nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒01‒23
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. A basic two-sector new Keynesian DSGE model of the Indian economy By Kumar, Anshul
  2. Optimal Bailouts in Banking and Sovereign Crises By Sewon Hur; Cesar Sosa-Padilla; Zeynep Yom
  3. Estimation and forecasting using mixed-frequency DSGE models By Meyer-Gohde, Alexander; Shabalina, Ekaterina
  4. Time to Say Goodbye: The Macroeconomic Implications of Termination Notice By Tomer Ifergane
  5. Optimal Monetary Policy and Liquidity with Heterogeneous Households By Florin Bilbiie; Xavier Ragot
  6. Mainly Employment: Survey-Based News and the Business Cycle By Riccardo M. Masolo
  7. Borrowing to Finance Public Investment: A Politico-economic Analysis of Fiscal Rules By Uchida, Yuki; Ono, Tetsuo
  8. Social Capital and Monetary Policy By Rustam Jamilov
  9. How Do Persistent Earnings Affect the Response of Consumption to Transitory Shocks? By Jeanne Commault
  10. Optimal Monetary Policy with and without Debt By Boris Chafwehé; Rigas Oikonomou; Romanos Priftis; Lukas Vogel
  11. Optimal Climate Policy as If the Transition Matters By Emanuele Campiglio; Simon Dietz; Frank Venmans
  12. Capital Flows in an Aging World By Zsófia L. Bárány; Nicolas Coeurdacier; Stéphane Guibaud
  13. Rational Inattention and the Business Cycle Effects of Productivity and News Shocks By Bartosz Maćkowiak; Mirko Wiederholt
  14. The Transmission of Keynesian Supply Shocks By Ambrogio Cesa-Bianchi; Andrea Ferrero
  15. Land Speculation and Wobbly Dynamics with Endogenous Phase Transitions By Tomohiro Hirano; Joseph E. Stiglitz
  16. The Wobbly Economy; Global Dynamics with Phase Transitions and State Transitions By Tomohiro Hirano; Joseph E. Stiglitz
  17. Trade Credit Default By Xavier Mateos-Planas; Giulio Seccia
  18. Consumer Bankrupcty, Mortgage Default and Labor Supply By Wenli Li; Costas Meghir; Florian Oswald
  19. Fiscal Rules and Public Investment: The Case of Peru, 2000-2019 By Mendoza Bellido, Waldo; Vega, Marco; Rojas, Carlos I.; Anastacio, Yuliño
  20. Budget Deficit in a Growing Monetary Economy: Ver. 2 By Tanaka, Yasuhito
  21. An Ergodic Theory of Sovereign Default By Damián Pierri; Hernán D. Seoane
  22. Greenflation: The cost of the green transition in small open economies By Airaudo, Florencia; Pappa, Evi; Seoane, Hernán
  23. Limited Energy Supply, Sunspots, and Monetary Policy By Nils Gornemann; Sebastian Hildebrand; Keith Kuester
  24. Sovereign Default and Liquidity: The Case for a World Safe Asset By François Le Grand; Xavier Ragot
  25. Asset Bubbles and Inflation as Competing Monetary Phenomena By Guillaume Plantin
  26. Money, e-money and consumer welfare By Carli, Francesco; Uras, Burak

  1. By: Kumar, Anshul
    Abstract: Indian economy is going through underlying changes in post-pandemic recovery process. Effect of policies, monetary or fiscal, on macroeconomy needs a thorough analysis in these recessionary times. In this context, this study develops a closed-economy DSGE model to see the impact of monetary policy on the Indian economy. The model includes price rigidities, and parameters are calibrated using the data on the Indian economy. The model includes two sectors - production and consumption, and an inflation-targeting regime following the Taylor rule. The model is simulated for a positive productivity shock and an expansionary monetary policy shock. Results show that a positive productivity shock improves economic activity, and an expansionary monetary policy shock increases output for the short term only.
    Keywords: DSGE models; New-Keynesian; monetary policy; general equilibrium; Indian economy; calibration
    JEL: C32 E32 E37 E5 E52
    Date: 2023–01–02
  2. By: Sewon Hur (Federal Reserve Bank of Dallas); Cesar Sosa-Padilla (University of Notre Dame/NBER); Zeynep Yom (Villanova University)
    Abstract: We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold governmentdebt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with the government sometimes finding it optimal to extend guaranteesover bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions and increase output, but also imply increasing government fiscal needs andpossible heightened default risk (i.e., they create a ‘diabolic loop’). We find that the optimal bailouts exhibit clear properties. Other things equal, the fraction of bankinglosses that the bailouts cover is: (i) decreasing in the level of government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of the bankingcrisis. Even though bailouts mitigate the adverse effects of banking crises, we find that the economy is ex ante better off without bailouts: Having access to bailouts lowers thecost of defaults, which in turn increases the default frequency, and reduces the levels of debt, output, and consumption.
    Keywords: Bailouts, Sovereign Defaults, Banking Crises, Contingent Transfers, Sovereignbank diabolic loop
    JEL: E32 E62 F34 F41 G01 G15 H63
    Date: 2022–12
  3. By: Meyer-Gohde, Alexander; Shabalina, Ekaterina
    Abstract: In this paper, we propose a new method to forecast macroeconomic variables that combines two existing approaches to mixed-frequency data in DSGE models. The first existing approach estimates the DSGE model in a quarterly frequency and uses higher frequency auxiliary data only for forecasting (see Giannone, Monti and Reichlin (2016)). The second method transforms a quarterly state space into a monthly frequency and applies, e.g., the Kalman filter when faced missing observations (see Foroni and Marcellino (2014)). Our algorithm combines the advantages of these two existing approaches, using the information from monthly auxiliary variables to inform in-between quarter DSGE estimates and forecasts. We compare our new method with the existing methods using simulated data from the textbook 3-equation New Keynesian model (see, e.g., Galí (2008)) and real-world data with the Smets and Wouters (2007) model. With the simulated data, our new method outperforms all other methods, including forecasts from the standard quarterly model. With real world data, incorporating auxiliary variables as in our method substantially decreases forecasting errors for recessions, but casting the model in a monthly frequency delivers better forecasts in normal times.
    Keywords: Mixed-frequency data, DSGE models, Forecasting, Estimation, Temporal aggregation
    JEL: E12 E17 E37 E44 C61 C68
    Date: 2022
  4. By: Tomer Ifergane (London School of Economics (LSE); Centre for Macroeconomics (CFM); Ben-Gurion University of the Negev)
    Abstract: In many countries, a sizeable portion of unemployment insurance is provided by employment protection policies, most commonly, termination notice. I show how termination notice alters wage bargaining outcomes and disincentivises job creation. I study the insurance role of termination notice in a general equilibrium heterogeneous agents model calibrated to moments of the Israeli labour market, which has both conventional unemployment insurance and termination notice. I demonstrate the complementarity between the two policies in the presence of moral hazard, which makes their joint design desirable. Finally, I find that termination notice is underutilised in the Israeli case.
    Keywords: Termination notice, Employment protection, Unemployment insurance, Incomplete markets, Search and matching, Heterogeneous agents, Optimal policy
    JEL: E21 E24 E60 J63 J64 J65 D52 D58
    Date: 2022–08
  5. 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
  6. By: Riccardo M. Masolo (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: Surprises in survey responses on news heard about business conditions explain a large share of the business cycle variation in labor market variables and real macro aggregates. They produce strong comovement in unemployment, vacancies, consumption, investment, and output, and a muted response of inflation and measured Total Factor Productivity. Reports about changes in labor market conditions are the key driver of the overall business conditions index. Vector Autoregression impulse-responses can be matched by a New-Keynesian DSGE in which individual risk is modeled explicitly and the assumption of free entry into vacancies is relaxed.
    Keywords: Consumer Surveys, Unemployment, Business Cycles, Search Frictions, Individual Risk
    JEL: C30 E31 E32
    Date: 2022–07
  7. By: Uchida, Yuki; Ono, Tetsuo
    Abstract: This study focuses on the golden rule of public finance, which distinguishes public investment from consumption spending when borrowing and permits only debt-financed public investment, in an overlapping-generations model with physical and human capital accumulation. In this model, the rule and the associated fiscal policy are endogenous, chosen in each period by a short-lived government representing existing generations. We calibrate the model to Germany, Japan, and the United Kingdom, where the rule has been in place, and show that Germany follows the rule while Japan and the United Kingdom break it, which is consistent with current literature. Subsequently, we evaluate the government’s choice and the resulting political distortions of physical and human capital accumulation from the perspective of future generations. We compute the optimal proportion of debt-financed public investment in terms of minimizing the political distortions and find that in each country, the optimal proportion is lower than the one determined by the short-lived government.
    Keywords: Fiscal Rule; Golden Rule of Public Finance; Probabilistic Voting; Overlapping Generations; Political Distortions
    JEL: D70 E62 H63
    Date: 2021–08–22
  8. By: Rustam Jamilov (University of Oxford)
    Abstract: The U.S. have experienced a significant decline in generalized trust over the past three decades. Has this secular trend impacted central banking? Empirically, we document that states with high levels of institutional and interpersonal trust are robustly more responsive to monetary policy shocks. Theoretically, we embed a circle of trust block into the New Keynesian framework in continuous time. The calibrated model predicts that monetary policy has become 20% less effective due to the decline in trust. Our findings firm up the social capital channel of monetary non-neutrality and warn that crises of trust could lead to crises of policy inefficacy.
    Keywords: Monetary policy, trust, social capital
    JEL: E5 E7 Z1
    Date: 2022–11
  9. 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
  10. By: Boris Chafwehé (European Commission (Joint Research Center) and IRES (UCLouvain)); Rigas Oikonomou (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Romanos Priftis (European Central Bank); Lukas Vogel (European Commission (ECFIN))
    Abstract: We derive optimal monetary policy rules when government debt may be a constraint for the monetary authority. We focus on an environment where fiscal policy is exogenous, setting taxes according to a rule that specifies the tax rate as a function of lagged debt. In the case where taxes do not adjust sufficiently to ensure the solvency of debt, then the monetary authority is burdened by debt sustainability. Under this scenario, optimal monetary policy is a ‘passive money rule’, setting the interest rate to weakly respond to inflation. We characterize analytically the optimal inflation coefficients under alternative specifications of the central bank loss function, using a simple Fisherian model, but also the canonical New Keynesian model. We show that the maturity structure of debt is a key variable behind optimal policy. When debt maturity is calibrated to US data, our model predicts that a simple inflation targeting rule where the inflation coefficient is 1 − 1 Maturity is a good approximation of the optimal policy. Lastly, our framework can also nest the case where fiscal policy adjusts taxes to satisfy the intertemporal debt constraint. In this scenario optimal monetary policy is an active policy rule. We contrast the properties of active and passive policies, using the analytical optimal policy rules derived from this framework of monetary/fiscal interactions.
    Keywords: Fiscal/monetary policy interactions, Fiscal theory of the price level, Ramsey policy
    JEL: E31 E52 E58 E62 C11
    Date: 2022–12–08
  11. By: Emanuele Campiglio; Simon Dietz; Frank Venmans
    Abstract: The optimal transition to a low-carbon economy must account for adjustment costs in switching from dirty to clean capital, technological progress, and economic and climatic shocks. We study the low-carbon transition using a dynamic stochastic general equilibrium model with emissions abatement costs calibrated on a large energy modelling database, solved with recursive methods. We show how capital inertia puts upward pressure on emissions and temperatures in the short run, but that nonetheless it is optimal to actively disinvest from – to ‘strand’ – a significant share of the dirty capital stock. Conversely, clean technological progress, as well as uncertainty about climatic and economic factors, lead to lower emissions and temperatures in the long run. Putting these factors together, we estimate a net premium of 33% on the optimal carbon price today relative to a ‘straw man’ model with perfect capital mobility, fixed abatement costs and no uncertainty.
    Keywords: adjustment costs, carbon price, climate change, low-carbon transition, stranded assets, technological progress, uncertainty
    JEL: C61 E22 H23 O44 Q54 Q55
    Date: 2022
  12. By: Zsófia L. Bárány (CEU - Central European University [Budapest, Hongrie], CEPR - Center for Economic Policy Research - CEPR); Nicolas Coeurdacier (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Stéphane Guibaud (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We investigate the importance of worldwide demographic evolutions in shaping capital flows across countries. Our lifecycle model incorporates crosscountry differences in fertility and longevity as well as differences in countries' ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers uphill capital flows from emerging to advanced economies, while country-specific demographic evolutions reallocate capital towards countries aging more slowly. Our quantitative multi-country overlapping generations model explains a large fraction of long-term capital flows across advanced and emerging countries.
    Keywords: Aging, Household Saving, International Capital Flows
    Date: 2022
  13. By: Bartosz Maćkowiak (CEPR - Center for Economic Policy Research - CEPR); Mirko Wiederholt (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR, LMU - Ludwig Maximilian University [Munich])
    Abstract: We solve a real business cycle model with rational inattention (an RI-RBC model). In the standard model, anticipated fluctuations in productivity fail to cause business cycle comovement. In response to news about higher future productivity, consumption rises but employment and investment fall. Introducing rational inattention helps produce comovement. Agents choose an optimal signal about the state of the economy. The optimal signal turns out to confound current with expected future productivity. Labor and investment demand rise after a news shock, causing an output expansion. Rational inattention also improves the propagation of a standard productivity shock, by inducing persistence.
    Keywords: Information choice, Rational inattention, Real business cycle model, News shocks, Productivity shocks
    Date: 2021–12
  14. By: Ambrogio Cesa-Bianchi (Bank of England; Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)); Andrea Ferrero (University of Oxford; Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR))
    Abstract: Sectoral supply shocks can trigger shortages in aggregate demand when strong sectoral complementarities are at play. US data on sectoral output and prices offer support to this notion of “Keynesian supply shocks” and their underlying transmission mechanism. Demand shocks derived from standard identification schemes using aggregate data can originate from sectoral supply shocks that spillover to other sectors via a Keynesian supply mechanism. This finding is a regular feature of the data and is independent of the effects of the 2020 pandemic. In a New Keynesian model with input-output network calibrated to 3-digit US data, sectoral productivity shocks generate the same pattern for output growth and inflation as observed in the data. The degree of sectoral interconnection, both upstream and downstream, and price stickiness are key determinants of the strength of the mechanism. Sectoral shocks may account for a larger fraction of business cycle fluctuations than previously thought.
    Date: 2021–08
  15. By: Tomohiro Hirano (Royal Holloway, University of London; Centre for Macroeconomics (CFM); Canon Institute for Global Studies); Joseph E. Stiglitz (Columbia University)
    Abstract: This paper examines the global macro-dynamics of a dynamic model with capital and land with rational expectations. Through the interactions between capital accumulation and land prices, the economy experiences phase transitions, endogenously moving from back and forth from situations with unique and multiple momentary equilibria. Consequently, there can be a plethora of rational expectation equilibria trajectories, without any smooth convergence properties, neither converging to a steady state or even to a limit cycle—what we call “wobbly” macro-dynamics. The price of land and other key macro variables (wages, interest rates, output, consumption, wealth, capital stock) endogenously fluctuate within a well-identified range with repeated boom-bust cycles. The key disturbance to the economy is endogenous; even with rational expectations, there can be real estate booms, with resource allocation deteriorating as land prices increase, crowding out productive investments; but such unsustainable land price booms inevitably are followed by a crash. We analyze the set of parameter values for which wobbly fluctuations occur, show that with some parameter values, the only r.e. trajectories involve such wobbly dynamics, demonstrate how changes in parameters affect global macro-dynamics, and show how policy interventions can affect stability and social welfare.
    Keywords: Interactions between land prices and capital, Critical point, Endogenous phase transitions, Endogenous crash
    Date: 2021–12
  16. By: Tomohiro Hirano (Royal Holloway, University of London; Centre for Macroeconomics (CFM); Canon Institute for Global Studies); Joseph E. Stiglitz (Columbia University)
    Abstract: This paper develops a model providing a markedly different picture of the dynamics of capitalism from the standard model with infinitely lived individuals with rational expectations. Using the standard life-cycle model with production, we show that under not implausible conditions, starting from any initial conditions, there can be a plethora of rational expectations dynamics, including “wobbly macro-dynamics” i.e. the macroeconomy can bounce around infinitely without converging depending on people’s beliefs without regular periodicity. As a result, laissez-faire market economies can be plagued by repeated periods of instabilities, inefficiencies, and unemployment. In wobbly dynamics, the economy endogenously changes from a state with a unique momentary equilibrium into one with multiple momentary equilibria, or vice versa, which we call a phase transition. Various patterns of dynamics can occur, depending on how phase transitions occur. We identify all possible patterns of dynamics (e.g. unique and multiple, stable and unstable, steady states, with or without wobbly dynamics), providing a complete characterization of the parameter values under which each may occur. Moreover, we provide a complete analytic representation of all the possible state transitions, i.e. how a change in some key parameter changes abruptly the set of feasible global dynamics. In some cases, if a stable “high output” (an economic boom) benefits from an above trend temporary productivity increase, there is a state transition from a stable regime to an unstable one. The economy enters into a situation where there are multiple equilibria, with the boom now being unstable, leading to the possibility of a large-scale collapse; the economy can enter a stagnation trap characterized by involuntary unemployment. In other cases, an increase in productivity shifts the economy from the economy from the stable boom to a completely wobbly economy in which the economy endogenously fluctuates in both full-employment and involuntary unemployment regions. Thus, the economy can exhibit long run hysteresis effects. There are government interventions which can stabilize the economy and increase societal welfare.
    Keywords: Multiplicity of momentary equilibria, Wobbly dynamics, Phase Transitions, State transitions
    JEL: C61 E32 O11
    Date: 2022–01
  17. By: Xavier Mateos-Planas (Queen Mary University of London; Centre for Macroeconomics (CFM)); Giulio Seccia (Nazarbayev University)
    Abstract: Recent micro evidence shows that default on trade credit repayments is substantial. What is the role of trade credit default in the transmission of macroeconomic shocks? We build a heterogeneous-firms quantitative model where an intermediate input is purchased by final-goods producers partly on trade credit before observing the realisation of their productivity. A bad productivity shock may ex-post induce final good producers to skip payment to suppliers or, alternatively, liquidate via bankruptcy. Aggregate trade credit delinquency and liquidation are taken into account by input suppliers; the individual liquidation risk is priced in by lenders supplying bank credit. The response of trade-credit delinquency and bankruptcy, via their effect on intermediate input supplier’s markups, provides an amplification mechanism of aggregate shocks. We consider productivity, financial and volatility shocks. In a calibrated version of the model, the surge in trade credit default that follows a negative shock accounts for a large portion of the fall in output and employment, and feeds into further firm liquidation and delinquency. For instance, trade-credit default accounts for about one third of the impact of a volatility shock.
    Keywords: trade credit, default, delinquency and bankruptcy, heterogeneous firms, amplification of macroeconomic shocks, markups
    JEL: D21 D25 E32 E44 G33
    Date: 2021–11
  18. By: Wenli Li (Federal Reserve Bank Philadelphia); Costas Meghir (Yale University [New Haven], CEPR - Center for Economic Policy Research - CEPR); Florian Oswald (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, {education specific} productivity shocks, and catastrophic consumption events, while bankruptcy is governed by the basic institutional framework in the US as implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and mortgages combined with data from the American Community Survey. We use the model to understand the relative importance of the two chapters (7 and 13) for each of our two education groups that differ in both preferences and wage profiles. We also provide an evaluation of the BACPCA reform. Our paper demonstrates importance of distributional effects of Bankruptcy policy.
    Keywords: Lifecycle, Bankruptcy, Mortgage Default, Housing, Labor Supply, Consumption, Education, Insurance, Moral hazard
    Date: 2022–03–17
  19. By: Mendoza Bellido, Waldo; Vega, Marco; Rojas, Carlos I.; Anastacio, Yuliño
    Abstract: This article has three goals. First, it describes the genesis of fiscal rules in Peru and its degree of compliance. Second, it estimates the effect of fiscal rules adoption on public investment. Last, it analyzes the impact of alternative fiscal rules on public investment and public debt sustainability. Our main results are as follows. First, the implementation of fiscal rules in the year 2000 caused a 60 to 80 percent fall in public investment relative to several counterfactuals. Second, our DSGE model suggests a Structural Fiscal Rule would have increased the consumers welfare in the period 2000-2019 more than other fiscal designs. This rule reduces the procyclicality of public investment under commodity price shocks and macroeconomic volatility under world interest rate shocks. Third, a Structural Fiscal Rule has the lowest probability of exceeding the current public debt limit (30 percent of GDP), although there is a trade-off between investment-friendly rules and fiscal sustainability issues. Nevertheless, our quantitative results are limited to short spans of analysis. With a long-run perspective, we may say that fiscal rulesdespite constant modifications and recurring non-compliancehave fulfilled their original and most important goal of achieving the consolidation of public finances.
    Keywords: public investment;Fiscal Rules;fiscal sustainability
    Date: 2021–01
  20. By: Tanaka, Yasuhito
    Abstract: Using a traditional neoclassical two-period overlapping generations model that takes into account consumers’ money holdings, we examine the existence of budget deficit in an economy which grows at the constant positive rate. The following results will be shown. 1) Budget deficit is necessary to achieve full employment under constant prices of goods. 2) If the actual budget deficit is larger than the value which is necessary and sufficient for full employment under constant prices, an inflation is triggered. 3) If the actual budget deficit is smaller than the value which is necessary and sufficient for full employment under constant prices, a recession occurs. Therefore, full employment at constant prices cannot be achieved with a balanced budget. If money as well as goods are produced by capital and labor, budget deficit is not necessary for full employment under constant prices.
    Keywords: budget deficit, economic growth, overlapping generations model
    JEL: E00 E12 E24
    Date: 2022
  21. By: Damián Pierri (Universidad Carlos III de Madrid); Hernán D. Seoane (Universidad Carlos III de Madrid)
    Abstract: We present the conditions under which the dynamics of a sovereign default model of private external debt are stationary, ergodic and globally stable. As our results are constructive, the model can be used for the accurate computation of global long run stylized facts. We show that default can be used to derive a stable unconditional distribution (i.e., a stable stochastic steady state), one for each possible event, which in turn allows us to characterize globally positive probability paths. We show that the stable and the ergodic distribution are actually the same object. We found that there are 3 type of paths: non-sustainable and sustainable; among this last category trajectories can be either stable or unstable. In the absence of default, non-sustainable and unstable paths generate explosive trajectories for debt. By deriving the notion of stable state space, we show that the government can use the default of private external debt as a stabilization policy
    Keywords: Default; Private external debt; Ergodicity; Stability
    JEL: F41 E61 E10
    Date: 2022–12
  22. By: Airaudo, Florencia; Pappa, Evi; Seoane, Hernán
    Abstract: We propose a new model of a small open economy with efficient energy use to investigate the inflationary dynamics along the green transition. The model incorporates the production of green energy that substitutes exogenous brown energy sources in energy production. Production is characterized by low substitutability between resource and traditional inputs that firms can alter through directed input-saving technical change. We study transitional dynamics induced by exogenous increases of brown energy prices and/or changes in the brown energy taxation; green subsidies and green public investment. Increases in brown energy prices and taxes decrease the usage of brown energy but do not expand significantly the green sector, they simply improve energy efficiency use, surging firm’s marginal costs leading to greenflation and output losses. Public investment and subsidies effectively increase the usage of green energy. Green investment expands output and reduces green energy prices as it increases the productivity of the green sector. Subsidies imply a slower transition with small output costs and elevated green energy prices. We discuss the fiscal costs and welfare implications of the transition using different welfare metrics.
    Keywords: Energía, Evaluación de impacto, Políticas públicas,
    Date: 2022
  23. By: Nils Gornemann (Board of Governors of the Federal Reserve System); Sebastian Hildebrand (University of Bonn); Keith Kuester (University of Bonn)
    Abstract: A common assumption in macroeconomics is that energy prices are determined in a world-wide, rather frictionless market. This no longer seems an adequate description for the situation that much of Europe currently faces. Rather, one reading is that shortages exist in the quantity of energy available. Such limits to the supply of energy mean that the local price of energy is affected by domestic economic activity. In a simple open-economy New Keynesian setting, the paper shows conditions under which energy shortages can raise the risk of self-fulfilling fluctuations. A firmer focus of the central bank on input prices (or on headline consumer prices) removes such risks.
    Keywords: Energy crisis, macroeconomic instability, sunspots, monetary policy, heterogeneous households
    JEL: E31 E32 E52 F41 Q43
    Date: 2022–12
  24. By: François Le Grand (EM - emlyon business school, ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]); 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: This paper presents a positive and normative study of a world financial market when sovereign countries can default on their debt. We construct a tractable model that enables us to study sovereign default in general equilibrium. The amount of safe assets is thus endogenous and determined by international risk-sharing. We characterize the equilibrium structure and we show that the market equilibrium can generate multiple equilibria. In addition, the market equilibrium is not constrained-efficient because countries do not fully internalize the value of their debt being used as liquidity. We prove that a world fund issuing a safe asset increases aggregate welfare. The fund's relationship with the IMF's Special Drawing Rights is discussed.
    Keywords: Sovereign Default, Safe Asset, International Liquidity
    Date: 2021–07
  25. 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
  26. By: Carli, Francesco; Uras, Burak
    Abstract: We develop a micro-founded monetary model to inquire the role of a privately provided e-money instrument for household consumption smoothing and welfare. Different from fiat money, e-money users pay electronic transaction fees, but in turn e-money reduces spatial separation frictions and enables risk-sharing. We characterize the conditions that promotes e-money to be Pareto improving and the conditions when e-money reduces its users' welfare - despite for the consumption-smoothing it induces. We calibrate our model for the context of M-Pesa in Kenya and conduct a quantitative analysis. Since our quantitative analysis reveals a limited role for privately provided e-money, we recommend the optimality of e-money regulation.
    Keywords: E-Money, M-Pesa, Risk-Sharing, Welfare, Monetary Policy
    JEL: E41 E44 G23 O11
    Date: 2022

This nep-dge issue is ©2023 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.