nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒08‒21
24 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. The Job Ladder: Inflation vs. Reallocation By Giuseppe Moscarini; Fabien Postel-Vinay
  2. Aging, Health Risk, and Interest Rates By Reona Hagiwara
  3. Unwinding quantitative easing: state dependency and household heterogeneity By Cantore, Cristiano; Meichtry, Pascal
  4. Self-fulfilling labor wedge fluctuations and unemployment insurance By Nikolaos Kokonas; Paulo Santos Monteiro
  5. Homeownership Rates, Housing Policies, and Co-Residence Decisions By Grevenbrock, Nils; Ludwig, Alexander; Siassi, Nawid
  6. Persistent Slumps: Innovation and the Credit Channel of Monetary Policy By Beqiraj, Elton; Cao, Qingqing; Minetti, Raoul; Tarquini, Giulio
  7. Long-term Economic Implications of Demeny. Voting: A Theoretical Analysis By Luigi Bonatti; Mauro Lorenza Alexandra Lorenzetti
  8. The Fiscal and Intergenerational Burdens of Brakes and Subsidies for Energy Prices By Christian Scharrer; Johannes Huber
  9. The COVID-19 recession on both sides of the Atlantic: A model-based comparison By Roberta Cardani; Philipp Pfeiffer; Marco Ratto; Lukas Vogel
  10. Green technology policies versus carbon pricing: An intergenerational perspective By Rausch, Sebastian; Yonezawa, Hidemichi
  11. Inflation surprises in a New Keynesian economy with a true consumption function. The Eurozone as an inflation target zone By Roberto Tamborini
  12. A tail of labor supply and a tale of monetary policy By Cristiano Cantore; Filippo Ferroni; Haroon Mumtaz; Angeliki Theophilopoulou
  13. CBDC Policies in Open Economies By Michael Kumhof; Marco Pinchetti; Phurichai Rungcharoenkitkul; Andrej Sokol
  14. The Regional Keynesian Cross By Marco Bellifemine; Adrien Couturier; Rustam Jamilov
  15. Health Externalities to Productivity and Efficient Health Subsidies By Siew Ling Yew; Jie Zhang
  16. Responses of Unemployment to Productivity Changes for a General Matching Technology By Richard W. Ryan
  17. News or Animal Spirits? Consumer Confidenceand and Economic Activity: Redux By Jean-Paul L’Huillier; Sanjay R. Singh; Donghoon Yoo
  18. The Racial Wealth Gap: the Role of Entrepreneurship By Daniel Albuquerque; Tomer Ifergane
  19. Stimulus through Insurance: The Marginal Propensity to Repay Debt By Gizem Koşar; Davide Melcangi; Laura Pilossoph; David Wiczer
  20. Private Wealth over the Life-Cycle: A Meeting between Microsimulation and Structural Approaches By L. GALIANA; L. WILNER
  21. House Price Expectations and Inflation Expectations: Evidence from Survey Data By Vedanta Dhamija; Ricardo Nunes; Roshni Tara
  22. Central Bank Digital Currency Adoption: A Two-Sided Model By Brandon Tan
  23. Biased Wage Expectations and Female Labor Supply By Maximilian Blesch; Philipp Eisenhauer; Peter Haan; Boryana Ilieva; Annekatrin Schrenker; Georg Weizsäcker
  24. Health accidents and wealth decline in old age By Hippolyte d'Albis; Najat El Mekkaoui; Bérangère Legendre

  1. By: Giuseppe Moscarini; Fabien Postel-Vinay
    Abstract: We introduce on-the-job search frictions in an otherwise standard monetary DSGE New-Keynesian model. Heterogeneity in productivity across jobs gives rise to a job ladder. Firms Bertrand-compete for employed workers according to the Sequential Auctions protocol of Postel-Vinay and Robin (2002). Outside job offers to employed workers, when accepted, reallocate employment up the productivity ladder; when declined, because matched by the current employer, they raise production costs and, due to nominal price rigidities, compress mark-ups, building inflationary pressure. When employment is concentrated at the bottom of the job ladder, typically after recessions, the reallocation effect prevails, aggregate supply expands, moderating marginal costs and inflation. As workers climb the job ladder, reducing slack in the employment pool, the inflation effect takes over. The model generates endogenous cyclical movements in the Neo Classical labor wedge and in the New Keynesian wage mark-up. The economy takes time to absorb cyclical misallocation and features propagation in the response of job creation, unemployment and inflation to aggregate shocks. The ratio between job-finding probabilities from job-to-job and from unemployment, a measure of the “Acceptance rate” of job offers to employed workers, predicts negatively inflation, independently of the unemployment rate.
    JEL: E24 E31 J60
    Date: 2023–07
  2. By: Reona Hagiwara (Faculty of Political Science and Economics, Waseda University)
    Abstract: Over the past few decades, the Japanese economy has experienced a secular decline in the real interest rate, which is the return on safe and liquid assets. At the same time, the gap between the returns on liquid bond and illiquid capital (i.e., the risk premium) has increased because of the steady return on risky assets. This paper explores the role of the health risk in the increase in the premium, using a general equilibrium overlapping generations model. In the model, individuals are heterogeneous in health status and they incur medical costs. The model also features the presence of additional medical transaction frictions, which increase with medical expenditure but can be reduced by holding liquid assets. I find that both demographic aging and the increase in the individual out-of-pocket medical costs could push down the return on bond and lead to the widening premium. However, the latter effect is dominant because higher medical burdens encourage individuals to save more liquid bond rather than illiquid capital in order to mitigate the medical transaction frictions. According to these findings, the changes in the medical systems will continue to contribute to the further widening risk premium, although the future trend will be affected by several factors, not only medical systems but also demographics and government bond supply.
    Keywords: Health Risk; Demographic Aging; Risk Premium; Overlapping Generations
    JEL: E21 G51 I10 J11
    Date: 2023–07
  3. By: Cantore, Cristiano (Sapienza University of Rome); Meichtry, Pascal (University of Lausanne)
    Abstract: This paper studies the macroeconomic effect of the state dependency of central bank asset market operations and their interactions with household heterogeneity. We build a New Keynesian model with borrowers and savers in which quantitative easing and tightening operate through portfolio rebalancing between short-term and long-term government bonds. We quantify the aggregate impact of an occasionally binding zero lower bound in determining an asymmetry between the effects of asset purchases and sales. When close to the lower bound, raising the nominal interest rate prior to unwinding quantitative easing minimises the economic costs of monetary policy normalisation. Furthermore, our results imply that household heterogeneity in combination with state dependency amplifies the revealed asymmetry, while household heterogeneity alone does not amplify the aggregate effects of asset market operations.
    Keywords: Unconventional monetary policy; quantitative tightening; quantitative easing; heterogeneous agents; zero lower bound.
    JEL: E21 E32 E52 E58
    Date: 2023–07–21
  4. By: Nikolaos Kokonas (University of Bath); Paulo Santos Monteiro (University of York)
    Abstract: We study unemployment insurance within an equilibrium business cycle model with labor search frictions, endogenous participation, and involuntary unemployment. The model yields an endogenous countercyclical labor wedge that may generate self-fulfilling fluctuations. We show that unemployment insurance makes local indeterminacy less pervasive and, therefore, is a powerful automatic stabilizer. In calibrated versions of the model, indeterminacy occurs for replacement rates that are empirically plausible for North America, but not for the replacement rates observed for European countries.
    Keywords: labor wedge, indeterminacy, unemployment insurance
    JEL: E32 E62 J20
    Date: 2023–03
  5. By: Grevenbrock, Nils; Ludwig, Alexander; Siassi, Nawid
    Abstract: Homeownership rates differ widely across European countries. We document that part of this variation is driven by differences in the fraction of adults co-residing with their parents. Comparing Germany and Italy, we show that in contrast to homeownership rates per household, homeownership rates per individual are very similar during the first part of the life cycle. To understand these patterns, we build an overlapping-generations model where individuals face uninsurable income risk and make consumption-saving and housing tenure decisions. We embed an explicit intergenerational link between children and parents to capture the three-way trade-off between owning, renting, and co-residing. Calibrating the model to Germany we explore the role of income profiles, housing policies, and the taste for independence and show that a combination of these factors goes a long way in explaining the differential life-cycle patterns of living arrangements between the two countries.
    Keywords: Homeownership, Co-residence, Overlapping generations
    JEL: D15 E21 H31 R21
    Date: 2023
  6. By: Beqiraj, Elton (University of Rome I); Cao, Qingqing (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Tarquini, Giulio (University of Rome I)
    Abstract: What are the long-run aggregate effects of monetary shocks displaying through the credit channel of monetary policy? We address this question by investigating the transmission mechanism and estimating the dynamic behaviour of variables related to credit and innovation. Then, we develop a DSGE model featuring endogenous growth, in which credit frictions constrain the financing of innovation. Under this paradigm, recessionary shocks develop into persistent stagnation. The deterioration of the R&D process, i.e. creation and adoption of new technologies, is at the core of hysteresis effects. We show the ability of our theoretical framework to reconcile with empirical evidence, quantifying the contribution of this channel to productivity and output hysteresis observed after the Global Financial Crisis.
    Keywords: Endogenous Growth; R&D; Stagnation; Credit Frictions; Monetary Policy
    JEL: E22 E24 E32 E44 E52 G01
    Date: 2023–07–25
  7. By: Luigi Bonatti; Mauro Lorenza Alexandra Lorenzetti
    Abstract: This paper places itself at the intersection between the literature on “Demeny voting†(the proposal of letting custodial parents exercise their children’s voting rights until they come of age) and the vast literature on formal models with endogenous fertility that address the problem of fiscal redistribution between young and old cohorts in the presence of an aging population. Linking these issues to the process of economic growth through a simple overlapping generations model, we show that, even if the government is myopic, in the sense that it cares only about the current well being of the living (and voting) generations, an increase in the relative importance that it attaches to the interests of the young cohort (for instance, due the introduction of Demeny voting) leads in the long run to a higher population growth rate and raises the consumption level of each young adult, the capital stock per worker and the output per adult. We also show that in the long run such a reform raises the well being that individuals can expect at birth to achieve during their lifetime.
    Keywords: OLG model, fertility, fiscal redistribution, well being, child allowances
    JEL: D10 D72 H23 J13 O41
    Date: 2022
  8. By: Christian Scharrer (University of Augsburg, Department of Economics); Johannes Huber (University of Regensburg, Department of Economics)
    Abstract: We study the effects of different financing rules for untargeted energy price brakes and subsidies on intergenerational welfare in a large-scale overlapping generations model. The results indicate that, in comparison to a laissez-faire solution without any government interventions, debt-financed implementations of such measures are very detrimental for young and future generations. However, the taxation of windfall profits can significantly contribute to reduce the economic burdens of these generations, whereas the positive effects on older generations are much less pronounced.
    Keywords: Fiscal Policy, Price Brakes, Price Subsidies, Energy Crisis, Welfare
    JEL: E62 E30 H20 H30
    Date: 2023–08
  9. By: Roberta Cardani (ESM); Philipp Pfeiffer (European Commission, DG ECFIN); Marco Ratto (European Commission, JRC); Lukas Vogel (European Commission, DG ECFIN)
    Abstract: This paper compares the COVID-19 recession in the euro area (EA) and the US using an estimated multi-region New Keynesian macroeconomic model. To capture quarterly dynamics from 2020 onwards, we introduce relevant extensions such as ‘forced’ savings, extensive versus intensive employment margins, and trade in commodities as inputs to production and final demand. Transitory (‘forced’) savings are central to account for the behaviour of economic activity in both regions during the pandemic, which was strongly driven by private consumption, alongside shocks to domestic demand and foreign activity. The model highlights the importance of demand recovery and rising commodity prices for the inflation acceleration during 2021-22. EA inflation has a stronger supply component (including commodity prices) compared to a stronger demand component in the US.
    Keywords: DSGE model, Bayesian estimation, COVID-19, Euro Area, United States, Inflation, Business cycles
    JEL: C11 E1 E20
    Date: 2023–07–19
  10. By: Rausch, Sebastian; Yonezawa, Hidemichi
    Abstract: Technology policy is the most widespread form of climate policy and is often preferred over seemingly efficient carbon pricing. We propose a new explanation for this observation: gains that predominantly accrue to households with large capital assets and that influence majority decisions in favor of technology policy. We study climate policy choices in an overlapping generations model with heterogeneous energy technologies and distortionary income taxation. Compared to carbon pricing, green technology policy leads to a pronounced capital subsidy effect that benefits most of the current generations but burdens future generations. Based on majority voting which disregards future generations, green technology policies are favored over a carbon tax. Smart 'polluter-pays' financing of green technology policies enables obtaining the support of current generations while realizing efficiency gains for future generations.
    JEL: Q54 Q48 Q58 D58 H23
    Date: 2023
  11. By: Roberto Tamborini
    Abstract: The resurgence of inflation since late 2021 is now accompanied by a reversal of prospects of growth, reviving fears of stagflation across the world (IMF 2022, World Bank 2022). In almost all accounts of the mounting stagflation threats, a prominent role is played by the fall of households purchasing power, and hence consumption, due to the inflation shock vis-Ã vis lagging nominal wages. This paper addresses the theoretical puzzle as to why this endogenous real income effect of inflation surprises, independent of restrictive monetary policy, is not present in the standard New Keynesian models for monetary policy. The paper shows how this channel can be introduced by reformulating the consumption function, with the consequence that it endogenously exerts a stabilisation effect on inflation. By means of simulations the paper discusses the main monetary policy implication: what is the role left to monetary policy intended to curb inflation in the same way?
    Keywords: Cost-push inflation, real income effect, stagflation, New Keynesian models for monetary policy
    JEL: E17 E3 E5
    Date: 2023
  12. By: Cristiano Cantore (Sapienza University of Rome); Filippo Ferroni (Chicago Fed); Haroon Mumtaz (Queen Mary University of London); Angeliki Theophilopoulou (Brunel University London)
    Abstract: We study the interaction between monetary policy and labor supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong countercyclicality of hours worked in the left tail of the income distribution, following a monetary policy shock in the U.S. and the U.K. That is, while aggregate hours and labor earnings decline, employed individuals at the bottom of the income distribution increase their hours worked in response to an interest rate hike. Moreover, their response is stronger in magnitude relative to other income groups. We rationalize this using a two-agent New-Keynesian (TANK) model where our empirical findings can be replicated with heterogeneity in the marginal utility of consumption and a stronger income effect for the Hand-to-Mouth households. This setup uncovers a novel channel of transmission of monetary policy via inequality generated by the Hand-to-Mouth substitution of leisure for consumption following a negative income shock. Using a quantitative model with both intensive and extensive margin of labor supply that replicates our evidence, we show that this new channel reduces the amplification of monetary policy via inequality generated by the heterogenous behavior of unemployment along the income distribution.
    Keywords: Monetary policy, Household Survey, FAVARs, TANK, Hand to Mouth
    JEL: E52 E32 C10
    Date: 2023–03
  13. By: Michael Kumhof (Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)); Marco Pinchetti (Centre for Macroeconomics (CFM)); Phurichai Rungcharoenkitkul (Bank of Thailand; Bank for International Settlement); Andrej Sokol (Bloomberg; Centre for Macroeconomics (CFM))
    Abstract: We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. Financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, a cash-like CBDC, and CBDC as generalized access to reserves, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross-border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of over 40% of annual GDP.
    Keywords: Central bank digital currencies, monetary policy, bank deposits, bank loans, monetary frictions, money demand, money supply, credit creation
    Date: 2023–03
  14. By: Marco Bellifemine (London School of Economics (LSE)); Adrien Couturier (London School of Economics (LSE)); Rustam Jamilov (University of Oxford)
    Abstract: We study the transmission of monetary policy across space in a heterogeneous agents New Keynesian (HANK) model of a monetary union. Using sequence-space methods, we derive the regional Keynesian cross: a characterization of the response of local employment to unexpected changes in interest rates along two dimensions of spatial heterogeneity: (i) openness to national trade and (ii) intertemporal marginal propensities to consume (iMPCs). At the core of our mechanism is an equilibrium complementarity between these two channels, which we validate in the data. We provide an aggregation result and derive the national Keynesian cross that summarizes the role of the joint distribution of regional iMPCs and trade openness across space for the nation-wide response to aggregate shocks. We provide empirical support for our theory using detailed county-level data and identified monetary surprises for the United States. Our main result is that the joint regional distribution of county-level openness to national trade and iMPCs is crucial for the amplification of monetary shocks and the potency of fiscal stabilization policies.
    Date: 2023–03
  15. By: Siew Ling Yew; Jie Zhang
    Abstract: We explore optimal health subsidies in a dynastic model with health externalities to productivity that cause low health spending, productivity, longevity, savings and labor but high fertility. Public or firms’ health subsidies increase health spending, longevity and productivity and decrease fertility. Labor income taxes reduce the marginal benefit of health spending and the time cost of raising a child, while consumption taxes reduce the relative cost of raising a child. Appropriate public or firms’ health subsidies can internalize the externalities through age-specific labor income taxes and consumption taxes. Calibrating the model to the Australia economy, numerical results suggest policy improvements.
    Keywords: Health Externality, Longevity, Productivity, Fertility, Savings
    JEL: H21 I13 I15 J13 O41
    Date: 2023–07
  16. By: Richard W. Ryan
    Abstract: Workers separate from jobs, search for jobs, accept jobs, and fund consumption with their wages. Firms recruit workers to fill vacancies, but search frictions prevent firms from instantly hiring available workers. Unemployment persists. These features are described by the Diamond--Mortensen--Pissarides modeling framework. In this class of models, how unemployment responds to productivity changes depends on resources that can be allocated to job creation. Yet, this characterization has been made when matching is parameterized by a Cobb--Douglas technology. For a canonical DMP model, I (1) demonstrate that a unique steady-state equilibrium will exist as long as the initial vacancy yields a positive surplus; (2) characterize responses of unemployment to productivity changes for a general matching technology; and (3) show how a matching technology that is not Cobb--Douglas implies unemployment responds more to productivity changes, which is independent of resources available for job creation, a feature that will be of interest to business-cycle researchers.
    Date: 2023–07
  17. By: Jean-Paul L’Huillier (Federal Reserve Bank of Cleveland; Department of Economics, Brandeis University); Sanjay R. Singh (Federal Reserve Bank of San Francisco; Department of Economics, University of California, Davis); Donghoon Yoo (Institute of Economics, Academia Sinica, Taipei, Taiwan; Economic Research, Osaka University)
    Abstract: Diagnostic expectations constitute a realistic behavioral model of inference. This paper shows that this approach to expectation formation can be productively integrated into the New Keynesian framework. Diagnostic expectations generate endogenous extrapolation in general equilibrium. We show that diagnostic expectations generate extra amplification in the presence of nominal frictions; a fall in aggregate supply generates a Keynesian recession ; fiscal policy is more effective at stimulating the economy. We perform Bayesian estimation of a rich medium-scale model that incorporates consensus forecast data. Our estimate of the diagnosticity parameter is in line with previous studies. Moreover, we find empirical evidence in favor of the diagnostic model. Diagnostic expectations offer new propagation mechanisms to explain fluctuations.
    Keywords: Heuristics, representativeness, general equilibrium, shocks, volatility
    JEL: E12 E32 E71
    Date: 2023–07
  18. By: Daniel Albuquerque (Bank of England); Tomer Ifergane (London School of Economics (LSE); Centre for Macroeconomics (CFM); Ben-Gurion University)
    Abstract: The racial wealth gap is one of the most striking and persistent disparities between Black and White households in the US. We study the determinants of this gap using a general equilibrium incomplete market model featuring dynamic discrete entrepreneurship choice and an empirically estimated income process. In the model, Black households face: (i) higher capital costs as entrepreneurs; (ii) a labour-income gap; and (iii) greater non-employment risk. We find that access to capital for Black entrepreneurs accounts for most of the racial wealth gap. Our model demonstrates that wealth transfers without social change cannot permanently address this gap and points towards addressing barriers faced by Black entrepreneurs as a key margin of intervention.
    Keywords: Racial wealth gap, entrepreneurship, incomplete markets, wealth accumulation, financial frictions, wealth inequality
    JEL: E21 J15 D31 D52
    Date: 2023–03
  19. By: Gizem Koşar; Davide Melcangi; Laura Pilossoph; David Wiczer
    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: 2023–06–01
  20. By: L. GALIANA (Insee); L. WILNER (Insee, Crest)
    Abstract: This paper embeds a structural model of private wealth accumulation over the life-cycle within a dynamic microsimulation model (Destinie 2) designed for long-run projections of pensions. In such an environment, the optimal savings path results from consumption smoothing and bequests motives, on top of the mortality risk. Preferences are estimated based on a longitudinal wealth survey through a method of simulated moments. Simulations issued from these estimations replicate quite well a private wealth that is more concentrated than labor income. They enable us to compute “augmented” standards of living including capital income, hence to quantify both the countervailing role played by private wealth to earnings dropout after retirement and the impact of the mortality risk in this regard.
    Keywords: Microsimulation; Intertemporal Consumer Choice; Life-cycle; Inequality
    JEL: C63 C88 D15
    Date: 2023
  21. By: Vedanta Dhamija (University of Surrey); Ricardo Nunes (University of Surrey; Centre for International Macroeconomic Studies (CIMS); Centre for Macroeconomics (CFM)); Roshni Tara (University of Surrey)
    Abstract: We find that households tend to overweight house price expectations when forming their inflation expectations. The finding is robust across several specifications and two survey data sets for the United States. We also find that there is a significant effect of the cognitive abilities of households as more sophisticated households don’t overweight house price inflation as much. We model this household behaviour in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and analytically derive a welfare loss function consistent with the micro-foundations of the model. In this setup, we show that to gauge the correct interest rate response, the central bank needs to be aware that some sectors are overweighted and that movements in expected inflation in such sectors are important for monetary policy.
    Keywords: Salience, Inflation Expectations, House Price Expectations, Monetary Policy
    JEL: D10 E12 E31 E52 E58
    Date: 2023–07
  22. By: Brandon Tan
    Abstract: For central bank digital currencies (CBDCs) to accomplish their intended objectives, it is necessary for both consumers to use them and for merchants to accept them. This paper develops a dynamic two-sided payments model with both heterogeneous households and merchants/firms to study: (1) The adoption of CBDC by households and firms, and (2) The impact of CBDC issuance on financial inclusion, informality, and disintermediation. Our model shows that there is a feedback loop where more households will adopt CBDC if more firms accept CBDC and vice versa -- incentivizing both households and firms will result in greater levels of take-up. Households are more likely to adopt CBDC if it is low cost, provides an attractive savings vehicle, reduces the cost of remittances, improves the efficiency of government payments, and (if accepted by merchants) offers a valuable means of payment. Firms are more likely to accept CBDC if fees are low, if there are tax exemptions or subsidies for transactions made in CBDC, and if households who prefer to make payments with CBDC make up a large share of revenue. Upon CBDC issuance, an economy can get stuck at a steady state with low CBDC adoption and small welfare gains if the features of CBDC which do not rely on merchant acceptance (remuneration, efficiency of cross border and government payments) are not sufficiently attractive, or if the households benefiting from these features make up a small share of merchant revenue. Temporary subsidies and using CBDC for government payments can spur initial take-up to transition an economy to a welfare improving steady state with high(er) CBDC usage. Greater adoption of CBDC will result in greater financial inclusion and formalization, but potentially the disintermediation of banks and card payments. Thus, there is a trade-off in designing CBDC for greater adoption. However, the gains are more likely to outweigh the risks in lower income economies with larger unbanked populations and informal sectors.
    Keywords: Central bank digital currency; financial inclusion; informality; digital money; disintermediation; two-sided market; adoption; payments
    Date: 2023–06–16
  23. By: Maximilian Blesch (HU Berlin and DIW Berlin); Philipp Eisenhauer (Amazon); Peter Haan (FU Berlin and DIW Berlin); Boryana Ilieva (HU Berlin and DIW Berlin); Annekatrin Schrenker (FU Berlin and DIW Berlin); Georg Weizsäcker (HU Berlin)
    Abstract: Wage growth occurs almost exclusively in full-time work, whereas it is close to zero in part-time work. German women, when asked to predict their own potential wage outcomes, show severely biased expectations with strong over-optimism about the returns to part-time experience. We estimate a structural life-cycle model to quantify how beliefs influence labor supply, earnings and welfare over the life cycle. The bias increases part-time employment strongly, induces flatter long-run wage profiles, and substantially influences the employment effects of a widely discussed policy reform, the introduction of joint taxation. The most significant impact of the bias appears for college-educated women.
    Keywords: returns to experience; biased beliefs; part-time work; dynamic life-cycle models; ;
    JEL: D63 H23 I24 I38 J22 J31
    Date: 2023–07–27
  24. By: Hippolyte d'Albis (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); Najat El Mekkaoui (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Bérangère Legendre (IREGE - Institut de Recherche en Gestion et en Economie - USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc)
    Abstract: This paper explores the impact of a health shock and changes in survival probability on the savings and portfolio choices of older individuals. Using a theoretical framework featuring a portfolio choice that incorporates imperfect annuity markets, we analyze how elderly individuals, whose survival probability has been altered by a health shock, allocate their resources. A difference-indifferences approach complements the theoretical approach by taking into account the effect of age and cohort, and controlling for selection bias related to health events at older ages. Our analysis utilizes a panel of 5570 observations from the Survey of Health, Aging, and Retirement in Europe (SHARE, 2011 and 2017). Both theoretical and empirical findings converge, indicating that experiencing a health accident such as a stroke or heart attack leads to a decrease in safe savings. Consequently, investing in annuities becomes crucial in enabling individuals to mitigate the consequences of poor health in aging economies.
    Keywords: Life cycle model, saving behavior, health shock, difference-indifferences Life cycle model, difference-in-differences
    Date: 2023–07

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