nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒04‒24
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Welfare Cost of Inflation, when Credit Card Transaction Services Are Included among Monetary Services By William Barnett; Sohee Park
  2. The housing market in a DSGE model for Kazakhstan By Akbobek Akhmedyarova
  3. Assessing the Stabilizing Effects of Unemployment Benefit Extensions By Alexey Gorn; Antonella Trigari
  4. The Effects of a Money-Financed Fiscal Stimulus Under Fiscal Stress By Hao Jin; Junfeng Wang
  5. Winners and losers from reducing global imbalances By Jacek Rothert; Ayse Kabukcuoglu Dur
  6. Dynamic Transportation of Economic Agents By Andrew Lyasoff
  7. Finding Regularized Competitive Equilibria of Heterogeneous Agent Macroeconomic Models with Reinforcement Learning By Ruitu Xu; Yifei Min; Tianhao Wang; Zhaoran Wang; Michael I. Jordan; Zhuoran Yang
  8. Longevity, Health and Housing Risks Management in Retirement By Pierre-Carl Michaud; Pascal St-Amour
  9. The Effects of Government Spending in Segmented Labor and Financial Markets By Dusan Stojanovic
  10. Why Are Immigrants Always Accused of Stealing People's Jobs? By Pascal Michaillat
  11. Natural Resources and Sovereign Risk in Emerging Economies: A Curse and a Blessing By Franz Hamann; Juan Camilo Mendez-Vizcaino; Enrique G. Mendoza; Paulina Restrepo-Echavarria
  12. Hegemony or Harmony? A Unified Framework for the International Monetary System By Tao Liu; Dong Lu; Liang Wang
  13. The Economic Effects of Climate Change in Dynamic Spatial Equilibrium By Rudik, Ivan; Lyn, Gary; Tan, Weiliang; Ortiz-Bobea, Ariel

  1. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Sohee Park (Department of Economics, Valparaiso University, Valparaiso, IN 46383, USA)
    Abstract: We investigate the welfare cost of anticipated inflation, when the volume of credit card transactions is included in measured monetary service flows. We use the credit-card-augmented Divisia monetary aggregates in a nonlinear dynamic stochastic general equilibrium (DSGE) New Keynesian model and calculate the welfare costs of inflation. The welfare costs of inflation with credit card services included are greater than without them in the New Keynesian DSGE model. Because of the complexity of the model’s dynamical structure, we are not aware of a simple explanation for the increased welfare sensitivity to inflation.
    Keywords: Welfare Cost, Divisia, Credit-Card-Augmented Divisia, Monetary Aggregates, Money Demand, Inflation, nonlinear dynamics.
    JEL: E31 E41 E51 E52
    Date: 2023–04
  2. By: Akbobek Akhmedyarova (NAC Analytica, Nazarbayev University)
    Abstract: In this paper, we build a DSGE model with the housing market, the non-resource sector and the endogenous oil production sector for an oil-exporting economy. We assess the role of housing market shocks in business cycle fluctuations for Kazakhstan. The model incorporates four key sectors and is estimated using Bayesian methods over the period from 2007Q2 to 2022Q1. We find that inflationary processes in Kazakhstan are mainly driven by shocks arising from housing and import markups. We also find that productivity and housing investment shocks are pivotal in explaining the disturbances in GDP growth. Impulse responses of the model show that a housing productivity shock exerts a stronger impact on output than a housing investment shock. We observe that a positive shock to an oil price leads to a negligible increase in output for all sectors except the non-resource sector, while its impact on inflation is limited.
    Keywords: DSGE; Housing market; Bayesian estimation; multi-sector; Kazakhstan
    JEL: C11 E30 E32 R21
    Date: 2022–09
  3. By: Alexey Gorn; Antonella Trigari
    Abstract: We study the stabilizing role of benefit extensions. We develop a tractable quantitative model with heterogeneous agents, search frictions, and nominal rigidities. The model allows for a stabilizing aggregate demand channel and a destabilizing labor market channel. We characterize each channel analytically and find that aggregate demand effects quantitatively prevail in the US. When feeding-in estimated shocks, the model tracks unemployment in the two most recent downturns. We find that extensions lowered unemployment by a maximum of 0.35 pp in the Great Recession, while the joint stabilizing effect of extensions and benefit compensation peaked at 1.08 pp in the pandemic. Keywords: cyclical unemployment insurance; heterogeneous agents; search frictions; nominal rigidities; Great Recession; Covid-19 recession. JEL codes: E24, E32, E52, J63, J64, J65.
    Date: 2023
  4. By: Hao Jin (Beihang University); Junfeng Wang (Xiamen University)
    Abstract: This paper studies the local determinacy requirements and effects of a money-financed fiscal stimulus under fiscal stress in a canonical New Keynesian model. We consider three alternative monetary policies and find that:(1) The money-financed policy adopted in Galí (2020) to keep real debt level unchanged (zero-debt-increase policy, or ZDI) leads to an unsustainable debt path, while introducing a debt growth target restores stability. (2) A debt-targeting money growth rule (DT) generates smaller instantaneous multipliers and larger cumulative multipliers with respect to ZDI. (3) A mixed-targeting money growth rule (MT) that takes both debt and inflation into consideration exaggerates the trade-off between short-run and long-run multipliers. In addition, we show that relative to seiniorage, inflation and changes in the discount factor play more important roles in financing fiscal stimulus. The results above hold with alternative degree of price stickiness, velocity of money and steady state debt level. Moreover, the effectiveness of a money-financed fiscal stimulus increases when the government issues real instead of nominal debt.
    Keywords: Fiscal Stimulus; Fiscal Stress; Seigniorage; Government Debt
    Date: 2023–03
  5. By: Jacek Rothert (United States Naval Academy; Group for Research in Applied Economics (GRAPE)); Ayse Kabukcuoglu Dur (North Carolina State University)
    Abstract: We analyze the welfare effects of various policies aimed at global rebalancing --- the elimination of persistent current account surpluses and deficits, and/or elimination of large positive and negative net foreign asset positions. Specifically, we study how these policies will affect the welfare of different groups of households, as well as overall wealth inequality within both debtor and creditor countries. We use a two-country version of a workhorse heterogeneous agents framework of Aiyagari (1994), calibrated to the U.S. (largest debtor) and a composite of its trading partners, the Rest of the World (ROW). Our results show that, relative to full financial integration, policies that reduce global imbalances via an increase in U.S. savings rates will lower global interest rates, increase capital-output ratio and total output in both countries. They will improve welfare of the poorest households and reduce wealth inequality in both countries. Conversely, policies that operate via a decrease in ROW's savings will raise global interest rates, reduce the capital-output ratio and total output in both countries. The rise in interest rates will reduce the welfare of the poor households, even though the overall wealth inequality will decline.
    Keywords: Global imbalances, wealth inequality, rebalancing, heterogeneous agents, international capital flows
    JEL: E21 F3 F32 F41
    Date: 2023
  6. By: Andrew Lyasoff
    Abstract: The paper was prompted by the surprising discovery that the common strategy, adopted in a large body of research, for producing macroeconomic equilibrium in certain heterogeneous-agent incomplete-market models fails to locate the equilibrium in a widely cited benchmark study. It is argued that incomplete-market general equilibrium models with endogenous prices and large number of agents cannot be resolved in the usual way by solving the private optimal control problems with given prices and then varying the prices until market clearing is enforced. By mimicking the technique proposed by Dumas and Lyasoff (2012), the paper develops a new approach to address this problem and provides a novel description of the law of motion of the distribution over the range of private states of a large population of interacting economic agents faced with uninsurable aggregate and idiosyncratic risk. A new algorithm for identifying the returns, the optimal private allocations, and the population transport in the state of equilibrium is developed and is tested in two well known benchmark studies.
    Date: 2023–03
  7. By: Ruitu Xu; Yifei Min; Tianhao Wang; Zhaoran Wang; Michael I. Jordan; Zhuoran Yang
    Abstract: We study a heterogeneous agent macroeconomic model with an infinite number of households and firms competing in a labor market. Each household earns income and engages in consumption at each time step while aiming to maximize a concave utility subject to the underlying market conditions. The households aim to find the optimal saving strategy that maximizes their discounted cumulative utility given the market condition, while the firms determine the market conditions through maximizing corporate profit based on the household population behavior. The model captures a wide range of applications in macroeconomic studies, and we propose a data-driven reinforcement learning framework that finds the regularized competitive equilibrium of the model. The proposed algorithm enjoys theoretical guarantees in converging to the equilibrium of the market at a sub-linear rate.
    Date: 2023–02
  8. By: Pierre-Carl Michaud; Pascal St-Amour
    Abstract: Annuities, long-term care insurance and reverse mortgages remain unpopular to manage longevity, medical and housing price risks after retirement. We analyze low demand using a life-cycle model structurally estimated with a unique stated-preference survey experiment of Canadian households. Low risk aversion, substitution between housing and consumption and low marginal utility when in poor health explain most of the reduced demand. Bequests motives are found to be a luxury good and play a limited role. The remaining disinterest is explained by information frictions and behavioural status-quo biases. We find evidence of strong spousal co-insurance motives motivating LTCI and of responsiveness to bundling with a near doubling of demand for annuities when reverse mortgages can be used to annuitize, instead of consuming home equity. Les rentes, l'assurance soins de longue durée (ASLD) et les prêts hypothécaires inversés restent impopulaires pour gérer les risques de longévité, les risques médicaux et les risques liés au prix du logement après la retraite. Nous analysons la faible demande à l'aide d'un modèle de cycle de vie estimé de manière structurelle avec une expérience par enquête unique de préférences déclarées auprès de ménages canadiens. Une faible aversion pour le risque, la substitution entre le logement et la consommation et une faible utilité marginale en cas de mauvaise santé expliquent principalement la faible demande. Les motifs de legs s'avèrent être un bien de luxe et ne jouent qu'un rôle limité. Le désintérêt restant s'explique par des frictions informationnelles et des biais comportementaux (inertie). Nous trouvons des preuves de l'existence d'une forte motivation de coassurance entre conjoints, qui motive l'achat d'ASLD; et de réactivité à l'offre groupée, avec un quasi-doublement de la demande de rentes lorsque les prêts hypothécaires inversés peuvent être utilisés pour constituer des rentes, au lieu de consommer la valeur nette du logement.
    Keywords: retirement wealth, insurance, health risk, housing risk, patrimoine retraite, assurance, risque santé, risque logement
    JEL: J14 G52 G53
    Date: 2023–03–13
  9. By: Dusan Stojanovic
    Abstract: This paper develops a model with high-skilled and low-skilled workers to show the expansionary effects of government spending despite large training costs for new hires. The main idea is that a fiscal stimulus induces changes in the composition of the labor force conditional on the extent of aggregate demand pressure. A period of high aggregate demand pressure is followed by a high value of forgone output as training activity causes production disruption. In this period firms decide to hire more low-skilled workers, who constitute a cheaper part of the labor force. When aggregate demand pressure is diminished, firms switch to hiring more high-skilled workers. However, the current literature considers only high-skilled workers, who tend to increase saving in government bonds to protect against poor employment prospects. In this case, the combination of weak employment prospects and the crowding-out effects of higher lump-sum taxes and government debt on private consumption and capital investment gives rise to recessionary effects. In contrast, this paper provides a model with a more realistic labor and financial market structure and suggests that countercyclical government spending in the form of government consumption and especially government investment can be used to deal with recessions.
    Keywords: Government spending; training cost; search and match frictions; financial friction;
    JEL: E22 E24 E32 E62
    Date: 2023–03
  10. By: Pascal Michaillat
    Abstract: Immigrants are always accused of stealing people's jobs. Yet, in a neoclassical model of the labor market, there are jobs for everybody and no jobs to steal. (There is no unemployment, so anybody who wants to work can work.) In standard matching models, there is some unemployment, but labor demand is perfectly elastic so new entrants into the labor force are absorbed without affecting jobseekers' prospects. Once again, no jobs are stolen when immigrants arrive. This paper shows that in a matching model with job rationing, in contrast, the entry of immigrants reduces the employment rate of native workers. Moreover, the reduction in employment rate is sharper when the labor market is depressed -- because jobs are more scarce then. Because immigration reduces labor-market tightness, it makes it easier for firms to recruit and improves firm profits. The overall effect of immigration on native welfare depends on the state of the labor market. It is always negative when the labor market is inefficiently slack, but some immigration improves welfare when the labor market is inefficiently tight.
    Date: 2023–03
  11. By: Franz Hamann; Juan Camilo Mendez-Vizcaino; Enrique G. Mendoza; Paulina Restrepo-Echavarria
    Abstract: Emerging economies that are large oil producers have sizable external debt, their country risk rises when oil prices fall, and several of them have defaulted at least once since 1979. Moreover, while oil and non-oil output reduce country risk on impact and in the long-run, oil reserves reduce it marginally on impact but increase it in the long-run. We propose a model of sovereign default and oil extraction consistent with these observations. The sovereign manages oil reserves strategically to make default less painful by altering the value of autarky, and hence its sustainable debt falls. All else equal, default is less likely in states in which reserves or oil prices are higher, or non-oil GDP is lower, but the equilibrium dynamics of reserves and country risk in response to oil-price shocks switch from negatively correlated on impact to positively correlated for several years.
    JEL: F34 F41
    Date: 2023–03
  12. By: Tao Liu (Central University of Finance and Economics); Dong Lu (Renmin University of China); Liang Wang (University of Hawaii Manoa)
    Abstract: There have been two competing views on the structure of the international monetary system. One sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that multiple international currencies can coexist. Aiming to provide a unified theoretical framework to reconcile these two views, we develop a micro-founded monetary model to examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles of international currencies reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other. Agents have the incentive to diversify their portfolio and we have a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. We also discuss welfare under different equilibria and the effect of financial sanctions on the dominant currency in a unipolar world.
    Keywords: International, Money, Multipolar, Safe Assets, Unipolar
    JEL: E42 E52 F33 F40
    Date: 2023–03
  13. By: Rudik, Ivan; Lyn, Gary; Tan, Weiliang; Ortiz-Bobea, Ariel
    Abstract: We develop a dynamic-spatial equilibrium model to quantify the economic effects of climate change with a focus on the United States. We find that climate change reduces US welfare by 4% and global welfare by over 20%. Market-based adaptation through trade and labor reallocation increases US welfare, but with substantial spatial heterogeneity. Adaptation through labor reallocation and trade are complementary: together they boost welfare by 50% more than their individual effects. We additionally develop a new dynamic envelope theorem method for measuring welfare impacts in reduced form and to validate our quantitative model. We find that welfare distributions from our two approaches are consistent, indicating that our quantitative model captures the first-order factors for measuring the distributional impacts of climate change. The level and distribution of the economic impacts of climate change depends the sectoral and spatial structure of the economy, and the extent to which different markets can adapt.
    Keywords: Environmental Economics and Policy, International Relations/Trade
    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.