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on Dynamic General Equilibrium |
| By: | Irmen, Andreas |
| JEL: | D91 J22 O33 O41 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc23:277568&r=dge |
| By: | Mr. Vimal V Thakoor; Engin Kara |
| Abstract: | As climate change intensifies, the frequency and severity of climate-induced disasters are expected to escalate. We develop a New Keynesian Dynamic Stochastic General Equilibrium model to analyze the impact of these events on monetary policy. Our model conceptualizes these disasters as left-tail productivity shocks with a quantified likelihood, leading to a skewed distribution of outcomes. This creates a significant trade-off for central banks, balancing increased inflation risks against reduced output. Our results suggest modifying the Taylor rule to give equal weight to responses to both inflation and output growth, indicating a gradual approach to climateexacerbated economic fluctuations. |
| Keywords: | Climate change; monetary policy; fiscal policy; Taylor rule |
| Date: | 2023–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/243&r=dge |
| By: | Peltonen, Juho |
| Abstract: | This paper estimates the extent to which unemployment in Germany would have been increased during the Covid-19 recession without a short-time work (STW) labor-market policy which enables employers to reduce temporarily the working hours of full-time workers. A Bayesian estimation of a general equilibrium model with a STW policy, and a simulation of a counterfactual model without STW, show that the German unemployment rate would have been 4.2 percentage points higher without the policy. These results indicate that the STW participates in preventing excess job destruction during economic downturns, and in stabilizing unemployment fluctuations over business cycles. |
| Keywords: | Search and matching, short-time work, Bayesian estimation |
| JEL: | E24 E32 J63 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119238&r=dge |
| By: | Stempel, Daniel; Zahner, Johannes |
| JEL: | E58 C45 C53 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc23:277627&r=dge |
| By: | Bilbiie, F. O.; Melitz, M. J. |
| Abstract: | Due to its impact on nominal firm profits, price rigidity amplifies the response of entry and exit to supply shocks. When those supply shocks are negative, such as those following supply chain disruptions, this “entry-exit multiplier†substantially magnifies the associated welfare losses—especially when wages are also rigid. This is in stark contrast to the benchmark New Keynesian model (NK), which predicts a positive output gap in response to that same shock under the same monetary policy. Endogenous entry-exit thus radically changes the consequences of nominal rigidities. In addition to the aggregate-demand amplification of supply disruptions, our model also reconciles the response of hours worked across the NK and RBC models. And unlike the standard NK model, our model can also be used to evaluate how monetary expansions can alleviate or even eliminate the negative output gap induced by supply disruptions. |
| Keywords: | Aggregate Demand and Supply, Entry-Exit, Monetary Policy, Recessions, Sticky Prices, Sticky Wages, Variety |
| JEL: | E30 E40 E50 E60 |
| Date: | 2023–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2368&r=dge |
| By: | Andrzej Kocięcki; Marcin Kolasa |
| Abstract: | We develop an analytical framework to study global identification in structural models with forward-looking expectations. Our identification condition combines the similarity transformation linking the observationally equivalent state space systems with the constraints imposed on them by the model parameters. The key step of solving the identification problem then reduces to finding all roots of a system of polynomial equations. We show how it can be done using the concept of a Gröbner basis and recently developed algorithms to compute it analytically. In contrast to papers relying on numerical search, our approach can prove whether a model is identified or not at a given parameter point, explicitly delivering the complete set of observationally equivalent parameter vectors. We present the solution to the global identification problem for several popular DSGE models. |
| Keywords: | global identification, state space systems, DSGE models, Gröbner basis |
| JEL: | C10 C51 C65 E32 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2023083&r=dge |
| By: | Pablo Garcia-Sanchez; Olivier Pierrard |
| Abstract: | We build a life cycle model to study the implications of two types of lifetime uncertainty on investment in health and welfare. We show that when the hazard rate of death depends on age, uncertainty increases health investment. Instead, when hazard rate depends on human frailty, uncertainty decreases health investment. In both cases, uncertainty reduces welfare. The size of the effects depends on an aggregate parameter related to the natural increase in human frailty with age, to the marginal return on health investment and to the rate of time preference. We first derive the main results from a small model which admits an analytical solution, before generalizing them in a larger model using numerical simulations. |
| Keywords: | life cycle, uncertainty, health, welfare. |
| JEL: | C60 D15 D81 I12 I18 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp178&r=dge |
| By: | Bilbiie, F. O.; Trabandt, M. |
| Abstract: | We show an equivalence result in the standard representative agent New Keynesian model after demand shocks: assuming sticky prices and flexible wages yields identical allocations for GDP, consumption, labor, inflation and interest rates to the opposite case flexible prices and sticky wages. This equivalence result arises if the price and wage Phillips curves-slopes are identical and generalizes to any pair of price and wage Phillips curve slopes such that their sum and product are identical. Nevertheless, the cyclical implications for profits and wages are substantially different. We discuss how the equivalence breaks when these factor-distributional implications matter for aggregate allocations, e.g. in New Keynesian models with heterogeneous agents, endogenous firm entry, and non-constant returns to scale in production. |
| Keywords: | inflation, Interest Rate, New Keynesian Model, Observational Equivalence, Output, Sticky Prices, Sticky Wages |
| JEL: | E10 E30 E50 |
| Date: | 2023–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2369&r=dge |
| By: | Tannous Kass-Hanna; Julien Reynaud; Chris Walker |
| Abstract: | Empirical (employing the Blanchard-Perotti framework) and modeling (using a country-specific DSGE model) approaches are used to estimate fiscal multipliers by policy instrument for Bolivia, to evaluate possible adjustments in a fiscal consolidation strategy. Multipliers are also estimated using alternative assumptions about the accompanying exchange rate regime and capital mobility, highlighting the importance of the policy mix in determining the impact of fiscal adjustments. The study exploits the DSGE modeling structure to assess this interaction of fiscal and monetary policy in a lower middle-income country under different exchange rate regimes. It finds that expenditure multipliers fall into the range of 1/3 to 2/3, with public investment multipliers slightly higher than government consumption multipliers over longer horizons, and multipliers generally higher under a peg than inflation targeting. Tax multipliers are shown to be about half of expenditure multipliers. |
| Keywords: | fiscal multiplier; capital mobility; Bolivia; DSGE model |
| Date: | 2023–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/240&r=dge |
| By: | Thomas M. Mertens; Tony Zhang |
| Abstract: | This paper solves a standard New Keynesian model in terms of risk-neutral expectations and estimates it using a cross-section of longer-dated financial assets at a single point in time. Inflation risk premia appear in the theory and cause inflation to deviate from its target on average. We re-estimate the model based on each day’s closing prices to capture high-frequency changes in the expected path of the economy. Our estimates show that financial markets reacted to the post-COVID surge in inflation with higher short-run inflation expectations, an increase in the inflation risk premium, and an increase in the long-run neutral real rate, 𝑟∗, while long-term inflation expectations remained well anchored. Our model produces long term inflation forecasts that outperform several standard alternative measures. |
| Keywords: | Keynesian models; financial markets; covid19; inflation forecasts |
| Date: | 2023–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:97341&r=dge |
| By: | Yoshiki Ando; Dirk Krueger; Harald Uhlig |
| Abstract: | In this paper we study the neoclassical growth model with idiosyncratic income risk and aggregate risk in which risk sharing is endogenously constrained by one-sided limited commitment. Households can trade a full set of contingent claims that pay off depending on both idiosyncratic and aggregate risk, but limited commitment rules out that households sell these assets short. The model results, under suitable restrictions of the parameters of the model, in partial consumption insurance in equilibrium. With log-utility and idiosyncratic income shocks taking two values one of which is zero (e.g., employment and unemployment) we show that the equilibrium can be characterized in closed form, despite the fact that it features a non-degenerate consumption- and wealth distribution. We use the tractability of the model to study, analytically, inequality over the business cycle and asset pricing, and derive conditions under which our model has identical, as well as conditions under which it has lower/higher risk premia than the corresponding representative agent version of the model. |
| JEL: | D15 D31 E21 E23 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31903&r=dge |
| By: | Ngai, L. Rachel (London School of Economics); Sheedy, Kevin D. (London School of Economics) |
| Abstract: | The housing market is subject to search frictions in buying and selling houses. This paper documents the role of inflows (new listings) and outflows (sales) in explaining the volatility and co-movement of housing-market variables. An 'ins versus outs' decomposition shows that both inflows and outflows are quantitatively important in understanding fluctuations in houses for sale. The correlations between sales, prices, new listings, and time-to-sell are shown to be stable over time, while the signs of their correlations with houses for sale are found to be time varying. A calibrated search-and-matching model with endogenous inflows and outflows and shocks to housing demand matches many of the stable correlations and predicts that correlations with houses for sale depend on the source and persistence of shocks. |
| Keywords: | housing-market cyclicality, inflows and outflows, search frictions, match quality |
| JEL: | E32 E22 R21 R31 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16603&r=dge |
| By: | Paul Levine (University of Surrey); Maryam Mirfatah (King’s College London); Joseph Pearlman (City University); Stylianos Tsiaras (Ecole Polytechnique Federale de Lausanne) |
| Abstract: | We study central bank liquidity provisions to the banking sector in a DSGE model estimated for the Euro Area with financial frictions on the supply and demand side of credit. We show that liquidity provisions, as in the ECB’s recent Long Term Refinancing Operations, can be welfare-enhancing or welfare-reducing when both these financial frictions exist. They relax the banks’ leverage constraint and induce banks to provide more credit. This reduces the credit spread facing firms and increases investment, but this comes at the cost of implementing the liquidity policy. We compute a welfare optimized liquidity rule for the central bank responding to output, inflation and the interest rate spread that can increase welfare in comparison with the case of no liquidity provision. Crucially, this result is conditional on a high level of central bank monitoring of the its loanable funds to banks. |
| JEL: | C11 E44 E52 E58 E61 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1323&r=dge |
| By: | Johnny Cotoc (McMaster University); Alok Johri (McMaster University); César Sosa-Padilla (University of Notre Dame/NBER) |
| Abstract: | Nations vary widely in how often they are governed by left-wing governments. Using data from 56 nations over 45 years, we find that the propensity of a nation to elect the left is positively correlated with both the average level and volatility of their sovereign spreads. To explain these facts, we build a quantitative sovereign default model in which two policymakers (left and right) alternate in power. Reelection probabilities are increasing in government spending, with the left having a small advantage (as found in the data). We use variation in the responsiveness of reelection probabilities to government spending in order to create economies that elect the left more or less frequently in equilibrium. We call these the left leaning and the right leaning economy. The left leaning economy faces worse borrowing terms due to higher default risk. Moreover, both policymakers have a greater reluctance for fiscal austerity and choose a higher share of government spending as compared to their counterparts in the right leaning economy. These features imply large welfare losses for households. |
| Keywords: | Sovereign default, Interest rate spread, Political turnover, Left-wing, Rightwing, Cyclicality of fiscal policy. |
| JEL: | F34 F41 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:290&r=dge |
| By: | Corsetti, G.; Maeng, S. H. |
| Abstract: | Uncertainty about a government willingness to repay its outstanding liabilities upon auctioning new debt creates vulnerability to belief-driven hikes in borrowing costs. We show that optimizing policymakers will eliminate such vulnerability by accumulating reserves up to ensuring post-auction debt repayment in all (off-equilibrium) circumstances. The model helps explaining why governments hold significant amounts of reserves and appear reluctant to use them to smooth fundamental shocks. Quantitatively, the model explains reserve holdings up to 3% of GDP if debt is short term, 2.4% with long-term debt—as long bond maturities mitigate vulnerability to belief-driven crises. |
| Keywords: | Debt Sustainability, Discretionary Fiscal Policy, Expectations, Foreign Reserves, Self-Fulfilling Crises, Sovereign Default |
| JEL: | E43 E62 F34 H50 H63 |
| Date: | 2023–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2370&r=dge |
| By: | Ben J. Heijdra; Pim Heijnen |
| Abstract: | We study the effects of time-using rent-seeking activities on the macroeconomic allocation and the economic growth rate. We formulate a highly stylized three-sector general equilibrium model with overlapping generations of individuals. The production side features one sector producing the capital good and two consumption goods sectors. All sectors operate under constant returns to scale technology with human and physical capital as inputs. One of the consumption goods sectors is a monopoly, where a continuum of agents compete for a share of monopoly profits. Agents are heterogeneous in their (intrinsically useless) rent-seeking ability. In the benchmark model each agent decides during youth on how much time to spend on lobbying activities, education, and production work. An intergenerational human capital externality of the ‘shoulders of giants’ type ensures that the model features endogenous growth. The rewards to rent-seeking accrue during youth and part of the additional income is saved. Interestingly, a move from a perfectly competitive economy to one involving monopolization and rent-seeking increases the steady-state economic growth rate in the benchmark model. We identify three main mechanisms affecting the growth rate under monopoly and rent-seeking, namely (a) the phase of life at which the rent-seeking booty is received (youth or old-age), (b) the kind of inputs used in the rent-seeking competition (raw time or education level), and (c) the type of growth engine (human or physical capital externality). The conclusions for the benchmark model are robust to changes in the mechanisms for (b) and (c) but not for (a). If rent-seeking rewards accrue during old-age then the move from a perfectly competitive economy to one involving monopolization and rent-seeking decreases the steady-state economic growth rate. |
| Keywords: | rent seeking, economic growth, capital accumulation, monopolization, wasteful competition |
| JEL: | D72 E24 L12 O41 O43 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10771&r=dge |
| By: | Bo Hu; Makoto Watanabe; Jun Zhang |
| Abstract: | This article develops a model in which an intermediary uses a supply chain finance (SCF) program to fund suppliers. The SCF program pools liquidity from suppliers and meanwhile provides immediate payment to suppliers with pressing liquidity needs. We show that the intermediary optimally selects not only suppliers with positive profitability but also suppliers with negative profitability who, however, contribute to the liquidity pool. Inserting the model to an otherwise standard monetary framework, we show that with higher nominal interest rates, the SCF program emphasizes the liquidity contribution more and the profitability contribution less. Deviating from the Friedman rule, where only suppliers with positive profitability are selected, may lead to welfare gains. |
| Keywords: | supply chain finance, liquidity pooling, liquidity cross-subsidization, money search, intermediary |
| JEL: | E41 E42 E51 G23 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10778&r=dge |
| By: | Arpad Abraham; Pavel Brendler; Eva Carceles |
| Abstract: | One important feature of capital tax reforms is uncertainty regarding their duration. We use the Bush Tax cuts as the leading example to illustrate how uncertainty about reform duration may affect the economy’s path and erode political support for the reform. We model policy uncertainty by assuming that the reform may be either repealed or made permanent with some probability at a predetermined date. We show that policy uncertainty is a critical ingredient that can explain why the Bush tax cuts had no economically significant effect on investment, as confirmed empirically by Yagan (2015). While the permanent reform leads to positive aggregate welfare gains on impact, policy uncertainty may reverse this result. These observations hold both in a model with a representative firm and heterogeneous firms, but adding firm heterogeneity generates an interesting implication. In contrast to the permanent reform, policy uncertainty increases the TPF since it dampens investment by mature, less productive firms. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:nys:sunysb:23-01&r=dge |
| By: | Marcelo Arbex (Department of Economics, University of Windsor); Luiz A. Barros (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil); Marcio V. Correa (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil) |
| Abstract: | This paper examines the role of the public health system and inequality during a health crisis (pandemic). We study a two-jurisdiction economy (rich, poor) with two household types (entrepreneurs, workers) and a shock affecting health goods demand and labor productivity. The presence of a public health system helps reduce health consumption inequality and lessens the impact of health shocks on non-health consumption inequality, especially when the pandemic leads to productivity loss. However, it also contributes to increased total consumption inequality, highlighting trade-offs in addressing inequality during a pandemic. Access to a public health system mitigates pandemic-driven inequality and dampens its rise. |
| Keywords: | Pandemic, Covid-19, Public Health, Inequality. |
| JEL: | E60 H0 I18 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:2302&r=dge |
| By: | Vivek Sharma |
| Abstract: | Using a Two-Agent RBC model with time-varying shock to loan-to-value (LTV) ratios, I show that including housing (real estate or land) in the entrepreneurial production function has profound implications for results. In a model in which housing does not play a role as a production input, an LTV tightening has starkly different effects compared to a model in which it is a factor in the production process. In a setup devoid of a role for housing as a production input, differently from the results in the current literature, an LTV tightening leads to a spike in housing price at impact and a lesser fall afterwards. Other macroeconomic variables such as investment and output fall more at lower initial LTV ratios than at higher steady state LTV ratios. The findings of this paper indicate that housing plays an important role in shaping macroeconomic effects of LTV shocks. |
| Keywords: | Loan-to-Value (LTV) Shocks, Housing in the Production Function, Macroeconomic Fluctuations |
| JEL: | E32 E44 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-62&r=dge |
| By: | Paweł Kopiec |
| Abstract: | I study the dependence of the forward guidance effectiveness on the level of economic slack. I use the model with price rigidities and uninsured unemployment risk and apply both analytical and numerical methods to study the forward guidance transmission in both''normal time'' and the crisis during which the unemployment rate rises by 150 percent. High unemployment accompanied by low job-finding rates raises the unemployment risk and increases precautionary motives. This, in turn, constrains the ability of the monetary authority to boost current demand by announcing cuts in future policy rates. The severity of that limitation increases with the time horizon of the announced change in interest rate. Quantitatively, the drop in the interest rate elasticity of aggregate consumption between the horizon of the interest rate cut equal to zero (i.e. the standard monetary policy shock) and the horizon equal to 15 quarters is 35.3% larger in the crisis than in ''normal time''. These more pronounced horizon effects imply that the forward guidance effectiveness is in general lower in the crisis than in''normal times''. |
| Keywords: | forward guidance, monetary policy, heterogeneous agents, frictional narkets, unemployment |
| JEL: | D30 D31 D52 E21 E24 E43 E52 E58 |
| Date: | 2022–12 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2022081&r=dge |
| By: | Piétri, Océane |
| JEL: | E21 E62 E52 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc23:277681&r=dge |
| By: | Fangzhi Wang (School of Management and Economics; Beijing Institute of Technology); Hua Liao (School of Management and Economics; Beijing Institute of Technology); Richard S.J. Tol (Department of Economics, University of Sussex, BN1 9SL Falmer, United Kingdom) |
| Abstract: | We investigate optimal carbon abatement in a dynamic general equilibrium climate-economy model with endogenous structural change. By differentiating the production of investment from consumption, we show that social cost of carbon can be conceived as a reduction in physical capital. In addition, we distinguish two final sectors in terms of productivity growth and climate vulnerability. We theoretically show that heterogeneous climate vulnerability results in a climate-induced version of Baumol’s cost disease. Further, if climate-vulnerable sectors have high (low) productivity growth, climate impact can either ameliorate (aggravate) the Baumol’s cost disease, call for less (more) stringent climate policy. We conclude that carbon abatement should not only factor in unpriced climate capital, but also be tailored to Baumol’s cost and climate diseases. |
| Keywords: | Structural change, Climate capital, Integrated assessment model, Social cost of carbon, Baumol’s cost disease |
| JEL: | O41 O44 Q54 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:sus:susewp:0823&r=dge |
| By: | Mr. Damien Capelle; Mr. Divya Kirti; Mr. Nicola Pierri; Mr. German Villegas Bauer |
| Abstract: | Using self-reported data on emissions for a global sample of 4, 000 large, listed firms, we document large heterogeneity in environmental performance within the same industry and country. Laggards—firms with high emissions relative to the scale of their operations—are larger, operate older physical capital stocks, are less knowledge intensive and productive, and adopt worse management practices. To rationalize these findings, we build a novel general equilibrium heterogeneous-firm model in which firms choose capital vintages and R&D expenditure and hence emissions. The model matches the full empirical distribution of firm-level heterogeneity among other moments. Our counter-factual analysis shows that this heterogeneity matters for assessing the macroeconomic costs of mitigation policies, the channels through which policies act, and their distributional effects. We also quantify the gains from technology transfers to EMDEs. |
| Keywords: | Climate Change; Productivity; Technology Adoption; Capital Vintages; Emissions |
| Date: | 2023–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/242&r=dge |
| By: | Bolt, U.; French, E.; Hentall MacCuish, J.; O'Dea, C. |
| Abstract: | Parental investments significantly impact children’s outcomes. Exploiting panel data covering individuals from birth to retirement, we estimate child skill production functions and embed them into an estimated dynastic model in which altruistic mothers and fathers make investments in their children. We find that time investments, educational investments, and assortative matching have a greater impact on generating inequality and intergenerational persistence than cash transfers. While education subsidies can reduce inequality, due to an estimated dynamic complementarity between time investments and education, it is crucial to announce them in advance to allow parents to adjust their investments when their children are young. |
| Date: | 2023–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2374&r=dge |