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on Dynamic General Equilibrium |
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Issue of 2023‒11‒06
sixteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See |
| Abstract: | We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the positive and normative implications of employer-to-employer (EE) transitions for inflation. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries, with the former exhibiting subdued EE transitions and inflation despite both episodes sharing similar unemployment dynamics. The optimal monetary policy prescribes a strong positive response to EE fluctuations, implying that central banks should distinguish between recovery episodes with similar unemployment but different EE dynamics. |
| Keywords: | Business fluctuations and cycles; Inflation and prices; Labour markets; Monetary policy |
| JEL: | E12 E24 E52 J31 J64 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-52&r=dge |
| By: | Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School) |
| Abstract: | DSGE models based on New Keynesian principles, which have been extended to allow for banking, the zero lower bound on interest rates (ZLB), and varying price duration, can account well for recent macroeconomic behavior across a variety of economies. These models Önd that active Öscal policy can contribute to macroeconomic stability and welfare by reducing the frequency of hitting the ZLB. Fiscal policy can also share the stabilisation role with monetary policy, whose effectiveness under the ZLB is much reduced. |
| Keywords: | Moments, fiscal policy, zero bound, monetary policy, DSGE model, macro stability, indirect inference |
| JEL: | E17 E31 E32 E42 E52 E62 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2023/26&r=dge |
| By: | Verónica Acurio Vásconez (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Olivier Damette (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); David W Shanafelt (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Although the current covid-19 pandemic was neither the first nor the last disease to threaten a pandemic, only recently have studies incorporated epidemiology into macroeconomic theory. This paper uses a dynamic stochastic general equilibrium (dsge) model with a financial sector to study the economic impacts of epidemics and the potential for unconventional monetary policy to remedy those effects. By coupling a macroeconomic model with a traditional epidemiological model, we can evaluate the pathways by which an epidemic affects a national economy. We find that no unconventional monetary policy can completely remove the negative effects of an epidemic crisis, save perhaps an exogenous increase in the shares of claims coming from the Central Bank (''epi loans''). To the best of our knowledge, our paper is one of the first to incorporate disease dynamics into a dsge-sir model with a financial sector and examine the use of an unconventional monetary policy. |
| Keywords: | New-Keynesian model, Financial dsge, Covid-19, Epidemiology, Unconventional monetary policy |
| Date: | 2023–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04220462&r=dge |
| By: | Nuguer, Victoria; Finkelstein-Shapiro, Alan |
| Abstract: | We study how policies that facilitate firm digital adoption shape the labor market and economic recovery from COVID-19 in a search and matching framework with firm entry and exit where salaried firms can adopt digital technologies and the labor market and firm structure embodies key features of Latin American economies. Using Mexico as a case study, we first show that the model quantitatively replicates the dynamics of the labor market and output at the onset of the COVID recession and in its aftermath, including the sharp decline in labor force participation and informal employment that is unique to the COVID recession. We then show that a policy-induced permanent reduction in the barriers to adopting digital technologies introduced at the trough of the recession bolsters the recovery of GDP, total employment, and labor income, and leads to a larger expansion in the share of formal employment compared to the no-policy scenario. In the long run, the economy exhibits a long-run reduction in total employment and labor force participation, but higher levels of GDP and labor income, greater average firm productivity, a larger formal employment share, and a marginally lower unemployment rate. |
| Keywords: | Business cycles and labor search frictions;Self-employmentand informality;Unemployment;Labor force participation;Information and communications technologies (ICT);Latin America |
| JEL: | E24 J23 J24 J64 O14 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:12232&r=dge |
| By: | Vivek Sharma |
| Abstract: | What are the effects of changing bank lending conditions in a model in which borrowers have endogenously-persistent credit relationships with lenders? This paper answers this question in a simple Two-Agent New Keynesian (TANK) setup. Fluctuations in collateral requirements, termed collateral shocks in this paper, result in a rise in spread, a drop in bank credit and amplification of macroeconomic volatility. These effects are amplified by presence of lending relationships and are greater at higher persistence and volatility of the collateral shocks. The results in this paper underscore that credit relationships matter when collateral shocks hit the economy and a model that assumes away the existence of these lending relationships, risks underestimating their effects. |
| Keywords: | Collateral Shocks, Lending Relationships, Economic Activity |
| JEL: | E32 E44 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-49&r=dge |
| By: | Peter Haan; Daniel Kemptner; Victoria Prowse; Maximilian Schaller |
| Abstract: | Individuals vary considerably in how much they earn during their lifetimes. This study examines the role of the tax-and-transfer system in mitigating such inequalities, which could otherwise lead to disparities in living standards. Utilizing a life-cycle model, we determine that taxes and transfers offset 45% of lifetime earnings inequality attributed to dierences in productive abilities and education. Additionally, the system insures against 48% of lifetime earnings risk. Implementing a lifetime tax reform linking annual taxes to previous employment could improve the system’s insurance capabilities, albeit at the cost of a lower employment rate. |
| Keywords: | Lifetime earnings, lifetime income, tax-and-transfer system, taxation, unemployment insurance, disability benefts, social assistance, inequality, redistribution, insurance, education, productive ability, risk, dynamic life-cycle models. |
| JEL: | D63 H23 I24 I38 J22 J31 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1335&r=dge |
| By: | Andreas Irmen (DEM, Université du Luxembourg) |
| Abstract: | A balanced growth path that accounts for a decline in hours worked per worker approximates the evolution of today’s industrialized countries since 1870. This stylized fact is explained in an OLG-model featuring two-period lived individuals equipped with per-period utility functions of the generalized log- log type proposed by Boppart and Krusell (2020) and a neoclassical production sector. Technological progress drives real wages up and expands the amount of consumption goods. The value of leisure increases, and the supply of hours worked declines. Technological progress moves a poor economy out of a regime with low wages and an inelastic supply of hours worked into a regime with high wages and a declining supply of hours worked. The balanced growth path is unique and stable. In the high wage regime, the equilibrium difference equation is available in closed form. A balanced growth path with declining hours worked may also be obtained with endogenous technological progress as in Romer (1986). |
| Keywords: | Technological Change, Comparative Economic Development, Endogenous Labor Supply, Neoclassical Endogenous Growth, OLG-model. |
| JEL: | D91 J22 O33 O41 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:23-08&r=dge |
| By: | Christian Bredemeier (University of Wuppertal and IZA); Babette Jansen (University of Antwerp); Roland Winkler (Friedrich Schiller University Jena, and University of Antwerp) |
| Abstract: | We propose a new fiscal transmission channel based on countercyclical monopsony power in the labor market. We develop a Two-Agent New Keynesian model incorporating a time-varying degree of monopsony power, with workers valuing various job aspects and firms having wage-setting power, inversely related to the elasticity of labor supply to individual firms. As government spending increases, labor supply to individual firms becomes more elastic, creating more competition, larger fiscal multipliers, and stronger distributional consequences. We examine this channel's interactions with other fiscal transmission channels. Finally, we confirm empirically the model's prediction of reduced employer market power following government spending expansions. |
| Keywords: | fiscal policy, labor-market monopsony, income inequality |
| JEL: | E62 J42 E25 E32 |
| Date: | 2023–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2023-015&r=dge |
| By: | Le, Anh H. |
| Abstract: | This paper studies the macro-financial implications of using carbon prices to achieve ambitious greenhouse gas (GHG) emission reduction targets. My empirical evidence shows a 0.6% output loss and a rise of 0.3% in inflation in response to a 1% shock on carbon policy. Furthermore, I also observe financial instability and allocation effects between the clean and highly polluted energy sectors. To have a better prediction of medium and long-term impact, using a medium-large macro-financial DSGE model with environmental aspects, I show the recessionary effect of an ambitious carbon price implementation to achieve climate targets, a 40% reduction in GHG emission causes a 0.7% output loss while reaching a zero-emission economy in 30 years causes a 2.6% output loss. I document an amplified effect of the banking sector during the transition path. The paper also uncovers the beneficial role of pre-announcements of carbon policies in mitigating inflation volatility by 0.2% at its peak, and our results suggest well-communicated carbon policies from authorities and investing to expand the green sector. My findings also stress the use of optimal green monetary and financial policies in mitigating the effects of transition risk and assisting the transition to a zero-emission world. Utilizing a heterogeneous approach with macroprudential tools, I find that optimal macroprudential tools can mitigate the output loss by 0.1% and investment loss by 1%. Importantly, my work highlights the use of capital flow management in the green transition when a global cooperative solution is challenging. |
| Keywords: | Climate change, Environmental policy, Optimal policy, Transition risk |
| JEL: | Q58 E32 Q54 C11 E17 E52 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:191&r=dge |
| By: | Meghana Gaur (Princeton University); John Grigsby (Princeton University); Jonathon (London School of Economics (LSE); Centre for Macroeconomics (CFM)); Abdoulaye Ndiaye (NYU Stern) |
| Abstract: | We introduce dynamic incentive contracts into a model of unemployment dynamics and present three results. First, wage cyclicality from incentives does not dampen unemployment dynamics: the response of unemployment to shocks is first-order equivalent in an economy with flexible incentive pay and without bargaining, vis-a-vis an economy with rigid wages. Second, wage cyclicality from bargaining dampens unemployment dynamics through the standard mechanism. Third, our calibrated model suggests 46% of wage cyclicality in the data arises from incentives. A standard model without incentives calibrated to weakly procyclical wages, matches unemployment dynamics in our incentive pay model calibrated to strongly procyclical wages. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2321&r=dge |
| By: | Miguel Acosta; Andreas I. Mueller; Emi Nakamura; Jón Steinsson |
| Abstract: | We study the macroeconomic effects of unemployment insurance (UI) benefit extensions in the United States at short and long durations. To do this, we develop a new state level dataset on trigger variables for UI extensions and a "UI benefit calculator" based on detailed legislative and administrative sources spanning five decades. Our identification approach exploits variation across states in the options governing the Extended Benefits program. We find that UI extensions during time periods when UI benefit durations are already long—such as in the Great Recession—have minimal effects. However, UI extensions when initial durations are shorter have substantial effects on the unemployment rate and the number of people receiving UI. Through the lens of a search-and-matching model, we show that our estimates are consistent with microeconomic estimates of the duration elasticity to UI, implying small general equilibrium effects of UI extensions. |
| JEL: | E2 J6 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31784&r=dge |
| By: | Stephen Cole; Enrique Martinez-Garcia; Eric R. Sims |
| Abstract: | This paper studies the effectiveness of forward guidance when central banks have imperfect credibility. Exploiting unique survey-based measures of expected inflation, output growth, and interest rates, we estimate a small-scale New Keynesian model for the United States and other G7 countries plus Spain allowing for deviations from full information rational expectations. In our model, the key parameter that aggregates heterogeneous expectations captures the central bank's credibility and affects the overall effectiveness of forward guidance. We find that the central banks of the U.S., the U.K., Germany, and other major advanced economies have similar levels of credibility (albeit far from full credibility); however, Japan's central bank credibility is much lower. For each country, our measure of credibility has declined over time, making forward guidance less effective. In a counterfactual analysis, we document that inflation would have been significantly higher, and the zero lower bound on short-term interest rates much less of an issue, in the wake of the Global Financial Crisis had the public perceived central bank forward guidance statements to be perfectly credible. Moreover, inflation would have declined more, and somewhat faster, with perfect credibility in the wake of the inflation surge post-COVID-19. |
| JEL: | E0 E32 E5 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31777&r=dge |
| By: | Herman, Uroš; Lozej, Matija |
| Abstract: | This paper first provides empirical evidence that labour market outcomes for the less educated, who also tend to be poorer, are substantially more volatile than labour market outcomes for the well-educated, who tend to be richer. We estimate job finding rates and separation rates by educational attainment for several European countries and find that job finding rates are smaller and separation rates larger at lower educational attainment levels. At cyclical frequencies, fluctuations of the job finding rate explain up to 80% of the unemployment fluctuations for the less educated. We then construct a stylised HANK model augmented with search and matching and ex-ante heterogeneity in terms of educational attainment. We show that monetary policy has stronger effects when the job market for the less educated and hence poorer is more volatile. The reason is that these workers have the most procyclical income coupled with the highest marginal propensity to consume. An expansionary monetary policy shock that increases labour demand disproportionally affects the labour market segment for the less educated, causing a strong increase in their consumption. This further amplifies labour demand and increases labour income of the poor even more, amplifying the initial effect. The same mechanism carries over to forward guidance. JEL Classification: E40, E52, J64 |
| Keywords: | business cycles, employment, heterogeneous agents, monetary policy, search and matching |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232850&r=dge |
| By: | Michael Elsby; Axel Gottfries; Pawel Krolikowski; Gary Solon |
| Abstract: | We present a model in which efficient long-term employment relationships are sustained by wage adjustments prompted by shocks to idiosyncratic productivity and the arrival of outside job offers. In accordance with casual and formal evidence, these wage adjustments occur only sporadically, due to the presence of renegotiation costs. The model is amenable to analytical solution and yields new insights into a number of labor market phenomena, including: (1) key features of the empirical distributions of changes in pay among job stayers; (2) a property of near-“memorylessness” in wage dynamics that implies that initial hiring wages have only limited influence on later wages and allocation decisions; and (3) a crucial role for nonbase pay—specifically, recruitment and retention bonuses—in sustaining efficient employment relationships. |
| Keywords: | sticky wages; business cycles |
| JEL: | E24 E3 J3 J6 |
| Date: | 2023–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:97089&r=dge |
| By: | Barlevy, Gadi (Federal Reserve Bank of Chicago); Hobijn, Bart (Federal Reserve Bank of Chicago); Faberman, Jason (Federal Reserve Bank of Chicago); Sahin, Aysegül (University of Texas at Austin) |
| Abstract: | We discuss how the relative importance of factors that contribute to movements of the U.S. Beveridge curve has changed from 1960 to 2023. We review these factors in the context of a simple flow analogy used to capture the main insights of search and matching theories of the labor market. Changes in inflow rates, related to demographics, accounted for Beveridge curve shifts between 1960 and 2000. A reduction in matching efficiency, that depressed unemployment outflows, shifted the curve outwards in the wake of the Great Recession. In contrast, the most recent shifts in the Beveridge curve appear driven by changes in the eagerness of workers to switch jobs. We argue that, while the Beveridge curve is a useful tool for relating unemployment and vacancies to inflation, the link between these labor market indicators and inflation depends on whether and why the Beveridge curve shifted. Therefore, a careful examination of the factors underlying movements in the Beveridge curve is essential for drawing policy conclusions from the joint behavior of unemployment and job openings. |
| Keywords: | Beveridge curve, inflation, job openings, unemployment |
| JEL: | E52 J6 J20 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16517&r=dge |
| By: | Ponthiere, Gregory; Thibault, Emmanuel |
| Abstract: | The Preston Curve - the increasing relation between income per capita and life expectancy - cannot be observed in countries where old-age dependency is widespread (that is, where long-term care (LTC) spending per capita is high). The absence of the Preston Curve in countries with high old-age dependency can be related to two other stylized facts: (1) the inverted-U relation between LTC spending and life expectancy; (2) the inverted-U relation between LTC spending and preventive health investments. This paper develops a two-period OLG model where survival to the old age depends on preventive health spending chosen by individuals while anticipating (fixed) old-age LTC costs. In that model, anticipated LTC costs are shown to have a non-monotonic effect on preventive health investment, thus rationalizing stylized facts (1) and (2). This framework is shown to provide an explanation for the absence of the Preston Curve in countries where old-age dependency is more acute. |
| Keywords: | Preston Curve, life expectancy, OLG models, long-term care |
| JEL: | E13 E21 I15 J14 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:1335&r=dge |