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

  1. Money versus debt financed regime: Evidence from an estimated DSGE model. By Chiara Punzo; Giulia Rivolta
  2. The long and short of financing government spending By Bastien Bernon; Joep Konings; Glenn Magerman
  3. Optimal Monetary Policy UnderHeterogeneous Beliefs By David Finck
  4. Banks, Credit Reallocation, and Creative Destruction By Christian Keuschnigg; Michael Kogler; Johannes Matt
  5. Desirable Banking Competition and Stability By Jonathan Benchimol; Caroline Bozou
  6. Borrowing Constraints in Emerging Markets By Santiago Camara; Maximo Sangiacomo
  7. Optimal GDP-indexed Bonds By Sandra Daudignon; Oreste Tristani
  8. Postponement, career development and fertility rebound By Johanna Etner; Natacha Raffin; Thomas Seegmuller
  9. A solution to the global identification problem in DSGE models By Andrzej Kocięcki; Marcin Kolasa
  10. Working Paper 365 - Public Investment Efficiency, Economic Growth and Debt Sustainability in Africa By George Kararach; Jacob Oduor; Edward Sennoga; Walter Odero; Peter Rasmussen; Lacina Balma
  11. Marginal Incentives for Birth Spacing By Naidoo, Jesse

  1. By: Chiara Punzo; Giulia Rivolta (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: We estimate a money- nancing versus debt- nancing medium-scale dynamic stochastic general equilibrium for the US with Borrower-Saver framework. Our results suggest that the share of net borrowers in a MF regime (17%) is lower than the one in a DF regime (19%). The MF regime enhances the positive e¤ects of scal and risk premium shocks with respect to the DF regime. After an inationary shock the MF regime leads to a mild recession while the DF regime leads to a temporary expansion followed by a sharp recession. The scal shock mainly explains the variance in output and borrowers consumption in a MF regime. The variance of the savers consumption remains mainly linked to the risk premium shock in both regimes. In a DF regime, the wage mark-up shock plays the major role.
    Keywords: Borrowers-Savers; Bayesian Estimation; Monetary Policy.
    JEL: E32 E42 E52
    Date: 2022–11
  2. By: Bastien Bernon (: DECARES (ULB)); Joep Konings (Nazarbayev University GSB; KU Leuven and CEPR); Glenn Magerman (ECARES (ULB) and CEPR)
    Abstract: This paper shows that debt-financed fiscal multipliers vary depending on the maturity of debt issued to finance spending. Utilizing state-dependent SVAR models and local projections for post-war US data, we show that a fiscal expansion financed with short term debt increases output more than one financed with long term debt. The reason for this result is that only the former may lead to a significant increase in private consumption. We then construct an incomplete markets model in which households invest in long and short assets. Short assets have a lower return (in equilibrium) since they provide liquidity services, households can use them to cover sudden spending shocks. An increase in the supply of these assets through a short term debt financed government spending shock makes it easier for constrained households to meet their spending needs and therefore crowds in private consumption. We first prove this analytically in a simplified model and then show it in a calibrated standard New Keynesian model. We finally study the optimal policy under a Ramsey planner. The optimizing government faces a trade-off between the hedging value of long term debt, as its price decreases in response to adverse shocks, and the larger multiplier when it issues short term debt. We find that the latter effect dominates and that the optimal policy for the government is to finance spending predominantly with short term debt.
    Keywords: Spending multiplier; Fiscal Policy; Debt Maturity, Incomplete Markets, SVAR, Local Projections.
    JEL: D52 E31 E43 E62
    Date: 2022–10
  3. By: David Finck (University of Giessen)
    Abstract: We use a New Keynesian model that features rational and non-rational households. Assuming that both the fraction of rational households and the expectations formation process are uncertain from the perspective of the central bank, we derive robust optimal discretionary monetary policy in a simple min-max framework where the central bank plays a zero-sum game versus a fictitious, malevolent evil agent. We show that the central bank is able to improve welfare if it accounts for uncertainty while the model is being distorted. Even if the central bank accounts for the worst possible outcomes while the model is being undistorted, the central bank can still reduce the welfare loss by implementing a more aggressive targeting rule that favorably affects the inflation-output stabilization trade-off.
    Keywords: Heterogeneous Expectations, Robust Monetary Policy, Policy Implementation, Uncertainty
    JEL: E52 D84
    Date: 2022
  4. By: Christian Keuschnigg (University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Michael Kogler (University of St. Gallen); Johannes Matt (London School of Economics & Political Science (LSE))
    Abstract: How do banks facilitate creative destruction and shape firm turnover? We develop a dynamic general equilibrium model of bank credit reallocation with endogenous firm entry and exit that allows for both theoretical and quantitative analysis. By restructuring loans to firms with poor prospects and high default risk, banks not only accelerate the exit of unproductive firms but also redirect existing credit to more productive entrants. This reduces banks’ dependence on household deposits that are often supplied inelastically, thereby relaxing the economy’s resource constraint. A more efficient loan restructuring process thus fosters firm creation and improves aggregate productivity. It also complements policies that stimulate firm entry (e.g., R&D subsidies) and renders them more effective by avoiding a crowding-out via a higher interest rate.
    Keywords: creative destruction, reallocation, bank credit, productivity
    JEL: E23 E44 G21 O4
    Date: 2022–11
  5. By: Jonathan Benchimol (Bank of Israel); Caroline Bozou (Centre d'Économie de la Sorbonne)
    Abstract: Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may lower markups and foster bank risk-taking, controlled banking concentration systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. Oligopolistic competition and concentration amplify the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. According to financial stability and social welfare objectives, the desirable banking market structure is determined. Depending on policymakers' preferences, the banking concentration of five to seven banks balances social welfare and bank stability objectives.
    Keywords: Banking Concentration, Imperfect Competition, Financial Stability, Welfare Analysis, DSGE Model
    JEL: D43 E43 E51 G21
    Date: 2022–10
  6. By: Santiago Camara; Maximo Sangiacomo
    Abstract: Borrowing constraints are a key component of modern international macroeconomic models. The analysis of Emerging Markets (EM) economies generally assumes collateral borrowing constraints, i.e., firms access to debt is constrained by the value of their collateralized assets. Using credit registry data from Argentina for the period 1998-2020 we show that less than 15% of firms debt is based on the value of collateralized assets, with the remaining 85% based on firms cash flows. Exploiting central bank regulations over banks capital requirements and credit policies we argue that the most prevalent borrowing constraints is defined in terms of the ratio of their interest payments to a measure of their present and past cash flows, akin to the interest coverage borrowing constraint studied by the corporate finance literature. Lastly, we argue that EMs exhibit a greater share of interest sensitive borrowing constraints than the US and other Advanced Economies. From a structural point of view, we show that in an otherwise standard small open economy DSGE model, an interest coverage borrowing constraints leads to significantly stronger amplification of foreign interest rate shocks compared to the standard collateral constraint. This greater amplification provides a solution to the Spillover Puzzle of US monetary policy rates by which EMs experience greater negative effects than Advanced Economies after a US interest rate hike. In terms of policy implications, this greater amplification leads to managed exchange rate policy being more costly in the presence of an interest coverage constraint, given their greater interest rate sensitivity, compared to the standard collateral borrowing constraint.
    Date: 2022–11
  7. By: Sandra Daudignon; Oreste Tristani (-)
    Abstract: Empirical analyses starting from Laubach and Williams (2003) find that the natural rate of interest is not constant in the long-run. This paper studies the optimal response to stochastic changes of the long-run natural rate in a suitably modified version of the new Keynesian model. We show that, because of the zero lower bound (ZLB) on nominal interest rates, movements towards zero of the long-run natural rate cause an increasingly large downward bias in expectations. To offset this bias, the central bank should aim to keep the real interest rate systematically below the long-run natural rate, as long as policy is not constrained by the ZLB. The neutral rate – the level of the policy rate consistent with stable inflation and the natural rate at its long-run level – will be lower than the long-run natural rate. This is the case both under optimal policy, and under a price level targeting rule. In the latter case, the neutral rate is equal to zero as soon as the long-run natural rate falls below 1%.
    Keywords: nonlinear optimal policy, zero lower bound, commitment, liquidity trap, New Keynesian, natural rate of interest
    JEL: C63 E31 E52
    Date: 2022–11
  8. By: Johanna Etner (EconomiX,Univ Paris Nanterre, CNRS. F92000 Nanterre, France.); Natacha Raffin (Universite Paris-Saclay, ENS Paris-Saclay, Centre for Economics at Paris-Saclay, 91190, Gif-sur-Yvette, France.); Thomas Seegmuller (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.)
    Abstract: We use an overlapping generations setup with two reproductive periods to explore how fertility decisions may differ in response to economic incentives in early and late adulthood. In particular, we analyze the interplay between fertility choices-related to career opportunities-and wages, and investigate the role played by late fertility. We show that young adults only postpone parenthood above a certain wage threshold and that late fertility increases with investment in human capital. The long run trend is either to a low productivity equilibrium, involving high early fertility, no investment in human capital and relatively low income, or to a high productivity equilibrium, where households postpone parenthood to invest in their human capital, with higher late fertility and higher levels of income. A convergence to the latter state would explain the postponement of parenthood and the fertility rebound observed in Europe in recent decades.
    Keywords: fertility, postponement, reproductive health, overlapping generations
    JEL: J11 J13 E21
    Date: 2022–11
  9. By: Andrzej Kocięcki (University of Warsaw, Faculty of Economic Sciences); Marcin Kolasa (SGH Warsaw School of Economics; International Monetary Fund)
    Abstract: We develop an analytical framework to study global identification in structural models with forward-looking expectations. Our identification condition combines the similarity transformation linking the observationally equivalent state space systems with the constraints imposed on them by the model parameters. The key step of solving the identification problem then reduces to finding all roots of a system of polynomial equations. We show how it can be done using the concept of a Gröbner basis and recently developed algorithms to compute it analytically. In contrast to papers relying on numerical search, our approach can effectively prove whether a model is identified or not at the given parameter point, explicitly delivering the complete set of observationally equivalent parameter vectors. We present the solution to the global identification problem for several popular DSGE models. Our findings indicate that observational equivalence in medium-sized models of this class might be actually not as widespread as suggested by earlier, small model-based evidence.
    Keywords: global identification, state space systems, DSGE models, Gröbner basis
    JEL: C10 C51 C65 E32
    Date: 2022
  10. By: George Kararach (African Development Bank); Jacob Oduor (African Development Bank); Edward Sennoga (African Development Bank); Walter Odero (African Development Bank); Peter Rasmussen (African Development Bank); Lacina Balma (African Development Bank)
    Abstract: Investment is an important driver of economic growth with important implications for debt sustainability. Investment efficiency gaps adversely impact debt sustainability in Africa. The current heightened fiscal vulnerabilities can be attributed to external factors including volatile commodity prices particularly for commodity-exporting countries and health challenges like COVID-19 pandemic that weakened fiscal revenues and growth. In addition are domestic factors such as elevated government spending on the back of big-push investment expenditures to close infrastructure gap, increased security expenditures in response to conflict and social unrest in some countries. Using a dynamic stochastic general equilibrium (DSGE) framework, we estimate the role of debt in the provision of productive investments, driving economic growth and subsequent debt sustainability. To entrench fiscal sustainability, countries need to strengthen domestic resource mobilization and improve public investment management for greater efficiency. Measures to increase tax revenue collections, savings mobilization and efficiency of public spending are therefore critical. It is prudent for development partners to support debt reporting, data harmonisation, tax compliance, combating illicit financial flows and developing effective debt resolution frameworks.
    Keywords: Public investment, economic growth, debt sustainability, dynamic stochastic general equilibrium, Africa development1George Kararach is a Lead Economist, African Development Bank ( Visiting Professor, Wits School of Governance, university of Witwatersrand, South Africa; Jacob Oduor is a Chief Country Economist, African Development Bank (; Edward Sennoga is a Lead Economist, African Development Bank (; Walter Oderois a Principal Country Economist, African Development Bank(; Peter Rasmussen is a Principal Country Economist, African Development Bank (; Lacina Balma is a Senior Research Economist, African Development Bank ( views expressed here are those of the authors and do not represent the official policy of the Africa DevelopmentBankand the University of the Witwatersrand, Johannesburg, South Africa JEL classification: E6, H63, H4, O11
    Date: 2022–07–08
  11. By: Naidoo, Jesse (University of Chicago)
    Abstract: I construct a model of life-cycle fertility choice and human capital accumulation in which women have the option to have children instantaneously, but the growth rate of human capital is potentially affected by the presence of children. Unless the growth rate of human capital falls permanently at the event of a birth, it will not be optimal to wait a finite, but nonzero, length of time between births. The model is, I argue, minimally sufficient to account for birth spacing. It is also simple enough to allow me to obtain its comparative statics analytically. The effects of fertility subsidies can be subtle: subsidies to marginal births accelerate the time to next birth, but subsidies to higher-order births extend times to the next birth. This ambiguity arises because forward-looking agents anticipate slower human capital growth in the future, and respond by accumulating more in the present.
    Date: 2022–10–03

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