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on Dynamic General Equilibrium |
|
Issue of 2023‒07‒10
eighteen papers chosen by Christian Zimmermann Federal Reserve Bank of St. Louis |
| By: | Jesús Fernández-Villaverde; Joël Marbet; Galo Nuño; Omar Rachedi |
| Abstract: | This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households' precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality. |
| JEL: | D31 E12 E21 E31 E43 E52 E58 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31282&r=dge |
| By: | Lorenzo Forni (University of Padova); Mehrab Kiarsi (Henan University) |
| Abstract: | This paper points to the welfare enhancing effect of policies to regulate emissions in the face of climate shock. Fiscal and monetary policies alone would achieve suboptimal outcomes. We consider the Ramsey-optimal long-run and dynamic policy interactions between climate and fiscal-monetary policies in a climate-monetary DSGE model under sticky prices. In the model, the planner – on top of a fiscal and a monetary instrument – controls also a carbon tax (or, equivalently, an emission abatement technology) to manage emissions, and therefore temperatures and climate damages. In this setup, the presence of carbon taxation sharply reduces the fall in key macroeconomic variables such as output, consumption, and welfare, to a shock to emissions compared with the case without carbon taxation in place. We also show that it is essential to consider climate-specific shocks to appreciate the importance of carbon policies; the Ramsey optimal solution to typical TFP or government spending shocks is not very different whether or not the planner has access to carbon taxation. In the face of climate shocks, the optimal monetary is very similar to the one under no climate policy, while the optimal fiscal policy set distortionary labor income taxation at a lower rate, as the planner now raises revenue also through carbon taxes. Finally, in an extension of the model, we show that the optimal environmental implications can significantly change as we explicitly include climate fiscal outlays in the government budget constraint. As climate change becomes more costly for the government, the optimal abatement increases and the magnitude of carbon emissions and thus output damages decreases. |
| Keywords: | Climate change; Climate-specific shocks; Optimal environmental and fiscal- monetary policy; Carbon taxation; Fiscal finance; New Keynesian model |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0299&r=dge |
| By: | Martin F. Hellwig (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | This expository note uses Hilbert's "infinite hotel", a hotel where one can always find place for another guest even if the hotel is already full, to illustrate the failure of the First Welfare Theorem in "large-square" economies that have infinitely many participants as well as infinitely many goods. Hilbert's hotel with infinitely many guests has a similar mathematical structure as the overlapping-generations model of Allais (1947) and Samuelson (1958). The phenomenon of "dynamic inefficiency" in such models represents a failure of the First Welfare Theorem in "large-square" economies, rather than frictions from the sequential nature of markets. |
| Keywords: | HilbertÂ’s hotel, overlapping-generations models, dynamic inefficiency, First Welfare Theorem |
| JEL: | D15 D61 E62 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2023_05&r=dge |
| By: | Martin F. Hellwig (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | The paper gives conditions for efficiency and inefficiency of equilibrium allocations in an overlapping-generations model with a constant rate of population growth and with multiple assets, but without labour. Optimal portfolio choice implies that, for any period and history up to that period, the conditional certainty equivalents of the one-period-ahead marginal rates of return must be the same for all assets that are held in positive amounts. The efficiency or inefficiency of equilibrium allocations depends on whether this common conditional certainty equivalent of returns on assets is larger or smaller than the population growth rate. If the growth rate is uncertain, the standard of comparison is the certainty equivalent of the population growth rate when interpreted as a marginal rate of return on an asset. |
| Keywords: | Dynamic Inefficiency, overlapping-generations models, First Welfare Theorem, certainty-equivalents criterion |
| JEL: | D15 D61 E21 E22 E62 H30 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2023_04&r=dge |
| By: | Marcela De Castro-Valderrama (Banco de la Republica, Colombia); Nicol’Moreno-Arias (Banco de la Republica, Colombia); Juan Josè Ospina-Tejeiro (Banco de la Republica, Colombia) |
| Abstract: | Should a government have more than one fiscal rule constraining fiscal aggregates? If so, why? In this paper, we present a dynamic general equilibrium model of a small open economy featuring an incumbent government to assess how and why implementing a budget balance rule and a debt anchor rule is non-redundant and welfare-improving. Our findings suggest that the implementation of a combination of fiscal rules is optimally preferred over a single rule, as each rule has a different effect on credibility and fiscal behaviour. While the debt anchor rule prevents the propagation of the negative effects of imperfect fiscal credibility, the operational rule reduces amplification by avoiding overindebtedness and minimizing the welfare-detrimental effects arising from a deficit-biased government. |
| Keywords: | Fiscal Rules; Credibility; Deficit Bias; Balanced Budget Rule; Debt Anchor Rule; Fiscal Policy; Welfare |
| JEL: | E61 E62 H60 H63 F41 |
| Date: | 2023–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp09-2023&r=dge |
| By: | De Grauwe, Paul; Foresti, Pasquale |
| Abstract: | In this article we study fiscal and monetary policies interaction under the assumption that agents have limited cognitive capabilities. To this aim, we employ a behavioral New Keynesian model in which agents’ beliefs generate endogenous waves of optimism and pessimism. The role of such waves is studied under three alternative policy setups: fiscal dominance, monetary dominance and no dominance. Output, inflation, government spending and public debt result to be strongly linked to the agents’ beliefs irrespectively of the policy regime. However, under fiscal dominance the system is characterized by more persistent waves of optimism and pessimism. The consequent higher volatility of the system under fiscal dominance also undermines the central bank’s credibility. We show that in order to minimize these negative effects of fiscal dominance, under such a regime governments should focus on public debt stabilization and leave the stabilization of output and inflation to the monetary authority. |
| Keywords: | monetary policy; fiscal policy; beliefs; heuristics; animal spirits; Elsevier deal |
| JEL: | E52 E61 F33 F36 |
| Date: | 2023–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:119452&r=dge |
| By: | Burkhard Heer; Vito Polito; Mike Wickens; Michael R. Wickens |
| Abstract: | Using an overlapping generations model, two new indicators of public pension system sustainability are proposed: the pension space, which measures the capacity to pay for pension expenditures out of labour taxation, and the pension space exhaustion probability reflecting demographic uncertainties. These measures reveal that the pension spaces of advanced economies are strikingly different. Most nations have little scope to further finance pensions out of labour income taxation over the next thirty years. There is no one-size-fits-all solution. Risk-equivalent pension reforms enhance welfare in the long run, particularly for rapidly ageing nations, but also entail non-negligible transitional costs. |
| Keywords: | ageing, fiscal space, public pension sustainability, overlapping generations model |
| JEL: | E62 H55 H20 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10487&r=dge |
| By: | Amina Enkhbold |
| Abstract: | I study the impact of banking market concentration and wholesale funding reliance on the transmission of monetary policy shocks to mortgage rates. I empirically demonstrate that in the United States, banks with higher reliance on wholesale funding in concentrated (competitive) deposit markets transmit monetary policy shocks less (more) to mortgage rates. I study this imperfect transmission through the lens of a New Keynesian model with monopolistically competitive banks and costly access to wholesale funding. I find that high market power banks with greater wholesale funding transmit monetary policy less to deposit rates, generating lower liability. This leads to lower mortgage lending, house prices, and borrower consumption. If monetary policy shocks become persistent, this negative effect is amplified with banks shifting away from deposits more towards wholesale funding. |
| Keywords: | Financial institutions; Inflation targets; Monetary policy transmission; Wholesale funding |
| JEL: | E44 E52 G21 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-35&r=dge |
| By: | Alex Ilek (Bank of Israel); Nimrod Cohen (Bank of Israel) |
| Abstract: | We propose a semi-structural DSGE model for the Israeli economy, as a small open economy, which contains a financial friction in the household sector credit market. Such a friction is reflected in a positive relationship between households’ leverage ratio and their interest rate (credit spread) on debt, as evident in the Israeli data. Our main purpose is to evaluate the implications of such a friction on the implementation of monetary policy and macroprudential policy. Our two main findings are: First, it is important that the monetary policy will react also to developments in the credit market, such as credit spread widening, to increase effectiveness in achieving its main goals of stabilizing inflation and real activity. Second, macroprudential policy may increase the sensitivity of households’ credit spread to their leverage. Thus, this policy can mitigate or even prevent over-borrowing and reduce the risk of a debt deleveraging crisis. Moreover, in a case of demand weakness and debt deleveraging, in addition to accommodative monetary policy, the macroprudential policy may contribute to stimulating demand due to a corresponding reduction in credit spread. |
| Keywords: | Monetary Policy, Household Finance, Financial Friction, Macroprudential Policy, Leaning Against the Wind (LAW) |
| JEL: | E44 E52 G21 G51 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2023.03&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 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: | Racial inequality; Monetary policy; Unemployment; Inflation; Discrimination |
| JEL: | E32 E52 J64 E31 |
| Date: | 2023–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:96260&r=dge |
| By: | Segal, Gill; Shaliastovich, Ivan |
| Abstract: | We find that high macroeconomic uncertainty is associated with greater accumulation of physical capital, despite a reduction in investment and valuations. To reconcile this puzzling evidence, we show that uncertainty predicts lower depreciation and utilization of existing capital, which dominates the investment slowdown. Motivated by these dynamics, we develop a quantitative production-based model in which firms implement precautionary savings through reducing utilization rather than raising investment. Through this novel intensive-margin mechanism, uncertainty shocks command a quarter of the equity premium in general equilibrium, while flexibility in utilization adjustments helps explain uncertainty risk exposures in the cross-section of industry returns. |
| Keywords: | Uncertainty, Production, Asset Pricing, Utilization, Depreciation, Equity Premium |
| JEL: | G12 E32 D81 D50 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:388&r=dge |
| By: | Miguel H. Ferreira (QMUL and CEPR); Timo Haber (De Nederlandsche Bank); Christian Rörig (QuantCo) |
| Abstract: | Using a unique dataset covering the universe of Portuguese firms and their credit situation we show that financially constrained firms are found across the entire firm size distribution, even in the top 1%. Incorporating a richer, empirically supported, productivity process into a standard heterogeneous firms model generates a joint distribution of size and credit constraints in line with the data. The presence of large constrained firms in the economy, together with their elevated capital share, explains about 66% of the response of output to a financial shock. We conclude by providing micro-evidence in support of the model mechanism. |
| Keywords: | Firm size, business cycle, financial accelerator |
| JEL: | E62 E22 E23 |
| Date: | 2023–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:948&r=dge |
| By: | Bertrand Achou; Philippe De Donder; Franca Glenzer; Minjoon Lee; Marie-Louise Leroux |
| Abstract: | Marginal utility of financial resources when needing long-term care, and the related incentives for precautionary savings and insurance, may vary significantly by whether one receives care at home or in a nursing home. In this paper, we develop strategic survey questions to estimate those differences. All else equal, we find that the marginal utility is significantly higher when receiving care at home rather than in a nursing home. We then use these estimates within a quantitative life cycle model to evaluate the impact of the expected choice of care setting (home versus nursing home) on precautionary savings and insurance valuation. The estimated marginal utility differences imply a significant increase in the incentives to save when expecting to receive care at home. Larger incentives to self-insure also translate to a higher valuation of additional subsidies for home care than for nursing homes, shedding light on an efficient way to expand public long-term care subsidies. We also examine how the magnitude of our results quantitatively vary with the existing public long-term care subsidies. L’utilité marginale des ressources financières lorsque les personnes nécessitent des soins de longue durée (ainsi que les incitations à épargner et à s’assurer en découlant) peuvent varier substantiellement suivant que les personnes reçoivent ces soins à la maison ou en CHSLD. Dans ce travail, nous développons un sondage en vue d’évaluer ces différences. Toute chose égale par ailleurs, nous montrons que l’utilité marginale des ressources financières est plus élevée pour ceux qui restent chez eux plutôt que d’être en institution. Nos estimés sont ensuite utilisés dans un modèle de cycle de vie de manière à quantifier l’impact d’un choix de résidence spécifique sur l’épargne de précaution et la valorisation de l’assurance. Les différences d’utilité marginale des ressources impliquent que les personnes prévoyant de recevoir des soins à domicile ont des incitatifs plus fortes à épargner. Des incitatifs plus élevés à s’assurer se traduisent par une valorisation plus importante de subventions publiques additionnelles pour les soins à domicile (plutôt qu’en CHSLD), qui devraient donc être privilégiées par les autorités. L’étude examine également comment ces résultats varient en fonction du montant des subventions aux soins de longue durée déjà existantes. |
| Keywords: | Long-term Care, Marginal Utility, Home Care, Nursing Home, Savings, Soins de longue durée, Utilité marginale, Soins à domicile, Maison de retraite, Ãpargne |
| JEL: | D14 E21 G51 I10 |
| Date: | 2023–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2023s-14&r=dge |
| By: | Elisa Giannone; Qi Li; Nuno Paixao; Xinle Pang |
| Abstract: | We argue that the interaction between mobility and wealth provides a view that rationalizes low geographic migration rates, despite migration costs being lower than currently thought. We reach this conclusion by developing and solving a quantitative dynamic spatial equilibrium model with endogenous wealth accumulated through liquid and illiquid assets. We estimate a yearly moving cost between Canadian cities of 196, 303 CAD for an average adult, substantially lower than previous estimates. To demonstrate the model’s validity, we study policies advocated to reduce disparities: Do moving vouchers or housing affordability policies enhance welfare, especially for the poor? Our findings suggest that moving vouchers only marginally increase the welfare of eligible households, and those who receive the vouchers tend to move to locations with lower house prices and wages. In contrast, our model shows that lower housing regulations in Vancouver can decrease the welfare gap between rich and poor by lowering house prices nationwide through spatial reallocation. Thus, the insurance value of living in high-income cities becomes higher, reducing the incentive for low-wealth families to move precautionarily to locations with low housing costs. |
| Keywords: | Housing; Regional economic developments |
| JEL: | G51 R13 R2 R31 R52 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-34&r=dge |
| 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. |
| Keywords: | production networks, multi-sector model, sufficient statistics, inflation dynamics, real effects of monetary policy, sectoral shocks |
| JEL: | E32 E52 C67 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10416&r=dge |
| By: | Makoto WATANABE; Tarishi Matsuoka |
| Abstract: | This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of a banks monetary reserves (a liquidity crisis) occurs endogenously. We show that discount window lending by the LLR is welfare improving but reduces banks ex-ante incentive to hold monetary reserves, which increases the probability of a liquidity crisis, and can cause moral hazard in capital investment. We also analyze the combined effects of monetary and extensive LLR policies, such as a nominal interest rate, a lending rate, and a haircut. |
| Keywords: | Monetary Equilibrium, Liquidity Crisis, Lender of Last Resort, Moral Hazard JEL Classification Number:E40 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:23-010e&r=dge |
| By: | Ngah Ntiga, Louis Henri; Badjeck Mvondo, Laureine |
| Abstract: | Cet article évalue l’impact de la guerre russo-ukrainienne sur les cours des produits de base exportés par les pays de la CEMAC. Ce travail s’inscrit dans un contexte où les pays de la CEMAC, dont les recettes à l’exportation proviennent principalement des matières premières et énergétiques, voient les cours de ces dernières augmenter. De ce fait, la connaissance de l’impact réel de cette guerre sur les cours de ces produits s’avère importante dans l’optique de l’élaboration des politiques pertinentes pouvant permettre à ces pays de tirer profit. En ayant recours à un modèle DSGE, des simulations ont été faites sur les cours de ces produits de base « sans guerre » et « avec guerre ». Les résultats obtenus suggèrent que l’impact est plus prononcé sur les cours du gaz, du pétrole et de l’huile de palme de sorte qu’il faille au moins 40 mois pour qu’il soit restauré. |
| Keywords: | guerre russo-ukrainienne; produits de base; modèle DSGE |
| JEL: | C13 C5 C82 E31 E31 Q |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:079&r=dge |
| By: | Anikó Bíró (Centre for Economic and Regional Studies); Réka Branyiczki (CEU, TÁRKI); Attila Lindner (UCL); Lili Márk (CEU); Dániel Prinz (World Bank) |
| Abstract: | We study the impact of a large payroll tax cut for older workers in Hungary. Motivated by the predictions of a standard equilibrium job search model, we examine the heterogeneous impact of the policy. Employment increases most at low-productivity firms offering low-wage jobs, which tend to hire from unemployment, while the effects are more muted for high-productivity firms offering high-wage jobs. At the same time, wages only increase at high-productivity firms. These results point to important heterogeneity in the incidence of payroll tax cuts across firms and highlight that payroll taxes have a significant impact on the composition of jobs in the labor market. |
| Keywords: | payroll tax, tax incidence, firm heterogeneity |
| JEL: | H24 H32 J23 J31 |
| Date: | 2022–11 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:2223&r=dge |