|
on Dynamic General Equilibrium |
|
Issue of 2023‒11‒13
thirteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Jeffrey R. Campbell; Filippo Ferroni; Jonas D. M. Fisher; Leonardo Melosi |
| Abstract: | The Chicago Fed dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting at the Federal Reserve Bank of Chicago. This guide describes its specification, estimation, dynamic characteristics, and how it is used to forecast the U.S. economy. In many respects the model resembles other medium-scale New Keynesian frameworks, but there are several features which distinguish it: the monetary policy rule includes anticipated future deviations, productivity is driven by both neutral and investment specific technical change, multiple price and wage indices identify price and wage inflation, the data are measured in a model consistent way, and market-expected interest rates are used to measure the expected path of the federal funds rate that is taken into account by the model’s agents when they make their decisions. The model also incorporates a new method introduced by Ferroni, Fisher, and Melosi (2023) to address the unusual Covid pandemic macroeconomic dynamics. |
| Keywords: | New Keynesian model; DSGE models; covid-19; Pandemic; Survey of Professional Forecasters; Business cycles; Forecasting; Policy analysis |
| JEL: | E1 E2 E3 E4 E5 |
| Date: | 2023–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:97211&r=dge |
| By: | Schulz, Bastian (Aarhus University) |
| Abstract: | I study a dynamic search-matching model with two-sided heterogeneity, a production complementarity that induces labor market sorting, and aggregate shocks. In response to a positive productivity shock, incentives to sort increase disproportionately. Firms respond by posting additional vacancies, and the strength of the response is increasing in firm productivity. The distribution of unemployment worker types adjusts slowly, which amplifies job creation in the short run. In the long run, falling unemployment curtails the firms' vacancy posting. The model closely matches time-series moments from U.S. labor market data and produces realistic degrees of wage dispersion and labor market sorting. |
| Keywords: | search, matching, sorting, mismatch, aggregate shocks, worker heterogeneity, firm heterogeneity, unemployment dynamics |
| JEL: | E24 E32 J63 J64 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16467&r=dge |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (City University); Stephen Wright (Birkbeck College); Bo Yang (Swansea University) |
| Abstract: | In a DSGE rational expectations model, the agents’ assumed information sets are crucial for both the dynamics of the solution and for whether a SVAR econometrician can infer impulse responses to structural shocks. We adopt a heterogeneous agent, incomplete markets general framework where agents have imperfect and idiosyncratic information sets. In the limiting empirically plausible case of extreme heterogeneity, we show that a unique finite state space solution exists taking the same form as a single agent problem. The solution induces higher-order dynamics, hidden both from the agents and the econometrician, that would be absent in a perfect information economy. |
| JEL: | C11 C18 C32 E32 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1223&r=dge |
| By: | Valdivia Coria, Joab Dan |
| Abstract: | This paper aims to find the effects of public investment in the education sector (infrastructure) on economic activity. It is evident from the stylized facts that economic activity and public resources show a pro-cyclical and lagged relationship. The positive effect found through a general equilibrium model is 0.8%, which shows that public financing has favorable effects on GDP performance. This result is explained by the fact that an improvement in educational infrastructure has a positive impact on the teaching and learning process, and since it is considered an investment in human capital, it has a positive return in the long run. |
| Keywords: | Endogenous growth, Dynamic Stochastic General Equilibrium (DSGE) model, public investment in education. |
| JEL: | H52 I28 O4 O40 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118770&r=dge |
| By: | Aleksander Berentsen; Romina Ruprecht; Hugo van Buggenum |
| Abstract: | Major central banks remunerate reserves at negative rates (NIR). To study thelong-run effects of NIR, we focus on the role of reserves as intertemporal stores of value that are used to settle interbank liabilities. We construct a dynamic general equilibrium model with commercial banks holding reserves and funding investments with retail deposits. In the long run, NIR distorts investment decisions, lowers welfare, depresses output, and reduces bank profitability. The type of distortion depends on the transmission of NIR to retail deposits. The availability of cash explains the asymmetric effects of policy-rate changes in negative vs positive territory. |
| Keywords: | Monetary policy; Interest rates; Money market; Negative interest rate |
| JEL: | E40 E42 E43 E50 E58 |
| Date: | 2023–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-64&r=dge |
| By: | Naoki Yoshihara (University of Massachusetts Amherst); Se Kwak (University of Massachusetts Amherst) |
| Abstract: | In contrast to Mandler’s (1999a; Theorem 6) generic determinacy of steady-state equilibria, we first show that any non-trivial steady-state equilibrium is indeterminate under a general overlapping generation economy with a fixed Leontief technique. We also check that this indeterminacy is generic. These results are obtained by explicitly introducing a general model of every generation’s utility function and individual optimization program to the overlapping generation economy, which also verifies that Mandler’s (1999a; section 6) claim on generic determinacy is invalid. We also argue the distinctiveness of our results in comparison with the standard literature, like Calvo (1978), of overlapping generation indeterminacy. |
| Keywords: | Sraffian indeterminacy, functional income distribution, general equilibrium framework |
| JEL: | B51 D33 D50 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:kch:wpaper:sdes-2023-2&r=dge |
| By: | Krause, Willi; Costa, Luís; Costa Filho, João Ricardo |
| Abstract: | What are the drivers of output fluctuations in Germany during the COVID-19 pandemic? We develop a macro-epidemiological model based on the evidence that efficiency and labor wedges are the key distortions in the neoclassical growth model that account for the GDP dynamics during the period. We find that the consumption and laborsupply effects of containment policies and the endogenous responses of households to pandemic-associated health risks can account for almost all weekly dynamics of output in Germany between the first quarter of 2020 and the second quarter of 2021. The containment policies are found to be responsible for especially large output losses during the pandemic, but the endogenous household responses appear to play an important complementary role. We simulate a counterfactual, laissezfaire type of response to the pandemic and find that not only would it not have avoided a sizeable recession either, but it would also lead to substantially higher losses in human life and stress on the German health service. |
| Keywords: | Covid-19, Germany, SIR-Macro, Dynamic General Equilibrium Model, Business Cycle Accounting. |
| JEL: | C63 E27 E32 I1 H0 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp02902023&r=dge |
| By: | Cardullo, Gabriele (University of Genova); Sechi, Agnese (University of Genoa) |
| Abstract: | We study the effects on employment, costs of living, and income inequality of local shocks in the housing market or in the productivity of a tradable good. We construct a two-region search and matching model in which housing is considered a necessity good. Mobility of labor implies that any change in one region propagates into the other. The model is analytically tractable and provides some intuitive comparative statics results. We then calibrate the model on the basis of German data. Our simulations indicate that both types of shock produce limited employment gains but have a significant impact on housing prices and real income inequality: poorer, unemployed workers experience a larger increase in their cost of living index. This depends on the assumption of a non-homothetic utility function that generates a specific nominal wage to housing price positive relationship, partially safeguarding employed individuals against the rising cost of living. |
| Keywords: | local labor markets, income inequality, costs of living, housing expenditures, housing prices |
| JEL: | R23 R21 R31 J31 J61 J64 D31 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16533&r=dge |
| By: | Priit Jeenas |
| Abstract: | I study the role of firms' balance sheet liquidity in the transmission of monetary policy to investment. In response to monetary contractions, U.S. firms with fewer liquid asset holdings reduce investment relatively more. This can be explained by their higher likelihood to issue debt and the implied exposure to borrowing cost fluctuations. I rationalize these results using a heterogeneous firm macroeconomic model with financial constraints, debt issuance costs, and differential returns on cash and borrowing. Compared to a framework which ignores liquidity considerations, monetary transmission to aggregate investment is slightly dampened and depends on liquid asset portfolios beyond net worth. |
| Keywords: | monetary policy, investment, financial frictions, firm heterogeneity |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1409&r=dge |
| By: | Yuliya Rychalovska; Sergey Slobodyan; Rafael Wouters |
| Abstract: | In this paper, we demonstrate the usefulness of survey data for macroeconomic analysis and propose a strategy to integrate and ec ciently utilize information from surveys in the DSGE setup. We extend the set of observable variables to include the data on consumption, investment, output, and ináation expectations, as measured by the Survey of Professional Forecasters (SPF). By doing so, we aim to discipline the dynamics of model-based expectations and evaluate alternative belief models. Our approach to exploit the timely information from surveys is based on re-speciÖcation of structural shocks into persistent and transitory components. Due to the SPF, we are able to improve identiÖcation of fundamental shocks and predictive power of the model by separating the sources of low and high frequency volatility. Furthermore, we show that models with an imperfectly-rational expectation formation mechanism based on Adaptive Learning (AL) can reduce important limitations implied by the Rational Expectation (RE) hypothesis. More speciÖcally, our models based on belief updating can better capture macroeconomic trend shifts and, as a result, achieve superior long-term predictions. In addition, the AL mechanism can produce realistic time variation in the transmission of shocks and perceived macro-economic volatility, which allows the model to better explain the investment dynamics. Finally, AL models, which relax the RE constraint of internal consistency between the agentsíand model forecasts, can reproduce the main features of agentsí predictions in line with SPF evidence and, at the same time, can generate improved model forecasts, thus diminishing possible inec ciencies present in surveys. |
| Keywords: | Expectations, Survey data, Adaptive Learning, DSGE models |
| JEL: | C5 D84 E3 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp766&r=dge |
| By: | Wunsch, Conny (University of Basel); Zabrodina, Véra (University of Basel) |
| Abstract: | The generosity of social insurance coverage often increases with the beneficiary's age and their contribution time to social security, but existing policies vary considerably. We study the differentiation of unemployment insurance (UI) generosity by evaluating how the insurance-incentive trade-off varies with age and contribution time. We exploit numerous discontinuities in potential benefit duration in Germany. Contribution time in the last three years carries information on job search efforts, as it is associated with lower moral hazard responses and fiscal externality. We find no significant response heterogeneity in age or longer contribution time horizons. Contrasting these gradients with an approximated insurance value for four UI regimes, we document that steepening the potential benefit duration schedule in contribution time and flattening it in age would have increased welfare. |
| Keywords: | Unemployment insurance, response heterogeneity, policy dierentiation |
| JEL: | J08 J64 J65 |
| Date: | 2023–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:bsl:wpaper:2023/08&r=dge |
| By: | Olivier CARDI; Romain RESTOUT |
| Abstract: | The contractionary effect of aggregate technology shocks on hours worked has shrunk over time in OECD countries. Our estimates suggest that this finding can be attributed to the increasing share of the variance of technology improvements driven by asymmetric technology shocks across sectors. While technology improvements uniformly distributed across sectors are found empirically to give rise to a dramatic decline in total hours worked, asymmetric technology shocks do the opposite. By depreciating non-traded prices, symmetric technology shocks generate a contractionary effect on non-traded labor and thus on total hours. In contrast, by appreciating non-traded prices, technological change concentrated toward traded industries puts upward pressure on wages which has a strong expansionary effect on total hours worked. A two-sector open economy model with frictions into the movements of inputs can reproduce the time -increasing response of both total and sectoral hours worked we estimate empirically once we allow for factor-biased technological change and we let the share of asymmetric technology shocks increase over time. A model with endogenous technology decisions reveals that two-third of the progression of asymmetric technology shocks is driven by greater exposition of traded industries to the international stock of knowledge. |
| Keywords: | Sector-biased technology shocks; Endogenous technological change; Factor-augmenting efficiency; Open economy; Labor reallocation; CES production function; Labor income share. |
| JEL: | E25 E62 F11 F41 O33 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2023-30&r=dge |
| By: | Dusan Stojanovic |
| Abstract: | This study examines how and to what extent quantitative easing of the ECB affects household income and wealth inequality in the euro area. Previous theoretical models have investigated the dynamics of inequality measures through differential access of households to financial/capital market (the portfolio rebalancing channel), neglecting the labor market differential (the earnings heterogeneity channel). Although the portfolio rebalancing channel may provide insight into wealth inequality and non-labor income inequality, this is not the case with labor (and thus total) income inequality. To be in line with the empirical evidence on labor income inequality, this study also considers segmented labor market on the basis of capital-skill complementarity in production and asymmetric real wage rigidities. When only financial market segmentation is considered, the quantitative results indicate a drop in total income inequality that is diminished over time, while wealth inequality experiences a rise that gradually becomes weaker. The introduction of the segmented labor market significantly mitigates the observed drop in total income inequality, while a rise in wealth inequality is largely amplified. Given the possible broadening of the ECB’s mandate towards distributional issues in the future, the analysis of segmented labor and financial markets can be more beneficial to the ECB as it provides a clearer picture of the inequality effects. |
| Keywords: | quantitative easing, capital-skill complementarity, asymmetric real wage rigidity, skill premium, portfolio rebalancing channel, earnings heterogeneity channel |
| JEL: | E21 E22 E44 E52 E58 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp760&r=dge |