nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒12‒04
seven papers chosen by
Christian Zimmermann, Federal Reserve Bank of St. Louis

  1. Demographic aging and the New Keynesian Phillips Curve By Ambrocio, Gene
  2. State-Dependent Effects of Loan-to-Value Shocks By Vivek Sharma
  3. (Endogenous) Growth Slowdowns By Miguel Leon-Ledesma; Katsuyuki Shibayama
  4. Reducing transaction taxes on housing in highly regulated economies” By Bontemps, Christian; Cherbonnier, Frédéric; Magnac, Thierry
  5. Optimal taxation and the Domar-Musgrave effect By Brendan K. Beare; Alexis Akira Toda
  6. Disincentive Effects of Unemployment Insurance Benefits By Andreas Hornstein; Marios Karabarbounis; Andre Kurmann
  7. Matching through Search Channels By Carrillo-Tudela, Carlos; Kaas, Leo; Lochner, Benjamin

  1. By: Ambrocio, Gene
    Abstract: I document a statistical link between old-age dependency ratios and average markups. I propose that a mechanism whereby households develop deep habits in consumption as they age could explain this feature of the data. I show that when this mechanism is embedded in an overlapping generations New Keynesian model, the slope of the New Keynesian Phillips Curve flattens as the population ages. Further, the contractionary effects of monetary policy surprises on output are amplified. These results suggest that the challenges faced by monetary policy may become more pronounced as populations age.
    Keywords: population aging, Phillips curve, deep habits, market power, markups
    JEL: D11 E21 E32 E52 J11
    Date: 2023
  2. By: Vivek Sharma
    Abstract: This paper presents a Two-Agent New Keynesian (TANK) model with collateral- constrained borrowers and a time-varying shock to loan-to-value (LTV) ratios. A temporary tightening in lending standards in this model leads to a sizable drop in macroeconomic aggregates and significant macroeconomic fluctuations. The analysis shows that effects of shocks to LTV ratios are highly non-linear and state-dependent in the sense that amplification of shocks depends crucially on steady-state LTV ratios. Shocks when LTV ratios are already high lead to effects which are substantially stronger than when the steady-state LTV ratios are comparatively lower. The results in this paper also show that permanent LTV shocks lead to permanent decline in housing prices – a 10 percentage point decline in steady-state LTV ratio from 0.95 results in more than 0.3% decline in housing prices. A novel finding in this paper is that a permanent tightening in lending standards leads to a permanent decline in wages. Additionally, other shocks such as TFP shocks, housing demand shocks and labor supply shocks also show clear state dependence and have highly persistent effects.
    Keywords: Loan-to-Value (LTV) Shocks, Housing Price, Macroeconomic Fluctuations
    JEL: E32 E44
    Date: 2023–11
  3. By: Miguel Leon-Ledesma; Katsuyuki Shibayama
    Abstract: We develop a model where temporary non-technology shocks can lead to permanent changes in the rate of growth of total factor productivity (TFP). The key ingredient of the model is a matching processes between basic researchers, product developers, and the stock of knowledge of the economy. In this context, search externalities generate vicious and virtuous cycles in R&D. The model has a unique equilibrium path but multiple balanced growth paths (BGPs) with different growth rates. After a deep or long-lived shock, the economy can transit between these BGPs, generating 'super-hysteresis' in TFP. We calibrate the model in the context of the Japanese growth slowdown and show that, quantitatively, it can explain well the TFP growth decline after the financial crisis in the 1990s. The simultaneous occurrence of demographic shocks and a persistent but temporary financial crisis gave rise to a 'wretched coincidence' resulting in the growth slowdown.
    Keywords: Growth slowdowns; permanent effects of recessions; research and development; super-hysteresis
    JEL: O40 O49 E32
    Date: 2023–11
  4. By: Bontemps, Christian; Cherbonnier, Frédéric; Magnac, Thierry
    Abstract: The existence of transaction taxes reduces transactions, and in the case of housing, reduces household mobility and affects the costs of downsizing in dire times. We construct and estimate an overlapping generation model in which households are heterogeneous in age and earnings, and prudential regulation and the tax system are modeled in fine detail. These housing and public policies are likely to affect markets globally, and clearing both rental and property markets is important when evaluating them. We use the institutional and data setting of France, where transactions taxes are some of the highest in Europe, and evaluate the counterfactual impact of reducing transaction taxes from 14% to 6%, similar to US levels. The impact on transactions is strong, but the impact on welfare remains limited.
    Keywords: Heterogenous agents; dynamic structural models; general equilibrium; housing;; transaction taxes
    JEL: C68 D15 D58 H31 R21 R31
    Date: 2023–11
  5. By: Brendan K. Beare; Alexis Akira Toda
    Abstract: This article concerns the optimal choice of flat taxes on labor and capital income, and on consumption, in a tractable economic model. Agents manage a portfolio of bonds and physical capital while subject to idiosyncratic investment risk and random mortality. We identify the tax rates which maximize welfare in stationary equilibrium while preserving tax revenue, finding that a very large increase in welfare can be achieved by only taxing capital income and consumption. The optimal rate of capital income taxation is zero if the natural borrowing constraint is strictly binding on entrepreneurs, but may otherwise be positive and potentially large. The Domar-Musgrave effect, whereby capital income taxation with full offset provisions encourages risky investment through loss sharing, explains cases where it is optimal to tax capital income. In further analysis we study the dynamic response to the substitution of consumption taxation for labor income taxation. We find that consumption immediately drops before rising rapidly to the new stationary equilibrium, which is higher on average than initial consumption for workers but lower for entrepreneurs.
    Keywords: consumption tax; income tax; optimal taxation
    Date: 2023–11
  6. By: Andreas Hornstein; Marios Karabarbounis; Andre Kurmann
    Abstract: Unemployment insurance (UI) acts both as a disincentive for labor supply and as a demand stimulus which may explain why empirical studies often find limited effects of UI on employment. This paper provides independent estimates of the disincentive effects arising from the largest expansion of UI in U.S. history, the pandemic unemployment benefits. Using high-frequency data on small restaurants and retailers from Homebase, we control for local demand effects by comparing neighboring businesses that largely share the positive impact of UI stimulus. We find that employment in low-wage businesses recovered more slowly than employment in high-wage businesses in labor markets with larger differences in the relative generosity of pandemic UI benefits. According to a labor search model that replicates the estimated employment differences between low- and high-wage businesses, the disincentive effects from the pandemic UI programs held back the aggregate employment recovery by 4.7 percentage points between April and December 2020.
    Keywords: Unemployment Insurance; Disincentive Effects; search and matching models
    JEL: E24 E32 J64 J65
    Date: 2023–11–01
  7. By: Carrillo-Tudela, Carlos (University of Essex); Kaas, Leo (Goethe University Frankfurt); Lochner, Benjamin (University of Erlangen-Nuremberg)
    Abstract: Firms and workers predominately match via job postings, networks of personal contacts or the public employment agency, all of which help to ameliorate labor market frictions. In this paper we investigate the extent to which these search channels have differential effects on labor market outcomes. Using novel linked survey-administrative data we document that (i) low-wage firms and low-wage workers are more likely to match via networks or the public agency, while high-wage firms and high-wage workers succeed more often via job postings; (ii) job postings help firms the most in poaching and attracting high-wage workers and help workers the most in climbing the job ladder. To evaluate the implications of these findings for employment, wages and labor market sorting, we structurally estimate an equilibrium job ladder model featuring two-sided heterogeneity, multiple search channels and endogenous recruitment effort. The estimation reveals that networks are the most cost-effective channel, allowing firms to hire quickly, yet attracting workers of lower average ability. Job postings are the most costly channel, facilitate hiring workers of higher ability, and matter most for worker-firm sorting. Although the public employment agency provides the lowest hiring probability, its removal has sizeable consequences, with aggregate employment declining by at least 1.4 percent and rising bottom wage inequality.
    Keywords: search channels, on-the-job search, recruitment effort, sorting, wage dispersion
    JEL: E24 J23 J31 J63 J64
    Date: 2023–11

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