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on Dynamic General Equilibrium |
| By: | Gan-Ochir Doojav (Bank of Mongolia); Munkhbayar Gantumur (Bank of Mongolia) |
| Abstract: | This paper develops an estimated New Keynesian model of a commodity-exporting economy for an integrated policy framework, integrating the full range of policies used in practice and featuring a range of nominal and real rigidities, macro-financial linkages, and transmission channels of external shocks. We jointly examine the optimal conduct of conventional and unconventional monetary policies, macroprudential policy, foreign exchange intervention, capital flow management, and fiscal policy based on the model. The policy analysis framework is applied empirically to Mongolia, a small open, and developing economy highly dependent on imports and commodity exports. We find that an eclectic policy mix improves policy tradeoffs, and a lack of cooperation among policy authorities may result in conflicting policies, hence suboptimal results for overall economic stability. Our optimal policy analysis shows that policy mix adjustments should differ depending on the type of shocks and the policy objectives. The results suggest that the policy analysis framework can help policymakers choose their policy mix adjustments to deal with external shocks in an integrated and optimal way. |
| Keywords: | Monetary policy; Macroprudential policy; Foreign exchange intervention; Fiscal policy; Capital flow management; Optimal policy mix; Open economy macroeconomics; External shocks; Bayesian analysis |
| JEL: | C11 C32 E32 E43 E52 F41 |
| Date: | 2023–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp05-2023&r=dge |
| By: | Marlon Azinovic; Jan \v{Z}emli\v{c}ka |
| Abstract: | Contemporary deep learning based solution methods used to compute approximate equilibria of high-dimensional dynamic stochastic economic models are often faced with two pain points. The first problem is that the loss function typically encodes a diverse set of equilibrium conditions, such as market clearing and households' or firms' optimality conditions. Hence the training algorithm trades off errors between those -- potentially very different -- equilibrium conditions. This renders the interpretation of the remaining errors challenging. The second problem is that portfolio choice in models with multiple assets is only pinned down for low errors in the corresponding equilibrium conditions. In the beginning of training, this can lead to fluctuating policies for different assets, which hampers the training process. To alleviate these issues, we propose two complementary innovations. First, we introduce Market Clearing Layers, a neural network architecture that automatically enforces all the market clearing conditions and borrowing constraints in the economy. Encoding economic constraints into the neural network architecture reduces the number of terms in the loss function and enhances the interpretability of the remaining equilibrium errors. Furthermore, we present a homotopy algorithm for solving portfolio choice problems with multiple assets, which ameliorates numerical instabilities arising in the context of deep learning. To illustrate our method we solve an overlapping generations model with two permanent risk aversion types, three distinct assets, and aggregate shocks. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.14802&r=dge |
| By: | Andrej Sokol; Michael Kumhof; Marco Pinchetti; Phurichai Rungcharoenkitkul |
| Abstract: | We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. According to our estimates, financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, CBDC as generalized retail access to reserves, and especially a cash-like zero-interest CBDC, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross- border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of around 40% of annual GDP. |
| Keywords: | central bank digital currencies, monetary policy, bank deposits, bank loans, monetary frictions, money demand, money supply, credit creation |
| JEL: | E41 E42 E43 E44 E52 E58 F41 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1086&r=dge |
| By: | Thepthida Sopraseuth; Eleni Iliopulos (Université de Cergy-Pontoise, THEMA) |
| Abstract: | In this paper, we examine the current state of the international macroeconomic literature, focusing specically on international spillovers and the international transmission of countryspeci c shocks. Using a general equilibrium framework, we analyze the standard two-country RBC model and its ability to replicate empirical evidence on international correlation of output, consumption, and international risk sharing. We then survey attempts in the literature to address the limitations of the model, including incorporating nominal rigidities and nancial frictions, as well as recent contributions bridging the gap between open-economy macroeconomics and international nance. These works have the potential to explain the international transmission of shocks among advanced countries by accounting for factors aecting international risk sharing. |
| Keywords: | international business cycles, cross-country co-movement, quantity puzzle |
| JEL: | E44 F41 F42 F44 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2023-03&r=dge |
| By: | Liu, Weifeng Larry |
| Abstract: | This paper explores the impacts of demographic change on national saving and international capital flows. Introducing demographic structure and pension systems into a four-stage overlapping-generation model of a small open economy, the paper derives analytical solutions which link a wide range of factors to national saving and the current account. This framework enables tractable analysis of the effects of various demographic shocks on national saving and external balances, and also of the interaction between demographic shocks and productivity growth and pension systems. The demographic impacts on national saving and capital flows depend on the nature of demographic shocks (fertility or mortality; transitory, permanent or persistent) and on the stage of demographic shocks, as well as productivity growth and pension structure. |
| Keywords: | International Relations/Trade, International Relations/Trade |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ags:pugtwp:333413&r=dge |
| By: | Pierre-Carl Michaud (HEC Montreal); Pascal St-Amour (University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute) |
| 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. |
| Keywords: | retirement wealth, insurance, health risk, housing risk |
| JEL: | J14 G52 G53 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2318&r=dge |
| By: | McKay, Alisdair; Reis, Ricardo |
| Abstract: | Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as business cycles that are inefficient due to the presence of matching frictions and nominal rigidities. We derive an augmented Baily-Chetty formula showing that the optimal generosity of the social insurance system depends on a macroeconomic stabilization term. This term pushes for an increase in generosity when the level of economic activity is more responsive to social programmes in recessions than in booms. A calibration to the US economy shows that taking concerns for macroeconomic stabilization into account substantially raises the optimal unemployment insurance replacement rate but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programmes as automatic stabilizers affects their optimal design. |
| Keywords: | counter-cyclical fiscal policy; redistribution; disortionary taxes |
| JEL: | E62 H21 H30 |
| Date: | 2021–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:108180&r=dge |
| By: | Cremer, Helmuth; Barigozzi, Francesca; Thibault, Emmanuel |
| Abstract: | We present a simple dynamic model based on on-the-job human capital accumu- lation affecting the dynamic of wage rates and labor earnings. We show how these dynamics are determined by the interplay between the supply and demand sides of the labor market. The model can generate and explain the different dynamics of women's earnings after childbirth documented in the empirical literature on child penalties. We show that the temporary negative shock in labor supply due to childbearing may cre- ate a wage trap and a permanent divergence of labor earnings between genders. Even when the wage trap is avoided, and working mothers are on a path toward a high-wage equilibrium, slow convergence can permanently lose earnings. We use this model to study the impact of different policies on the gender wage gap and child penalties. We show that mandatory maternal leave exacerbates the shock which pleads against long leaves. Similarly, cash transfers to mothers via the income effect on labor supply ag- gravate gender wage di_erences. By contrast, temporary subsidies to mothers' wages (possibly in the form of Income Tax Credits) are not only useful to exit the wage trap, but also to speed up recovery and reduce the child penalty when the shock in labor supply is small enough to avoid the wage trap. Other family policies, like formal child- care subsidies and in-kind provision of formal childcare, are potentially useful because they reduce the mothers' cost of labor supply, but they a_ect mothers' choices only indirectly. |
| Keywords: | child penalty, mothers' earnings dynamics, multiple equilibria, wage; and income traps |
| JEL: | J31 H24 |
| Date: | 2023–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:128039&r=dge |