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on Dynamic General Equilibrium |
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Issue of 2023‒04‒03
fourteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | KANO, Takashi |
| Abstract: | The minimal econometric interpretation (MEI) of DSGE models provides a formal model evaluation and comparison of misspecified nonlinear dynamic stochastic general equilibrium (DSGE) models based on atheoretical reference models. The MEI approach recognizes DSGE models as incomplete econometric tools that provide only prior distributions of targeted population moments but have no implications for actual data and sample moments. This study, based on the MEI approach, develops a Bayesian posterior inference method. Prior distributions of targeted population moments simulated by the DSGE model restrict the hyperparameters of Dirichlet distributions. These are natural conjugate priors for multinomial distributions followed by corresponding posterior distributions estimated by the reference model. The Polya marginal likelihood of the resulting restricted Dirichlet-multinomial model has a tractive approximated log-linear representation of the Jensen-Shannon divergence, which the proposed distribution-matching posterior inference uses as the limited information likelihood function. Monte Carlo experiments indicate that the MEI posterior sampler correctly infers calibrated structural parameters of an equilibrium asset pricing model and detects the true model with posterior odds ratios. |
| Keywords: | Bayesian posterior inference, Minimum econometric interpretation, Nonlinear DSGE model, Model misspecification, Equilibrium asset pricing model |
| JEL: | C11 C52 E37 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-128&r=dge |
| By: | Giorgio Fabbri; Marie-Louise Leroux; Paolo Melindi-Ghidi; Willem Sas |
| Abstract: | This paper develops an overlapping generations model which links a public health system to a pay-as-you-go (PAYG) pension system. It relies on two assumptions. First, the health system directly finances curative health spending on the elderly. Second, public pensions partially depend on health status during old age, by introducing a component which is indexed to society’s average level of disability. This way, reducing disability during old age lowers the pension benefit as the need to finance long-term care services also drops. We then study the effects of introducing such a ‘comprehensive’ social security system on individual decisions, capital accumulation, and welfare. We first show that under certain conditions, health investments can boost savings and capital accumulation in the long run. Second, we show that if individuals are sufficiently concerned with their health when old, it is optimal to introduce a health-dependant pension system, as this will raise social welfare compared to a system where pensions are not tied to the society’s average level of old-age disability. Our analysis thus highlights an important policy recommendation: making PAYG pension schemes partially health-dependent can be beneficial to society. |
| Keywords: | Curative Health Investments, PAYG Pension System, Disability, Overlapping Generations, Long-term Care |
| JEL: | H55 I15 O41 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:2022-05&r=dge |
| By: | Krueger, Dirk; Uhlig, Harald |
| Abstract: | This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which households can insure against idiosyncratic income risk through long-term insurance contracts. Insurance companies operating in perfectly competitive markets can commit to future contractual obligations, whereas households cannot. For the case in which household labor productivity takes two values, one of which is zero, and where households have log-utility we provide a complete analytical characterization of the optimal consumption insurance contract, the stationary consumption distribution and the equilibrium aggregate capital stock and interest rate. Under parameter restrictions, there is a unique stationary equilibrium with partial consumption insurance and a stationary consumption distribution that takes a truncated Pareto form. The unique equilibrium interest rate (capital stock) is strictly decreasing (increasing) in income risk. The paper provides an analytically tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously, as in Krueger and Uhlig (2006). |
| Keywords: | Idiosyncratic Risk, Limited Commitment, Stationary Equilibrium |
| JEL: | E21 D11 D91 G22 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:698&r=dge |
| By: | Carlos Zarazaga; Marek Kapicka; Finn Kydland |
| Abstract: | The paper investigates why capital accumulation in Argentina was weaker in the 1990s and 2000s than suggested by the high productivity growth rates and low international interest rates prevailing then. It is shown that lack of commitment to honor contractual obligations with foreign investors introduces two mechanisms that account for that puzzling capital accumulation dynamics. First, the response of investment to a total factor productivity increase is muted and short-lived, while the response to a decrease is large and persistent. Second, unlike in an economy with commitment, low international interest rates may reduce capital accumulation, because they increase the relevance of future commitment constraints. A quantitative implementation of a canonical open economy model with limited commitment constraints shows that the two mechanisms are very important to understand the evolution of Argentina’s capital stock over time. The model accounts for virtually all the capital missing from Argentina in the period 1980-2019, relative to that which would have been observed in the absence of the limited commitment friction. |
| JEL: | F34 F41 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:aep:anales:4610&r=dge |
| By: | Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey) |
| Abstract: | Sovereigns' public capital and fiscal constraint tightness influence sovereign debt crises and resolution. We compile a dataset on public expenditure composition in 1975{2020 for 75 countries. We show that during sovereign debt restructurings with private external creditors, public investment (i) experiences severe decline and slow recovery, (ii) differs from public consumption and transfers, and (iii) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows public investment dynamics and fiscal constraint tightness delay debt settlement. Data support theoretical predictions. |
| JEL: | F34 F41 H63 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0323&r=dge |
| By: | Aubhik Khan; Soyoung Lee |
| Abstract: | We study an economy with a time-varying distribution of production to examine the role of debt in amplifying and propagating recessions. In our model, entrepreneurs use risky, long-term debt to finance capital. Liquid assets serve as collateral and transaction costs make debt illiquid. Debt payments increase the volatility of earnings relative to output, deterring entrepreneurs with insufficient collateral from financing efficient levels of capital. This results in a misallocation of resources. In a large recession, productive entrepreneurs with high levels of debt deleverage, amplifying the downturn. The model economy exhibits asymmetries over the business cycle. Recessions involve a rapid deterioration of economic activity, while expansions are more gradual. When a recession coincides with a rise in leverage resulting from a fall in assets, fewer producers operate at efficient levels. When the aggregate business leverage is ten percentage points above average, the half-life of the recovery doubles. |
| Keywords: | Business fluctuations and cycles; Firm dynamics, Productivity |
| JEL: | E23 E32 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-17&r=dge |
| By: | Magin, Jana Anjali; Neyer, Ulrike; Stempel, Daniel |
| Abstract: | Many central banks discuss the introduction of a Central Bank Digital Currency (CBDC). Empirical evidence suggests that households may differ in their willingness to hold CBDC. Against this background, this paper investigates the macroeconomic effects of different CBDC regimes in a New Keynesian model with a heterogeneous household sector. We consider that a CBDC may facilitate transactions. In particular, households will face additional transaction costs if they do not hold their optimal mix of conventional forms of money and CBDC. We analyze the impact of four different CBDC regimes: (i) no CBDC, (ii) each household may hold an unlimited amount of CBDC, (iii) the central bank sets a maximum amount of CBDC each household is allowed to hold, (iv) the central bank uses the CBDC as a monetary policy instrument by adjusting the maximum amount of CBDC each household is allowed to hold. Generally, we find that the introduction of a CBDC increases economy-wide utility as it allows higher consumption. Moreover, the shock absorption capability increases in an economy with CBDC. This particularly applies to the case when the central bank uses the CBDC as a monetary policy instrument. By adjusting the maximum amount of CBDC, the central bank can stabilize prices more effectively after adverse shocks. However, this stabilization implies distributional effects between households. |
| Keywords: | Central bank digital currency, monetary policy, household heterogeneity, central banks, New Keynesian model |
| JEL: | E52 E42 E58 E41 E51 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:396&r=dge |
| By: | Nicola Branzoli (Bank of Italy); Edoardo Rainone (Bank of Italy); Ilaria Supino (Bank of Italy) |
| Abstract: | Policy evaluation based on the estimation of dynamic stochastic general equilibrium models with aggregate macroeconomic time series rests on the assumption that a representative agent can be identified, whose behavioural parameters are independent of the policy rules. Building on earlier work by Geweke, the main goal of this paper is to show that the representative agent is in general not structural, in the sense that its estimated behavioural parameters are not policyindependent. The paper identifies two different sources of nonstructurality. The latter is shown to be a fairly general feature of optimizing representative agent rational expectations models estimated on macroeconomic data. |
| Keywords: | bank credit, information technology, firms, COVID-19 pandemic |
| JEL: | G21 G22 G23 G24 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1406_23&r=dge |
| By: | Kohei Takeda |
| Abstract: | The interplay between structural transformation in the aggregate and local economies is key to understanding spatial inequality and worker mobility. This paper develops a dynamic overlapping generations model of economic geography where historical exposure to different industries creates persistence in occupational structure, and non-homothetic preferences and differential productivity growth lead to different rates of structural transformation. Despite the heterogeneity across locations, sectors, and time, the model remains tractable and is calibrated with the U.S. economy from 1980 to 2010. The calibration allows us to back out measures of upward mobility and inequality, thereby providing theoretical underpinnings to the Gatsby Curve. The counterfactual analysis shows that structural transformation has substantial effects on mobility: if there were no productivity growth in the manufacturing sector, income mobility would be about 6 percent higher, and if amenities were equalized across locations, it would rise by around 10 percent. In these effects, we find that different degrees of historical exposure to industries in local economies play an important role. |
| Keywords: | structural transformation, upward mobility, labor mobility, economic geography |
| Date: | 2022–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1893&r=dge |
| By: | Miyazaki, Koichi |
| Abstract: | Workers temporarily leave their jobs for various reasons, for example, maternity, caregiving, and illness. In such a situation, a firm can lay off these workers and search for a new worker. To protect workers from such a firm's behavior, many developed countries have implemented a mandatory leave policy. The goal of this study was to rationalize such a government intervention in the labor market from an efficiency perspective. To achieve this objective, this study constructed a search-theoretic model of the labor market and analyzed a steady-state equilibrium in the model. The results demonstrated that introducing a mandatory leave policy increases efficiency under certain conditions. This result justifies such government interventions in the labor market from an efficiency perspective. |
| Keywords: | Search-theoretic model of the labor market; temporary leave; mandatory leave policy; efficiency |
| JEL: | E24 E60 J20 |
| Date: | 2023–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:116614&r=dge |
| By: | Federico Esposito; Fadi Hassan |
| Abstract: | We analyze the role of trade credit and financial frictions in the propagation of international trade shocks along the supply chain. First, we show empirically that exposure to import competition from China increased the use of trade credit in the U.S. Then, we use a multi-country input-output trade model with borrowing constraints, trade credit, and endogenous employment to quantify the general equilibrium effects of such increase, characterizing the different channels at work. Borrowing constraints amplify the negative consequences of the China shock on employment, but introducing trade credit reduces these losses by 8%-27%, depending on the tightness of the constraints. |
| Keywords: | trade credit, trade shocks, financial frictions, borrowing constraints, employment |
| Date: | 2023–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1901&r=dge |
| By: | Tohid Atashbar; Rui Aruhan Shi |
| Abstract: | This study seeks to construct a basic reinforcement learning-based AI-macroeconomic simulator. We use a deep RL (DRL) approach (DDPG) in an RBC macroeconomic model. We set up two learning scenarios, one of which is deterministic without the technological shock and the other is stochastic. The objective of the deterministic environment is to compare the learning agent's behavior to a deterministic steady-state scenario. We demonstrate that in both deterministic and stochastic scenarios, the agent's choices are close to their optimal value. We also present cases of unstable learning behaviours. This AI-macro model may be enhanced in future research by adding additional variables or sectors to the model or by incorporating different DRL algorithms. |
| Keywords: | Reinforcement learning; Deep reinforcement learning; Artificial intelligence; RL; DRL; Learning algorithms; Macro modeling; RBC; Real business cycles; DDPG; Deep deterministic policy gradient; Actor-critic algorithms |
| Date: | 2023–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/040&r=dge |
| By: | Amberg, Niklas (Research Department, Central Bank of Sweden); Jacobson, Tor (Research Department, Central Bank of Sweden); Quadrini, Vincenzo (University of Southern California, Marshall School of Business); Rogantini Picco, Anna (Research Department, Central Bank of Sweden) |
| Abstract: | We use a comprehensive Swedish credit register to document that firms throughout the size distribution have access to fairly large and reasonably priced credit lines, but borrow relatively little from them. We rationalize this using a theoretical framework in which the expected cost of financial distress increases with current borrowing and lower credit-line utilization reflects tighter ‘dynamic’ credit constraints. Consistently with the predictions of the model, the data shows that there is a negative relation between firm-level uncertainty and credit-line utilization. We also find that firms increase borrowing in response to credit-limit increases, even when their current debt is far from the limit. |
| Keywords: | Credit constraints; banks; uncertainty; credit lines; precautionary behavior |
| JEL: | D22 E44 G21 G32 |
| Date: | 2023–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0422&r=dge |
| By: | Lloyd, S. P.; Marin, E. A. |
| Abstract: | How does the conduct of optimal cross-border financial policy change with prevailing trade agreements? We study the joint optimal determination of trade policy and capital-flow management in a two-country, two-good model with trade in goods and assets. While the cooperative optimal allocation is efficient and involves no intervention, a country planner acting unilaterally can achieve higher domestic welfare by departing from free trade in addition to levying capital controls. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the real exchange rate. In response to fluctuations where incentives for the planner to manipulate the terms of trade inter-and intra-temporally are aligned-e.g., the availability of domestic goods changes, or when faced with trade disruptions to imports-optimal capital controls are larger when used in conjunction with optimal tariffs. In contrast, when the incentives are misaligned, the optimal trade tariff partly substitutes for the use of capital controls. Accounting for strategic interactions, we show that committing to a free-trade agreement can reduce incentives to engage in costly capital-control wars. |
| Keywords: | Capital-Flow Management, Free-Trade Agreements, Ramsey Policy, Tariffs, Trade Policy |
| JEL: | F13 F32 F33 F38 |
| Date: | 2023–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2318&r=dge |