nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒07‒31
twelve papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Wage Employment, Unemployment and Self-Employment across Countries By Poschke, Markus
  2. Macrofinancial Dynamics in a Monetary Union By Daniel Monteiro
  3. Social learning expectations: microfoundations and a Dynare toolbox By Grimaud, Alex; Salle, Isabelle; Vermandel, Gauthier
  4. Whose inflation rates matter most? A DSGE model and machine learning approach to monetary policy in the Euro area By Stempel, Daniel; Zahner, Johannes
  5. Trade Integration, Industry Reallocation, and Welfare in Colombia By George A. Alessandria; Oscar I. Avila-Montealegre
  6. Empirical evidence on the Euler equation for investment in the US By Guido Ascari; Qazi Haque; Leandro Magnusson; Sophocles Mavroeidis
  7. The Anatomy of Small Open Economy Productivity Trends By Christoph Gortz; Konstantinos Theodoridis; Christoph Thoenissen
  8. Tax policies, informality, and real wage rigidities By Andres García-Suaza; Fernando Jaramillo; Marlon Salazar
  9. Transition risk uncertainty and robust optimal monetary policy By Dück, Alexander; Le, Anh H.
  10. Downward interest rate rigidity By Jean-Guillaume Sahuc; Grégory Levieuge
  11. Equilibrium Evictions By Dean Corbae; Andrew Glover; Michael Nattinger
  12. Exchange rate exposure and firm dynamics By Salomao, Juliana; Varela, Liliana

  1. By: Poschke, Markus (McGill University)
    Abstract: Poor countries have low wage employment and high self-employment. This paper shows that they also have high unemployment relative to wage employment, and that self-employment increases with this ratio. To understand the sources of these patterns, I build a search and matching model with choice between job search and self-employment and with learning about matches, and calibrate it to match all transition rates between wage employment, unemployment and self-employment as well as separation hazards by job duration, separately for all 37 countries with available data. Quantitative analysis of the model shows that labor market frictions affect self-employment as much as unemployment. Labor market frictions also reduce aggregate output, not only by raising unemployment, but also by worsening the average quality of both wage employment matches and active self-employment projects.
    Keywords: wage employment, unemployment, self-employment, labor market frictions, occupational choice, productivity
    JEL: O11 E24 J64 L26
    Date: 2023–06
  2. By: Daniel Monteiro
    Abstract: We develop a dynamic stochastic general equilibrium model of a monetary union and employ it to study in an integrated manner different macrofinancial disturbances and related policy options. The model is calibrated to the euro area, comprises two regions subject to real, nominal and financial rigidities, and features microfounded regional banking sectors and portfolio selection mechanisms allowing for empirically-consistent properties. Among the questions to which we devote our analysis are the transmission of conventional and unconventional monetary policy, the effects of private- and government-sector default risk, the implications of different macroprudential policies, the endogenous emergence of country risk premia in a context of crossborder financial flows, and the stabilising properties of joint sovereign debt issuance.
    JEL: E32 E44 E52 F36 F45 G28 H63
    Date: 2023–06
  3. By: Grimaud, Alex; Salle, Isabelle; Vermandel, Gauthier
    Abstract: Social learning (SL) is a behavioral model in which expectations and the resulting aggregate dynamics stem from the interactions of a large amount of heterogeneous agents. Nonetheless, this framework has so far lacked micro-foundations and a general-solution method. This paper bridges these two gaps with: (i) a micro-founded New Keynesian model with social learning expectations; (ii) a general solution method that we implement in a Dynare toolbox that solves any linear state- space model with SL expectations. The resulting framework provides a self-contained tool to contrast policy analysis under SL and rational expectations. As an illustration, optimal monetary policy rules are studied under the two expectation regimes.
    Keywords: Inflation targeting; Monetary policy; Heterogeneous expectations
    Date: 2023–07
  4. By: Stempel, Daniel; Zahner, Johannes
    Abstract: In the euro area, monetary policy is conducted by a single central bank for 20 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. They authors find that a neural network performs best out-of-sample. They use this algorithm to generally classify historical EMU data, and to determine the exact weight on the inflation rate of EMU members in each quarter of the past two decades. Their findings suggest disproportional emphasis of the ECB on the inflation rates of EMU members that exhibited high inflation rate volatility for the vast majority of the time frame considered (80%), with a median inflation weight of 67% on these countries. They show that these results stem from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.
    Keywords: New Keynesian Models, Monetary Policy, European Monetary Union, Neural Networks, Transfer Learning
    JEL: E58 C45 C53
    Date: 2023
  5. By: George A. Alessandria; Oscar I. Avila-Montealegre
    Abstract: We study empirically and theoretically the dynamic effects of the unilateral reduction in import tariffs undertaken by Colombia from 1989-1993, with a particular emphasis on the transition and including any anticipation effects. We develop an asymmetric two-country, multi-sector heterogeneous firm model with a dynamic exporting decision, input-output linkages, capital accumulation, and trade in financial assets. The model is calibrated to match Colombian exporter dynamics, sectoral trade openness, tariffs, imbalances, and input-output linkages in the late 1980s. We introduce an anticipated phased out reform into the model and relate the predicted path of sectoral and aggregate activity to the data. Our multi-sector dynamic exporting model predicts much larger gains from these reforms than models that abstract from exporter dynamics, sectoral heterogeneity, trade in financial assets, or capital accumulation. It also captures the key macroeconomic features in terms of a temporary expansion in growth featuring a large, but short-lived investment boom financed by international borrowing, more so when the reforms are expected to be short-lived.
    JEL: F15 F4
    Date: 2023–06
  6. By: Guido Ascari; Qazi Haque; Leandro Magnusson; Sophocles Mavroeidis
    Abstract: Is the typical specification of the Euler equation for investment employed in DSGE models consistent with aggregate macro data? Using state-of-the-art econometric methods that are robust to weak instruments and exploit information in possible structural changes, the answer is yes. Unfortunately, however, there is very little information about the values of the parameters in aggregate data because investment is unresponsive to changes in capital utilization and the real interest rate. Bayesian estimation using fully-specified DSGE models is more accurate likely due to informative priors and cross-equation restrictions.
    Keywords: Investment; Adjustment costs; Weak identification
    JEL: C2 E22
    Date: 2023–07
  7. By: Christoph Gortz (Department of Economics, University of Birmingham); Konstantinos Theodoridis (Business School, Cardiff University); Christoph Thoenissen (Department of Economics, University of Sheffield)
    Abstract: We estimate a novel empirical (state-space) model to study the effects of international and domes- tic technology trend shocks on the UK economy. We jointly identify anticipated and unanticipated domestic and international technological innovations arising from changes in total factor productivity (TFP) and investment specific technology (IST). The long-run restrictions used to jointly identify the structural trends in the data are informed by a standard two-country structural model. Our results point to large and persistent swings in productivity. International non-stationary TFP and IST shocks explain about 30% and 24% of the variance of UK GDP, respectively. UK-specific TFP and IST shocks are somewhat less important, but still a relevant factor. Notably, it is the anticipated components of these international and domestic productivity shocks, rather than their unanticipated counterparts, which account for the bulk of the volatility in the data. We dissect the historical role of different shocks as drivers of UK labor productivity growth. We find that a decline in the contribution of international IST shocks, combined with weak domestic TFP growth, can explain the widely documented slowdown in UK labor productivity after the financial crisis. A standard two-country model implies widely-used restrictions on the relative price of investment which we find to be inconsistent with our empirical evidence that relies on a minimum of structure. We show that a two-sector version of this model with adjustment cost in investment and costly sectoral labor reallocation can capture the empirical dynamics.
    Keywords: International Transmission of Productivity Shocks, Total Factor Productivity, Investment Specific Technology, Small Open Economy Dynamics, News Shocks, State Space Model
    JEL: E32 E3 F41 F44
    Date: 2023–07
  8. By: Andres García-Suaza; Fernando Jaramillo; Marlon Salazar
    Abstract: Developing countries have a vast informal sector generally associated with low productivity levels. The response of informal employment to tax policies might depend on labor market rigidities. This paper proposes a theoretical framework consisting of a search and matching model with segmentation in the labor market to understand how tax policies and enforcement interact to determine the size of the formal sector. The analytical results show that decreasing payroll taxes increases formal employment demand, and enforcement expenditure decreases informal employment offers. The model suggests that a tax policy combination leads to a significant impact on informality reduction. Moreover, the magnitude of the effect of tax policies depends on real wage rigidities, i.e., when the economy faces high real wage rigidities, the tax policies have a higher effect on informality reduction. **** RESUMEN: Los países en desarrollo presentan un sector informal relevante asociado con bajos niveles de productividad. Los efectos de las políticas tributarias sobre los niveles de informalidad dependen de las rigideces del mercado laboral. En el presente artículo se propone un modelo de busqueda y emparejamiento en un mercado laboral segmentado para entender la interaccion entre las políticas tributarias y la aplicacion de la ley sobre el sector formal. Los resultados analíticos muestran que, disminuir los impuestos a la nomina genera aumentos en la demanda de empleo formal, mientras que un aumento en el gasto de auditar a las empresas disminuye la oferta de empleo informal. El modelo sugiere un impacto significativo en la reduccion de la informalidad al combinar las políticas tributarias. Ademas, la magnitud del efecto de las políticas depende de las rigideces en los salarios reales. De esta forma, cuando la economía presenta altas rigideces en los salarios reales, las políticas tributarias tienen un mayor efecto sobre la reducción de la informalidad.
    Keywords: Informality, payroll taxes, fiscal policy, enforcement, search frictions, shirking, Informalidad, Impuestos a la nómina, Política fiscal, Aplicación de la ley, Busqueda y Emparejamiento
    JEL: E26 E62 J21 J46 J31 O17 K42
    Date: 2023–07
  9. By: Dück, Alexander; Le, Anh H.
    Abstract: Climate change has become one of the most prominent concerns globally. In this paper, we study the transition risk of greenhouse gas emission reduction in structural environmental-macroeconomic DSGE models. First, we analyze the uncertainty in model prediction on the effect of unanticipated and pre-announced carbon price increases. Second, we conduct optimal model-robust policy in different settings. We find that reducing emissions by 40% causes 0.7% - 4% output loss with 2% on average. Pre-announcement of carbon prices affects the inflation dynamics significantly. The central bank should react slightly less to inflation and output growth during the transition risk. With optimal carbon price designs, it should react even less to inflation, and more to output growth.
    Keywords: Climate change, Environmental policy, Optimal policy, Transition risk, Model uncertainty, DSGE models
    JEL: Q58 E32 Q54 C11 E17 E52
    Date: 2023
  10. By: Jean-Guillaume Sahuc (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Grégory Levieuge
    Abstract: Empirical evidence suggests that bank lending rates are downward rigid: banks tend to adjust their rates more slowly and less completely to short-term market rates decreases than to increases. We investigate the macroeconomic consequences of this downward interest rate rigidity by introducing asymmetric bank lending rate adjustment costs in a macrofinance dynamic stochastic general equilibrium model. Calibrating the model to the euro area economy, we find that the difference in the initial response of GDP to positive and negative economic shocks of similar amplitude can reach up to 25%. This means that a central bank would have to cut its policy rate much more to obtain a symmetric medium-run impact on GDP. We also show that downward interest rate rigidity is stronger when policy rates are stuck at their effective lower bound, further disrupting monetary policy transmission. These findings imply that neglecting asymmetry in retail interest rate adjustments may yield misguided monetary policy decisions.
    Date: 2021–08
  11. By: Dean Corbae; Andrew Glover; Michael Nattinger
    Abstract: We develop a simple equilibrium model of rental markets for housing in which eviction occurs endogenously. Both landlords and renters lack commitment; a landlord evicts a delinquent tenant if they do not expect total future rent payments to cover costs, while tenants cannot commit to paying more rent than they would be able or willing to pay given their outside option of searching for a new house. Renters who are persistently delinquent are more likely to be evicted and pay more per quality-adjusted unit of housing than renters who are less likely to be delinquent. Evictions are never socially optimal, and lead to lower quality investment in housing and too few vacancies relative to the socially optimal allocation. In our calibrated model, housing externalities widen the gap in housing access and quality between relatively high- and low-earning renters. Finally, government policies that restrict landlords’ ability to evict can improve welfare, though a full moratorium on evictions should be reserved for crises; rent support is generally a better policy than restricting evictions.
    Keywords: eviction; rental burden; housing externalities; housing supply
    JEL: R31 R21 R38
    Date: 2023–04–21
  12. By: Salomao, Juliana; Varela, Liliana
    Abstract: This article develops a heterogeneous firm-dynamics model to jointly study firms’ currency debt composition and investment choices. In our model, foreign currency borrowing arises from a dynamic trade-off between exposure to currency risk and growth. The model endogenously generates selection of productive firms into foreign currency borrowing. Among them, firms with high marginal product of capital use foreign loans more intensively. We assess econometrically the model’s predicted pattern of foreign currency borrowing using firm-level census data from the deregulation of these loans in Hungary, calibrate the model, and quantify the aggregate impact of this financing. Our counterfactual exercises show that understanding the characteristics of firms borrowing in foreign currency is critical to assess the aggregate consequences of this financing.
    Keywords: firm dynamics; foreign currency debt; currency mismatch; uncovered interest rate parity
    JEL: F3 G3
    Date: 2022–01–01

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