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on Dynamic General Equilibrium |
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Issue of 2023‒08‒28
thirteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Jangyoun Lee (Incheon National University); Hyunduk Suh (Inha University) |
| Abstract: | The total fertility rate (TFR) in Korea fell to the historically lowest value of 0.78, reaching the state of super low fertility, also similarly observed in other East Asian countries. We quantitatively assess future implications of super low fertility on housing markets using an overlapping generations (OLG) general equilibrium model, which features housing markets and demographic transitions. The results predict that while the current housing boom will continue in the near future, real housing prices will eventually decline after 2035 because of low fertility. Among government policies, increasing the housing supply or the birth rate can mitigate this long-term housing boom-bust cycle and is welfare-improving for currently young generations. Meanwhile, stricter caps on the LTV ratio are ineffective in stabilizing the housing cycle and welfare-reducing except for old generations. |
| Keywords: | super low fertility, OLG model, housing markets, housing supply, LTV policy |
| JEL: | J11 J13 R21 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:inh:wpaper:2023-2&r=dge |
| By: | Roberto M. Billi; Jordi Galí; Anton Nakov |
| Abstract: | We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, when the steady state natural rate (r*) becomes permanently negative. We show that the optimal policy aims to approach gradually a new steady state with positive average inflation. Around that steady state, the optimal policy implies well defined (second-best) paths for inflation and output in response to shocks to the natural rate. Under plausible calibrations, the optimal policy implies that the nominal rate remains at its ZLB most of the time. Despite the latter feature, the central bank can implement the optimal outcome as a unique equilibrium by means of an appropriate nonlinear interest rate rule. In order to establish that result, we derive sufficient conditions for local determinacy in a general model with endogenous regime switches. |
| JEL: | E32 E5 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31508&r=dge |
| By: | Guido Ascari; Paolo Bonomolo; Qazi Haque |
| Abstract: | In U.S. data, inflation and output are negatively related in the long run. A Bayesian VAR with stochastic trends generalized to be piecewise linear provides robust reduced-form evidence in favor of a threshold level of trend inflation of around 4%, below which potential output is independent of trend inflation, and above which, instead, potential output is negatively affected by trend inflation. Moreover, this negative relationship is quite substantial: above the threshold every percentage point increase in trend inflation is related to about 1% decrease in potential output per year. A New Keynesian model generalized to admittime-varying trend inflation and estimated via particle filtering provides theoretical foundations to this reduced-form evidence. The structural long-run Phillips Curve implied by the estimated New Keynesian model is not statistically different from the one implied by the reduced-form piecewise linear BVAR model. |
| Keywords: | Long-Run Phillips Curve, Inflation, Bayesian VAR, DSGE, Particle Filter |
| JEL: | C32 C51 E30 E31 E52 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-37&r=dge |
| By: | Katie Baker; Logan Casey; Marco Del Negro; Aidan Gleich; Ramya Nallamotu |
| Abstract: | This post discusses the evolution of the short-run natural rate of interest, or short-run r*, over the past year and a half according to the New York Fed DSGE model, and the implications of this evolution for inflation and output projections. We show that, from the model’s perspective, short-run r* has increased notably over the past year, to some extent outpacing the large increase in the policy rate. One implication of these findings is that the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively buoyant so far despite the elevated level of interest rates. |
| Keywords: | r*; r-star; post-pandemic; Dynamic Stochastic General Equilibrium (DSGE) models |
| JEL: | E4 E5 |
| Date: | 2023–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:96543&r=dge |
| By: | Goodhart, Charles A.E.; Tsomocos, Dimitrios P.; Wang, Xuan |
| Abstract: | The financial intermediation wedge of the banking sector used to co-move positively with the federal funds rate, but the post-GFC era saw a disconnect between them. We develop a flexible price dynamic general equilibrium with banks’ liquidity creation to offer an explanation. In a corridor system, the financial wedge and policy rate are shown to co-move, and the pass-through of monetary policy onto both inflation and output obtains. However, the post-GFC floor system obviates the need for the financial wedge to cover the cost of obtaining reserves, so the wedge and the policy rate indeed disconnect in equilibrium; furthermore, we show that the disconnect obstructs monetary expansions from generating inflation. In this environment, tightening bank capital requirement leads to disinflationary pressure. Money-financed fiscal expansions that subsidise non-bank sectors’ borrowing costs improve output and reduce default risks but increase inflation. The model uses banks’ liquidity creation via credit extension to provide a rationale for both the pre-pandemic disinflation and the post-pandemic inflation. The results hold both on the dynamic paths and in the steady state, and the role of money enlarges the Taylor rule determinacy region. |
| Keywords: | corporate default; financial intermediation wedge; inside money deposits; liquidity creation; long-run non-neutrality; money-financing; reserve management |
| JEL: | F3 G3 J1 |
| Date: | 2023–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:119771&r=dge |
| By: | Richard Audoly |
| Abstract: | I build a tractable random search model with firm dynamics, on-the-job search, and aggregate shocks. Multi-worker firms make recruitment decisions, choose whether to enter or exit the market, and design wage contracts. Tractability is obtained by showing that, under a set of assumptions on the recruitment technology, the decisions of workers and firms can be expressed in terms of the firms’ current productivity. I introduce a numerical solution method to accommodate aggregate shocks in this environment and show that the model can replicate salient features of both firm-level data on productivity and employment and aggregate time series describing the business cycle. I use this framework to quantify the drivers of worker reallocation over the recent business cycle in Britain. |
| Keywords: | firm dynamics; search; business cycle |
| JEL: | E3 |
| Date: | 2023–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:96551&r=dge |
| By: | Roberta Cardani; Philipp Pfeiffer; Marco Ratto; Lukas Vogel |
| Abstract: | This paper compares the COVID-19 recession in the euro area (EA) and the US using an estimated multiregion 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. |
| JEL: | C11 E1 E20 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:191&r=dge |
| By: | Lucian Briciu; Stefan Hohberger; Luca Onorante; Beatrice Pataracchia; Marco Ratto; Lukas Vogel |
| Abstract: | This paper investigates two important elements of the ECB’s 2021 monetary policy strategy review in an estimated structural open-economy macro model of the euro area: (a) explicit symmetry of the 2% inflation target, which can be expected to lower the risk of hitting the effective lower bound (ELB) on short-term interest rates by raising average inflation towards the target, and (b) commitment to forceful or persistent monetary accommodation in a low interest rate environment, here interpreted as low-for-longer response in the recovery from the ELB. We simulate the model with draws from the estimated distribution of shocks. Both elements increase average inflation and reduce the average output gap. Stabilisation gains are modest in quantitative terms, however, for the given illustrative policy rules, and they are more pronounced when the economy operates at the ELB. Important in the current context, the low-for-longer policy in the model does not jeopardise inflation stabilisation in the event of (inflationary) negative supply shocks at the exit from the ELB. With private sector ‘myopia’ instead of fully rational expectations, the low-for-longer rule still yields stabilisation gains at the ELB, but they shrink in quantitative terms. |
| JEL: | E30 E52 E58 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:193&r=dge |
| By: | Urban, Jörg |
| Abstract: | Credit and business cycles play an important role in economic research, especially for central banks and supervisors. We reexamine a dynamic model proposed by Kiyotaki and Moore (1997) of an economy with an endogenous credit limit. They claim that a small temporary shock generates large and persistent deviations from the steady state due to a positive feedback loop and the endogenous credit constraint. We mathematically show that contrary to common belief the model does not show amplification and persistence is visible only for a few parameter settings. Kiyotaki and Moore have linearized the model in deviations of landholdings and found that these deviations from the equilibrium are large. This is mathematically inconsistent, because any higher order term would then be more important, rendering any finite-order Taylor expansion invalid. Further, we show that spillover effects in an economy with two distinct sectors are small. The strong amplification present in the original results, which supposedly is due to the large inter-temporal or dynamic multiplier effect, is spurious. The dynamic multiplier effect is of similar size than the static effect and in all cases numerically small. |
| Keywords: | Amplification, credit constraints, credit cycles, dynamic economies, Taylor expansion |
| JEL: | E32 E37 E51 E52 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:162&r=dge |
| By: | Mariano Kulish; James Morley; Nadine Yamout; Francesco Zanetti |
| Abstract: | We build a multi-sector, open economy model that captures the effects of a commodity boom on unemployment when there is also ongoing structural change. We use Bayesian methods to jointly estimate transition path effects of structural change and business cycle dynamics. Applying our model to the Australian economy, the estimates suggest that the large, permanent increase in commodity prices of the 2000s is critical for the observed appreciation of the real exchange rate and the contraction of net exports. Consistent with Dutch disease, the commodity boom increases unemployment in the short run. But structural change in the form of shifting preferences over non-tradable consumption and non-tradable employment, a process somewhat akin to structural transformation, explains the long-run reduction in unemployment, the increasing importance of the non-tradable sector for aggregate fluctuations and the increasing responsiveness of the tradable sector to shocks. |
| Keywords: | Dutch disease, commodity prices, unemployment, structural change, structural transformation |
| JEL: | E52 E58 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-38&r=dge |
| By: | Engin Kara; Ahmed Pirzada |
| Abstract: | This paper aims to explore the impact of rising uncertainty on prices using micro-data on prices and multi-sector new Keynesian models. We identify diverse price responses to increasing macroeconomic uncertainty: goods with relatively flexible prices experience a decline due to lower demand caused by the rising uncertainty, while those with sticky prices experience an increase. The model suggests that economic uncertainty creates strategic complementarity for firms with sticky prices, prompting them to raise markups and prices in anticipation of potentially higher future inflation. These findings establish a connection between heightened uncertainty, higher core inflation, and increased profits. |
| Keywords: | uncertainty, inflation, heterogeneity in price stickiness, micro-data on prices, New Keynesian |
| JEL: | E52 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10587&r=dge |
| By: | Jesús Crespo (WIFO); Christian Glocker (WIFO) |
| Abstract: | We assess the role that nontradable goods play as a determinant of fiscal spending multipliers, making use of a two-sector model. While fiscal multipliers increase with the share of nontradable goods, an inverted U-shaped relationship exists between multiplier size and the import share. Employing an interacted panel VAR model for EU countries, we estimate the effect of the share of nontradable goods on fiscal spending multipliers. Our empirical results provide strong evidence for the predictions of the theoretical model. They imply that the drag of fiscal consolidations is on average smaller in countries with a low share of nontradable goods. |
| Keywords: | Fiscal spending multiplier, Nontradable goods, Openness, DSGE model, Interacted panel VAR model |
| Date: | 2023–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2023:i:664&r=dge |
| By: | Katie Baker; Logan Casey; Marco Del Negro; Aidan Gleich; Ramya Nallamotu |
| Abstract: | The debate about the natural rate of interest, or r*, sometimes overlooks the point that there is an entire term structure of r* measures, with short-run estimates capturing current economic conditions and long-run estimates capturing more secular factors. The whole term structure of r* matters for policy: shorter run measures are relevant for gauging how restrictive or expansionary current policy is, while longer run measures are relevant when assessing terminal rates. This two-post series covers the evolution of both in the aftermath of the pandemic, with today’s post focusing especially on long-run measures and tomorrow’s post on short-run r*. |
| Keywords: | r*; r-star; post-pandemic; Dynamic Stochastic General Equilibrium (DSGE) models |
| JEL: | E4 E5 |
| Date: | 2023–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:96542&r=dge |