vast literature on formal models with endogenous fertility that address the problem of fiscal redistribution between young and old cohorts in the presence of an aging population. Linking these issues to the process of economic growth through a simple overlapping generations model, we show that, even if the government is myopic, in the sense that it cares only about the current well being of the living (and voting) generations, an increase in the relative importance that it attaches to the interests of the young cohort (for instance, due the introduction of Demeny voting) leads in the long run to a higher population growth rate and raises the consumption level of each young adult, the capital stock per worker and the output per adult. We also show that in the long run such a reform raises the well being that individuals can expect at birth to achieve during their lifetime.
    Keywords: OLG model, fertility, fiscal redistribution, well being, child allowances
    JEL: D10 D72 H23 J13 O41
    Date: 2022
  6. By: Gonzalez-Aguado, Eugenia
    Abstract: There has been a growing concern about the vulnerability of emerging countries to fluc-tuations in international interest rates. Empirical evidence shows that these countries suffer significant output drops when developed countries raise their interest rates. In this paper, I document that an important determinant of the magnitude of this effect is the ability of coun-tries to issue sovereign debt domestically, rather than to external creditors. Moreover, I find that the level of financial development of domestic markets is positively related to the share of total public debt that is domestically held. I build a model that integrates a domestic banking sector into a sovereign default model where governments can issue domestic and external debt and decide whether to default on debt selectively. Due to financial frictions, issuing domestic debt crowds out investment in capital. As financial markets develop, crowding-out costs decrease, and banks demand lower interest rates on domestic bonds. Both effects reduce the relative cost to the government of borrowing domestically, leading to a higher share of domestic debt. The results of the quantitative solution of the model are consistent with the patterns of vulnerabil-ity to world interest rates and sovereign debt composition observed in the data. I show that financial development, through a less costly access to domestic debt, decreases the vulnerability of emerging economies to external shocks.
    Keywords: Sovereign debt; Interest rates; International spillovers; Financial development
    JEL: E44 F34 F42
    Date: 2022–11–04
  7. By: Marcin Kolasa (SGH Warsaw School of Economics and International Monetary Fund); Grzegorz Wesołowski (University of Warsaw, Faculty of Economic Sciences)
    Abstract: Large international capital movements tend to be associated with strong fluctuations in asset prices and credit, contributing to domestic financial cycles and posing challenges for stabilization policies, especially in emerging market economies. In this paper we argue that these challenges are particularly severe if the global financial cycle is driven by quantitative easing (QE) in the US, and when the local banking sector has large holdings of government bonds, like in many Latin American (LA) countries. We first investigate empirically the impact of a typical round of QE by the US Fed on LA economies, finding a persistent expansion in credit to households and house prices as well as a significant loss of price competitiveness in this group of economies. We next develop a quantitative macroeconomic model of a small open economy with segmented asset markets and banks, which accounts for these observations. In this framework, foreign QE creates tensions between macroeconomic and financial stability as a contractionary impact of exchange rate appreciation is accompanied by booming credit and house prices. As a consequence, conventional monetary policy accommodation aimed at stabilizing output and inflation would further exacerbate domestic financial cycle. We show that an effective way of resolving this trade-off is to impose a time-varying tax on capital inflows. Combining foreign exchange interventions with tightening of local credit policies can also restore macroeconomic and financial stability, but at the expense of a large redistribution of wealth between borrowers and savers.
    Keywords: quantitative easing, global financial cycle, domestic credit, exchange rate interventions, capital controls, macroprudential policy
    JEL: E44 E58 F41 F42 F44
    Date: 2022
  8. By: Dal Bianco, Chiara
    Abstract: I provide a quantitative assessment of the labor market and welfare effects of return- to-work policies targeted at disability insurance (DI) recipients by estimating a life- cycle model in which individuals with different health evolving over time choose con- sumption, labor supply, and DI application. I find that a wage subsidy incentivizing return to work is welfare improving, and the willingness to pay for such reform is in- creasing in sickness and decreasing in wealth. This policy increases labor force par- ticipation of DI beneficiaries by 3.6 percentage points, and decreases the DI rate by 4.6 percentage points. A policy mandating yearly eligibility reassessment with a 10% probability would decrease the welfare of individuals in bad health and worse economic condition, and force about 30% of the beneficiaries to exit the program, 56% of whom would return to work.
    Date: 2022–06–15
  9. By: Richard H. Day; Oleg V. Pavlov
    Abstract: Existence theory in economics is usually in real domains such as the findings of chaotic trajectories in models of economic growth, tatonnement, or overlapping generations models. Computational examples, however, sometimes converge rapidly to cyclic orbits when in theory they should be nonperiodic almost surely. We explain this anomaly as the result of digital approximation and conclude that both theoretical and numerical behavior can still illuminate essential features of the real data.
    Date: 2022–11
  10. By: Bharadwaj Kannan; Roberto Pinheiro; Harry Turtle
    Abstract: We model an environment with overlapping generations of labor to show that policies restricting labor mobility increase a firm's monopsony power and labor turnover costs. Subsequently, firms increase capital expenditure, altering their optimal capital-labor ratio. We confirm this by exploiting the statewide adoption of the inevitable disclosure doctrine (IDD), a law intended to protect trade secrets by restricting labor mobility. Following an IDD adoption, local firms increase capital expenditure (capital-labor ratio) by 3.5 percent (5.5 percent). This result is magnified for firms with greater human capital intensity. Finally, IDD adoptions do not spur investment in either R&D or growth options as intended.
    Keywords: Labor Mobility; Capital-Labor Ratio; Inevitable Disclosure Doctrine
    JEL: G31 J42
    Date: 2022–11–08
  11. By: Radoslaw Stefanski; Alex Trew
    Abstract: The interest rate has been falling for centuries. A process of natural selection that leads to increasing societal patience is key to explaining this decline. Three observations support this mechanism: patience varies across individuals, is inter-generationally persistent, and is positively related to fertility. A calibrated dynamic, heterogenous-agent model of fertility permits us to isolate the quantitative contribution of this mechanism. Selection can explain most of the decline in the interest rate, a fact that is robust to a number of model extensions. Quantitative implications are consistent with other facts, such as the steady increase in the investment rate since 1300.
    Keywords: Interest rates; selection; fertility; patience; heterogenous agents
    JEL: E21 E43 J11 N30 O11
    Date: 2022–07
  12. By: Alessandro Ferrari; Sébastien Laffitte; Mathieu Parenti; Farid Toubal
    Abstract: We develop a quantitative general equilibrium model of multinational activity embedding corporate taxation and profit shifting. In addition to trade and investment frictions, our model shows that profit-shifting frictions shape the geography of multinational production. Key to our model is the distinction between the corporate tax elasticity of real activity and profit shifting. The quantification of our model requires estimates of shifted profits flows. We provide a new, model-consistent methodology to calibrate bilateral profitshifting frictions based on accounting identities. We simulate various tax reforms aimed at curbing tax-dodging practices of multinationals and their impact on a range of outcomes, including tax revenues and production. Our results show that the effects of the international relocation of firms across countries are of comparable magnitude as the direct gains in taxable income.
    Keywords: Profit Shifting; Tax Avoidance; Tax Havens, International Tax Reforms, Minimum taxation, DBCFT, Multinational firms
    Date: 2022–10
  13. By: Bingsong Wang (Department of Economics, University of Sheffield, S1 4DT, UK)
    Abstract: To generate large responses of unemployment to productivity changes requires a high elasticity of the fundamental surplus with respect to productivity. When all deductions that enter the fundamental surplus are acyclical, and the fundamental surplus does not involve endogenous variables, then the elasticity of the fundamental surplus coincides with the inverse of the fundamental surplus fraction.
    Keywords: the fundamental surplus, search frictions, labor market volatility, real wage rigidity
    JEL: E24 E32 J31 J41 J63
    Date: 2022–11
  14. By: Skander J. Van den Heuvel
    Abstract: The stringency of bank liquidity and capital requirements should depend on their social costs and benefits. This paper investigates their welfare effects and quantifies their welfare costs using sufficient statistics. The special role of banks as liquidity providers is embedded in an otherwise standard general equilibrium growth model. Capital and liquidity requirements mitigate moral hazard from deposit insurance, which, if unchecked, can lead to excessive credit and liquidity risk at banks. However, these regulations are also costly because they reduce the ability of banks to create net liquidity and can distort investment. Equilibrium asset returns reveal the strength of demand for liquidity, yielding two simple sufficient statistics that express the welfare cost of each requirement as a function of observable variables only. Based on U.S. data, the welfare cost of a 10 percent liquidity requirement is equivalent to a permanent loss in consumption of about 0.02%, a modest impact. Even using a conservative estimate, the cost of a similarly-sized increase in the capital requirement is roughly ten times as large. Even so, optimal policy relies on both requirements, as the financial stability benefits of capital requirements are found to be broader.
    Keywords: Capital requirements; Convenience yields; Banking; Welfare; Liquidity requirements; Sufficient statistics
    JEL: G28 G21 E44
    Date: 2022–11–04

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