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on Dynamic General Equilibrium |
| By: | Marco Del Negro; Pranay Gundam; Donggyu Lee; Ramya Nallamotu; Brian Pacula |
| Abstract: | This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since June 2023. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A. |
| Keywords: | Dynamic Stochastic General Equilibrium (DSGE) models; forecasting |
| JEL: | E5 |
| Date: | 2023–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:96879&r=dge |
| By: | HIRAGUCHI Ryoji |
| Abstract: | In this paper, we study the two-period overlapping generations model in which individuals are subject to idiosyncratic risks and study the optimal provision of government debt. In our model, individuals are ex ante homogeneous, and hold risky capital and safe government bonds in the first period. They are subject to idiosyncratic capital return risk in the second period. It is well-known that in deterministic overlapping generations models, when government debt is provided to maximize steady state welfare, the interest rate (r) is equal to the economic growth rate (g). However, in our model with idiosyncratic risks, the risk-free rate is less than the economic growth rate in the optimal steady state. This implies that even when the rollover of government debt is sustainable, increases in debt may reduce welfare. When the return on capital accumulation is risky, the level of safe assets the individuals hold is inefficiently high. Setting the risk-free rate below the economic growth rate reduces demand for government bonds and enhances capital accumulation, which is welfare-improving. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:23063&r=dge |
| By: | Mark Aguiar; Manuel Amador; Cristina Arellano |
| Abstract: | This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in the stock of government debt. The framework also provides a tractable tool to explore the use of fiscal policy to escape the Effective Lower Bound (ELB) on nominal interest rates and the resolution of the “forward guidance puzzle.” A common theme throughout is that following the monetary policy guidance from the standard Ricardian framework leads to excess fluctuations in income and inflation. |
| Keywords: | Inflation; Ricardian Equivalence; Heterogeneous agents; Government debt |
| JEL: | E60 E40 E30 |
| Date: | 2023–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:96368&r=dge |
| By: | Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Ghote (-) |
| Abstract: | We provide evidence that the ECB system-wide dividend recommendation (SWDR) of March 2020 contributed to sustain lending, had a negative but moderate and transitory impact on bank stock prices and largely operated as a deferral of dividend payouts rather than as a dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts for this evidence and captures the key mechanism through which SWDRs operate to study the general equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregate bank lending and mitigate the adverse impact of the COVID-19 shock on economic activity by safeguarding euro area banks’ capitalization. Welfare-maximizing SWDRs stabilize the economy regardless of the shock type but they only induce significant welfare gains in response to financial shocks. |
| Keywords: | dividend recommendation, dividend prudential target (DPT), COVID-19, usable capital buffers, welfare |
| JEL: | E44 E58 E61 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:23/1075&r=dge |
| By: | Alberto Cavallo; Francesco Lippi; Ken Miyahara |
| Abstract: | We leverage the inflation upswing of 2022 and various granular datasets to identify robust price-setting patterns following a large supply shock. We show that the frequency of price changes increases dramatically after a large shock. We set up a parsimonious New Keynesian model and calibrate it to fit the steady-state data before the shock. The model features a significant component of state-dependent decisions, implying that large cost shocks incite firms to react more swiftly than usual, resulting in a rapid pass-through to prices -- large shocks travel fast. Understanding this feature is crucial for interpreting recent inflation dynamics. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31659&r=dge |
| By: | Victoria Gregory; Julian Kozlowski; Hannah Rubinton |
| Abstract: | This paper seeks to understand the forces that maintain racial segregation and the implications for the Black-White gap in college attainment. We incorporate race into an overlapping-generations spatial-equilibrium model with neighborhood spillovers. The model incorporates race in three ways: (i) a Black-White wage gap, (ii) an amenity externality—households care about the racial composition of their neighbors—and (iii) an additional barrier to moving for Black households. These forces quantitatively account for all of the racial segregation and 80% of the Black-White gap in college attainment in the data for the St. Louis metro area. Counterfactual exercises show that all three forces are quantitatively important. The presence of spillovers and externalities generates multiple equilibria. Although St. Louis is in the segregated equilibrium, there also exists an integrated equilibrium with a lower college gap, and we analyze a transition path between the two. |
| Keywords: | Income inequality; Neighborhood segregation; Education; Racial disparities |
| JEL: | J15 O18 J24 |
| Date: | 2023–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:96699&r=dge |
| By: | Iacopo Morchio; Christian Moser |
| Abstract: | Using linked employer-employee data from Brazil, we document a large gender pay gap due to women working at lower-paying employers with better amenities. To interpret these facts, we develop an equilibrium search model with endogenous firm pay, amenities, and employment. We provide a constructive proof of identification of all model parameters. The estimated model suggests that amenities are important for men and women, that compensating differentials explain half of the gender pay gap, and that there are significant output and welfare gains from eliminating gender differences. However, equal-treatment policies fail to achieve those gains. |
| Keywords: | Monopsony; Amenities; Earnings inequality; Linked employer-employee data; Equilibrium search model; Taste-based discrimination; Worker and firm heterogeneity; Compensating differentials |
| JEL: | J16 J32 E24 J31 |
| Date: | 2023–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:96702&r=dge |
| By: | Juan Jacobo |
| Abstract: | The article develops a general equilibrium model where power relations are central in the determination of unemployment, profitability, and income distribution. The paper contributes to the market forces versus institutions debate by providing a unified model capable of identifying key interrelations between technical and institutional changes in the economy. Empirically, the model is used to gauge the relative roles of technology and institutions in the behavior of the labor share, the unemployment rate, the capital-output ratio, and business profitability and demonstrates how they complement each other in providing an adequate narrative to the structural changes of the US economy. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2309.00909&r=dge |