nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒05‒08
thirteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Money velocity, digital currency, and inflation dynamics By Hermawan, Danny; Lie, Denny; Sasongko, Aryo; Yusan, Richard
  2. Entry Decision, the Option to Delay Entry, and Business Cycles By Ia Vardishvili
  3. Equilibrium bitcoin pricing By Bruno Biais; Christophe Bisière; Matthieu Bouvard; Catherine Casamatta; Albert J. Menkveld
  4. Technology diffusion and international business cycles By Uluc Aysun
  5. Unemployment and Endogenous Reallocation over the Business Cycle By Carlos Carrillo-Tudela; Ludo Visschers
  6. Sources of Inequality and Business Cycles: Evidence from the US and Japan By Masaru INABA; Kengo NUTAHARA; Daichi SHIRAI
  7. Modelling the impacts of a surge in shipping costs By Ferrari, Emanuele; Christidis, Panayotis
  8. Public Employment Agency Reform, Matching Efficiency, and German Unemployment By Christian Merkl; Timo Sauerbier
  9. Wage Bargaining and Labor Market Policy with Biased Expectations By Almut Balleer; Georg Duernecker; Susanne Forstner; Johannes Goensch
  10. On The Role of Trademarks: From Micro Evidence to Macro Outcomes By Emin Dinlersoz; Nathan Goldschlag; Mehmet Yorukoglu; Nikolas Zolas
  11. Permanent Primary Deficits, Idiosyncratic Long-Run Risk, and Growth By Amol Amol; Erzo G. J. Luttmer
  12. A Theory of Fear of Floating By Javier Bianchi; Louphou Coulibaly
  13. Assessing the Economic Impact of Sustainable Development Goals (SDGs) through DSGE Modeling By Andrianady, Josué R.

  1. By: Hermawan, Danny; Lie, Denny; Sasongko, Aryo; Yusan, Richard
    Abstract: This paper empirically investigates the impact of transaction cost-induced variations in the velocity of money on inflation dynamics, based on a structural New Keynesian Phillips curve (NKPC) with an explicit money velocity term. The money velocity effect arises from the role of money, both in physical and digital forms, in reducing the aggregate transaction costs and facilitating purchases of goods and services. We find a non-trivial aggregate impact in the context of the Indonesian economy: our benchmark estimates suggest that a 10% decrease in money velocity, which might be facilitated by a new digital currency (e.g. CBDC) issuance, would reduce the inflation rate by 0.6-1.7%, all else equal. Using the estimates and within a small-scale New Keynesian DSGE model, we analyze the potential implications of a CBDC issuance on aggregate fluctuations. A CBDC issuance that conservatively lowers the velocity of money by 5% is predicted to permanently raise the GDP level by 0.8% and lower the inflation rate by 0.8%. Both nominal and real interest rates are also permanently lower. Our findings imply that central banks could potentially use CBDCs as an additional stabilization policy tool by influencing the velocity.
    Keywords: inflation dynamics; transaction cost; velocity of money; digital money; digital currency; central bank digital currency (CBDC); aggregate fluctuations;
    JEL: E31 E32 E41 E42 E50 E51 E58
    Date: 2023–03–29
  2. By: Ia Vardishvili
    Abstract: I show that firms' ability to postpone entry has important implications for our understanding of the observed business cycle behavior of start-ups. I use a model that closely replicates the main features of the US firm dynamics to explore and quantify the mechanism. I find that the option to wait endogenously generates a countercyclical opportunity cost of entry: during recessions, a higher risk of failure increases the value of waiting, hence the cost of entry. The mechanism increases the elasticity of entrants to aggregate shocks five times. It is responsible for three-fourths of the observed persistent differences in the recessionary and expansionary cohorts' productivity, survival, and employment. Without the channel, existing models require either large shocks that generate excessive aggregate fluctuations or exogenous mechanisms to reconcile the observed dynamics of entrants. Overlooking this channel may also result in misleading predictions about entrants' responses to different shocks or policies.
    Keywords: Entry Decision; Delay; Option Value; Firm Dynamics; Business Cycles
    JEL: D25 E22 E23 E32 E37 L25
    Date: 2023–04
  3. By: Bruno Biais (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Christophe Bisière (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Matthieu Bouvard (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Catherine Casamatta (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Albert J. Menkveld (Unknown)
    Abstract: We offer an overlapping generations equilibrium model of cryptocurrency pricing and confront it to new data on bitcoin transactional benefits and costs. The model emphasizes that the fundamental value of the cryptocurrency is the stream of net transactional benefits it will provide, which depend on its future prices. The link between future and present prices implies that returns can exhibit large volatility unrelated to fundamentals. We construct an index measuring the ease with which bitcoins can be used to purchase goods and services, and we also measure costs incurred by bitcoin owners. Consistent with the model, estimated transactional net benefits explain a statistically significant fraction of bitcoin returns.
    Date: 2023–01–19
  4. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: This paper shows that the cross-country diffusion of innovations forms a critical channel through which macroeconomic shocks are transmitted across economies. This inference is obtained from a two country, medium scale DSGE model that includes an endogenous growth mechanism. R&D activity and innovation are the main components of this mechanism and they are introduced through a labor-augmenting technology. The model features international diffusion of technologies as the innovations by a firm are not only adopted by other firms within a country but also by those in the other country. Estimating the model with US and Euro Area data, I observe that foreign shocks contribute a high share to the macroeconomic volatility in each economy. By contrast, foreign shocks make a negligible contribution when the model is estimated after shutting down technology diffusion. The results, more generally, show that it is not technology shocks, nor any other shock, but the transmission of shocks through the diffusion of new technologies that is the key driver of international business cycles.
    Keywords: Research and development, international business cycles, endogenous growth, DSGE, Bayesian estimation.
    JEL: F42 F44 O30 O33
    Date: 2023–04
  5. By: Carlos Carrillo-Tudela; Ludo Visschers
    Abstract: This paper studies the extent to which the cyclicality of occupational mobility shapes that of aggregate unemployment and its duration distribution. We document the relation between workers' occupational mobility and unemployment duration over the long run and business cycle. To interpret this evidence, we develop a multi-sector business cycle model with heterogenous agents. The model is quantitatively consistent with several important features of the US labor market: procyclical gross and countercyclical net occupational mobility, the large volatility of unemployment and the cyclical properties of the unemployment duration distribution, among many others. Our analysis shows that occupational mobility due to workers; changing career prospects, and not occupation-wide differences, interacts with aggregate conditions to drive the fluctuations of the unemployment duration distribution and the aggregate unemployment rate.
    Date: 2023–04
  6. By: Masaru INABA; Kengo NUTAHARA; Daichi SHIRAI
    Abstract: The main objectives of this paper are twofold. The first is identifying the sources of inequality and business cycle fluctuations in the US and Japan. The second is investigating the effects of reducing inequality on business cycles. We develop a tractable heterogeneous-agent business cycle model with unconstrained (U) and hand-to-mouth (HtM) households. We also introduce wedges, which imply various types of distortions in economic activities, into the model following the business cycle accounting approach and estimate them by the Bayesian method. We focus on consumption inequality as inequality. We find that, in the US, the labor market distortions specific to the U households have significant impacts on both business cycles and consumption inequality, while the primary source of business cycles is the distortion in aggregate productivity, and that of consumption inequality is the labor market distortion specific to the HtM. In contrast, we find that no common factors significantly impact both business cycles and consumption inequality in Japan. In Japan, the key for business cycles is the distortion in aggregate productivity, and that for consumption inequality is the labor market distortions specific to U and HtM households. We also investigate the effects of reductions in consumption inequality on business cycle volatility through two types of experiments: (1) removing labor market distortions specific to two types of households, which are primary sources of consumption inequality, and (2) redistribution policy. Removing the labor market distortions increases output growth volatility in the US while it reduces in Japan. Removing cyclical consumption inequality by redistribution policy reduces output growth volatility in the US and increases in Japan. In contrast, reducing the level of consumption inequality from the estimated steady-state levels increases output volatility in both countries. However, the relation between the level of consumption inequality and output growth volatility is not monotonic. If consumption inequality is quite severe, a reduction in consumption inequality reduces output growth volatility.
    Keywords: Inequality; consumption inequality; business cycle accounting; wedges; distortions; hand-to-mouth JEL codes: E25; E32; E37
    Date: 2023–04
  7. By: Ferrari, Emanuele; Christidis, Panayotis
    Abstract: The paper evaluates the impact of the increase of freight transport costs on the global economy. Using a detailed transport database, a set of detailed shocks by transportation mode, regions and commodities feed a multi-region, recursive dynamic general equilibrium model which analyses the sectorial (agri-food sectors, manufacturing) and macroeconomic (trade, wide-economic indicators) impacts of the recent surge in shipping costs.
    Keywords: Public Economics, International Relations/Trade
    Date: 2022
  8. By: Christian Merkl; Timo Sauerbier
    Abstract: Our paper analyzes the role of public employment agencies in job matching, in particular the effects of the restructuring of the Federal Employment Agency in Germany (Hartz III labor market reform) for aggregate matching and unemployment. Based on two microeconomic datasets, we show that the market share of the Federal Employment Agency as job intermediary declined after the Hartz reforms. We propose a macroeconomic model of the labor market with a private and a public search channel and fit the model to various dimensions of the data. We show that direct intermediation activities of the Federal Employment Agency did not contribute to the decline in unemployment in Germany. By contrast, improved activation of unemployed workers reduced unemployed by 0.8 percentage points. Through the lens of an aggregate matching function, more activation is associated with a larger matching efficiency.
    Keywords: Hartz reforms, search and matching, reform of employment agency
    JEL: E24 E00 E60
    Date: 2023
  9. By: Almut Balleer; Georg Duernecker; Susanne Forstner; Johannes Goensch
    Abstract: Recent research documents mounting evidence for sizable and persistent biases in individual labor market expectations. This paper incorporates subjective expectations into a general equilibrium labor market model and studies the implications of biased expectations for wage bargaining, vacancy creation, worker flows and labor market policies. Importantly, we find that under the widely used period-by-period Nash bargaining protocol, the model generates a counterfactual relationship between workers’ job separation expectations and wages. Instead, a wage setting process with less frequent wage renegotiations is found to be empirically consistent. Moreover, we show that the presence of biased beliefs can qualitatively alter the equilibrium effects of labor market policies. Lastly, when allowing for biased firms’ beliefs, we establish that only the difference between firms’ and workers’ biases matters for the bargained wage but not the size of biases.
    Keywords: subjective expectations, labor markets, search and matching, bargaining, policy
    JEL: E24 J64 D84
    Date: 2023
  10. By: Emin Dinlersoz; Nathan Goldschlag; Mehmet Yorukoglu; Nikolas Zolas
    Abstract: What are the effects of trademarks on the U.S. economy? Evidence from comprehensive firm-level data on trademark registrations and outcomes suggests that trademarks protect firm value and are associated with higher firm growth and marketing activity. Motivated by this evidence, trademarks are introduced in a general equilibrium framework to quantify their aggregate effects. In the model, firms invest in product quality and marketing to build a cus tomer base subject to depreciation. Firms can register trademarks to protect their customer base and reduce the cost of informing consumers. The model’s predictions on the incidence and timing of trademark registrations, as well as firm growth and advertising expenditures, are consistent with the empirical evidence. Analysis of the calibrated model indicates that the U.S. economy with trademarks generates higher product variety, quality, and welfare, along with higher concentration, compared to the counterfactual economy with no trademarks.
    Date: 2023–03
  11. By: Amol Amol; Erzo G. J. Luttmer
    Abstract: We consider an economy with perpetual youth and inelastic labor supply that grows endogenously. Consumers are subject to idiosyncratic capital accumulation risk and markets are incomplete. The government purchases consumption goods, makes transfers in the form of baby bonds, and it can use consumption and wealth taxes. The wealth distribution is given in closed form. When the intertemporal elasticity of substitution ɛ is equal to 1, the government can run a permanent primary deficit, up to a finite upper bound, if the coefficient of relative risk aversion is high enough and the factor share of labor is not too close to 1. This causes the risk-free rate r to be below the growth rate g of the economy. But the government can implement Pareto improvements when r - g does not exceed zero by enough. If ɛ ≠ 1, then there may not be an upper bound on the permanent primary deficits of the government. If ɛ Є (0, 1), this happens when the economy is relatively unproductive, and then taking deficits to be very large makes all consumers worse off. If ɛ Є (1, ∞), very large deficits are possible if the economy is sufficiently productive, and then they imply unbounded Pareto improvements.
    Keywords: Long-run idiosyncratic risk; Public debt; Endogenous growth; Incomplete markets
    JEL: H60 O40 E60
    Date: 2022–11–16
  12. By: Javier Bianchi; Louphou Coulibaly
    Abstract: Many central banks whose exchange rate regimes are classified as flexible are reluctant to let the exchange rate fluctuate. This phenomenon is known as “fear of floating”. We present a simple theory in which fear of floating emerges as an optimal policy outcome. The key feature of the model is an occasionally binding borrowing constraint linked to the exchange rate that introduces a feedback loop between aggregate demand and credit conditions. Contrary to the Mundellian paradigm, we show that a depreciation can be contractionary, and letting the exchange rate float can expose the economy to self-fulfilling crises.
    Keywords: Self-fulfilling financial crises; Exchange rates
    JEL: E52 F45 F41 G01 F36 F33 E44 F34
    Date: 2023–02–03
  13. By: Andrianady, Josué R.
    Abstract: This article aims to analyze the impact of the Sustainable Development Goals (SDGs) on the economy using a DSGE model. We simulate two different shocks: an increase and a decrease in the SDGs expenditures to evaluate their effects on key macroeconomic variables. The results show that an increase in the SDGs expenditures has a positive effect on most macroeconomic variables, while a decrease in the SDGs has a negative effect. These findings suggest that pursuing the SDGs can lead to sustainable economic growth and improved living conditions in Madagascar.
    Keywords: Sustainable Development Goals (SDGs), DSGE model, Madagascar, economic growth, economic policy.
    JEL: F43 O47 Q01
    Date: 2023

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