nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒09‒04
nine papers chosen by
Christian Zimmermann, Federal Reserve Bank of St. Louis

  1. Corporate taxes, productivity, and business dynamism By Colciago, Andrea; Lewis, Vivien; Matyska, Branka
  2. Monetary policy rules under bounded rationality By Dobrew, Michael; Gerke, Rafael; Kienzler, Daniel; Schwemmer, Alexander
  3. On the empirical relevance of the exchange rate as a shock absorber at the zero lower bound By Finck, David; Hoffmann, Mathias; Hürtgen, Patrick
  4. The state-dependent impact of changes in bank capital requirements By Lang, Jan Hannes; Menno, Dominik
  5. The Long-Run Phillips Curve is ... a Curve By Guido Ascari; Paolo Bonomolo; Qazi Haque
  6. Implementing Yield Curve Control Measures into the CNB Core Forecasting Model By Frantisek Brazdik; Karel Musil; Stanislav Tvrz
  7. The Network Gravity of Global Banking By Minetti, Raoul; Romanini, Giacomo; Ziv, Oren
  8. Learning about profitability and dynamic cash management By Jean-Paul Décamps; Stéphane Villeneuve
  9. Inflation and entry costs in a monetary search model By Ryoji Hiraguchi; Keiichiro Kobayashi

  1. By: Colciago, Andrea; Lewis, Vivien; Matyska, Branka
    Abstract: We identify the effects of corporate income tax shocks on key US macroeconomic aggregates. In response to a corporate income tax cut, we find that: (i) labor productivity increases; (ii) entry increases with delay; (iii) exit increases; (iv) total labor increases by more than production labor. To rationalize these empirical findings, we build a New Keynesian model with idiosyncratic firm productivity, and entry and exit. Our model features productivity gains due to selection and cleansing along the entry and exit margins. Models with homogeneous firms fail to account for the selection and cleansing process and produce counterfactual results.
    Keywords: corporate taxation, productivity, firm entry and exit
    JEL: E62 E32 H25
    Date: 2023
  2. By: Dobrew, Michael; Gerke, Rafael; Kienzler, Daniel; Schwemmer, Alexander
    Abstract: We study the welfare performance of various simple monetary policy rules under bounded rationality (BR) along the lines of Gabaix (2020) in a New Keynesian model with sticky wages and an effective lower bound (ELB) on interest rates. Policy strategies with a strong history dependence lose their advantage over inflation targeting in mitigating a demand-driven recessions when interest rates are constrained by the ELB. For supply shocks, inflation t argeting o utperforms h istory-dependent r ules f or a s ufficiently high degree of BR. An exponential average inflation targeting rule, which features a variable degree of history dependence, performs remarkably well, independent of the degree of BR.
    Keywords: Bounded Rationality, Sticky Wages, Monetary Policy Strategies, Zero LowerBound
    JEL: E20 E24 E31 E32 E52
    Date: 2023
  3. By: Finck, David; Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: We estimate the effects of a negative asymmetric demand shock on the real exchange rate for the euro area vis-à-vis the United States, Canada, and Japan by state-dependent sign-restricted local projection methods. We find a real depreciation when interest rates are not at the ZLB, but also when they are. The exchange rate can accomodate considerable variations in output, confirming its shock-absorbing capacity before and during the ZLB episode. The stabilizing role of the exchange rate is accompanied by a significant expansion of the ECB's balance sheet at the ZLB, while it remained unaffected in the pre-ZLB period. Our empirical results can be reconciled with an open economy New Keynesian model extended with unconventional monetary policy measures when interest rates are at the ZLB.
    Keywords: Zero Lower Bound, Exchange Rate, Local Projections, State-dependent Effects, Unconventional Monetary Policy, Demand Shocks
    JEL: F31 E31 E37 C54
    Date: 2023
  4. 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.
    Keywords: Bank capital requirements, loan supply, dynamic stochastic equilibrium model, financial accelerator, global solution methods
    JEL: D21 E44 E51 G21 G28
    Date: 2023
  5. 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 admit time-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
  6. By: Frantisek Brazdik; Karel Musil; Stanislav Tvrz
    Abstract: In response to the 2008 financial crisis, when policy rates hit their lower bound, central banks adopted unconventional policies to meet their announced targets. These policies can either directly target interest rates or the quantities of assets. Taking into account the specific features of the Czech economy, this paper presents an extension of the CNB's core projection model for long-term assets and yield curve control measures. This extension demonstrates the ability of the CNB to consider and assess various unconventional policies within its analytical framework.
    Keywords: DSGE models, inflation targeting, quantitative easing, unconventional monetary policy, yield curve
    JEL: E32 E37 E43 E58
    Date: 2023–08
  7. By: Minetti, Raoul (Michigan State University, Department of Economics); Romanini, Giacomo (Bank of Italy); Ziv, Oren (Michigan State University, Department of Economics)
    Abstract: A substantial fraction of international banking is intermediated through banking hubs and complex multi-national routing. These flows are ignored or unaccounted for, both theoretically and empirically. We develop an N-country DSGE model of lending where banks choose the path of lending through a network of partner institutions in multiple countries. Banking hub countries arise endogenously as central nodes in the intermediation network. The model provides a framework to rationalize observable international statistics with theoretical models of banking gravity. It generates a set of bilateral locational flow of funds that conceptually matches aggregate (BIS LBS) statistics, as distinct from the ultimate demand and supply of lending. Using a series of calibrations for both node and edge shocks, we show that accounting for the network is crucial for understanding the propagation of shocks and the impact of banking consolidation on aggregate fluctuations. The analysis reveals that neglecting the multinational banking network can lead to biased conclusions about the aggregate effects of banking unions.
    Keywords: Heterogeneous Banks; Gravity; Intermediation Network; Contagion
    JEL: F40 G20
    Date: 2023–08–17
  8. By: Jean-Paul Décamps (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); Stéphane Villeneuve (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)
    Abstract: We study a dynamic model of a firm whose shareholders learn about its profitability, face costs of external nancing and costs of holding cash. The shareholders' problem involves a notoriously challenging singular stochastic control problem with a two-dimensional degenerate diffusion process. We solve it by means of an explicit construction of its value function, and derive a corporate life-cycle with two stages: a "probation stage" where it is never optimal for the firm to issue new shares, and a "mature stage" where the firm resorts to the market whenever needed. The cash target level is non-monotonic in the belief about the profitability and reaches its highest value on the edge between the two stages. It follows new insights on the firm's volatility and its payout ratio which depend on the firm's stage in its life cycle.
    Keywords: Corporate cash management, Corporate life cycle, Learning, Singular control
    Date: 2022
  9. By: Ryoji Hiraguchi; Keiichiro Kobayashi
    Abstract: In this study, we construct a variant of the Lagos-Wright monetary model in which both buyers and sellers optimally decide whether to enter decentralized market by paying fixed entry costs. In the decentralized market, the sellers produce the intermediate inputs which are necessary to produce the general good traded in the centralized market. We show that the Friedman rule of setting nominal interest rate to zero may not be optimal. The optimal inflation rate is derived explicitly for specific functional forms. It is shown that the optimal inflation rate is lower for lower buyer entry costs, because the lower entry costs generate the congestion of buyers which must be compensated for by lower cost of money holdings. It is also shown that the optimal inflation is lower for higher seller entry costs. These results may explain why the secular decline in inflation has been observed in recent decades when the emergence and growth of Internet usage has lowered shopping costs for buyers.
    Date: 2023–08

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