nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒07‒24
eighteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Quantitative Effect of the Thatcherism Taxation Programme: Computational Experiments based on a Dynamic General Equilibrium Model By Robbie Noel Wilson; Aleksandar Vasilev
  2. Monetary and Macroprudential Policy and Welfare in an Estimated Four-Agent New Keynesian Model By George J. Bratsiotis; Kasun D. Pathirage
  3. Labor market search, informality, and on-the-job human capital accumulation By Matteo Bobba; Luca Flabbi; Santiago Levy; Mauricio Tejada
  4. On the Time Consistency of Universal Basic Income By Jang, Youngsoo
  5. The Heterogeneous Effects of Social Assistance and Unemployment Insurance: Evidence from a Life-Cycle Model of Family Labor Supply and Savings By Peter Haan; Victoria Prowse
  6. Intergeneration Human Capital Transmission and Poverty Traps By Carmen Camacho; Fernanda Estevan
  7. Social security reforms, retirement and sectoral decisions By Delalibera, Bruno Ricardo; Ferreira, Pedro Cavalcanti; Parente, Rafael Machado
  8. Comparing different features of a fiscal stimulus in the euro area By Caroline Bozou; Jérôme Creel
  9. Rational inattention and the business cycle effects of productivity and news shocks By Maćkowiak, Bartosz; Wiederholt, Mirko
  10. Do this or do that? A model to prioritize reforms By Carmen Camacho; Hannes Tepper
  11. Dynamical analysis of healthcare policy effects in an integrated economic-epidemiological model By Fausto Cavalli; Ahmad Naimzada; Daniela Visetti
  12. Patience and Comparative Development By Uwe Sunde; Thomas Dohmen; Benjamin Enke; Armin Falk; David Huffman; Gerrit Meyerheim
  13. Dynamic Programming on a Quantum Annealer: Solving the RBC Model By Jesús Fernández-Villaverde; Isaiah Hull
  14. Stimulus through Insurance: The Marginal Propensity to Repay Debt By Gizem Koşar; Davide Melcangi; Laura Pilossoph; David Wiczer; Gizem Kosar
  15. International Reserve Accumulation: Balancing Private Inflows with Public Outflows By Bada Han; Dongwook Kim; Youngjin Yun
  16. Overborrowing, Underborrowing, and Macroprudential Policy By Fernando Arce; Julien Bengui; Javier Bianchi
  17. Accounting for the Duality of the Italian Economy By Jesús Fernández-Villaverde; Dario Laudati; Lee Ohanian; Vincenzo Quadrini
  18. The Neoclassical Growth of China By Jesús Fernández-Villaverde; Lee Ohanian; Wen Yao

  1. By: Robbie Noel Wilson; Aleksandar Vasilev
    Abstract: This paper analyses the quantitative welfare effects of the Thatcherism taxation programme reforms. Modern macroeconomic techniques are put into application to the important historical fiscal reforms. The Paper provides details of the Thatcherism taxation reform, the changes in taxation rates and brackets. Through a dynamic general equilibrium model, the paper provides counter-factual growth rates. A comparison between the factual and counter-factual growth rates is given. The paper finds that through both welfare measures, that welfare increased due to the Thatcherism taxation program. These results will provide use and benefit for; policymakers, those studying the Laffer-Curve, those with supply-side economic ideas or beliefs, and those studying the economic, political, and historical period under the Thatcher government.
    Keywords: Thatcher government, tax reform, general equilibrium, endogenous growth model, compensatory variation
    JEL: E32
    Date: 2023–06–02
  2. By: George J. Bratsiotis; Kasun D. Pathirage
    Abstract: We examine the social and agent-specific welfare effects of monetary and macroprudential policy in a four-agent estimated macroeconomic model, consisting of 'banked simple households', 'underbanked simple households', 'firm owners', and 'bank owners'. Optimal capital requirement and loan loss provisions ratios, are shown to improve all agent-specific and social welfare, but imply smaller gains for simple households and firm owners that rely on credit. Countercyclical capital buffers support firm owners and bank owners, with smaller gains for the two simple households. Countercyclical loan loss provisions improve social welfare only for specific shocks and benefit the 'simple underbanked household' and 'firm-owners' at the expense of 'bank-owners' and 'banked simple households'. Coordination between monetary and macroprudential policies yields higher social welfare than no coordination.
    Keywords: monetary policy; macroprudential policy; financial frictions; risk of default; welfare
    JEL: E31 E32 E44 E52 E58 G28
    Date: 2023–06
  3. By: Matteo Bobba (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Luca Flabbi; Santiago Levy; Mauricio Tejada
    Abstract: We develop a search and matching model where rms and workers produce output that depends both on match-specic productivity and worker-specic human capital. The human capital is accumulated while working but depreciates while searching for a job. Jobs can be formal or informal. The model is estimated on labor market data for Mexico. Human capital accumulation is responsible for more than half of the overall value of production, and upgrades more quickly while working formally than informally. Policy experiments reveal that human capital accumulation magnies the negative impact on productivity of the labor market institutions that give raise to informality.
    Keywords: Labor market frictions, Search and matching, Nash bargaining, Informality, Onthe Job human capital accumulation.
    Date: 2021–08
  4. By: Jang, Youngsoo
    Abstract: I study how government commitment shapes optimal Universal Basic Income (UBI) by characterizing the equilibria of a dynamic game between heterogeneous individuals and a benevolent government. I find that commitment, throughout the transition, influences how the government balances income redistribution through taxes and UBI with pecuniary externalities from changes in factor income composition. In a calibrated economy, commitment substantially improves welfare by implementing considerable UBI that incurs long-run welfare losses but drives front-loaded welfare gains through income redistribution facilitated by reduced precautionary savings. Without commitment, the government obtains smaller welfare improvements, overlooking the impacts of long-run UBI on the short-run economy.
    Keywords: Universal Basic Income, Time Inconsistency, Taxes and Transfers, Heterogeneous Agents, Incomplete Markets
    JEL: E61 H11
    Date: 2023–04
  5. By: Peter Haan; Victoria Prowse
    Abstract: We empirically analyze the heterogeneous welfare effects of unemployment insurance and social assistance. We estimate a structural life-cycle model of singles' and married couples' labor supply and savings decisions. The model includes heterogeneity by age, education, wealth, sex and household composition. In aggregate, social assistance dominates unemployment insurance; however, the opposite holds true for married men, whose leisure time declines more than that of their spouses when unemployment insurance is reduced. A revenue-neutral rebalancing of social support away from unemployment insurance and toward social assistance increases aggregate welfare. Income pooling in married households decreases the welfare value of social assistance.
    Keywords: Life-cycle labor supply, family labor supply, unemployment insurance, social assistance, household savings, employment risk, added worker effect, intra-household insurance
    JEL: J18 J58 H21 I38
    Date: 2023
  6. By: Carmen Camacho (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Fernanda Estevan (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro])
    Abstract: We use an overlapping generations model to investigate the role of parental health investment and children's schooling on the aggregate level of human capital and inequality. In our model, parental longevity affects children's human capital since it impacts human capital transmission. When poor parents cannot afford to invest in health, poverty traps may arise as human capital levels remain low in the long run. Both health costs and public school quality are crucial in determining whether households fall into the poverty trap. We demonstrate that high-quality schools ensure that successive generations become more educated, eventually attaining a higher human capital steady state. However, public health investments are particularly effective, as they affect household income and schooling and allow for human capital transmission through generations. We calibrate our model for Brazil and Chile and show that our model predicts that a poverty trap will arise in Brazil but not in Chile.
    Keywords: Poverty trap, Human capital, School quality, Intergenerational transmission, Longevity
    Date: 2023–04
  7. By: Delalibera, Bruno Ricardo; Ferreira, Pedro Cavalcanti; Parente, Rafael Machado
    Abstract: In many countries, the regulations governing public and private pension systems, hiring procedures, and job contracts differ. Public sector employees tend to have longer tenures and higher wages compared to workers in the private sector. As such, social security reforms can affect both retirement decisions and sectoral choices. We study the effects of social security reforms on retirement and sectoral behavior in an economy with multiple pension systems. We develop a life-cycle model with three sectors - private formal, private informal and public - and endogenous retirement. In a model calibrated to Brazil, we quantitatively assess the long-run effects of reforms being discussed and implemented across countries. Among them, we study the unification of pension systems and increasing the minimum retirement age. We find that these reforms affect the decision to apply to a public job, the profile of savings over the life cycle, and informality. In the long run, these reforms lead to higher output and capital, reduced informality, and average welfare gains. They also drastically reduce the social security deficit.
    Date: 2023–07–06
  8. By: Caroline Bozou (UP1 - Université Paris 1 Panthéon-Sorbonne); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: We build a two-country DSGE model where we distinguish the core from the periphery of a monetary union. First, we highlight the spillovers of fiscal shocks across countries. Then, we evaluate and compare the macroeconomic effects of the European recovery plan NGEU with national plans. In all settings, we distinguish public consumption shocks from public investment ones, and funding via loans or grants. We also generate a post-Covid situation where we add a zero-lower bound and demand shocks and compare the outcomes to the former scenarios. We find that the stimulus is more effective when it is financed by grants, interestingly enough especially for public consumption, that public investment spending has a higher multiplier effect in the long run and that a European fiscal stimulus has always more impact per country than a national stimulus plan. A side-result permits to assess the opportunity cost of accepting loans.
    Keywords: fiscal policy, open economy, euro area, spillovers, DSGE, NGEU, RRF
    Date: 2023–02–08
  9. By: Maćkowiak, Bartosz; Wiederholt, Mirko
    Abstract: We solve a real business cycle model with rational inattention (an RI-RBC model). In the RIRBC model, the growth rates of employment, investment, and output are about as persistent as in the data, with an amount of inattention consistent with survey data on expectations. Moreover, consumption, employment, and output move in the same direction in response to news about future productivity. By contrast, the baseline RBC model produces neither persistent growth rates nor business cycle comovement after news shocks. JEL Classification: D83, E32, E71
    Keywords: information choice, news shocks, productivity shocks, rational inattention, real business cycle model
    Date: 2023–07
  10. By: Carmen Camacho (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Hannes Tepper (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper aims to fill the methodological gap in development economics that until now there exists no quantitative tool that allows to prioritize reforms in a systematic nor optimal way. Following the recent debate on the issues Randomized Control Trials (RCTs) have with establishing external validity and general equilibrium effects, this paper proposes a micro-founded Growth Diagnostics framework to consider general equilibrium effects and prioritize policy prescriptions. Contrarily to Hausmann et al. (2005), we set up two continous-time Overlapping Generations (OLG) models to account for the different net-marginal valuations of various economic activities rigorously. We solve the household and planner problem to respectively obtain the private and social net-marginal valuations of economic activities via the corresponding Lagrange multipliers. With these in hand, we define the wedges in the net-marginal private and social valuations to set up a new planner problem (we call super policy maker problem), where the planner minimizes the sum of wedges. This final wrapping optimization problem allows to prioritize optimally economic reforms in a second-best framework, thus, to put it in the words of Rodrik (2010), to first diagnose before one prescribes the remedy.
    Keywords: Reform, Economic policy, Structural change, General equilibrium reform
    Date: 2023–02–27
  11. By: Fausto Cavalli; Ahmad Naimzada; Daniela Visetti
    Abstract: We study the static and dynamical properties of a model that describes the interaction between the economic and epidemiological domains. The epidemiological sphere is represented by a susceptible-infected-susceptible model, while the economic domain consists of an overlapping generations model in which the workers correspond to the non infected population of adults. The productivity of the firms and the propensity to save for retirement of the households are negatively affected by the disease spread. A capital tax is levied and the collected resources are used to curb the spread of the outbreak. We show that multiple endemic steady states can arise from the interaction between the two domains, and different stable endemic attractors can coexist with the stable disease free steady state. We study analytically and numerically the complex dynamics and the evolution of the basins of attraction in the case of multistability. We show that the effect of taxation can be beneficial both from the epidemiological and the economic points of view, as it can give rise to new steady states characterized by reduced shares of infected people and increased capital level, it can simplify the dynamical behaviors and reduce the size of the basins of attraction of those outcomes in which large shares of infected people and low capital levels are observed.
    Date: 2023–06
  12. By: Uwe Sunde; Thomas Dohmen; Benjamin Enke; Armin Falk; David Huffman; Gerrit Meyerheim
    Abstract: This paper studies the relationship between patience and comparative development through a combination of reduced-form analyses and model estimations. Based on a globally representative dataset on time preference in 76 countries, we document two sets of stylized facts. First, patience is strongly correlated with per capita income and the accumulation of physical capital, human capital and productivity. These correlations hold across countries, subnational regions, and individuals. Second, the magnitude of the patience elasticity strongly increases in the level of aggregation. To provide an interpretive lens for these patterns, we analyze an OLG model in which savings and education decisions are endogenous to patience, aggregate production is characterized by capital-skill complementarities, and productivity implicitly depends on patience through a human capital externality. In our model estimations, general equilibrium effects alone account for a non-trivial share of the observed amplification effects, and an extension to human capital externalities can quantitatively match the empirical evidence.
    Keywords: Time Preference, Comparative Development, Factor Accumulation
    JEL: D03 D90 O10 O30 O40
    Date: 2023–01
  13. By: Jesús Fernández-Villaverde; Isaiah Hull
    Abstract: We introduce a novel approach to solving dynamic programming problems, such as those in many economic models, on a quantum annealer, a specialized device that performs combinatorial optimization. Quantum annealers attempt to solve an NP-hard problem by starting in a quantum superposition of all states and generating candidate global solutions in milliseconds, irrespective of problem size. Using existing quantum hardware, we achieve an order-of-magnitude speed-up in solving the real business cycle model over benchmarks in the literature. We also provide a detailed introduction to quantum annealing and discuss its potential use for more challenging economic problems.
    Keywords: computational methods, dynamic equilibrium economies, quantum computing, quantum annealing
    JEL: C63 C80 E37
    Date: 2023
  14. By: Gizem Koşar; Davide Melcangi; Laura Pilossoph; David Wiczer; Gizem Kosar
    Abstract: Using detailed micro data, we document that households often use “stimulus” checks to pay down debt, especially those with low net wealth-to-income ratios. To rationalize these patterns, we introduce a borrowing price schedule into an otherwise standard incomplete markets model. Because interest rates rise with debt, borrowers have increasingly larger incentives to use an additional dollar to reduce debt service payments rather than consume. Using our calibrated model, we then study whether and how this marginal propensity to repay debt (MPRD) alters the aggregate implications of fiscal transfers. We uncover a trade-off between stimulus and insurance, as high-debt individuals gain considerably from transfers, but consume relatively little immediately. We show how this mechanism can lower short-run fiscal multipliers, but sustain aggregate consumption for longer.
    Keywords: marginal propensity to consume, consumption, debt, fiscal transfers
    JEL: E21 E62
    Date: 2023
  15. By: Bada Han (Bank of Korea); Dongwook Kim (Bank of Korea); Youngjin Yun (Inha University)
    Abstract: This paper investigates the reasons behind international reserve accumulation in Emerging Market Economies (EMEs). We rationalize the view held among policymakers in EMEs that reserve accumulation is necessary to counteract the negative effects of unwanted capital inflows. First, we empirically show that EMEs do accumulate reserves in response to global push factor-driven capital inflows, particularly in the form of direct investment. In addition, EMEs with restrictions on residents' investment abroad or with less developed financial institutions accumulate higher levels of reserves. Next, we introduce a theoretical model with direct investment inflows to explain the empirical findings. In the face of a capital flow bonanza, it is optimal for EMEs to invest abroad to smooth consumption. However, various frictions hinder residents' overseas investments or make the investments socially inefficient. In such cases, the public sector accumulates international reserves to supplement the insufficient private outflows or replace the inefficient private outflows. Reserve accumulation becomes an essential tool for managing capital inflows in the presence of restrictions on private outflows.
    Keywords: international reserves, sudden stops, financial openness
    JEL: E60 E61 F30 F38 G01
  16. By: Fernando Arce; Julien Bengui; Javier Bianchi
    Abstract: In this paper, we revisit the scope for macroprudential policy in production economies with pecuniary externalities and collateral constraints. We study competitive equilibria and constrained-efficient equilibria and examine the extent to which the gap between the two depends on the production structure and the policy instruments available to the planner. We argue that macroprudential policy is desirable regardless of whether the competitive equilibrium features more or less borrowing than the constrained-efficient equilibrium. In our quantitative analysis, macroprudential taxes on borrowing turn out to be larger when the government has access to ex-post stabilization policies.
    Keywords: Macroprudential Policy; Over-borrowing; Under-borrowing
    JEL: E58 F31 F32 F34
    Date: 2023–05
  17. By: Jesús Fernández-Villaverde; Dario Laudati; Lee Ohanian; Vincenzo Quadrini
    Abstract: After 162 years of political unification, Italy still displays large regional economic differences. In 2019, the per capita GDP of Lombardia was 39, 700 euros, but Calabria’s per capita GDP was only 17, 300 euros. We build a two-region, two-sector model of the Italian economy to measure the wedges that could account for the differences in aggregate variables between the North and the South. We find that the largest driver of the regional disparity in per capita output is the difference in total factor productivity, followed by fiscal redistribution. These two factors, together, account for more than 70 percent of the output disparity between the North and the South.
    Keywords: Italian economy, macroeconomic wedges, regional fiscal redistribution, regional convergence
    JEL: E10 E60
    Date: 2023
  18. By: Jesús Fernández-Villaverde; Lee Ohanian; Wen Yao
    Abstract: This paper studies China’s four-fold increase in per capita GDP relative to the U.S. between 1995 and 2019. First, we argue that China’s growth pattern is very similar to that of several other East Asia economies that initially grew very quickly. Second, we show that a minimalist Ramsey-Cass-Koopmans model with a parsimonious TFP catch-up process can account for China’s growth path and the growth paths of other East Asia economies at a similar stage of development. The growth paths of other East Asia economies and the model predictions suggest that China’s growth will substantially slow, so much so that we find the U.S. growth rate will likely be higher than China’s by 2043. We also find that China’s income per capita will level off at roughly 44% of the U.S. level around 2100.
    Keywords: China, East Asia, economic growth, Ramsey-Cass-Koopmans model, TFP catch up
    JEL: E10 E20 O40
    Date: 2023

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