nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒01‒09
thirty-two papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Homelessness By Ayşe İmrohoroğlu; Kai Zhao
  2. (Un)Conventional Monetary and Fiscal Policy By Jing Cynthia Wu; Yinxi Xie
  3. DSGE Nash: solving Nash Games in Macro Models With an application to optimal monetary policy under monopolistic commodity pricing By Massimo Ferrari Minesso; Maria Sole Pagliari
  4. Optimal Monetary Policy and Liquidity with Heterogeneous Households By Florin Bilbiie; Xavier Ragot
  5. The Dynamics of the Racial Wealth Gap By Dionissi Aliprantis; Daniel Carroll; Eric Young
  6. The Welfare Effects of Debt: Crowding Out and Risk Shifting: Working Paper 2022-10 By Michael Falkenheim
  7. The long-term impact of quasi-universal transfers to older households By Aleksandra Kolasa
  8. Demographic Changes and Asset Prices in an Overlapping Generations Model By Simo-Kengne, Beatrice D.; Riedel, Frank; Demeze-Jouatsa, Ghislain-Herman
  9. A Fiscal Theory of Trend Inflation By Francesco Bianchi; Renato Faccini; Leonardo Melosi
  10. Endogenous technology, scarring and fiscal policy By Schmöller, Michaela
  11. Banks, Credit Reallocation, and Creative Destruction By Christian Keuschnigg; Michael Kogler; Johannes Matt
  12. Financial Development, Cycles and Income Inequality in a Model with Good and Bad Projects By Spiros Bougheas; Pasquale Commendatore; Laura Gardini; Ingrid Kubin
  13. Real Exchange Rates and Primary Commodity Prices: Mussa Meets Backus-Smith By Ayres, JoaÞo; Hevia, Constantino; Nicolini, Juan Pablo
  14. Declining US Natural Interest Rate: Quantifying and Qualifying the Role of Pensions By Jacopo Bonchi; Guido Caracciolo
  15. External Shocks and FX Intervention Policy in Emerging Economies By Carrasco, Alex; Florian Hoyle, David
  16. Postponement, career development and fertility rebound By Johanna Etner; Natacha Raffin; Thomas Seegmuller
  17. Climate change mitigation: How effective is green quantitative easing? By Abiry, Raphael; Ferdinandusse, Marien; Ludwig, Alexander; Nerlich, Carolin
  18. How Do Persistent Earnings Affect the Response of Consumption to Transitory Shocks? By Jeanne Commault
  19. Automation with heterogeneous agents: The effect on consumption inequality By Santini, Tommaso
  20. Optimal trend inflation, misallocation and the pass-through of labour costs to prices By Santoro, Sergio; Viviano, Eliana
  21. Firms, policies, informality, and the labour market By Camila Cisneros-Acevedo; Alessandro Ruggieri
  22. A Liquidity-based Resolution to the Dividend Puzzle By Wang, Yijing
  23. Use It or Lose It: Efficiency and Redistributional Effects of Wealth Taxation By Sergio Ocampo; Fatih Guvenen; Gueorgui Kambourov; Burhan Kuruscu; Daphne Chen
  24. Fintech Entry, Firm Financial Inclusion, and Macroeconomic Dynamics in Emerging Economies By Finkelstein-Shapiro, Alan; Mandelman, Federico S.; Nuguer, Victoria
  25. Over-optimism About Graduation and College Financial Aid By Emily G. Moschini; Gajendran Raveendranathan; Ming Xu
  26. Imperfect Law Enforcement, Informality, and Organized Crime By Mascarúa Lara Miguel A.
  27. A review of macroeconomic models for the WEFE nexus assessment By Chiara Castelli; Marta Castellini; Emanuele Ciola; Camilla Gusperti; Ilenia Gaia Romani; Sergio Vergalli
  28. Measuring the impact of structural reforms and investment policies: A DSGE model for South Africa By Falilou Fall; Paul Cahu
  29. Estimation of continuous-time linear DSGE models from discrete-time measurements By Bent Jesper Christensen; Luca Neri; Juan Carlos Parra-Alvarez
  30. In-kind housing transfers and labor supply: a structural approach By Ning Zhang
  31. CBDC as Imperfect Substitute to Bank Deposits: a Macroeconomic Perspective By Perazzi, Elena; Bacchetta, Philippe
  32. Statistical inference of the value function for reinforcement learning in infinite-horizon settings By Shi, Chengchun; Zhang, Shengxing; Lu, Wenbin; Song, Rui

  1. By: Ayşe İmrohoroğlu (University of Southern California); Kai Zhao (University of Connecticut)
    Abstract: This paper examines the effectiveness of several policies in reducing the aggregate share of homeless in a dynamic general equilibrium model. The model economy is calibrated to capture the most at-risk groups and generates a diverse population of homeless with a significant fraction becoming homeless for short spells due to labor market shocks and a smaller fraction experiencing chronic homelessness due to health shocks. Our policy experiments show housing subsidies to be more effective in reducing the aggregate homeless share, mostly by helping those with short spells, than non-housing policies. For the chronically homeless population, a means-tested expansion of disability income proves to be effective. We also find that some policies that result in higher exit rates from homelessness, such as relaxation of borrowing constraints, help the currently homeless population but lead to a larger homeless share at the steady state by increasing the entry rate.
    Keywords: Inequality, Housing, Income Shock, Health Shock, General Equilibrium
    JEL: E20 H20
    Date: 2022–12
  2. By: Jing Cynthia Wu; Yinxi Xie
    Abstract: We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not. Ricardian equivalence breaks: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments, the policy rate together with QE or fiscal transfers, can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion.
    JEL: E5 E62 E63
    Date: 2022–12
  3. By: Massimo Ferrari Minesso; Maria Sole Pagliari
    Abstract: This paper presents DSGE Nash, a toolkit to solve for pure strategy Nash equilibria of global games in general equilibrium macroeconomic models. Although primarily designed to solve for Nash equilibria in DSGE models, the toolkit encompasses a broad range of options including solutions up to the third order, multiple players/strategies, the use of user-defined objective functions and the possibility of matching empirical moments and IRFs. When only one player is selected, the problem is re-framed as a standard optimal policy problem. We apply the algorithm to an open-economy model where a commodity importing country and a monopolistic commodity producer compete on the commodities market with barriers to entry. If the commodity price becomes relevant in production, the central bank in the commodity importing economy deviates from the first best policy to act strategically. In particular, the monetary authority tolerates relatively higher commodity price volatility to ease barriers to entry in commodity production and to limit the market power of the dominant exporter.
    Keywords: DSGE Model, Optimal Policies, Computational Economics
    JEL: C63 E32 E61
    Date: 2022
  4. By: Florin Bilbiie (UNIL - Université de Lausanne = University of Lausanne, CEPR - Center for Economic Policy Research - CEPR); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: A liquidity-insurance motive for monetary policy operates when heterogeneous households use government-provided liquidity ("money") to insure idiosyncratic risk. In our tractable sticky-price model this changes the central bank's trade-off by adding a linear benefit of insurance in the second-order approximation to aggregate welfare. Inflation volatility hinders the consumption volatility of constrained households as a side-effect of liquidity-insuring them; but price stability has quantitatively significant welfare costs only when monopolistic rents are also large, which indicates a complementarity between imperfect-insurance and New-Keynesian distortions. Helicopter drops are welfare-superior to open-market operations to achieve insurance, but quantitatively their benefit is surprisingly small.
    Keywords: Optimal (Ramsey) Monetary Policy,Heterogeneous Households,Incomplete Markets,Money,Inequality,Helicopter Drops
    Date: 2021–07
  5. By: Dionissi Aliprantis (Federal Reserve Bank of Cleveland); Daniel Carroll (Federal Reserve Bank of Cleveland); Eric Young (University of Virginia and Federal Reserve Bank of Cleveland)
    Abstract: What drives the dynamics of the racial wealth gap? We answer this question using a dynamic stochastic general equilibrium heterogeneous-agents model. Our calibrated model endogenously produces a racial wealth gap matching that observed in recent decades along with key features of the current cross-sectional distribution of wealth, earnings, intergenerational transfers, and race. Our model predicts that equalizing earnings is by far the most important mechanism for permanently closing the racial wealth gap. One-time wealth transfers have only transitory effects unless they address the racial earnings gap, and return gaps only matter when earnings inequality is reduced.
    Keywords: racial inequality, wealth dynamics
    JEL: D31 D58 E21 E24 J70
    Date: 2022–11
  6. By: Michael Falkenheim
    Abstract: Government debt affects people’s welfare through two distinct channels: It crowds out capital, and it shifts risk from current to future generations. This study extends Olivier Blanchard’s 2019 analysis of the welfare effects of debt by decomposing his estimates into those two categories. Blanchard estimated the change in average utility under simulations of an overlapping generations model with and without a transfer of wealth from the younger to the older generation. This study decomposes those estimated welfare effects into crowding-out and risk- shifting components and
    JEL: E22 E23 E43 E62 H50 H63
    Date: 2022–12–16
  7. By: Aleksandra Kolasa (University of Warsaw, Faculty of Economic Sciences)
    Abstract: One of the key challenges associated with current demographic trends is to provide adequate financial support to older households without jeopardizing fiscal sustainability or harming macroeconomic performance. Among possible policies, quasi-universal transfers have recently gained traction in several countries. One example of this approach is the 13th Pension, introduced in 2019 in Poland. In this paper, I study the long-term aggregate, redistributive, and welfare effects of this type of program, and compare its impact to that of more standard elderly-oriented policies with similar fiscal costs. I also investigate how simple modifications would affect its costs and effectiveness. My analysis is based on a general equilibrium overlapping generations model of an open economy that incorporates family types, individual risk associated with earnings, health and mortality, and stochastic out-of-pocket expenses. According to the model simulations, a quasi-universal transfer to retired households such as the Polish 13th Pension program significantly improves the financial situation of a median pensioner but generates an aggregate welfare loss (under the veil of ignorance) equivalent to a 0.7% reduction in average household lifetime consumption. It also has only a moderate impact on average measures of poverty and inequality.
    Keywords: monetary poverty, catastrophic health expenditure, out-of-pocket medical expenses, recursive probit models
    JEL: I32 I14 J14
    Date: 2022
  8. By: Simo-Kengne, Beatrice D. (Center for Mathematical Economics, Bielefeld University); Riedel, Frank (Center for Mathematical Economics, Bielefeld University); Demeze-Jouatsa, Ghislain-Herman (Center for Mathematical Economics, Bielefeld University)
    Abstract: We examine the effect of demographic shifts on asset prices in an overlapping generations model with endogenous population dynamics. We establish a robust inverse relationship between returns and the old dependency ratio. We document the absence of a simple monotonic relationship between asset prices and demographic parameters. Returns depend on the joint evolution of fertility, mortality, and lifetime work in a complex way that we quantify. We carry out an extensive empirical study involving 55 countries. Both theoretical and empirical findings reconcile existing propositions on the population age structure and asset returns for riskless and short-lived risky assets.
    Keywords: Demography, Asset prices, OLG, Panel cointegration, Granger causality
    Date: 2022–12–15
  9. By: Francesco Bianchi; Renato Faccini; Leonardo Melosi
    Abstract: We develop a new class of general equilibrium models with partially unfunded debt to propose a fiscal theory of trend inflation. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. However, the central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation, output, and real interest rates. In an estimated quantitative model, fiscal trend inflation accounts for the bulk of inflation dynamics. As external validation, we show that the model predicts the post-pandemic increase in inflation. Unfunded fiscal shocks sustain the recovery and cause an increase in trend inflation that counteracts deflationary non-policy shocks.
    JEL: E30 E50 E62
    Date: 2022–12
  10. By: Schmöller, Michaela
    Abstract: This paper studies fiscal policy in a New Keynesian DSGE model with endogenous technology growth in which scarring can occur endogenously through hysteresis effects in TFP. Both demand- and supply-driven recessions can weaken investment in R&D and technology adoption, thus depressing the long-run trend. Fiscal policy has long-term effects under endogenous growth and the type of fiscal stimulus is decisive for the sign and magnitude of fiscal multipliers. Expansionary government spending boosts output transitorily but over time crowding out in technology-enhancing investment weakens the long-run trend. I introduce fiscal growth policies in this environment which in the short run raise aggregate demand and simultaneously support growth-enhancing investment and thus the long-run trend, generating a positive trend multiplier. Multipliers of fiscal growth policies can be sizeable, above all when targeted to R&D, which is characterized by fiscal multipliers greater than unity. The importance of monetary-fiscal interaction is amplified due to long-run non-neutrality of monetary policy.
    Keywords: Fiscal Multiplier, Hysteresis, Endogenous Growth, Inflation, Monetary-Fiscal Interaction
    JEL: E24 E31 E32 E52 E62 O42
    Date: 2022
  11. By: Christian Keuschnigg; Michael Kogler; Johannes Matt
    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 O40
    Date: 2022
  12. By: Spiros Bougheas; Pasquale Commendatore; Laura Gardini; Ingrid Kubin
    Abstract: We introduce a banking sector and heterogeneous agents in the Matsuyama et al. (2016) dynamic over-lapping generations neoclassical model with good and bad projects. The model captures the benefits and costs of an advanced banking system which can facilitate economic development when allocates resources to productive activities but can also hamper progress when invests in projects that do not contribute to capital formation. When the economy achieves higher stages of development it becomes prone to cycles. We show how the disparity of incomes across agents depends on changes in both the prices of the factors of production and the reallocation of agents across occupations.
    Keywords: Banks, business cycles, Economic Development, Financial Innovation, Income Inequality
    JEL: E32 E44 G21
    Date: 2022–12
  13. By: Ayres, JoaÞo; Hevia, Constantino; Nicolini, Juan Pablo
    Abstract: We show that explicitly modeling primary commodities in an otherwise totally standard incomplete markets open economy model can go a long way in explaining the Mussa puzzle and the Backus-Smith puzzle, two of the main puzzles in the international economics literature.
    Keywords: Mussa puzzle;Backus-Smith puzzle
    JEL: F31 F41
    Date: 2022–01
  14. By: Jacopo Bonchi; Guido Caracciolo
    Abstract: We develop a life-cycle model and calibrate it to the US economy to quantify and qualify the role of the public pension system for the past and future trend of the natural interest rate, the so-called r*. Between 1970 and 2015, past pension reforms mitigated the secular decline in r*, raising it by around 1%, mainly through the positive effect of a higher replacement rate. As regards the future, we simulate the demographic trends, expected between 2015 and 2060, combined with alternative pension reforms and productivity growth scenarios. An increase in the effective retirement age delivers the highest r*, and thus the best welfare results, regardless of future productivity. On the contrary, the effects of a lower replacement rate strongly depend on the future productivity scenario. Under stagnant productivity, such pension system adjustment would exacerbate the fall in r* induced by population ageing, with negative implications for welfare.
    Keywords: Natural interest rate, pensions, population ageing
    JEL: E60 H55
    Date: 2022–12
  15. By: Carrasco, Alex; Florian Hoyle, David
    Abstract: This paper discusses the role of sterilized foreign exchange (FX) interventions as a monetary policy instrument for emerging market economies in response to external shocks. We develop a model for a commodity-exporting small open economy in which FX intervention is considered as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and their creditors. The severity of banks agency problem depends directly on a bank-level measure of currency mismatch. Endogenous deviations from the standard UIP condition arise at equilibrium. In this context, FX interventions moderate the response of financial and macroeconomic variables to external shocks by leaning against the wind with respect to real exchange rate pressures. Our quantitative results indicate that, conditional on external shocks, the FX intervention policy successfully reduces credit, investment, and output volatility, along with substantial welfare gains when compared to a free-floating exchange rate regime. Finally, we explore distinct generalizations of the model that eliminate the presence of endogenous UIP deviations. In those cases, FX intervention operations are considerably less effective for the aggregate equilibrium.
    Keywords: Foreign exchange intervention;External shocks;Financial dollarization;Monetary policy
    JEL: E32 E44 E52 F31 F41
    Date: 2021–08
  16. By: Johanna Etner (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Natacha Raffin (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    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
    Date: 2022–11–18
  17. By: Abiry, Raphael; Ferdinandusse, Marien; Ludwig, Alexander; Nerlich, Carolin
    Abstract: We develop a two-sector incomplete markets integrated assessment model to analyze the effectiveness of green quantitative easing (QE) in complementing fiscal policies for climate change mitigation. We model green QE through an outstanding stock of private assets held by a monetary authority and its portfolio allocation between a clean and a dirty sector of production. Green QE leads to a partial crowding out of private capital in the green sector and to a modest reduction of the global temperature by 0.04 degrees of Celsius until 2100. A moderate global carbon tax of 50 USD per tonne of carbon is 4 times more effective.
    Keywords: Climate Change, Integrated Assessment Model, 2-Sector Model, Green Quantitative Easing, Carbon Taxation
    JEL: E51 E62 Q54
    Date: 2022
  18. By: Jeanne Commault (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: I show theoretically and empirically that, everything else being equal, people with higher persistent earnings respond more to transitory shocks. Theoretically, people with the same wealth and transitory earnings but higher persistent earnings than others consume more and finance a larger share of their consumption out of their uncertain expected future earnings. Their precautionary motive is thus stronger and their consumption more responsive to transitory shocks. Empirically, in US survey data, an increase in persistent earnings by one standard deviation raises people's consumption response to transitory shocks by 6%-8%. Numerical simulations of a life-cycle model can reproduce these empirical results.
    Keywords: Consumption Response to Shocks, Heterogeneous Agents, Life-Cycle Models, Household Finance
    Date: 2022–11
  19. By: Santini, Tommaso
    Abstract: In this paper, I study technological change as a candidate for the observed increase in consumption inequality in the United States. I build an incomplete market model with educational choice combined with a task-based model on the production side. I consider two channels through which technology affects inequality: the skill that an agent can supply in the labor market and the level of capital she owns. In a quantitative analysis, I show that (i) the model replicates the increase in consumption inequality between 1981 and 2008 in the US (ii) educational choice and the return to wealth are quantitatively important in explaining the increase in consumption inequality.
    Keywords: automation,factor shares,inequality,productivity,tasks,technological change
    JEL: D63 J23 J24 O14 O31 O33
    Date: 2022
  20. By: Santoro, Sergio; Viviano, Eliana
    Abstract: We show that a sticky price model featuring firms' heterogeneity in terms of productivity and strategic complementarities in price setting delivers a strictly positive optimal inflation in steady state, differently from standard New Keynesian models. Due to strategic complementarities, more productive firms have higher markups in steady state. This leads to a misallocation distortion, as more productive firms produce too little compared to the social optimum. An increase of steady state inflation curbs the markups, especially those of the more productive firms, hence attenuating the inefficient dispersion of markups. At low levels of inflation, the gains from the reduction in misallocation outweigh the cost of inflation. Heterogeneity in productivity and strategic complementarities in price setting, the key ingredients of our model, imply that also firms' response to shocks is heterogenous: less productive firms transmit cost shocks to prices much more than more productive ones. To provide empirical support to our key mechanism we resort to a quasi-natural experiment occurred in Italy in late 2014, when a cut to social security contributions for all new open-ended contracts was announced. Consistently with our theory, we show that the pass-through of this shock to labour costs was much stronger for less productive firms. JEL Classification: D00, D22, E31
    Keywords: firm heterogeneity, labour costs, optimal inflation rate, price pass-through
    Date: 2022–12
  21. By: Camila Cisneros-Acevedo; Alessandro Ruggieri
    Abstract: In this paper we study how firm-level policies affect labor market outcomes in the developing world. For a large set of low- and medium-income countries, we document that high corporate income tax rate is associated to a higher rate of informal employment, lower GDP per worker and lower unemployment rate. To interpret this evidence, we build a general equilibrium model that features: 1) industry dynamics dictated by heterogeneous firms, 2) search and matching friction, 3) imperfectly enforced legislation, leading to informal employment along the intensive and the extensive margin. We estimate the model using firm and worker-level data from Peru — a country where more than 70 per cent of the population is employed in informal jobs, and use the model as a laboratory to assess the distributional consequences of firm-level taxes and policies. The model generates the observed cross-country relation between corporate income tax rate and labor market outcomes: a reduction in corporate taxes concentrates employment over a smaller mass of larger and more productive firms, increasing efficiency and reallocating workers to formal employment at the expense of a higher unemployment rate. Quantitatively, changes in tax rates account for about 60% of the difference in unemployment rate and 45% of the differences in GDP per worker observed across countries. The model provides a basis for the evaluation of various firm-level policy interventions.
    Keywords: corporate tax, firm dynamics, informality, unemployment, welfare
    Date: 2022
  22. By: Wang, Yijing
    Abstract: Contrary to the renowned irrelevance theory proposed by Modigliani and Miller in 1961, empirical evidence suggests that assets that pay dividends command a price premium, despite the fact that dividend payments are generally taxed more heavily than capital gains. In this paper, I use a monetary-search model and propose a new resolution to this puzzle, based on the idea that the price premium of dividend assets arises due to the superior liquidity role played by dividends compared to returns in the form of capital gain. As dividend is virtually identical to money in facilitating transactions, it helps stockholders avoid selling their assets at an undesirable price in financial markets with frictions and trading delays. The paper provides a number of theoretical results that find support in the data. I also study firms’ optimal decision to pay dividends, and show that an increase in the interest rate can hurt the economy not only through the traditional channel, i.e., reduction in real money holdings, but also through the reduction in aggregate R&D activities.
    Keywords: Dividend Puzzle, Search and Matching, Asset Liquidity, Over-the-Counter Markets
    JEL: E40 E44 E50 G11 G12
    Date: 2022–11–14
  23. By: Sergio Ocampo (University of Western Ontario); Fatih Guvenen (University of Minnesota, Federal Reserve Bank of Minneapolis, and NBER); Gueorgui Kambourov (University of Toronto); Burhan Kuruscu (University of Toronto); Daphne Chen (Econ One)
    Abstract: How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent return heterogeneity, we revisit this question. With heterogeneity, the two tax systems typically have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive and therefore generate more income pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average welfare. Turning to optimal taxation, the optimal wealth tax (OWT) is positive and yields large welfare gains by raising efficiency and lowering inequality. In contrast, the optimal capital income tax (OKIT) is negative—a subsidy—and delivers lower welfare gains than OWT, owing to the welfare losses from higher inequality. Furthermore, when the transition path is considered, the gains from OKIT turn into significant welfare losses for existing cohorts, whereas OWT continues to deliver robust welfare gains. These results suggest that moderate wealth taxation may be a more appealing alternative than capital income taxation, which can be significantly more distorting under return heterogeneity than under the equal-returns assumption.
    Keywords: wealth tax, capital income tax, optimal taxation, rate of return heterogeneity, power law models, Pareto tail, wealth inequality
    JEL: E21 E22 E62 H21
    Date: 2022
  24. By: Finkelstein-Shapiro, Alan; Mandelman, Federico S.; Nuguer, Victoria
    Abstract: Financial inclusion is strikingly low in emerging economies. In only a few years, financial technologies (fintech) have led to a dramatic expansion in the number of non-traditional credit intermediaries, but the macroeconomic and credit-market implications of this rapid growth of fintech are not known. We build a model with a traditional banking system and endogenous fintech intermediary creation and find that greater fintech entry delivers positive long-term effects on aggregate output and consumption. However, greater entry bolsters aggregate firm financial inclusion only if it stems from lower barriers to accessing fintech credit by smaller, unbanked firms. Decreasing entry costs for fintech intermediaries alone has only marginal effects in the aggregate. While firms that adopt fintech credit are less sensitive to domestic financial shocks and contribute to a reduction in output volatility, greater fintech entry also leads to greater volatility in bank credit, thereby introducing a tradeoff between output volatility and credit-market volatility.
    JEL: E24 E32 E44 F41 G21
    Date: 2022–01
  25. By: Emily G. Moschini; Gajendran Raveendranathan; Ming Xu
    Abstract: In the United States, one in three students enrolled in a bachelor’s degree program eventually drops out, and the stock of student loans held by these dropouts is sizable. We establish empirically that college students and their parents are overly optimistic about the probability of college graduation when making college enrollment decisions. We incorporate such over-optimism into an overlapping generations model, which also includes family transfers, federal student loans, and a private student loan market. We discipline these model attributes using panel data from the U.S. Bureau of Labor Statistics and the U.S. Department of Education, and then examine the impact of over-optimism and of expanding federal student loan limits in the presence of over-optimism. We find that over-optimism, despite reflecting mistaken beliefs, increases welfare for 18-year-olds as a result of equilibrium adjustments in income taxes, family transfers, and skill. Expanding federal student loan limits reduces welfare for low-skill 18-year-olds from poor families, a result driven by the presence of over-optimism.
    Keywords: Post-secondary education; Over-optimism; Student loans
    JEL: I22 I26 E7 G28 G5
    Date: 2022–12
  26. By: Mascarúa Lara Miguel A.
    Abstract: How does imperfect law enforcement affect drug trafficking, predation on firms, informality, and aggregate production? To quantify it, a general equilibrium occupational model is developed in which there is room for drug trafficking, crime against businesses, and tax evasion in the presence of imperfect institutions. Detailed micro-level data on business victimization and cartels in Mexico are used to calibrate the model. It is found that the imperfect application of the law generates considerable losses in production derived from a misallocation of occupations and resources. Finally, using counterfactual simulations, the effects of policies that seek to improve the allocation of resources are calculated. With complete law enforcement in the illegal drug market, the workers in that sector would relocate to the productive sector, and aggregate production would increase. Without crimes against businesses, which would allow a reallocation of work, capital, and occupations to the formal sector, production would increase even more. However, the largest effects come from a decrease in informality.
    Keywords: Misallocation;aggregate distortions;drug cartels;crime;formal and informal sectors
    JEL: O11 O17 O43 O47 K42
    Date: 2022–12
  27. By: Chiara Castelli (Fondazione Eni Enrico Mattei and Wiener Institut fur Internationale Wirtschaftsvergleiche); Marta Castellini (Fondazione Eni Enrico Mattei and Department of Civil, Environmental and Architectural Engineering, University of Padua); Emanuele Ciola (Fondazione Eni Enrico Mattei and Department of Economics and Management, University of Brescia); Camilla Gusperti (Fondazione Eni Enrico Mattei); Ilenia Gaia Romani (Fondazione Eni Enrico Mattei and Department of Economics and Management, University of Brescia); Sergio Vergalli (Fondazione Eni Enrico Mattei and Department of Economics and Management, University of Brescia)
    Abstract: The Water, Energy, Food and Ecosystems (WEFE) nexus refers to the system of complex and highly non-linear interconnections between these four elements. It now represents the basic framework to assess and design policies characterized by an holistic environmental end economical perspective. In this work, we provide a systematic review of the macroeconomic models investigating its components as well as combinations of them and their interlinkages with the economic system. We focus on four different types of macroeconomic models: Computable General Equilibrium (CGE) models, Integrated Assessment Models (IAMs), Agent-based Models (ABMs), and Dynamic Stochastic General Equilibrium (DSGE) models. On the basis of our review, we find that the structure of IAMs is currently the most used to represent the nexus complexity, while DSGE models focus only on single components but appear to be better suited to account for the randomization of exogenous shocks. CGE models and ABMs could be more effective on the side of the policy perspective. Indeed, the former can account for interlinkages across sectors and countries, while the latter can define theoretical frameworks that better approximate reality.
    Keywords: Agent-based, Computable general equilibrium, Dynamic stochastic general equilibrium, Integrated assessment, Macroeconomic models, Water-energy-food ecosystems nexus
    JEL: Q18 Q25 Q43 Q54 Q57
    Date: 2022–11
  28. By: Falilou Fall; Paul Cahu
    Abstract: This paper aims at quantifying the macroeconomic and distributional impacts of product market reforms and additional public investment using a DSGE model. The model reflects specific features of the South African economy. Tradable and non-tradable product markets are modelled separately, and a segmented labour market is designed to reproduce the labour market duality in South Africa between skilled and unskilled workers. The role of public investment on total factor productivity and its financing modality are taken into allowing the quantification of the net benefits of reforms.Our results show that enhancing competition in the non-tradable sector has a short run recessionary impact while deregulating the tradable sector is expansionary. Overall, the latter has a bigger impact on GDP. From a distributional perspective, a product market reform in both sectors benefits all income deciles. Finally, additional public infrastructure investment, either financed by raising VAT or capital income tax, increases GDP in the short-term less than product market reform in the tradable sector but is more expansionary in the long run, so a combination of both reforms would boost living standards.
    Keywords: Labour market, Product market, Productivity, Public investment, Structural reforms
    JEL: D24 E24 F13 F14 F41 J64 L11 L51
    Date: 2022–12–22
  29. By: Bent Jesper Christensen (Aarhus University, Dale T. Mortensen Center, Danish Finance Institute, CREATES); Luca Neri (University of Bologna, Dale T. Mortensen Center, Ca’ Foscari University of Venice, CREATES); Juan Carlos Parra-Alvarez (Aarhus University, Dale T. Mortensen Center, Danish Finance Institute and CREATES)
    Abstract: We provide a general state space framework for estimation of the parameters of continuous-time linear DSGE models from data that are only available at discrete points in time. Our approach relies on the exact discrete-time representation of the equilibrium dynamics, which allows avoiding discretization errors. Using the Kalman filter, we construct the exact likelihood for data sampled either as stocks or flows, and estimate frequency-invariant parameters by maximum likelihood. We address the aliasing problem arising in multivariate settings and provide conditions for precluding it, which is required for local identification of the parameters in the continuous-time economic model. We recover the unobserved structural shocks at measurement times from the reduced-form residuals in the state space representation by exploiting the underlying causal links imposed by the economic theory and the information content of the discrete-time observations. We illustrate our approach using an off-the-shelf real business cycle model. We conduct extensive Monte Carlo experiments to study the finite sample properties of the estimator based on the exact discrete-time representation, and show they are superior to those based on a naive Euler-Maruyama discretization of the economic model. Finally, we estimate the model using postwar U.S. macroeconomic data, and offer examples of applications of our approach, including historical shock decomposition at different frequencies, and estimation based on mixed-frequency data. JEL classification: C13, C32, C68, E13, E32, J22 Key words: DSGE models, continuous time, exact discrete-time representation, stock and flow variables, Kalman filter, maximum likelihood, aliasing, structural shocks
    Date: 2022–12–20
  30. By: Ning Zhang
    Abstract: Policymakers continuously debate the current U.S. Housing Voucher Program, which features a high degree of rationing and decreasing subsidy amount as income increases. This paper studies the effect of the Housing Voucher Program on low-income household labor supply and welfare. Using several datasets, I estimate a dynamic lifecycle model to study the long-term impacts of housing vouchers on employment, and examine how a set of policy reforms affect household labor supply and well-being. I show that voucher usage (as opposed to no vouchers) decreases female labor supply by 17% and male labor supply by 7% in the long run. Compared to the current program, a proposed reform that provides every recipient with a flat-rate subsidy increases female labor supply by 4% and leads to higher welfare. Policies that offer a lower subsidy to a larger population decrease labor supply by 3-4% and increase household welfare. Time-limited subsidies increase female employment by 4% and improve overall welfare.
    Date: 2022–12–06
  31. By: Perazzi, Elena; Bacchetta, Philippe
    Abstract: The impact of Central Bank Digital Currency (CBDC) is analyzed in a closed-economy model with monopolistic competition in banking and where CBDC is an imperfect substitute with bank deposits. The design of CBDC is characterized by its interest rate, its substitutability with bank deposits, and its relative liquidity. We examine how interest-bearing CBDC would affect the banking sector, public finance, GDP and welfare. Welfare may improve through three channels: seigniorage; a lower opportunity cost of money; and a redistribution away from bank owners. In our numerical analysis we find a maximum welfare improvement of 60 bps in consumption terms.
    Keywords: CBDC, Welfare, Substitutability
    JEL: E5
    Date: 2022–12–08
  32. By: Shi, Chengchun; Zhang, Shengxing; Lu, Wenbin; Song, Rui
    Abstract: Reinforcement learning is a general technique that allows an agent to learn an optimal policy and interact with an environment in sequential decision-making problems. The goodness of a policy is measured by its value function starting from some initial state. The focus of this paper was to construct confidence intervals (CIs) for a policy’s value in infinite horizon settings where the number of decision points diverges to infinity. We propose to model the action-value state function (Q-function) associated with a policy based on series/sieve method to derive its confidence interval. When the target policy depends on the observed data as well, we propose a SequentiAl Value Evaluation (SAVE) method to recursively update the estimated policy and its value estimator. As long as either the number of trajectories or the number of decision points diverges to infinity, we show that the proposed CI achieves nominal coverage even in cases where the optimal policy is not unique. Simulation studies are conducted to back up our theoretical findings. We apply the proposed method to a dataset from mobile health studies and find that reinforcement learning algorithms could help improve patient’s health status. A Python implementation of the proposed procedure is available at
    Keywords: bidirectional asymptotics; confidence interval; infinite horizons; reinforcement learning; value function; New Research Support Fund; DMS-1555244; DMS-2113637
    JEL: C1
    Date: 2022–07–01

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