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on Dynamic General Equilibrium |
| By: | Obstbaum, Meri; Oinonen, Sami; Pönkä, Harri; Vanhala, Juuso; Vilmi, Lauri |
| Abstract: | In this paper we analyze features of the recent business cycle with a New Keynesian small open economy DSGE model with labour market frictions and wage rigidity. The model complements the existing analytical tools of the Bank of Finland by enabling detailed analysis of labour markets in a DSGE framework. We illustrate the properties of the model by presenting how recent shocks explain in flation and economic recovery in the euro area and Finland, with a specifi c emphasis on factors that are critical to explaining current labour market tightness. |
| Keywords: | DGSE model, labour market frictions, wage rigidity |
| JEL: | E24 E32 E37 F41 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:12023&r=dge |
| By: | David Leung; Markus Poschke |
| Abstract: | We study the effects of tax reforms in a heterogeneous agent overlapping generations life cycle model with idiosyncratic risk in capital and labour income and a rich tax system. The model replicates empirical joint distributions of income, wealth and tax payments well. In an economy with highly progressive income taxes, a revenue-neutral shift of the tax burden from income to consumption taxes increases saving and output, while also reducing inequality. It particularly benefits those with low wealth relative to income. It tends to harm retirees, who have high wealth relative to income. In contrast, an increase in the progressivity of income taxes also reduces inequality, but implies lower saving and output. Nous étudions les effets de plusieurs réformes fiscales à l’aide d’un modèle de cycle de vie avec générations chevauchantes. Le modèle décrit des agents hétérogènes qui confrontent des risques idiosyncratiques pour leurs revenus du travail et du capital, dans un environnement avec un système fiscal progressif complexe. Le modèle réplique fidèlement les distributions empiriques conjointes du revenu, de la richesse et des paiements de taxes et d’impôts. Dans ce contexte, un déplacement du fardeau fiscal à effet neutre sur les revenus publics vers les taxes à la consommation augmente l’épargne et la production tout en réduisant les inégalités. Cette politique est avantageuse particulièrement pour les individus disposant d’un faible niveau de richesse par rapport à leur revenu, mais tend à nuire aux personnes retraitées en raison du niveau élevé de leur richesse par rapport à leurs revenus. En revanche, une hausse de la progressivité de l’impôt sur le revenu des particuliers réduit aussi les inégalités, mais génère une épargne et une production plus faible. |
| Keywords: | Tax reforms, labor income, capital income, progressive tax system, consumption tax, Réformes fiscales, revenus du travail, revenus du capital, système fiscal progressif, taxe à la consommation |
| Date: | 2023–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirpro:2023rp-07&r=dge |
| By: | Andrea Colciago; Vivien Lewis; Branka Matyska |
| Abstract: | We identify the effects of corporate income tax shocks on key US macroeconomic aggregates. In response to a corporate income tax cut, we find that: (i) labor productivity increases; (ii) entry increases with delay; (iii) exit increases; (iv) total labor increases by more than production labor. To rationalize these empirical findings, we build a New Keynesian model with idiosyncratic firm productivity, and entry and exit. Our model features productivity gains due to selection and cleansing along the entry and exit margins. Models with homogeneous firms fail to account for the selection and cleansing process and produce counterfactual results. |
| Keywords: | corporate taxation, productivity, firm entry and exit. |
| JEL: | E62 E32 H25 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:512&r=dge |
| By: | Bianca Barbaro; Patrizio Tirelli |
| Abstract: | We build a business cycle model characterized by endogenous firms dynamics, where banks may prefer debt renegotiation, i.e. non-performing exposures, to outright borrowers default. Debt renegotiations per se do not have adverse effects in the event of financial crisis episodes, but a large share of non-performing firms is associated with a sharp deterioration of economic activity if there are congestion effects in banks ability to monitor non-performing loans and the opacity of such loans adversely affects banks' moral hazard problem. Aggressive interest rate reductions and quantitative easing limit defaults and the output contraction caused by a financial crisis, without adverse effects on the entry of new firms. The decline in the natural interest rate, due to slower productivity growth and persistent liquidity shocks, might explain the observed long-run trend in the share of non-performing loans. |
| Keywords: | Non-Performing Loans, DSGE Model, Financial Frictions, Quantitative Easing, Firms Entry. |
| JEL: | E32 E44 E50 E58 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:516&r=dge |
| By: | Juan C. Córdoba; Anni T. Isojärvi; Haoran Li |
| Abstract: | Workhorse search and matching models assume constant bargaining weights, while recent evidence indicates that weights vary across time and in cross section. We endogenize bargaining weights in a life-cycle search and matching model by replacing a standard Cobb-Douglas (CD) matching function with a general constant elasticity of substitution (CES) matching function and study the implications for the long-term labor share and bargaining power in the U.S. The CES model explains 64 percent of the reported decline in the labor share since 1980, while the CD model explains only 28 percent of the decline. We then use the model to recover changes in bargaining power and find that workers' bargaining power has declined 11 percent between 1980 and 2007 because of a decline in tightness. |
| Keywords: | Labor share; Endogenous bargaining power; Search and matching; CES matching function |
| JEL: | E25 J30 J50 |
| Date: | 2023–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-30&r=dge |
| By: | Isabel Gödl-Hanisch; Ronald Mau; Jonathan Rawls |
| Abstract: | We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. The “divine coincidence” holds with the nominal short-term rate and central bank balance sheet available as policy tools. Credit spread-targeting balance sheet policy provides a determinate equilibrium with a fixed policy rate. This policy induces similar welfare losses relative to dual-instrument policy as inflation-targeting interest rate policy with a fixed balance sheet. |
| Keywords: | unconventional monetary policy, optimal monetary policy, New Keynesian model, policy rate lower bound, interest rate peg |
| JEL: | E43 E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10399&r=dge |
| By: | Jasmina Arifovic (Simon Fraser University); Isabelle Salle (University of Ottawa); Hung Truong (Simon Fraser University) |
| Abstract: | Price-level targeting (PLT) is optimal under the fully-informed rational expectations (FIRE) benchmark but lacks empirical support. Given the hurdles to the implementation of macroeconomic field experiments, we utilize a laboratory group experiment – where expectations are elicited from human subjects – to collect data on expectations, inflation and output dynamics under a traditional inflation targeting (IT) framework and a PLT regime with both deflationary and cost-push shocks. We then emulate the subjects’ expectations with a micro-founded heterogeneous-expectation New Keynesian (HENK) model and reproduce the macroeconomic dynamics observed in the lab. Both in the lab and in the HENK model, the benefits of PLT over an IT regime obtained under the FIRE assumption are not observed: both human subjects and HENK agents are unable to learn the underlying implications of PLT, which results in excess macroeconomic volatility. However, once augmented with an inflation guidance from the CB consistent with closing the price gap, the stabilizing benefits of PLT materialize both in the lab and in the model. |
| Keywords: | heterogeneous expectations, learning, central bank communication, lab experiments |
| JEL: | E7 E52 E42 C92 |
| Date: | 2023–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20230028&r=dge |
| By: | Scholl, Almuth |
| Abstract: | This paper studies how distributional and electoral concerns shape sovereign default incentives within a quantitative model of sovereign debt with heterogeneous agents and non-linear income taxation. The small open economy is characterized by a two-party system in which the left-wing party has a larger preference for redistribution than the right-wing party. Political turnover is the endogenous outcome of the electoral process. Fiscal policy faces a tradeoff: On the one hand, the government has incentives to fi- nance redistribution via external debt to avoid distortionary income taxation. On the other hand, the accumulation of external debt raises the cost of borrowing. Quanti- tative findings suggest that the left-wing party implements a more progressive income tax, is more prone to default, and has a lower electoral support than the right-wing party due to worse borrowing conditions and the distortionary effects of income taxa- tion. In equilibrium, electoral uncertainty raises sovereign default risk. |
| Keywords: | sovereign debt and default, inequality, redistribution, political economy |
| JEL: | F34 H63 E62 F41 D72 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cexwps:13&r=dge |
| By: | Pablo Garcia Sanchez; Alban Moura; Olivier Pierrard |
| Abstract: | Not so well. We reach this conclusion by evaluating the empirical performance of a benchmark DSGE model with real estate and collateral constraints. We estimate the model from U.S. data using Bayesian methods and assess its fit along various dimensions. We find that the model is strongly rejected when tested against unrestricted Bayesian VARs and cannot replicate the persistence of real estate prices and various comovements between aggregate demand, real estate prices, and debt. Performance does not improve with alternative definitions of real estate prices, estimation samples, or detrending approaches. Our results raise doubts about the ability of current DSGE models with real estate and collateral constraints to deliver credible policy insights and identify the dimensions in need of improvement. |
| Keywords: | Health; long-term care costs; uncertainty; stochastic model |
| JEL: | C60 D15 D81 I12 I18 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp171&r=dge |
| By: | Luca Gagliardone; Mark Gertler |
| Abstract: | We develop a simple quantitative New Keynesian model aimed at accounting for the recent sudden and persistent rise in inflation, with emphasis on the role of oil shocks and accommodative monetary policy. The model features oil as a complementary good for households and as a complementary input for firms. It also allows for unemployment and real wage rigidity. We estimate the key parameters by matching model impulse responses to those from identified money and oil shocks in a structural VAR. We then show that our model does a good job of explaining unemployment and inflation since 2010, including the recent inflation surge that began in mid 2021. We show that mainly accounting for this surge was a combination oil price shocks and “easy” monetary policy, even after allowing for demand shocks and shocks to labor market tightness. Important for the quantitative impact of the oil price shock is a low elasticity of substitution between oil and labor, which we estimate to be the case. |
| JEL: | E0 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31263&r=dge |
| By: | Langot, François; Malmberg, Selma; Tripier, Fabien; Hairault, Jean-Olivier |
| Abstract: | French government implemented a subsidy on the purchase of energy products to shield consumers from rising energy prices during the energy crisis that started in 2021. We develop a new-Keynesian business cycle model with heterogeneous agents to assess the macroeconomic and redistributive effects of this energy subsidy. We propose a new methodology for ex-ante policy evaluation based on the government forecasts embedded in budgetary law. From a macroeconomic perspective, this policy supports economic growth and curbs inflation, but slightly rises debt-to-GDP ratio. In terms of redistribution, this policy contains the rise in consumption inequalities even if the subsidy is not targeted at poorest households. We compare the effects of this policy with alternative policies such as a re-indexation of wages on prices or a redistributive policy targeted at the most vulnerable households. |
| Keywords: | HANK model, Energy crisis, Tariff shield, Policy evaluation |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:docweb:2305&r=dge |
| By: | Alessia Cafferata; Marwil J. Dávila-Fernández |
| Abstract: | This paper assesses the robustness of the so-called “natalist bias” of pollution control. The latter suggests that taxing emissions encourage agents to shift from production to tax-free activities such as procreation, further deteriorating the environment and gradually impoverishing the next generations. We relax the assumptions that human capital does not depend on environmental quality and that society does not allocate resources to pollution control. Using a similar Overlapping Generations (OLG) growth model, our findings indicate that taxation does not necessarily encourage agents to permanently shift away from production because living under better environmental conditions enhances productivity through human capital formation. As the government increases the emissions price, agents reduce consumption and education spending, hurting output in the short term. However, in the long run, the reduction in emissions that follows taxation more than compensates for the initial adverse effects, provided that the sensitivity of human capital accumulation to environmental degradation is strong enough. Furthermore, as we increase the coefficient capturing such pollution externality, a Neimark-Sacker bifurcation occurs, making the system compatible with persistent endogenous fluctuations |
| Keywords: | Climate change, Natalist bias, OLG, Growth, Neimark-Sacker bifurcation |
| JEL: | Q56 Q57 O11 C62 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:895&r=dge |
| By: | DI BARTOLOMEO, Giovanni; SERPIERI, Carolina |
| Abstract: | In this study, we compare the conduct of central banks across seven advanced economies by analyzing the relationship between observed and optimal monetary policies. We estimate the New Keynesian Phillips curves for prices and wages and use model-consistent welfare measures to conduct counterfactual analysis. What sets our approach apart is the focus on the impact of inertia on output gaps and price/wage dynamics, which we model using duration-dependent adjustments. Ignoring the effects of inertia on welfare and policies could result in a misleading and incomplete understanding of inflation dynamics. By incorporating this element into our analysis, we aim to identify common trends and specificities in central banks’ monetary policy conduct across different countries. |
| Keywords: | Duration-dependent adjustments, Intrinsic inflation persistence, DSGE models, Hybrid Phillips curves, Optimal policy |
| JEL: | E31 E32 C11 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2023004&r=dge |
| By: | Jesse Schreger; Pierre Yared; Emilio Zaratiegui |
| Abstract: | We consider a New Keynesian model with strategic monetary and fiscal interactions. The fiscal authority maximizes social welfare. Monetary policy is delegated to a central bank with an anti-inflation bias that suffers from a lack of commitment. The impact of central bank hawkishness on debt issuance is non-monotonic because increased hawkishness reduces the benefit from fiscal stimulus while simultaneously increasing real debt capacity. Starting from high levels of hawkishness (dovishness), a marginal increase in the central bank's anti-inflation bias decreases (increases) debt issuance. |
| JEL: | E40 E44 E49 E50 E52 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31246&r=dge |
| By: | Andrianady, Josué R.; Rajaonarison, Njakanasandratra R. |
| Abstract: | This work investigates the impact of an increase in the money supply on inflation using DSGE model in Madagascar. The results showed a strong positive correlation between these two variables, confirming the economic theory that an increase in the money supply leads to a proportional increase in inflation. The study also revealed that the increase in the money supply has a significant effect on inflation in the short term, but this effect quickly diminishes and disappears after about twelve quarters.Targeted monetary policies may limit short-term effects on inflation, but strcutural and busgetary policies in the long term are needed to sustainably reduce inflation and promote sustained economic growth. |
| Keywords: | Madagascar, DSGE, Inflation, money, PCA |
| JEL: | A1 E3 E4 E42 E43 E5 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117330&r=dge |
| By: | Paola Boel; Christopher J. Waller |
| Abstract: | We investigate the welfare-increasing role of credit and banking at zero interest rates in a microfounded general equilibrium monetary model. Agents differ in their opportunity costs of holding money due to heterogeneous idiosyncratic time-preference shocks. Without banks, the constrained-efficient allocation is never attainable, since impatient agents always face a positive implicit rate in equilibrium. With banks, patient agents pin down the borrowing rate and in turn enable impatient agents to borrow at no cost when the inflation rate approaches the highest discount factor. Banks can therefore improve welfare at zero rates, provided that both types of agents are included in the financial system and that the borrowing limit is sufficiently lax. The result is robust to several extensions. |
| Keywords: | Banking; Money; Zero Interest Rates |
| JEL: | E40 E50 |
| Date: | 2023–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:96203&r=dge |
| By: | Christopher Sandmann; Nicolas Bonneton |
| Abstract: | This paper proves the existence of a non-stationary equilibrium in the canonical searchand- matching model with heterogeneous agents. Non-stationarity entails that the number and characteristics of unmatched agents evolve endogenously over time. An equilibrium exists under minimal regularity conditions and for both paradigms considered in the literature: transferable and non-transferable utility. We suggest that our proof strategy applies more broadly to a class of continuous-time, infinite-horizon models with a continuum of heterogeneous agents, also referred to as mean-field games, that evolve deterministically over time. |
| Keywords: | equilibrium existence, search and matching, non-stationary, mean-field game |
| JEL: | C62 C78 D50 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_427&r=dge |
| 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 US. 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 is counter-cyclical 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 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 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:433&r=dge |
| By: | Ozge Akinci; Gianluca Benigno; Marco Del Negro; Ethan Nourbash; Albert Queraltó |
| Abstract: | In a recent research paper we argue that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions. In the long run, lower real rates lead intermediaries to shift their portfolios toward risky assets, making them more vulnerable over time. In this post, we use a model to highlight the challenging trade-offs faced by policymakers in setting interest rates. |
| Keywords: | financial stability; monetary policy; Dynamic Stochastic General Equilibrium (DSGE) models; rates; nonlinear responses; shocks; fire sale |
| JEL: | E2 E5 E4 G2 |
| Date: | 2023–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:96196&r=dge |
| By: | Mr. Francis Vitek |
| Abstract: | We derive measures of the stances of monetary and fiscal policy within the framework of an empirically plausible extension of the basic New Keynesian model, and jointly estimate them for the United States using a closed form multivariate linear filter. Our theoretical analysis reveals that the neutral stance of monetary policy — as measured by the real natural rate of interest — depends on the stance of fiscal policy, which in turn depends on the composition and expected timing of structural changes in the fiscal instruments. Our empirical application finds that accounting for fiscal policy significantly alters the estimated stance of monetary policy, and that the so-called fiscal impulse is a poor proxy for the stance of fiscal policy. |
| Keywords: | stance of monetary policy; stance of fiscal policy; new keynesian model; multivariate linear filter |
| Date: | 2023–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/106&r=dge |
| By: | Andrianady, Josué R.; Rajaonarison, Njakanasandratra R. |
| Abstract: | This work investigates the impact of an increase in the money supply on inflation using DSGE model in Madagascar. The results showed a strong positive correlation between these two variables, confirming the economic theory that an increase in the money supply leads to a proportional increase in inflation. The study also revealed that the increase in the money supply has a significant effect on inflation in the short term, but this effect quickly diminishes and disappears after about twelve quarters.Targeted monetary policies may limit short-term effects on inflation, but strcutural and busgetary policies in the long term are needed to sustainably reduce inflation and promote sustained economic growth. |
| Keywords: | Madagascar, DSGE, Inflation, money, PCA |
| JEL: | E0 E3 E4 E41 E43 E51 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117332&r=dge |
| By: | Coenen, Günter; Lozej, Matija; Priftis, Romanos |
| Abstract: | We use scenario analysis to assess the macroeconomic effects of carbon transition policies aimed at mitigating climate change. To this end, we employ a version of the ECB’s New Area-Wide Model (NAWM) augmented with a framework of disaggregated energy production and use, which distinguishes between “dirty” and “clean” energy. Our central transition scenario is that of a permanent increase in carbon taxes, which are levied as a surcharge on the price of dirty energy. Our findings suggest that increasing euro area carbon taxes to an interim target level consistent with the transition to a net-zero economy entails a transitory rise in inflation and a lasting, albeit moderate decline in GDP. We show that the short and medium-term effects depend on the monetary policy reaction, on the path of the carbon tax increase and on its credibility, while expanding clean energy supply is key for containing the decline in GDP. Undesirable distributional effects can be addressed by redistributing the fiscal revenues from the carbon tax increase to low-income households. JEL Classification: C54, E52, E62, H23, Q43 |
| Keywords: | carbon taxation, climate change, DSGE model, euro area, monetary policy, fiscal policy |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232819&r=dge |
| By: | Blanco, Andrés (University of Michigan); Drenik, Andres (University of Texas at Austin); Moser, Christian (Columbia University); Zaratiegui, Emilio (Columbia University) |
| 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: | inflation, monetary policy, wage rigidity, wage inequality, unemployment, inefficient job separations, quits, layoffs, directed search, commitment, stopping times, continuous-time methods, variational inequalities |
| JEL: | E12 E31 D31 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16121&r=dge |
| By: | Julien Pascal |
| Abstract: | Artificial Neural Networks (ANNs) are powerful tools that can solve dynamic programming problems arising in economics. In this context, estimating ANN parameters involves minimizing a loss function based on the model’s stochastic functional equations. In general, the expectations appearing in the loss function admit no closed-form solution, so numerical approximation techniques must be used. In this paper, I analyze a bias-corrected Monte Carlo operator (bc-MC) that approximates expectations by Monte Carlo. I show that the bc-MC operator is a generalization of the all-in-one expectation operator, already proposed in the literature. I propose a method to optimally set the hyperparameters defining the bc-MC operator and illustrate the findings numerically with well-known economic models. I also demonstrate that the bc-MC operator can scale to high-dimensional models. With just a few minutes of computing time, I find a global solution to an economic model with a kink in the decision function and more than 100 dimensions. |
| Keywords: | Dynamic programming, Artificial Neural Network, Machine Learning, Monte Carlo |
| JEL: | C45 C61 C63 C68 E32 E37 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp172&r=dge |