nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒11‒20
fourteen papers chosen by
Christian Zimmermann, Federal Reserve Bank of St. Louis

  1. System-wide dividend restrictions: evidence and theory By Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Gothe
  2. Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money By Hassan Afrouzi
  3. Housing Tenure, Consumption and Household Debt: Life-Cycle Dynamics During a Housing Bust in Spain By Clodomiro Ferreira; Julio Gálvez; Myroslav Pidkuyko
  4. International Portfolio Rebalancing and Fiscal Policy Spillovers By Sami Alpanda; Uluc Aysun; Serdar Kabaca
  5. Financial Innovations, Taxes, and the Growth of Finance By Shuhei Aoki; Makoto Nirei; Kazufumi Yamana
  6. The Impact of Multinationals along the Job Ladder By Ragnhild Balsvik; Doireann Fitzgerald; Stefanie Haller
  7. Shocks to the Lending Standards and the Macroeconomy By Vivek Sharma
  8. Entrepreneurial Rates of Return and Wealth Inequality By Bettina Bruggemann; Zachary L. Mahone
  9. Firm balance sheet liquidity, monetary policy shocks, and investment dynamics By Priit Jeenas
  10. When Institutions Interact: How the Effects of Unemployment Insurance are Shaped by Retirement Policies By Matthew Gudgeon; Pablo Guzman; Johannes F. Schmieder; Simon Trenkle; Han Ye
  11. Using Macro Counterfactuals to Assess Plausibility: An Illustration using the 2001 Rebate MPCs By Jacob Orchard; Valerie A. Ramey; Johannes Wieland
  12. Borrow Now, Pay Even Later: A Quantitative Analysis of Student Debt Payment Plans By Michael Boutros; Nuno Clara; Francisco Gomes
  13. Non-linear approximations of DSGE models with neural-networks and hard-constraints By Emmet Hall-Hoffarth
  14. On the Trends of Technology, Family Formation, and Women's Time Allocation By KITAO Sagiri; NAKAKUNI Kanato

  1. By: Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Gothe
    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: 2023–10
  2. By: Hassan Afrouzi
    Abstract: This paper studies how competition affects firms’ expectations in a new dynamic general equilibrium model with rational inattention and oligopolistic competition where firms acquire information about their competitors’ beliefs. In the model, firms with fewer competitors are less attentive to aggregate variables—a novel prediction supported by survey evidence. A calibrated version of the model matches the relationship between firms’ numbers of competitors and their uncertainty about aggregate inflation as a non-targeted moment. A quantitative exercise reveals that firms’ strategic inattention to aggregates significantly amplifies monetary non-neutrality and shifts output response disproportionately towards less competitive oligopolies by distorting relative prices.
    JEL: E31 E32 E71
    Date: 2023–10
  3. By: Clodomiro Ferreira (Banco de España); Julio Gálvez (CUNEF Universidad/SHOF); Myroslav Pidkuyko (Banco de España)
    Abstract: The housing bust in Spain was characterized by a significant and rapid drop in home ownership among the younger cohorts, a relatively homogeneous but significant decrease in consumption, and significant movements in the rent-to-house price ratio. To uncover the causes of these movements, we solve and estimate an equilibrium life-cycle model with non-linear income dynamics, mortgages, housing, and rental markets and simulate a series of counterfactual policy changes and macroeconomic conditions observed in Spain during the period. The lion’s share of the observed drop in home ownership and consumption and the housing market dynamics can be explained by the tightening of credit conditions and the major shift in income dynamics observed in Spain between the boom and bust phases.
    Keywords: life-cycle models, mortgage debt, housing
    JEL: E21 E44
    Date: 2023–11
  4. By: Sami Alpanda; Uluc Aysun; Serdar Kabaca
    Abstract: We evaluate, both empirically and theoretically, the spillover effects that debt-financed fiscal policy interventions of the United States have on other economies. We first consider a two-country dynamic stochastic general equilibrium model with international portfolio rebalancing effects arising from an imperfect substitutability between short- and long-term domestic and foreign bonds. The model shows that US fiscal expansions financed by long-term debt issuance would, on net, hinder economic activity in the rest of the world (ROW). This is despite the standard trade channel’s net positive effect on the ROW economy given the depreciation in the ROW currency. The fall in ROW output occurs mainly due to the increase in the ROW term premia and long-term rates through the portfolio rebalancing channel. This is because the relative demand for ROW long-term bonds decreases following the increase in the supply of US long-term bonds accompanying the fiscal expansion. Testing the predictions of our theoretical model by using panel regressions and vector autoregressions, we find empirical support for the negative relationship between ROW output and US fiscal spending. The data also confirm the positive relationship between ROW term spreads and US fiscal spending.
    Keywords: Economic models; Fiscal policy; International topics
    JEL: E3 E32 E6 E62 F4 F41 F44
    Date: 2023–11
  5. By: Shuhei Aoki (Shinshu University); Makoto Nirei (University of Tokyo); Kazufumi Yamana (Deloitte Tohmatsu Consulting LLC)
    Abstract: The U.S. economy since 1980 has experienced the growth of finance, manifested by the increases in the value-added of financial services and the value of financial assets. The growth of finance has been associated with the increase in the mutual fund share in the financial assets and the relatively stable unit cost of finance. This paper constructs an incomplete market dynamic general equilibrium model with the islands structure, which has both idiosyncratic and island-level shocks on the firm’s productivity. Financial intermediaries trade shares of individual firms and risk-free debts, as well as mutual funds which diversify away idiosyncratic shocks but can not diversify island-level shocks. This model, together with the declining transaction costs on mutual funds and personal and corporate income tax rates calibrated from data, can quantitatively account for these facts.
    Date: 2023–10
  6. By: Ragnhild Balsvik; Doireann Fitzgerald; Stefanie Haller
    Abstract: Multinational affiliates are more productive than domestic firms, so how do they affect a host country through the labor market? We use data for Norway to show that the labor market is characterized by a job ladder, with multinationals on the upper rungs. We calibrate a general equilibrium job ladder model with endogenous multinational entry to the Norwegian data. In a counterfactual where multinationals face an infinite entry cost, payments to labor fall and profits of domestic firms rise, but the impact is heterogeneous. Competition for workers increases low down on the job ladder, while it decreases high up.
    Keywords: multinationals, labor market, job ladder
    JEL: E24 F23 F66 J63 J64
    Date: 2023
  7. By: Vivek Sharma
    Abstract: This paper presents a model in which firms have endogenously-persistent lending relationships with banks which compete both on interest rates and collateral requirements. The economy features an endogenously-evolving lending standard which is subject to an exogenous shock. A shock to bank lending standards in this model leads to a spike in spread, drop in bank credit and amplification of macroeconomic volatility. These effects are higher at greater intensity and persistence of the lending relationships. This work shines a spotlight on how shocks to lending standards can have wider macroeconomic implications and shows how financial shocks can affect real economy.
    Keywords: Lending Standards, Deep Habits in Banking, Macroeconomic Fluctuations
    JEL: E32 E44
    Date: 2023–10
  8. By: Bettina Bruggemann; Zachary L. Mahone
    Abstract: We investigate rates of return to business wealth and total net worth along the wealth distribution in a quantitative model of occupational choice and housing. While it has long been established that these models are very successful at replicating wealth inequality, we show that they also produce endogenous rates of return to private equity and total net worth that share important properties with their empirical counterparts. Rates of return to entrepreneurial wealth are heterogeneous, persistent, negatively correlated with net worth, and very dependent on household type. Rates of return to total net worth exhibit similar scale dependence as the data but are positively correlated with net worth.
    Keywords: Wealth Inequality; Returns to Wealth; Entrepreneurship; Housing; Type and Scale Dependence
    JEL: E21 G11 D14 D15 D31
    Date: 2023–10
  9. 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
  10. By: Matthew Gudgeon; Pablo Guzman; Johannes F. Schmieder; Simon Trenkle; Han Ye
    Abstract: This paper shows empirically that the non-employment effects of unemployment insurance (UI) for older workers depend in a first-order way on the structure of retirement policies. Using German data, we first present reduced-form evidence of these interactions, documenting large bunching in UI inflows at the age that allows workers to claim their pension following UI expiration. We then estimate a dynamic life-cycle model and use it to directly quantify how the effects of UI vary with retirement policies. Accounting for interactions across UI and retirement institutions also helps explain otherwise difficult-to-explain trends in the unemployment rate of older German workers.
    JEL: E24 J2 J26 J6 J63 J64 J65 J68
    Date: 2023–10
  11. By: Jacob Orchard; Valerie A. Ramey; Johannes Wieland
    Abstract: Macroeconomics has increasingly adopted tools from the applied micro “credibility revolution” to estimate micro parameters that can inform macro questions. In this paper, we argue that researchers should take advantage of this confluence of micro and macro to take the credibility revolution one step further. We argue that researchers should assess the plausibility of the micro estimates and macro models by constructing macro counterfactuals for historical periods and comparing these counterfactuals with reasonable benchmarks. We illustrate this approach by conducting a case study of the 2001 U.S. tax rebates, as well as briefly summarizing two previous applications of the methodology. In the 2001 rebate case, we calibrate a two-good, two-agent New Keynesian model with the leading estimates of the household marginal propensity to consume (MPC) out of the rebates to construct a counterfactual path for nondurable consumption. The counterfactual path implies that without the tax rebate nondurable consumption spending would have fallen dramatically in the late summer and fall of 2001. Using forecasting regressions and other evidence, we argue that this counterfactual is implausible. When we investigate the source of the discrepancy, we find that the leading MPC estimates are not representative of the response of total consumption.
    JEL: E21 E27 E62
    Date: 2023–10
  12. By: Michael Boutros; Nuno Clara; Francisco Gomes
    Abstract: In the United States, student debt currently represents the second largest component of consumer debt, just after mortgage loans. Repayment of those loans reduces disposable income early in their life cycle when marginal utility is particularly high, and limits households' ability to build a buffer stock of wealth to insure against background risks. In this paper we study alternative student debt contracts, which offer a 10-year deferral period. Individuals either defer principal payments only ("Principal Payment Deferral", PPD) or all payments ("Full Payment Deferral", FPD) with the missed interest payments added to the value of the debt outstanding. We first calibrate an equilibrium with the current contracts, and then solve for counterfactual equilibria with the PPD or FPD contracts. We find that both alternatives generate economically large welfare gains, which are robust to different assumptions about the behavior of the lenders and borrower preferences. We decompose the gains into the percentages resulting from loan repricing and from the deferral of debt repayments. We compare these alternative contracts with the current changes in income driven repayment plans being proposed by the current U.S. administration and show that they dominate such proposals. Crucially, the PPD and FPD contracts deliver similar welfare gains to the debt relief program considered by the administration, with no impact on the government budget constraint.
    Keywords: Asset pricing; Economic models; Financial markets; Labour markets; Market structure and pricing
    JEL: E2 G5 H3
    Date: 2023–10
  13. By: Emmet Hall-Hoffarth
    Abstract: Recently a number of papers have suggested using neural-networks in order to approximate policy functions in DSGE models, while avoiding the curse of dimensionality, which for example arises when solving many HANK models, and while preserving non-linearity. One important step of this method is to represent the constraints of the economic model in question in the outputs of the neural-network. I propose, and demonstrate the advantages of, a novel approach to handling these constraints which involves directly constraining the neural-network outputs, such that the economic constraints are satisfied by construction. This is achieved by a combination of re-scaling operations that are differentiable and therefore compatible with the standard gradient descent approach used when fitting neural-networks. This has a number of attractive properties, and is shown to out-perform the penalty-based approach suggested by the existing literature, which while theoretically sound, can be poorly behaved practice for a number of reasons that I identify.
    Date: 2023–10
  14. By: KITAO Sagiri; NAKAKUNI Kanato
    Abstract: Over the past 50 years, Japan has witnessed a dramatic decline in fertility and marriage rates, along with a rise in educational attainment, particularly among women. Married women now dedicate significantly less time on housework and more time on leisure and childcare. We develop a model that allows for various forms of technological change and relative prices surrounding families, and quantify their roles to account for the trends of family formation and time allocation. We find that neutral productivity growth leads to an increase in leisure time and a decrease in work hours. Technological changes that favor female labor supply and rises in the time and financial costs of childcare are the main factors contributing to the decline in fertility and marriage rates. Skill-biased technological change contributes to the rise in education levels, while advancements of home production technology explain the shift in married women's time allocation from housework to the market work.
    Date: 2023–10

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