nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒08‒14
fourteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Migration, Search and Skill Heterogeneity By Myrto Oikonomou
  2. The Macroeconomic Returns of Investment in Resilience to Natural Disasters under Climate Change: A DSGE Approach By Emilio Fernández Corugedo; Andres Gonzalez; Mr. Alejandro D Guerson
  3. Fiscal Tightening and Skills Mismatch By Konstantinos Mavrigiannakis; Andreas Vasilatos; Eugenia Vella
  4. An Estimated DSGE Model for Integrated Policy Analysis By Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
  5. Simulations in Models with Heterogeneous Agents, Incomplete Markets and Aggregate Uncertainty By Damián Pierri
  6. Price Level and Inflation Dynamics in Heterogeneous Agent Economies By Greg Kaplan; Georgios Nikolakoudis; Giovanni L. Violante
  7. The Macroeconomics of Skills Mismatch in the Presence of Emigration By George Liontos; Konstantinos Mavrigiannakis; Eugenia Vella
  8. The state-dependent impact of changes in bank capital requirements By Lang, Jan Hannes; Menno, Dominik
  9. Product Dynamics and Macroeconomic Shocks: Insights from a DSGE model and Japanese data By HAMANO Masashige; OKUBO Toshihiro
  10. Aggregate Implications of Deviations from Modigliani-Miller: A Sufficient Statistics Approach By Robert J. Kurtzman; David Zeke
  11. Labor Market Regulation and Firm Adjustments in Skill Demand By Bottasso, Anna; Bratti, Massimiliano; Cardullo, Gabriele; Conti, Maurizio; Sulis, Giovanni
  12. Green monetary and fiscal policies: The role of consumer preferences By Mohamed Tahar Benkhodja; Xiaofei Ma; Tovonony Razafindrabe
  13. Payments and prices By Dirk Niepelt
  14. Production, Trade, and Cross-Border Data Flows By Qing Chang; Lin William Cong; Liyong Wang; Longtian Zhang

  1. By: Myrto Oikonomou
    Abstract: Cross-border migration can act as an important adjustment mechanism to country-specific shocks. Yet, depending on who moves, it can have unintended consequences for business cycle stability. This paper argues that the skill composition of migration plays a critical role. When migration flows become more concentrated in skilled labor an important trade-off arises. On the one hand, migration releases unemployment pressures for the origin countries. On the other hand, it generates negative compositional effects (the so-called “brain drain” effects) and skill imbalances, which reduce supply capacity in origin countries. This paper analyses quantitatively the impact of cyclical migration in an open-economy Dynamic Stochastic General Equilibrium (DSGE) model with endogenous migration flows, trade linkages, search and matching frictions, and skill heterogeneity. I apply this framework to the case of the Greek emigration wave following the European Debt Crisis. What I find is that emigration flows implied strong negative effects for capital formation, leading to more than a 15 percentage point drop in investment. Rather than stabilizing the Greek business cycle, labor mobility led to a deeper and more protracted recession.
    Keywords: Migration; Matching Frictions; Skill Heterogeneity
    Date: 2023–06–30
  2. By: Emilio Fernández Corugedo; Andres Gonzalez; Mr. Alejandro D Guerson
    Abstract: This paper presents a Markov switching dynamic stochastic general equilibrium model designed to evaluate the macroeconomic return of adaptation investment to natural disasters (NDs) and the impact of climate change. While the model follows the existing literature in assuming that NDs destroy a share of the public and private capital stocks and a government that can invest in adaptation at an additional cost, it adds several features that are key to the analysis, both in the near (transition) and long (steady state) terms. Those include incomplete markets, financial frictions with collateral constraints, foreign remittances, full menu of tax and government spending instruments, and endogenous climate risk premium. The model is calibrated to the case of Dominica. It finds that NDs have large and persistent negative effects on output and public finances. It also shows that adaptation investment has large returns in terms of private investment, employment, output and tax revenue in the long term, especially under climate change.
    Keywords: natural disasters; climate change; DSGE; resilient capital; financial frictions; Dominica; climate adaptation policies
    Date: 2023–06–30
  3. By: Konstantinos Mavrigiannakis (Athens University of Economics and Business); Andreas Vasilatos (Athens University of Economics and Business); Eugenia Vella
    Abstract: The paper documents a new link between fiscal tightening and the vertical skills mismatch rate (share of over-qualified workers). Using data for Greece, where this rate exceeds one-third, and a variety of structural Bayesian vector auto regressions and identification strategies, we show that fiscal tightening increases mismatch. We then introduce the latter in a DSGE model with heterogeneous households and labor frictions. In line with the data, a fiscal tightening shock raises the mismatch rate in the model. This result holds for production function specifications both with and without capital-skill complementarity (CSC).
    Keywords: skills mismatch, fiscal shocks, capital-skill complementarity, SVAR, DSGE model
    JEL: J24 F41 J63 E62
    Date: 2023–05–30
  4. By: Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
    Abstract: We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
    Keywords: Integrated Policy Framework; Emerging Markets; Monetary Policy; Foreign Exchange Intervention; Endogenous Risks; Incomplete Financial Markets; Bayesian Estimation
    Date: 2023–06–30
  5. By: Damián Pierri (UBA/CONICET)
    Abstract: This paper present conditions to guarantee the convergence of simulations to a stochastic steady state, characterized by an invariant probability distribution, in an endowment economy with a finite number of heterogeneous agents, aggregate uncertainty and uncountable shocks. The results are robust to the presence of multiple discontinuous equilibria and do not require ad-hoc convexification techniques, like "sunspots". Thus, our results are numerically implementable. We work on a Markov environment with an enlarged state space, applied to an incomplete markets model, to characterize ergodic equilibria and differentiate them with respect to time-independent, and stationary ones. We show that, by imposing a mild restriction on the discontinuity set, every measurable time-independent selection can be used to approximate the stochastic steady state of the model. Considering the common practice of clustering agents according to, for instance, deciles of the wealth and assuming uncountable income shocks, the results in this paper can help to design calibration and estimation methods for heterogeneous agent models based on unconditional moments.
    Keywords: non-optimal economies, Markov equilibrium, heterogeneous agents, simulations
    JEL: C63 C68 D52 D58
    Date: 2023–07
  6. By: Greg Kaplan; Georgios Nikolakoudis; Giovanni L. Violante
    Abstract: We study equilibria in a heterogeneous-agent incomplete-market economy with nominal government debt and flexible prices. Unlike in representative agent economies, steady-state equilibria exist when the government runs persistent deficits, provided that the level of deficits is not too large. In these equilibria, the real interest rate is below the growth rate of the economy. We quantify the maximum sustainable deficit for the US and show that it is lower under more redistributive tax and transfer systems. With constant primary deficits, there exist two steady-states, and the price level and inflation are not uniquely determined. We describe alternative policy settings that deliver uniqueness. We conduct quantitative experiments to illustrate how redistribution and precautionary saving amplify price level increases in response to fiscal helicopter drops, deficit expansions, and loose monetary policy. We show that rising primary deficits can account for a decline in the long-run real interest rate, leading to higher inflation for any given monetary policy. Our work highlights the role of household heterogeneity and market incompleteness in determining inflation.
    JEL: E3 E4 E5 E6 H2 H3
    Date: 2023–07
  7. By: George Liontos (Athens University of Economics and Business); Konstantinos Mavrigiannakis (Athens University of Economics and Business); Eugenia Vella
    Abstract: Employment in mismatch (low-skill) jobs is a potential factor in the emigration of highly qualified workers. At the same time, high-skilled emigration and emigration of mismatch workers can free up positions for stayers. In bad times, it could also amplify demand losses and the unemployment spell, which in turn affects the mismatch rate. In this paper, we investigate the link between vertical skills mismatch and emigration of both non-mismatch and mismatch workers in a DSGE model. The model features also skill and wealth heterogeneous households, capital-skill complementarity (CSC) and labor frictions. We find that an adverse productivity shock reduces investment and primarily hurts the high-skilled who react by turning to both jobs abroad and mismatch jobs in the domestic labor market. A negative shock to government spending crowds-in investment and primarily hurts the low-skilled who thus turn to jobs abroad. Following the fiscal cut, the high-skilled instead reduce their search for mismatch employment and later they also reduce their search for jobs abroad.
    Keywords: vertical skills mismatch, under-employment, emigration, capital-skill complementarity, RBC model
    Date: 2023–05–30
  8. By: Lang, Jan Hannes; Menno, Dominik
    Abstract: Based on a non-linear equilibrium model of the banking sector with an occasionally-binding equity issuance constraint, we show that the economic impact of changes in bank capital requirements depends on the state of the macro-financial environment. In ”normal” states where banks do not face problems to retain enough profits to satisfy higher capital requirements, the impact on bank loan supply works through a ”pricing channel” which is small: around 0.1% less loans for a 1pp increase in capital requirements. In ”bad” states where banks are not able to come up with sufficient equity to satisfy capital requirements, the impact on loan supply works through a ”quantity channel”, which acts like a financial accelerator and can be very large: up to 10% more loans for a capital requirement release of 1pp. Compared to existing DSGE models with a banking sector, which usually feature a constant lending response of around 1%, our state-dependent impact is an order of magnitude lower in ”normal” states and an order of magnitude higher in ”bad” states. Our results provide a theoretical justification for building up a positive countercyclical capital buffer in ”normal” macro-financial environments. JEL Classification: D21, E44, E51, G21, G28
    Keywords: Bank capital requirements, dynamic stochastic equilibrium model, financial accelerator, global solution methods, loan supply
    Date: 2023–07
  9. By: HAMANO Masashige; OKUBO Toshihiro
    Abstract: This paper investigates the relationships between aggregate shocks and individual products in the economy, aiming to inform macroeconomic policy and address sectoral imbalances. Using Japanese manufacture census data from 1992 to 2013, we analyze product sales growth (intensive margins) and the number of product-producing plants (extensive margins) to identify patterns and heterogeneity across products and product categories. We employ a structural model to analyze the sources of product business cycles, finding that product-specific demand shocks play a crucial role in explaining product sales dynamics, while both product-specific and plant-product specific shocks are essential for understanding extensive margins. Our findings offer important implications for the design of targeted and effective policies that promote stability, growth, employment, and inclusiveness across diverse sectors of the economy.
    Date: 2023–06
  10. By: Robert J. Kurtzman; David Zeke
    Abstract: A few sufficient statistics can identify the aggregate effects of distortions to firm investment in a class of general equilibrium models that can accommodate rich general equilibrium effects including endogenous firm entry. This result does not depend on the microfoundation of the distortion; one can generate inferences about aggregate effects that apply for multiple microfoundations or in cases where a fully specified model is difficult to solve. To demonstrate the relevance of themethodology, we use it to quantify the aggregate consequences of costly external equity financing and a manager-shareholder friction, relying on estimates from the corporate finance literature to identify the sufficient statistics. The results elucidate differences between partial and general equilibrium findings and demonstrate how labor supply elasticities, complementarities in production, and firm entry interact with the different firm-level distortions.
    Keywords: Heterogeneous firms; General equilibrium; Firm entry; Agency costs; Costly external finance; Sufficient statistics
    JEL: E22 E23 G39
    Date: 2023–07–06
  11. By: Bottasso, Anna (University of Genova); Bratti, Massimiliano (University of Milan); Cardullo, Gabriele (University of Genova); Conti, Maurizio (University of Genova); Sulis, Giovanni (University of Cagliari)
    Abstract: We study how changes in labor market regulation may trigger firm adjustments in skill demand. Leveraging rich administrative data from Italy, we investigate the effects of a reform that reduced firing costs for permanent employees and tightened temporary contracts' regulation to increase job stability. By using a difference-in-differences design, we document that the reform had unintended effects, inducing firms to increase layoffs of unskilled permanent employees and reducing hirings of unskilled workers on temporary contracts, but had no effect on skilled workers or permanent hirings. A theoretical search and matching model with heterogeneous skills and contract durations rationalizes our main findings.
    Keywords: labor market regulation, employment protection, temporary work, skill demand, worker flows
    JEL: J42 J63 J65 M53
    Date: 2023–06
  12. By: Mohamed Tahar Benkhodja (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers); Xiaofei Ma (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers); Tovonony Razafindrabe (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We establish a two-sector model to simulate the potential effects of green fiscal poli- cies and unconventional green monetary policy on the economy during a recovery or in case of a stimulus policy. We find that instruments such as a carbon tax, an implicit tax on brown loans, and a subsidy for the purchase of green goods are all beneficial to the green sector, in contrast to green quantitative easing. A carbon tax imposed directly on firms in the brown sector is the most effective tool to reduce pollution. More importantly, the marginal effects of green instruments on the economy depend on consumer preferences. Namely, the marginal effects are the most prominent when consumers start to purchase more green goods as an increasing part of their consumption basket. Furthermore, the effects of those green policies are more effective when the elasticity of substitution between green and brown goods increases. This finding suggests that raising consumers' awareness and ability to consume green goods reinforce the effectiveness of public policies designed for low-carbon transition of the economy.
    Keywords: Consumers’ preferences, E-DSGE, Economic recovery, Elasticity of substitution, Environmental policies, Stimulus policy
    Date: 2023
  13. By: Dirk Niepelt
    Abstract: We analyze the effect of structural change in the payment sector and of monetary policy on prices. Means of payment are obtained through portfolio choices and commodity sales and "liquified" through velocity choices. Interest rates, intermediation margins, and costs of payment instrument use affect portfolios, velocities, liquidity, relative prices, and the aggregate price level. Money is neutral, interest rate policy is not. Scarcer liquidity need not drive up velocity. Payment instruments and velocities generate positive externalities. Commodity price aggregates mis-measure consumer price inflation, distinctly so over the business cycle.
    Keywords: Payments, velocity, prices, intermediation, inflation
    JEL: E31 E41 E44 E52 G11 G23
    Date: 2023
  14. By: Qing Chang; Lin William Cong; Liyong Wang; Longtian Zhang
    Abstract: We build a two-country general equilibrium model to analyze the effects of cross-border data flows and pre-existing development gaps in data economies on each country's production and international trade. Raw data as byproducts of consumption can be transformed into various types of working data (information) to be used by both domestic and foreign producers. Because data constitute a new production factor for intermediate goods, a large extant divide in data utilization can reduce or even freeze trade. Cross-border data flows mitigate the situation and improve welfare when added to international trade. Data-inefficient countries where data are less important in production enjoy a "latecomer's advantage'' with international trade and data flows, contributing more raw data from which the data-efficient countries generate knowledge for production. Furthermore, cross-border data flows can reverse the cyclicity of working data usage after productivity shocks, whereas shocks to data privacy or import costs have opposite effects on domestic and foreign data sectors. The insights inform future research and policy discussions concerning data divide, data flows, and their implications for trade liberalization, the data labor market, among others.
    JEL: F15 F29 F43
    Date: 2023–06

This nep-dge issue is ©2023 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.