nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒03‒13
fifteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. AK Type Production Function in DSGE Model By Masaya Yasuoka; Minoru Hayashida; Ryoichi Namba; Hiroyuki Ono
  2. The Canadian Neutral Rate of Interest through the Lens of an Overlapping-Generations Model By Martin Kuncl; Dmitry Matveev
  3. Analysis of the Transmission of Carbon Tax using a Multi-Sector Dynamic Stochastic General Equilibrium Model By Kohei Matsumura; Tomomi Naka; Nao Sudo
  4. How Costly Will Reining in Inflation Be? It Depends on How Rational We Are By Jorge Alvarez; Allan Dizioli
  5. Regulatory Collateral Requirements and Delinquency Rate in a Two-Agent New Keynesian Model By Aicha Kharazi; Francesco Ravazzolo
  6. Is the Green Transition Inflationary? By Marco Del Negro; Julian di Giovanni; Keshav Dogra
  7. The Green Metamorphosis of a small Open Economy By Florencia S. Airaudo; Evi Pappa; Hernán D. Seoane
  8. Optimal Fiscal Reform with Many Taxes By Daniel R. Carroll; Andre Luduvice; Eric R. Young
  9. Optimal simple monetary policy rules for a resource-rich economy and the Zero Lower Bound By Mikhail Andreyev; Andrey Polbin
  10. Dynamic Tax Evasion and Growth with Heterogeneous Agents By Francesco Menoncin; Andrea Modena
  11. Discriminación salarial de género, efectos en la política monetaria y fluctuación cíclica del producto By Valdivia Coria, Joab Dan
  12. Learning in a Complex World: Insights from an OLG Lab Experiment By Cars Hommes; Stefanie J. Huber; Daria Minina; Isabelle Salle
  13. Inflation, Output, and Welfare in the Laboratory By Janet Hua Jiang; Daniela Puzzello; Cathy Zhang
  14. Negotiating the Wilderness of Bounded Rationality through Robust Policy By Szabolcs Deak; Paul Levine; Afrasiab Mirza; Son Pham
  15. Marriage, Labor Supply and the Dynamics of the Social Safety Net By Hamish Low; Costas Meghir; Luigi Pistaferri; Alessandra Voena

  1. By: Masaya Yasuoka (Kwansei Gakuin University); Minoru Hayashida (The University of Kitakyushu); Ryoichi Namba (Chubu Region Institute for Social and Economic Research); Hiroyuki Ono (Toyo University)
    Abstract: Some DSGE (Dynamic Stochastic General Equilibrium) models include no consideration of long-run economic growth. Our paper presents consideration of a DSGE model with economic growth in the long run. As shown by the data, economic growth continues in terms of a long span. Therefore, we consider that it is appropriate to examine short-run and long-run policy effects on macroeconomic variables in a model in which long-run economic growth continues. The contribution represented by our paper is the description of the simple endogenous growth DSGE model. Although there exist some related papers about endogenous growth DSGE models, our setting is a very simple DSGE model, showing the ease of setting a DSGE model with endogenous growth.
    Keywords: DSGE model, Endogenous growth
    JEL: E60
    Date: 2023–02
  2. By: Martin Kuncl; Dmitry Matveev
    Abstract: The neutral rate of interest is an important concept and communication tool for central banks. We develop a small open economy model with overlapping generations to study the determinants of the neutral real rate of interest in a small open economy. The model captures domestic factors such as population aging, declining productivity, rising government debt and inequality. Foreign factors are captured by changes in the global neutral real rate. We use the model to evaluate secular dynamics of the neutral rate in Canada from 1980 to 2018. We find that changes in both foreign and domestic factors resulted in a protracted decline in the neutral rate.
    Keywords: Economic models; Interest rates; Monetary policy
    JEL: E21 E22 E43 E50 E52 E58 F41
    Date: 2023–02
  3. By: Kohei Matsumura (Bank of Japan); Tomomi Naka (Bank of Japan); Nao Sudo (Bank of Japan)
    Abstract: Carbon tax has attracted increasing attention as a means of curbing greenhouse gas (GHG) emissions. While the implementation of carbon taxes necessarily involves consideration of the impact across different sectors and different periods, most existing studies use models which do not provide a detailed account of either sectoral interaction or the dynamic nature of the responses of households and firms. To fill this gap, we construct a New Keynesian multi-sector dynamic stochastic general equilibrium (DSGE) model with an input-output structure of intermediate inputs and an investment network calibrated to Japan's economy. We study the impact over time of carbon tax on different sectors, on aggregate GDP, and on GHG emissions. We then consider the long-term implications through a steady-state analysis, and the short- to medium-term implications by a simulation from 2020 to 2050, under various scenarios with different tax base compositions and announcement timings. We show that the impact on the trade-off between output and GHG emissions is importantly affected by inter-sectoral interactions among firms, and by the intertemporal decisions of households and firms.
    Keywords: carbon tax, climate change, transition risks, input-output linkages
    JEL: D57 E22 H23 Q54
    Date: 2023–02–17
  4. By: Jorge Alvarez; Allan Dizioli
    Abstract: We document that past highly inflationary episodes are often characterized by a steeper inflationslack relationship. We show that model-generated data from a standard small Dynamic Stochastic General Equilibrium (DSGE) model can replicate this empirical finding when estimated with different expectation formation processes. When inflation becomes de-anchored and expectations drift, we can observe high inflation even with a mildly positive output gap in response to cost-push shocks. The results imply that we should not use an unconditioned (not controlling for expectations change) Phillips curve estimated in normal times to predict the cost of reining in inflation. Our optimal policy exercises prescribe early monetary policy tightening and then easing in the context of positive output gaps and inflation far above the central bank target.
    Keywords: DSGE; inflation dynamics; optimal monetary policy; forecasting and simulation; bayesian estimation
    Date: 2023–02–03
  5. By: Aicha Kharazi (Free University of Bozen-Bolzano, Italy); Francesco Ravazzolo (BI Norwegian Business School, Norway; Free University of Bozen-Bolzano, Italy; Rimini Centre for Economic Analysis)
    Abstract: In light of the high levels of systemic risks and the elevated probability of a crisis occurring, understanding the effectiveness of macro-prudential policies is becoming increasingly crucial. We incorporate a collateral-based macro-prudential policy into a two-agent New Keynesian model, this policy adjusts counter-cyclically to the state of the borrowing sector. We show that regulators accommodate high delinquency rates by allowing for tighter collateral requirements. An active macro-prudential policy amplifies the impact of a monetary policy shock on output and labor supply, and this policy emerges as a potential tool to prevent the risk of delinquency in the short run.
    Keywords: macro prudential policies, credit supply, collateral constraint, monetary policy
    JEL: E32 E44 G21
    Date: 2023–02
  6. By: Marco Del Negro; Julian di Giovanni; Keshav Dogra
    Abstract: We develop a two-sector New Keynesian model to analyze the inflationary effects of climate policies. Climate policies do not force a central bank to tolerate higher inflation, but may generate a tradeoff between the central bank's objectives for inflation and real activity. The presence and size of this tradeoff depends on how flexible prices are in the “dirty” and “green” sectors relative to the rest of the economy, and on whether climate policies consist of taxes or subsidies.
    Keywords: inflation; central bank's tradoffs; green transition
    JEL: E12 E31 E52 Q54
    Date: 2023–02–01
  7. By: Florencia S. Airaudo (Universidad Carlos III de Madrid); Evi Pappa (Universidad Carlos III de Madrid); Hernán D. Seoane (Universidad Carlos III de Madrid)
    Abstract: We design a small open economy model where production combines energy and traditional factors with low short run substitutability and efficient technology adoption. We study green transitional dynamics. Permanent increases in brown energy prices induce a green transition with short run inflation and persistent output losses. Fiscal policy impacts the transition. Brown energy taxes are inflationary and crowd out brown energy use in favor of green energy. Green public investment or green subsidies have moderate macroeconomic effects, but do not crowd out brown energy use. We discuss fiscal costs and evaluate welfare along the green transition using different metrics
    Date: 2023–02
  8. By: Daniel R. Carroll; Andre Luduvice; Eric R. Young
    Abstract: We study the optimal one-shot tax reform in the standard incomplete markets model where households differ in their wealth, earnings, permanent labor skill, and age. The government can provide transfers by raising tax revenue and has several tax instruments at its disposal: a flat capital income tax, a flat consumption tax, and a non-linear labor income tax. The optimal fiscal policy funds a transfer that is nearly 50 percent of GDP through a combination of very high taxes on consumption and capital income. The labor tax schedule has a high average rate but is also moderately progressive. We find an identical outcome when policy is instead determined by majority voting. Finally, we offer suggestive empirical evidence that households’ preferences for tax and redistribution are more strongly associated with political identity than economic status.
    Keywords: Optimal Taxation; Inequality; Heterogeneous Agents; Incomplete Markets; Voting
    JEL: E62 E21 D72 H21
    Date: 2023–02–09
  9. By: Mikhail Andreyev (Bank of Russia, Russian Federation; Russian Presidential Academy of National Economy and Public Administration under the President of the Russian Federation (RANEPA), Russian Federation); Andrey Polbin (Russian Presidential Academy of National Economy and Public Administration under the President of the Russian Federation (RANEPA), Russian Federatio; Gaidar Institute for Economic Policy, Russian Federation)
    Abstract: In this article, we study the optimal simple monetary policy rules under a Zero Lower Bound (ZLB) using a DSGE model. The modeled economy is open and highly dependent on the terms of trade (TOT). Economic dynamics is the result of a TOT shock and an external interest rate shock. Using impulse response functions, we show that the presence of the ZLB reduces the impact of positive external shocks. This means greater growth in real interest rates and lesser growth in consumption and production. The monetary authority minimizes the volatility of key macroeconomic indicators. The optimal parameters for the rule turn out to be such that the regulator de facto reduces the probability of being at the ZLB. At the ZLB, the regulator is less responsive to inflation changes, and the interest rate is more persistent. In the case of Russia, we have got low probability estimate of hitting the ZLB under the current monetary policy and a long-term value of the interest rate of 6%. The gap reaction parameter and interest rate persistence parameter for the current monetary policy are in the range of values for optimal monetary policy rules. The current CPI reaction parameter is much less than the optimal one. This implies a higher probability of hitting the ZLB in the optimum than under the current monetary policy. We also found that under current monetary policy, the likelihood of reaching the effective lower bound (ELB), defined by the alternative households' ability to save, is quite significant
    Keywords: DSGE models, zero lower bound, nonlinear models, optimal policy, monetary policy, terms of trade
    JEL: D58 E32 E52 E58
    Date: 2021–10
  10. By: Francesco Menoncin; Andrea Modena
    Abstract: We develop a tractable model of a production economy in which public capital improves aggregate productivity and the taxpayers have heterogeneous evasion opportunities. We show that, by issuing bonds, compliant taxpayers supply the evaders with an instrument to hedge against auditing risks, thereby expanding their evasion capacity. Moreover, we demonstrate that a higher share of tax evaders reduces the economy’s total factor productivity but has a hump-shaped relationship with the growth rate of aggregate capital.
    Keywords: Dynamic tax evasion; general equilibrium; growth; heterogeneous agents
    JEL: E20 G11 H26
    Date: 2023–02
  11. By: Valdivia Coria, Joab Dan
    Abstract: The purpose of this research is to demonstrate the benefits of monetary policy based on wage equality in the labor market. The investigation considers the unpaid work that women assume, within the household. The results demonstrate wage discrimination between men and women is related to differential labor costs. Unemployment women take on unpaid work at home due to a decrease in their bargaining power compared to men in taking on household chores. Simulations show that an expansionary monetary policy is less effective the larger the wage gap between men and women is. With a wage gap of 17pp, Bolivia loses 0.16pp of GDP growth as a consequence of positive monetary policy shocks.
    Keywords: Dynamic stochastic general equilibrium (DSGE) model, gender wage discrimination, unpaid work, monetary policy transmission
    JEL: D13 D31 E32 E52 J71
    Date: 2023–02–09
  12. By: Cars Hommes; Stefanie J. Huber; Daria Minina; Isabelle Salle
    Abstract: This paper brings novel insights into group coordination and price dynamics in complex environments. We implement an overlapping-generation model in the lab where output dynamics are given by the well-known chaotic quadratic map. This model structure allows us to study previously unexplored parameter regions where perfect-foresight dynamics exhibit chaotic dynamics. This paper highlights three key findings. First, the price converges to the simplest equilibria, namely either the monetary steady state or the two-cycle in all markets. Second, we document a novel and intriguing finding: a non-monotonicity of the behavior when complexity increases. Convergence to the two-cycle occurs for the intermediate parameter range, while the extreme scenarios of both a simple, stable two-cycle and highly nonlinear dynamics (chaos) lead to coordination on the steady state in the lab. All indicators of coordination and convergence significantly exhibit this non-monotonic relationship in the learning-to-forecast experiments. This finding also persists in the learning-to-optimize design. Finally, convergence in the learning-to-optimize experiment is more challenging to achieve: coordination on the two-cycle is never observed, although the two-cycle Pareto dominates the steady state.
    Keywords: Business fluctuations and cycles; Economic models
    JEL: C62 C68 C91 C92 E13 E70 G12 G41
    Date: 2023–02
  13. By: Janet Hua Jiang; Daniela Puzzello; Cathy Zhang
    Abstract: We develop an experimental framework to investigate the quantity theory of money and the real effects of inflation in an economy where money serves as a medium of exchange. We test the classical view that inflation reduces output and welfare by taxing monetary exchange. Inflation is engineered by constant money growth. We conduct three treatments, where the newly issued money is used to finance government spending, lump-sum transfers, and proportional transfers, respectively. Experimental results largely support theoretical predictions. Higher money growth leads to higher inflation. Output and welfare are significantly lower with government spending, and output is significantly lower with lump-sum transfers, while there are no significant real effects with proportional transfers. A deviation from theory is that the detrimental effect of money growth in our framework depends on the implementation scheme and is stronger with government spending than with lump-sum transfers.
    Keywords: Inflation and prices; Inflation: costs and benefits; Monetary policy
    JEL: C92 D83 E40
    Date: 2023–02
  14. By: Szabolcs Deak (University of Exeter); Paul Levine (University of Surrey); Afrasiab Mirza (University of Birmingham); Son Pham (University of Hamburg)
    Abstract: We show how the “wilderness of non-rationality" posed for the policymaker may be negotiated by designing a robust Taylor-type monetary rule across a RE NK model and competing behavioural alternatives. The latter consist of a model with “Euler learning" and a bounded rational one with myopia due to Gabaix (2020). For the former expectations of endogenous variables take the form of a general heuristic rule, encompassing simple adaptive expectations, that is supported by an experiment study. This gives four competing NK models, the benchmark one with rational expectations (model RE), Euler learning with a simple adaptive expectations heuristic rule (model EL-SAE), Euler learning with the general rule (model EL-GAE) and the Gabaix bounded rational model (model BR). In our novel forward-looking approach, policymakers weight models based on relative forecasting performance rather than Bayesian model averaging. Our main results are: first, three models completely dominate model EL-SAE with weights wRE = 0.4, wEL−GAE = 0.32 and wEL−BR = 0.28. Second, whereas Bayesian model averaging would design a welfareoptimized rule that hits the ZLB with a probability solely based on the Gabaix model, we find that our prediction pool using these weights choice has a significant impact on the robust optimized rule. Third, there are significant differences between the optimized rules for each model separately highlighting the need for seeking a robust rule. Fourth, we find that robust optimized rule found using optimal pooling weights is very close to the price level rule. This confirms good robustness properties of such a rule found in other studies. Finally to achieve a probability of hitting the ZLB constraint on the nominal interest rate of 5% per quarter, the robust optimal rule requires a target (steady-state) net inflation annual rate of between 3% and 4%.
    JEL: C11 C18 C32 E32
    Date: 2023–03
  15. By: Hamish Low (University of Oxford and IFS); Costas Meghir (Cowles Foundation, Yale University); Luigi Pistaferri (Stanford University, NBER, CEPR and SIEPR); Alessandra Voena (Stanford University, NBER, CEPR and SIEPR)
    Abstract: The 1996 US welfare reform introduced time limits on welfare receipt. We use quasi-experimental evidence and a lifecycle model of marriage, divorce, program participa-tion, labor supply and savings to understand the impact of time limits on behavior and well-being. Time limits cause women to defer claiming in anticipation of future needs, an effect that depends on the probabilities of marriage and divorce. Time limits cost women 0.5% of life-time consumption, net of revenue savings redistributed by reduced taxation, with some groups affected much more. Expectations over future marital status are important determinants of the value of the social safety net.
    Keywords: Time limits, Welfare reform, Life-cycle, marriage and divorce, time limits, limited commitment, intrahousehold allocations
    JEL: D91 H53 J12 J21
    Date: 2022–12

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