nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒06‒12
twenty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. CBDC and business cycle dynamics in a New Monetarist New Keynesian model By Assenmacher, Katrin; Bitter, Lea; Ristiniemi, Annukka
  2. Monetary Policy with Racial Inequality By Makoto Nakajima
  3. Inflation Strikes Back: The Role of Import Competition and the Labor Market By Mary Amiti; Sebastian Heise; Fatih Karahan; Ayşegül Şahin
  4. Optimal Dynamic Tax-Transfer Policies in Heterogeneous-Agents Economies By YiLi Chien; Yi Wen
  5. Heterogeneous Agents Dynamic Spatial General Equilibrium By Maximiliano Dvorkin
  6. Welfare and Spending Effects of Consumption Stimulus Policies By Christopher D. Carroll; Edmund Crawley; Håkon Tretvoll
  7. Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications By Julian di Giovanni; Manuel García-Santana; Priit Jeenas; Enrique Moral-Benitoz; Josep Pijoan-Mas
  8. Racial Unemployment Gaps and the Disparate Impact of the Inflation Tax By Mohammed Ait Lahcen; Garth Baughman; Hugo van Buggenum
  9. The Effects of the Legal Minimum Working Time on Workers, Firms and the Labor Market By Pauline Carry
  10. Intertemporal equilibrium with physical capital and financial asset: role of dividend taxation By Ngoc-Sang Pham
  11. Expanding Unemployment Insurance Coverage By Amanda M. Michaud
  12. Access to Pensions, Old-Age Support, and Child Investment in the People’s Republic of China By Shan, Xiaoyue; Park, Albert
  13. A Theory of Non-Coasean Labor Markets By Andres Blanco; Andres Drenik; Christian Moser; Emilio Zaratiegui
  14. Real Rigidities, Firm Dynamics, and Monetary Nonneutrality: The Role of Demand Shocks By S. Boragan Aruoba; Eugene Oue; Felipe Saffie; Jonathan L. Willis
  15. Energy News Shocks and their Propagation to Renewable and Fossil Fuels Use By Guinea, Laurentiu; Ruiz, Jesús; Puch, Luis A.
  16. Navigating the Waves of Global Shipping: Drivers and Aggregate Implications By Jason Dunn; Fernando Leibovici
  17. Subjective Earnings Risk By Andrew Caplin; Victoria Gregory; Eungik Lee; Soren Leth-Petersen; Johan Sæverud
  18. The Choice of Technology in Economic Development By Wen, Lei; Zhou, Haiwen
  19. The public investment multiplier in a production network By Alessandro Peri; Omar Rachedi; Iacopo Varotto
  20. Inflation and GDP Dynamics in Production Networks: A Sufficient Statistics Approach By Hassan Afrouzi; Saroj Bhattarai
  21. Asset Pricing in a Low Rate Environment By Marlon Azinovic; Harold L. Cole; Felix Kübler

  1. By: Assenmacher, Katrin; Bitter, Lea; Ristiniemi, Annukka
    Abstract: To study implications of an interest-bearing CBDC on the economy, we integrate a New Monetarist-type decentralised market that explicitly accounts for the means-of-exchange function of bank deposits and CBDC into a New Keynesian model with financial frictions. The central bank influences the store-of-value function of money through a conventional Taylor rule while it affects the means-of-exchange function of money through CBDC operations. Peak responses to monetary policy shocks remain similar in the presence of an interest-bearing CBDC, implying that monetary transmission is not impaired. At the same time however, the provision of CBDC helps smooth responses to macroeconomic shocks. By supplying CBDC, the central bank contributes to stabilising the liquidity premium, thereby affecting bank funding conditions and the opportunity costs of money, which dampens and smoothes the reaction of investment and consumption to macroeconomic shocks. JEL Classification: E58, E41, E42, E51, E52
    Keywords: Central bank digital currency, DSGE, monetary policy, search and matching
    Date: 2023–05
  2. By: Makoto Nakajima
    Abstract: I develop a heterogeneous-agent New-Keynesian model featuring racial inequality in income and wealth, and studies interactions between racial inequality and monetary policy. Black and Hispanic workers gain more from accommodative monetary policy than White workers mainly due to higher labor market risks. Their gains are larger also because of a larger proportion of them are hand-to-mouth, while wealthy White workers gain more from asset price appreciation. Monetary and fiscal policies are substitutes in providing insurance against cyclical labor market risks. Racial minorities gain even more from an accommodative monetary policy in the absence of income-dependent fiscal transfers.
    Keywords: Business cycle; Marginal Propensity to Consume; Monetary policy; Labor market; Heterogeneous agents; Hand-to-mouth; Unemployment; Wealth distribution; Racial inequality
    JEL: J64 J15 E52 E21
    Date: 2023–04–19
  3. By: Mary Amiti; Sebastian Heise; Fatih Karahan; Ayşegül Şahin
    Abstract: U.S. inflation has recently surged, with inflation reaching its highest readings since the early 1980s. We examine the drivers of this rise in inflation, focusing on supply chain disruptions, labor supply constraints, and their interaction. Using a calibrated two-sector New Keynesian DSGE model with multiple factors of production, foreign competition, and endogenous markups, we find that supply chain disruptions combined with a rise in the disutility of work raised inflation by about 2 percentage points in the 2021-22 period. We show that the combined shock increased price inflation in the model by 0.6 percentage point more than it would have risen if the shocks had hit separately. This amplification arises because the joint shock to labor and imported input prices makes substituting between labor and intermediates less effective for domestic firms. Moreover, the simultaneous foreign competition shock allows domestic producers to increase their pass-through into prices without losing market share. We then show that the benefit of aggressive monetary policy in the model depends on the source of the rise in inflation. If the rise in inflation is demand-driven, then aggressive monetary tightening can contain inflation without a recession later. In contrast, aggressive policy can have a large negative effect on the labor market when inflation is driven by supply chain and labor market disruptions. We use aggregate and industry-level data on producer prices, wages, and input prices to provide corroborating evidence for the key amplification channels in the model.
    JEL: E24 E31
    Date: 2023–05
  4. By: YiLi Chien; Yi Wen
    Abstract: In the design of an optimal tax-transfer system, there are two complementary conventional wisdoms: the labor-efficiency argument and the debt-efficiency argument. The former emphasizes the trade-off between redistribution and distortions in the labor market, while the latter emphasizes the trade-off between gains from monopoly rents and distortions in the asset market. We use an analytically tractable infinite-horizon model with both ex-ante and ex-post heterogeneity to show that neither argument is complete in the design of the tax-transfer system. Instead, in Aiyagari-type models the optimal system should be determined at the point where the intertemporal wedge between the market interest rate and the time discount rate is completely eliminated, provided that the government fiscal space permits an interior Ramsey steady state. Otherwise the optimal labor tax rate approaches 100% regardless of the Pareto weight distribution in the social welfare function.
    Keywords: Ramsey redistribution; optimal tax-transfer system; optimal interest rate; Laffer curve; incomplete markets; heterogeneity
    JEL: E13 E62 H21 H30
    Date: 2023–05–01
  5. By: Maximiliano Dvorkin
    Abstract: I develop a dynamic model of migration and labor market choice with incomplete markets and uninsurable income risk to quantify the effects of international trade on workers’ employment reallocation, earnings, and wealth. Macroeconomic conditions in different labor markets and idiosyncratic shocks shape agents’ labor market choices, consumption, earnings, and asset accumulation over time. Despite the rich heterogeneity, the model is highly tractable as the optimal consumption, labor supply, capital accumulation, and migration and reallocation decisions of individual workers across different markets have closed-form expressions and can be aggregated. I study the asymmetric impact of international trade on the evolution of employment, earnings, and wealth, and decompose the frictions workers face to reallocate across U.S. sectors and regions into those with a transitory effect and those with long-lasting consequences.
    Keywords: international trade; migration; spatial equilibrium; dynamic Roy models; human capital; wealth; inequality
    JEL: E21 E24 F16 F66 J24 J61 R23
    Date: 2023–03–22
  6. By: Christopher D. Carroll; Edmund Crawley; Håkon Tretvoll
    Abstract: Using a heterogeneous agent model calibrated to match measured spending dynamics over four years following an income shock (Fagereng, Holm, and Natvik (2021)), we assess the effectiveness of three fiscal stimulus policies employed during recent recessions. Unemployment insurance (UI) extensions are the clear “bang for the buck” winner, especially when effectiveness is measured in utility terms. Stimulus checks are second best and have the advantage (over UI) of being scalable to any desired size. A temporary (two-year) cut in the rate of wage taxation is considerably less effective than the other policies and has negligible effects in the version of our model without a multiplier.
    Keywords: fiscal stimulus; consumption; mpc
    JEL: E62 E21
    Date: 2023–01
  7. By: Julian di Giovanni (FEDERAL RESERVE BANK OF NEW YORK); Manuel García-Santana (Universitat Pompeu Fabra); Priit Jeenas (Universitat Pompeu Fabra); Enrique Moral-Benitoz (Banco de España); Josep Pijoan-Mas (CEMFI)
    Abstract: We provide a framework to study how different public procurement allocation systems affect firm dynamics and long-run macroeconomic outcomes. We build a new panel dataset of administrative data for Spain that merges credit-register loan data, quasi-census firm-level data and public procurement project data. We find evidence consistent with the hypothesis that procurement contracts provide valuable collateral for firms, and that they do so to a greater extent than private-sector contracts. We then build a model of firm dynamics with both asset-based and earnings-based borrowing constraints and a government that buys goods and services from private-sector firms, and use it to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. We find that policies that promote the participation of small firms have sizeable macroeconomic effects, but their net impact on aggregate output is ambiguous. These policies help small firms grow and overcome financial constraints, which increases output in the long run. However, they also reduce saving incentives for large firms, decreasing output. The relative strength of these two forces and hence which of them dominates crucially depends on the type of financial frictions firms face and the specific way the policy is implemented.
    Keywords: government procurement, financial frictions, capital accumulation, aggregate productivity
    JEL: E22 E23 E62 G32
    Date: 2022–08
  8. By: Mohammed Ait Lahcen; Garth Baughman; Hugo van Buggenum
    Abstract: We study the nonlinearities present in a standard monetary labor search model modified to have two groups of workers facing exogenous differences in the job finding and separation rates. We use our setting to study the racial unemployment gap between Black and white workers in the United States. A calibrated version of the model is able to replicate the difference between the two groups both in the level and volatility of unemployment. We show that the racial unemployment gap rises during downturns, and that its reaction to shocks is state-dependent. In particular, following a negative productivity shock, when aggregate unemployment is above average the gap increases by 0.6pp more than when aggregate unemployment is below average. In terms of policy, we study the implications of different inflation regimes on the racial unemployment gap. Higher trend inflation increases both the level of the racial unemployment gap and the magnitude of its response to shocks.
    Keywords: Unemployment; Discrimination; Racial inequality; Monetary policy; Inflation
    JEL: E31 E32 E52 J64
    Date: 2023–04–11
  9. By: Pauline Carry (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper provides new evidence on how firms and workers adjust to a restriction on lowhour jobs. I exploit a unique reform introducing a minimum workweek of 24 hours in France in 2014, affecting 15% of jobs. Drawing on linked employer-employee data and an event study design, I find a firm-level reduction in the number of jobs and an increase in average hours per worker. Overall, total hours worked in the firm decreased significantly, showing imperfect substitutability between workers and hours. The effects differ by gender: part-time female workers were replaced by full-time male workers. Importantly, reduced-form evidence indicates the reallocation of workers from firms highly exposed to the policy to firms less exposed. To quantify the aggregate impact taking into account these effects, I build and estimate a search and matching model with heterogeneous workers and firms. I find that the minimum workweek destroyed 1% of jobs but had no effect on total hours, due to positive general equilibrium effects. Finally, the gender gap in welfare increased by 3% because women were more affected by the direct negative employment effects and benefited less from reallocation effects.
    Keywords: Working time regulation, Hours of work, Reallocation effects, Gender inequality
    Date: 2022–12–29
  10. By: Ngoc-Sang Pham (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie, EM Normandie - École de Management de Normandie)
    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 Classifications: C62 D31 D91 G10 E44, Intertemporal equilibrium, recession, economic growth, productive government spending, dividend taxation, asset price bubbles
    Date: 2023–02–18
  11. By: Amanda M. Michaud
    Abstract: This paper develops a quantitative framework to study the impact of Unemployment Insurance (UI) expansions to workers earning below eligibility thresholds. A model of how UI affects welfare and labor supply is developed and calibrated with microeconomic data, including consumption. The model predicts that the current ineligible would choose to stay on UI longer than the current eligible and the margins of why this is the case are quantified. The model is applied to the Great Recession by identifying ineligible workers in the data using machine learning and to an actual expansion during COVID-19 using administrative data. The UI duration for newly eligible under the expansion was 1.7 times longer than the previous eligible but is one-third shorter than the model's economic incentives predict. This suggests caution in extrapolating from the COVID-19 data and the model is used to predict impacts of smaller scale expansions during non-pandemic times.
    Keywords: Labor supply; Business cycles; Unemployment insurance
    JEL: J65 E32 E24 J20
    Date: 2023–03–27
  12. By: Shan, Xiaoyue (University of Pennsylvania); Park, Albert (Asian Development Bank)
    Abstract: This paper studies how access to public pensions affects old-age support and child investment in traditional societies. Guided by predictions from an overlapping generations model, we analyze the influences of a new pension program in rural People’s Republic of China, using a difference-in-differences approach. We find that the program crowds out transfers from working-age adults, especially men, to their elderly parents. Interestingly, the impact on child investment significantly differs by child gender. While adult parents increase educational investment in sons, their investment in daughters appears to decrease. Our findings highlight the unintended consequences of public pensions on parental investment.
    Keywords: altruism; pension; old-age support; rural PRC; intergenerational transfers
    JEL: D64 H55 J14 J16
    Date: 2023–05–12
  13. By: Andres Blanco; Andres Drenik; Christian Moser; Emilio Zaratiegui
    Abstract: We develop a theory of labor markets in a monetary economy with four realistic features: search frictions, worker productivity shocks, wage rigidity, and two-sided lack of commitment. Due to the non-Coasean nature of labor contracts, inefficient job separations occur in the form of endogenous quits and layoffs that are unilaterally initiated whenever a worker’s wage-to-productivity ratio moves outside an inaction region. We derive sufficient statistics for the aggregate labor market response to a monetary shock based on the distribution of workers’ wage-to-productivity ratios. These statistics crucially depend on the incidence of inefficient job separations, which we show how to identify using readily available microdata on wage changes and worker flows between jobs.
    Keywords: Continuous-time methods; Wage rigidity; Wage inequality; Monetary policy; Layoffs; Quits; Inefficient job separations; Variational inequalities; Commitment; Unemployment; Stopping times; Directed search; Inflation
    JEL: D31 E12 E31
    Date: 2023–03–10
  14. By: S. Boragan Aruoba; Eugene Oue; Felipe Saffie; Jonathan L. Willis
    Abstract: We propose a parsimonious framework for real rigidities, in the form of strategic complementarities, that can generate real and nominal dynamics and match key features of the data across several literatures. Existing menu-cost models featuring strategic complementarities require unrealistically volatile shocks to idiosyncratic productivity to be consistent with pricing moments. We develop a simple menu-cost model with strategic complementarities along with idiosyncratic productivity and demand shocks that are disciplined by the data. This approach allows us to overcome previous criticism from analysis of models that employ only an idiosyncratic productivity shock and calibrate solely using data from the price-adjustment literature. Despite its simplicity, the model can generate sizable monetary nonneutrality along with the magnitude of cost pass-through documented in previous studies, while also remaining consistent with micro pricing and markup evidence.
    Keywords: menu costs; strategic complementarities; demand shocks; sticky prices; monetary nonneutrality
    JEL: D02 E02 E44 G21
    Date: 2023–04–21
  15. By: Guinea, Laurentiu; Ruiz, Jesús; Puch, Luis A.
    Abstract: This paper investigates the impact of anticipated (news) shocks on renewable and fossil energy use on the US economy. Using structural vector autoregressions (SVARs), we identify the news shocks captured in energy stock market indexes. Our findings show that renewable and fossil energy news shocks significantly affect economic activity, revealing the tensions between the traditional fossil fuel-based industries and the emerging green technology-based ones. We further identify news shocks on Economic Policy Uncertainty (EPU) index, as policy is a key factor driving the changes in the energy mix. First, we show that the identified anticipated shocks have very different propagation mechanisms from traditional surprise shocks. Then, we find that the combination of news shocks to energy stock prices and economic policy uncertainty jointly account for about 90% of the variability of output, job openings and house prices. To interpret our findings, we use a DSGE model that incorporates fossil and renewable energy sectors and news shocks as a driving force, and we show that the propagation mechanisms of news shocks in the model are consistent with our empirical observations. Our study illustrates on the critical interaction between energy news and economic policy uncertainty in affecting the real economy in the transition from dirty to clean energy technologies.
    Keywords: News Shocks; Renewable Energy; Economic Policy Uncertainty; Expectations
    JEL: E2 E6 E32 E44 Q42 Q43 Q58
    Date: 2023–05–24
  16. By: Jason Dunn; Fernando Leibovici
    Abstract: This paper studies the drivers of global shipping dynamics and their aggregate implications. We document novel evidence on the dynamics of global shipping supply, demand, and prices. Motivated by this evidence, we set up a multi-country dynamic model of international trade with a global shipping market where shipping companies and importers endogenously determine shipping supply and prices. We find the model can successfully account for the dynamics of global shipping observed in the aftermath of COVID-19 and that accounting for these has important implications for the dynamics of aggregate economic activity.
    Keywords: international shipping; international trade; shipping supply; shipping demand; shipping prices
    JEL: F1 F41 L91
    Date: 2023–02
  17. By: Andrew Caplin; Victoria Gregory; Eungik Lee; Soren Leth-Petersen; Johan Sæverud
    Abstract: Earnings risk is central to economic analysis. While this risk is essentially subjective, it is typically inferred from administrative data. Following the lead of Dominitz and Manski (1997), we introduce a survey instrument to measure subjective earnings risk. We pay particular attention to the expected impact of job transitions on earnings. A link with administrative data provides multiple credibility checks. It also shows subjective earnings risk to be far lower than its administratively- estimated counterpart. This divergence arises because expected earnings growth is heterogeneous, even within narrow demographic and earnings cells. We calibrate a life-cycle model of search and matching to administrative data and compare the model-implied expectations with our survey instrument. This calibration produces far higher estimates of individual earnings risk than do our subjective expectations, regardless of age, earnings, and whether or not workers switch jobs. This divergence highlights the need for survey-based measures of subjective earnings risk.
    Keywords: earnings risk; job transitions; subjective expectations
    JEL: D31 D84 E24 J31
    Date: 2023–03–03
  18. By: Wen, Lei; Zhou, Haiwen
    Abstract: The impact of capital accumulation on job creation is an important and interesting issue in economic development. This model provides a general-equilibrium framework for studying technology choice with unemployment in a developing economy based on microfoundations. Unemployment in the urban sector results from the existence of efficiency wages. Manufacturing firms engage in oligopolistic competition and choose technologies to maximize profits. A more advanced technology uses more capital and less labor. In the steady state, an increase in the amount of capital induces firms to choose more advanced technologies and the wage rate increases. While a higher capital stock always induces firms to choose more advanced technologies, urban unemployment rate may decrease, and agricultural sector employment may increase.
    Keywords: Economic development, technology choice, unemployment, increasing returns, rural-urban migration
    JEL: E24 J64 L13 O14
    Date: 2023–05–16
  19. By: Alessandro Peri (Banco de España); Omar Rachedi (Banco de España); Iacopo Varotto (Banco de España)
    Abstract: Aggregate and sectoral effects of public investment crucially depend on the interaction between the output elasticity to public capital and input-output linkages. We identify this dependence through the lens of a New Keynesian production network. This setting doubles the socially optimal amount of public capital relative to the average one-sector economy, leading to a substantial amplification of the public investment multiplier. We also document novel sectoral implications of public investment. Although public investment is concentrated in far fewer sectors than public consumption, its effects are relatively more evenly distributed across industries. We validate this model implication in the data.
    Keywords: sectoral heterogeneity, input-output matrix, public capital
    JEL: E31 E32 E52
    Date: 2023–03
  20. By: Hassan Afrouzi; Saroj Bhattarai
    Abstract: We derive closed-form solutions and sufficient statistics for inflation and GDP dynamics in multi-sector New Keynesian economies with arbitrary input-output linkages. Analytically, we decompose how production linkages (1) amplify the persistence of inflation and GDP responses to monetary and sectoral shocks and (2) increase the pass-through of sectoral shocks to aggregate inflation. Quantitatively, we confirm the significant role of production networks in shock propagation, emphasizing the disproportionate effects of sectors with large input-output adjusted price stickiness: The three sectors with the highest contribution to the persistence of aggregate inflation have consumption shares of around zero but explain 16% of monetary non-neutrality.
    JEL: C67 E32 E52
    Date: 2023–05
  21. By: Marlon Azinovic (University of Pennsylvania); Harold L. Cole (University of Pennsylvania; National Bureau of Economic Research); Felix Kübler (University of Zurich; Swiss Finance Institute)
    Abstract: We examine asset prices in environments where the risk-free rate lies considerably below the growth rate. To do so, we introduce a tractable model of a production economy featuring heterogeneous trading technologies, as well as idiosyncratic and aggregate risk. We show that allowing for the possibility of firms exiting is crucial for matching key macroeconomic moments and, simultaneously, the risk-free rate, the market price of risk, and price-earnings ratios. In particular, our model allows us to consider calibrations that match the high observed market price of risk and average interest rates as low as 2-3.5 percent below the average growth rate. High values for risk aversion or non-standard preferences are not necessary for this. We use the model to examine the wealth distribution and asset prices in economies with very low real rates. We also examine under which conditions realistic calibrations allow for an infinite rollover of government debt. For our benchmark calibration, rollover is impossible even if the average risk-free rate lies 3.5 percent below the average growth rate.
    Keywords: Asset pricing, low rates, r-g, limited participation, market price of risk
    JEL: E6 E44 G12
    Date: 2023–05

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