nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒05‒15
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Sovereign Uncertainty By Silgado-Gómez, Edgar
  2. Unemployment Insurance when the Wealth Distribution Matters By Facundo Piguillem; Hernán Ruffo; Nicholas Trachter
  3. Capital Controls or Macroprudential Regulation: Which is Better for Land Booms and Busts? By Yang Zhou; Shigeto Kitano
  4. The effect of wage rigidity on the transmission of monetary policy to inequality By Momo Komatsu
  5. Human Capital and Pensions with Endogenous Fertility and Retirement By Cipriani, Giam Pietro; Fioroni, Tamara
  6. Is There Cross-fertilization in Macroeconomics? A Quantitative Exploration of the Interactions between DSGE and Macro Agent-Based Models By Muriel Dal Pont Legrand; Martina Cioni; Eugenio Petrovich; Alberto Baccini
  7. Unconventional Monetary Policy and Local Fiscal Policy By Huixin Bi; Nora Traum
  8. Solving Heterogeneous Agent Models with the Master Equation By Adrien Bilal
  9. Public Debt and the Balance Sheet of the Private Sector By Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden
  10. Generational Distribution of Fiscal Burdens: A Positive Analysis By Uchida, Yuki; Ono, Tetsuo
  11. Intertemporal equilibrium with physical capital and financial asset: role of dividend taxation By Pham, Ngoc-Sang
  12. Uncertainty, Citizenship & Migrant Saving Choices By Hannah Zillessen
  13. Progressive Pension and Optimal Tax Progressivity By Chung Tran; Nabeeh Zakariyya
  14. Credit Guarantee and Fiscal Costs By Huixin Bi; Yongquan Cao; Wei Dong

  1. By: Silgado-Gómez, Edgar (Central Bank of Ireland)
    Abstract: This paper investigates the impact and the transmission of uncertainty regarding the future path of government finances on economic activity. I first employ a data-rich approach to extract a novel proxy that captures uncertainty surrounding public finances, which I refer to as sovereign uncertainty, and demonstrate that the estimated measure exhibits distinct fluctuations from macro-financial and economic policy uncertainty indices. Next, I analyze the behavior of sovereign uncertainty shocks and detect the presence of significant and long-lasting negative effects in the financial and macroeconomic sectors using state-ofthe-art identification strategies, within the context of a Bayesian vector autoregression framework. I show that a shock to sovereign uncertainty differs from a macro-financial uncertainty shock — while the former dampens the economy in the medium-run and points to deflationary dynamics, the latter displays a short-lived response in real activity and generates inflationary pressures. Finally, I study the role of sovereign uncertainty in a New Keynesian dynamic stochastic general equilibrium model augmented with recursive preferences and financial intermediaries. I find that a sovereign uncertainty shock in the model is able to capture the empirical slowdowns in economic aggregates if there is lack of reaction by the monetary authority in the aftermath of the shock. The model also emphasizes the importance of financial frictions in transmitting the effects of sovereign uncertainty shocks and highlights the minor role played by nominal rigidities.
    Keywords: Sovereign Uncertainty Index, Government Finances, Economic Activity, Eventbased Identification, Bayesian VARs, Non-Linear DSGE Models.
    JEL: C32 E32 E44 E60
    Date: 2022–12
  2. By: Facundo Piguillem; Hernán Ruffo; Nicholas Trachter
    Abstract: This paper analyzes the welfare effects of unemployment insurance in a life-cycle model, focusing on partial vs. general equilibrium effects. We study an OLG economy with learning-by-doing human capital accumulation. Agents can be employed or unemployed. While unemployed agents costly search for new jobs. We calibrate the model to the U.S. economy, and find that replacement ratio and potential duration are close to the current one. But, in contrast with the previous literature, we find that the optimal policies under general and partial equilibrium are almost the same. Through a series of exercises we conclude that the life-cycle model provides two key components, crucial for welfare evaluation: it emphasizes workers’ insurance needs by accurately reproducing the left tail of the wealth distribution, and generates a realistic response of precautionary savings to transfers.
    Keywords: Unemployment insurance, Human capital, Life cycle, Wealth inequality, General equilibrium.
    JEL: E62 H21 E24
    Date: 2023–04
  3. By: Yang Zhou (Institute of Developing Economies, Japan External Trade Organization and Junir Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: Emerging markets have experienced land booms and busts along with international capital inflows and outflows repeatedly. This study quantitatively examines the effectiveness of (i) macroprudential policies targeting land markets and (ii) capital controls targeting capital inflows and outflows. We analyze which policy better manages the coincidence between land booms (busts) and capital inflows (outflows). We build a small open economy NK-DSGE model in which banks choose their asset portfolio between physical capital and land subject to financial constraints. The quantitative results show that the superiority of the two policies depends on the type of shock impacting a small open economy. In the case of domestic land market shocks, macroprudential policies enhance welfare, whereas capital controls reduce welfare. Conversely, in the case of foreign interest rate shocks, the superiority of the two policies is reversed: capital controls enhance welfare, while macroprudential policies deteriorate welfare.
    Keywords: Capital control; Macroprudential policy; Financial frictions; Balance sheets channel; DSGE
    JEL: E69 F32 F38 F41
    Date: 2023–04
  4. By: Momo Komatsu
    Abstract: What is the effect of wage rigidities on the transmission of monetary policy to inequality? This paper investigates this question with a Two-Agent New Keynesian model with financially constrained and unconstrained households, and with search-and-matching frictions. I study the relative effects of the wage channel and the labour market channel in the transmission of conventional and unconventional monetary policy, and how these change with degrees of wage rigidity. My main result is that the stickier the wage, the more a contractionary monetary policy shock reduces consumption inequality, whether that is conventional monetary policy or quantitative tightening, driven by the wage channel.
    Date: 2023–03–31
  5. By: Cipriani, Giam Pietro (University of Verona); Fioroni, Tamara (University of Verona)
    Abstract: We study an OLG model with child policies and a PAYG pension with endogenous retirement and fertility. The result of the planned economy is compared to the decentralized competitive equilibrium deriving optimal policies. We show that in the presence of a PAYG pension system, the optimal policy mix includes an education subsidy and a subsidy for the supply of labor in old age. Fertility should be taxed or incentivized depending on whether there is full or partial retirement, and on the parameters. We focus on the parameter reflecting the deterioration of human capital and show that a child tax may be required.
    Keywords: PAYG pensions, endogenous fertility, endogenous retirement, social security, education subsidies, human capital
    JEL: J13 H2 H8 H55
    Date: 2023–03
  6. By: Muriel Dal Pont Legrand (Université Côte d'Azur, CNRS, GREDEG, France); Martina Cioni (Università degli Studi di Siena); Eugenio Petrovich (Università degli Studi di Siena); Alberto Baccini (Università degli Studi di Siena)
    Abstract: This paper compares Dynamic Stochastic General Equilibrium (DSGE) and Macro Agent-Based Models (MABMs) by adopting mainly a distant reading perspective. A set of 2, 299 papers is retrieved from Scopus by using keywords related to MABM and DSGE domains. The interactions between the two streams of DSGE and MABM literature are explored by considering a social axis (co-authorship network), and an intellectual axis (cited references and bibliographic coupling). The analysis gave results that are neither consistent with a unitary structure of macroeconomics, nor with a simple dichotomic structure of alternative paradigms and separated academics communities. Indeed, the co-authorship network shows that DSGE and MABM form fragmented communities still belonging to two different larger MABM and DSGE communities rather neatly separated. Collaboration insists mainly inside the smaller groups and inside each of the two larger DSGE and MABM communities. Moreover, the co-authorship network analysis does not show evidence of systematic collaboration between MABM and DSGE authors. From an intellectual point of view, data show that DSGE and MABM articles refer to two different sets of bibliographic references. When a measure of paper-similarity is adopted, it appears that DSGE literature is fragmented in 4 groups while the MABM articles are clustered together in a unique group. Hence, DSGE approach is less monolithic than at the time of the New Synthesis: indeed, a large and a growing literature has developed at the margins of the core DSGE approach which includes elements of heterogeneous agent modelling, social interactions, experiments, expectations formation, learning etc. The analysis gave no evidence of cross-fertilization between DSGE and MABM literature whilst it rather suggests a totally dissymmetric influence of DSGE over MABM literature, i.e., only MABM modelers look at DSGE but not vice-versa. The paper questions the capacity of the current dominant approach to benefit from cross-fertilization.
    Keywords: Macroeconomics, DSGE, macro agent-based models, heterogeneity, New Synthesis, cross-fertilization, hybrid models, co-authorship network, co-citation analysis, bibliographic coupling, paper similarity
    Date: 2022–07
  7. By: Huixin Bi; Nora Traum
    Abstract: Following the onset of the pandemic, the Federal Reserve employed an unconventional monetary policy that directly intervened in municipal bond markets. We characterize the fiscal and macroeconomic implications of such central bank actions in a New Keynesian model of a monetary union. We assume that state and local governments are subject to a loan-in-advance constraint, reflecting that with lumpy cash flows, they often finance a fraction of expenditures by issuing short-term bonds. The municipal debt is held by financial intermediaries, who also supply credit to the private sector. Direct central bank purchases can transmit to the economy through two main channels: 1) by alleviating cash flow problems of the regional governments and 2) by accelerating lending to the private sector if credit constraints ease more broadly. By quantifying the relative importance of these channels, we highlight that the central bank’s actions lead to sizable increases in private investment but have more muted effects on state and local government expenditures. In addition, we also show the transmission of direct federal government aid through intergovernmental transfers is markedly different from unconventional policy.
    Keywords: monetary policy; quantitative easing; municipal debt; Municipal Liquidity Facility (MLF)
    JEL: E52 E58 E62
    Date: 2022–11–07
  8. By: Adrien Bilal
    Abstract: This paper proposes an analytic representation of perturbations in heterogeneous agent economies with aggregate shocks. Treating the underlying distribution as an explicit state variable, a single value function defined on an infinite-dimensional state space provides a fully recursive representation of the economy: the ‘Master Equation’ introduced in the mathematics mean field games literature. I show that analytic local perturbations of the Master Equation around steady-state deliver dramatic simplifications. The First-order Approximation to the Master Equation (FAME) reduces to a standard Bellman equation for the directional derivatives of the value function with respect to the distribution and aggregate shocks. The FAME has six main advantages: (i) finite dimension; (ii) closed-form mapping to steady-state objects; (iii) applicability when many distributional moments or prices enter individuals' decision such as dynamic trade, urban or job ladder settings; (iv) block-recursivity bypassing further fixed points; (v) mapping to analytic sequence-space derivatives; (vi) fast implementation using standard numerical methods. I develop the Second-order Approximation to the Master Equation (SAME) and show that it shares these properties, making the approach amenable to settings such as asset pricing. I apply the method to two economies: an incomplete market model with unemployment and a wage ladder, and a discrete choice spatial model with migration.
    JEL: C02 C6 E10
    Date: 2023–04
  9. By: Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden
    Abstract: This paper studies how political interests and welfare objectives influence fiscal policy and growth. We introduce different interest groups, firms and households, into a simple growth model with incomplete markets, heterogeneous agents, and noninsurable idiosyncratic productivity shocks. Firms finance productive investments by issuing bonds but cannot issue equity. Households invest in corporate and public debt. The government selects the levels of taxes and public debt so as to maximize a weighted sum of the welfare of firms’ owners and households. More government debt reduces corporate leverage, increases the risk free rate r, and decreases the growth rate g. The weight of firms in social welfare determines whether r g at the optimum, with different dynamics in both regimes.
    Keywords: Incomplete Financial Markets, Debt, Interest, Growth, Ponzi Games, Heterogeneous Agents, Political Economy
    JEL: E44 E62
    Date: 2023–04
  10. By: Uchida, Yuki; Ono, Tetsuo
    Abstract: This study presents a political economy model with overlapping generations to analyze the effects of population aging on fiscal policy formation and the resulting distribution of the fiscal burden across generations. We show that population aging incentivizes the government to raise the capital and labor income tax rates as well as the ratio of public debt to GDP; this result is consistent with the cross-country evidence of OECD countries. We then undertake a model-based simulation over the period 2000-2070 for Japan and the United States and show that Japan is anticipated to face higher labor income tax rates, a greater public debt-to-GDP ratio, and a lower government expenditure-to-GDP ratio than the United States throughout the entire period. Moreover, starting form 2040, Japan is predicted to surpass the United States in terms of the capital tax rate.
    Keywords: Generational burden; Overlapping generations; Political economy; Population aging; Public debt
    JEL: D70 E24 E62 H60
    Date: 2023–04–22
  11. By: Pham, Ngoc-Sang
    Abstract: The paper introduces dividend taxation and productive government spending in an infinite-horizon general equilibrium model with heterogeneous agents and financial market imperfections. We point out that imposing a dividend tax and using the revenue from this tax to finance productive government spending may prevent economic recession and promote economic growth. We also investigate the issue of optimal dividend taxation and the role of dividend taxation on the asset price bubble.
    Keywords: Intertemporal equilibrium, recession, economic growth, productive government spending, dividend taxation, asset price bubbles
    JEL: D5 D9 E4 E44 O4
    Date: 2023–03–01
  12. By: Hannah Zillessen
    Abstract: In most Western countries, migrants hold significantly less wealth than natives. Migrants also face significantly more uncertainty about their future. This paper examines the central role of uncertainty over citizenship prospects and future location in explaining their saving choices. Exploiting quasi-experimental variation and panel data from Germany, I show that migrants with a right to citizenship save as much as comparable natives, while migrants without this right save 30% less. This unexplained gap is closed completely when migrants in the latter group gain access to citizenship. The effect is not driven by changes in resources, but rather willingness to save. While standard theory predicts that saving increases in uncertainty, I show that the effect can reverse if utility is state-dependent, malleable, or resources are not equally accessible across states. I build a life-cycle saving model with uncertain retirement location and heterogeneous country preferences. The model shows that agents can have a “preparatory saving motive” that decreases in uncertainty. I confirm the importance of this novel motive empirically, showing that migrants become significantly more likely to invest in illiquid assets if they gain certainty about their right to stay.
    Date: 2022–11–10
  13. By: Chung Tran; Nabeeh Zakariyya
    Abstract: We examine the extent to which progressivity in the income tax and public pension systems could complement one another. We demonstrate that there is a negative relationship between optimal tax progressivity and pension progressivity. Shifting the social insurance and redistribution roles embedded in the progressive income tax code to a progressive pension system with stricter means-testing rules can yield better overall welfare outcomes. Flattening the income tax code (less tax progressivity) while tightening means-testing rules for pension payments (more pension progressivity) indeed results in larger welfare gains. The optimal design consists of a flat income tax rate and a strict means-tested pension scheme. Overall, redistributive concerns should be addressed directly through more progressive transfers; meanwhile, reducing tax progressivity is important for improving aggregate efficiency.
    Keywords: Taxation; age pension; tax progressivity; income dynamics; inequality; Suits index; heterogeneity; dynamic general equilibrium
    JEL: E62 H24 H31
    Date: 2023–04
  14. By: Huixin Bi; Yongquan Cao; Wei Dong
    Abstract: This paper studies the effectiveness of government-backed credit guarantees to the infrastructure sector, a policy tool adopted by a range of countries during recessions. We propose a two-sector model with financial intermediary frictions so that infrastructure producers rely on bank loans to finance their risky production. Governments can intervene in the credit market by providing a partial guarantee on those bank loans. We find that a credit guarantee increases infrastructure production, leading to a high fiscal multiplier in the longer run. In the near term, however, higher wages in the infrastructure sector crowd out labor supply in the private sector, dampening economic activity. Importantly, the higher leverage associated with credit expansion raises non-performing loans, and this channel is particularly pronounced if the government-backed credit guarantee lingers for a long period of time.
    Keywords: fiscal policies; markets
    JEL: E62 E44
    Date: 2022–09–02

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