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on Dynamic General Equilibrium |
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Issue of 2024‒01‒15
fourteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Kaas, Leo; Lalé, Etienne; Siassi, Nawid |
| Abstract: | This paper develops a macroeconomic model that combines an incomplete-markets overlapping-generations economy with a job ladder featuring sequential wage bargaining, endogenous search effort of employed and non-employed workers, and differences in match quality. The calibrated model offers a good fit to the empirical age profiles of search activity, job-finding rates, wages and savings, so that we use the model to examine the role of age and wealth for worker flows and for the consequences of job loss. We further analyze the impact of unemployment insurance and progressive taxation for labor market dynamics and aggregate economic activity via capital, employment and labor efficiency channels. Lower unemployment benefits or a less progressive tax schedule bring about welfare losses for a newborn worker household. |
| Keywords: | Search and matching, ob-to-job transitions, Incomplete markets, Overlapping generations, Wealth accumulation |
| JEL: | E21 E24 H24 J64 J65 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:280694&r=dge |
| By: | Hajar Fanchy (Economic Performance and Logistics - University Hassan II [Casablanca]); Amal El Mzabi (Economic Performance and Logistics - University Hassan II [Casablanca]); Ahmed Hefnaoui (Economic Performance and Logistics - University Hassan II [Casablanca]) |
| Abstract: | This article explores the origins of cyclical macroeconomic fluctuations in Morocco. A reduced Dynamic Stochastic General Equilibrium (DSGE) model is used to identify these fluctuations, with a specific focus on demand, supply and monetary policy shocks. The study leverages data spanning from the first quarter of 2007 to the fourth quarter of 2022.The results indicates that supply pertubations predominantly drive production and inflation fluctuations within Morocco. Our economy tends to react more sensitively to supply-side factors, such as productivity fluctuations, supply chain interruptions and agricultural supply dynamics. The implications of these findings are significant for policy-makers, revealing the necessity to adjust and adapt their policies in order to stabilise the economy and promote economic growth. |
| Abstract: | Cet article explore les origines des fluctuations cycliques au Maroc en utilisant un modèle d'équilibre général stochastique dynamique (DSGE) réduit privilégiant l'examen des chocs résultant des variations de la demande, de l'offre, ainsi que de la politique monétaire. Pour étayer notre étude, nous mobilisons des données s'étalant du premier trimestre 2007 au quatrième trimestre 2022. Les résultats obtenus soulignent le rôle prépondérant des perturbations du côté de l'offre dans les variations de la production et de l'inflation au Maroc L'économie réagit de manière plus marquée aux facteurs liés l'offre, notamment la productivité, les interruptions de la chaîne d'approvisionnement et la dynamique de l'offre agricole. Les implications de ces constatations sont d'importance pour les décideurs politiques, mettant en évidence la nécessité d'ajuster et d'adapter leur politique en vue de stabiliser l'économie et de promouvoir la croissance économique. |
| Keywords: | Business cycle, Reduced DSGE, Fluctuations origins, Supply shocks., Cycle économique, DSGE réduit, Origines de fluctuations, Chocs d'offre. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04304857&r=dge |
| By: | Elena Capatina; Michael P. Keane |
| Abstract: | We specify and calibrate a life-cycle model of labor supply and savings incorporating health shocks and medical treatment decisions. Our model features endogenous wage formation via human capital accumulation, employer-sponsored health insurance, and means-tested social insurance. We use the model to study the effects of health shocks on health, labor supply and earnings, and to assess how health shocks contribute to earnings inequality. We also simulate provision of public insurance to agents who lack employer-sponsored insurance. The public insurance program substantially increases medical usage by the uninsured, leading to improved health and life expectancy, which generates higher Social Security costs. But the program also creates positive labor supply incentives, and substantially reduces costs of social insurance, Medicaid and free care. On balance the net program cost is modest, and all agents in the model are ex ante better off in a balanced budget simulation. In contrast, improving access to Medicaid has perverse labor supply effects, does little to improve health, and makes almost all agents worse off in a balanced budget scenario. |
| Keywords: | Income risk; Health insurance; Welfare; Health; Earnings inequality; Human capital; Precautionary saving; Health shocks |
| JEL: | E21 I31 D91 I14 |
| Date: | 2023–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:97509&r=dge |
| By: | Jonathan Créchet (Department of Economics, University of Ottawa, Ottawa, ON) |
| Abstract: | In OECD countries, the labor market features a coexistence of open-ended, permanent jobs subject to strict employment protection and fixed-term, temporary contracts. This paper introduces a search-and-matching model of a dual labor market - divided between permanent and temporary jobs - with risk aversion and dynamic employment contracts. Optimal contracting entails a trade-off between commitment and the flexibility of separation, a novel rationale for the coexistence of permanent and temporary jobs. The paper shows that this coexistence emerges when (i) firms find it optimal to provide insurance to workers, (ii) the firms' commitment ability is limited, and (iii) the match-quality distribution has enough dispersion. In this setup, firing costs are potentially associated with welfare gains for both employed and unemployed workers. |
| Keywords: | Search frictions, Dynamic contracts, Limited commitment, Employment protection legislation |
| JEL: | E24 J41 J58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ott:wpaper:2307e&r=dge |
| By: | Anh Le; Alexander Copestake; Brandon Tan; Mr. Shanaka J Peiris; Umang Rawat |
| Abstract: | We develop a two-country New Keynesian model with endogenous currency substitution and financial frictions to examine the impact on a small developing economy of a stablecoin issued in a large foreign economy. The stablecoin provides households in the domestic economy with liquidity services and an additional hedge against domestic inflation. Its introduction amplifies currency substitution, reducing bank intermediation and weakening monetary policy transmission, worsening the impacts of recessionary shocks and increasing banking sector stress. Capital controls raise stablecoin adoption as a means of circumvention, increasing exposure to spillovers from foreign shocks. Unlike a domestic CBDC, a ban on stablecoin payments can alleviate these effects. |
| Keywords: | Cryptocurrency; Open Economy; Financial Frictions; Optimal Policy |
| Date: | 2023–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/249&r=dge |
| By: | Zhao Han; Chengcheng Jia |
| Abstract: | Is the "information effect" of monetary policy quantitatively important? We first use a simple model to show that under asymmetric information, monetary policy surprises are correlated with the unobserved state of the economy. This correlation implies that monetary policy surprises provide information about the state of the economy, and at the same time, explains why the estimation of the information effect may be biased. We then develop a New Keynesian DSGE model under asymmetric information and calibrate model parameters to match macroeconomic dynamics in the US and forecasting accuracy in the Greenbook. Under our calibration, both the central bank and the private sector initially have noisy information. Over time, the information effect of monetary policy mitigates information frictions by enhancing the two-way learning between the central bank and the private sector. |
| Keywords: | monetary policy; information frictions; asymmetric information |
| JEL: | E52 E58 D84 |
| Date: | 2023–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:97469&r=dge |
| By: | Julian di Giovanni; Åžebnem Kalemli-Özcan; Alvaro Silva; Muhammed A Yildirim |
| Abstract: | We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries' inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. |
| Keywords: | inflation; supply chains; trade economics; structural global network model; supply shocks |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbaacp:acp2023-01&r=dge |
| By: | Hernán Rincón-Castro; Juan Pablo Ángel-Mojica |
| Abstract: | El objetivo del estudio es modelar y determinar la incidencia tributaria de una reducción del impuesto sobre la renta de las empresas en Colombia. Para cumplir dicho objetivo se utiliza un modelo de equilibrio general dinámico y estocástico DSGE de economía cerrada con hogares heterogéneos y dos tipos de capital. Esto último permite incluir de una manera sencilla la prima por calificación (skill-premium) y la complementariedad del capital con la calificación del trabajo (capital-skill complementarity), variables que son determinantes de los cambios en la distribución del ingreso y el bienestar de los distintos tipos de hogares. Los resultados indican que una reducción del impuesto sobre la renta de las empresas aumenta el crecimiento económico, pero genera efectos redistributivos no deseados y no es óptimo en el sentido de Pareto, ya que, dependiendo del tipo instrumento de consolidación fiscal utilizado, se puede ampliar la brecha de la distribución de los ingresos de los hogares y afectar negativamente el bienestar de aquellos con restricciones financieras y menos calificados. Con el fin de lograr al mismo tiempo una menor carga tributaria sobre las empresas y mayor crecimiento económico, pero con más equidad y bienestar para todos los hogares, se requieren instrumentos alternativos. **** ABSTRACT: The objective of the study is to model and determine the tax incidence of a reduction in the corporate income tax in Colombia. To meet this objective, a dynamic and stochastic general equilibrium model DSGE of a closed economy with heterogeneous households and two types of capital is used. These make it possible to easily include the skill-premium and the complementarity of capital with labor skills (capital-skill complementarity), variables that are determinants of changes in the distribution of income and the welfare of the different types of households. The results indicate that a reduction in the corporate income tax increases economic growth but generates unwanted redistributive effects and is not optimal in the Pareto sense, since, depending on the type of fiscal consolidation instrument used, it can enlarge the distribution income gap and negatively affect the welfare of those households with financial constraints and less qualified. To achieve at the same time a lower tax burden on companies and greater economic growth, but with more equity and welfare for all households, alternative instruments are required.lassification-JEL: H22, H25 |
| Keywords: | impuesto sobre la renta, empresas, incidencia tributaria, efectos redistributivos, bienestar, corporate income tax, tax incidence, redistributive effects, welfare |
| JEL: | H22 H25 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1260&r=dge |
| By: | Jonathan Créchet (Department of Economics, University of Ottawa, Ottawa, ON); Étienne Lalé (Department of Economics, York University); Linas Tarasonis (CEFER, Bank of Lithuania) |
| Abstract: | We propose new data moments to measure the role of life-cycle worker flows between employment, unemployment and out of the labor force in shaping cross-country differences in aggregate employment. We then show that a suitably extended version of the Diamond-Mortensen-Pissarides model can capture well these data moments. Two features of the model are crucial for this result: heterogeneity in match quality and endogenous search intensity. We examine the implications of this model for the sources of employment dispersion across Europe's largest countries, assessing the contribution of factors related to (i) the production technology, (ii) search, and (iii) policies. The sources of cross-country employment dispersion differ substantially across ages. Technology factors account for most of the employment variance of youths and prime-age workers, whereas search and policies are the main drivers of employment differences for older individuals. |
| Keywords: | Employment, Unemployment, Labor Force Participation, Life cycle, Worker Flows, Labor Market Institutions |
| JEL: | E02 E24 J21 J64 J82 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ott:wpaper:2306e&r=dge |
| By: | Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN); Kenya Takaku (Faculty of International Studies, Hiroshima City University, JAPAN) |
| Abstract: | Fluctuations in commodity prices have significant effects on output and financial stability in emerging countries. We examine the effect of macroprudential policies on commodity-exporting countries, which consist of two sectors---the commodity-producing sector and final goods sector. When a commodity-exporting country suffers from volatile fluctuations in commodity prices, we find that macroprudential policy in each sector is welfare-enhancing and that it is optimal to impose macroprudential policies in both sectors. We also show that macroprudential policies are more effective in improving welfare for commodity-exporting economies suffering from a stronger link between commodity prices and interest rate spreads, higher sensitivity of interest spreads to debt, and larger commodity price shocks. |
| Keywords: | Macroprudential policies; Commodity-exporting countries; DSGE model; Financial frictions; Emerging economies; Mongolia |
| JEL: | E32 E44 F32 O20 Q48 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2023-21&r=dge |
| By: | Mr. Jiaqian Chen; Ms. Era Dabla-Norris; Carlos Goncalves; Zoltan Jakab; Jesper Lindé |
| Abstract: | This paper argues case that a tighter fiscal policy stance can meaningfully support central banks in fighting inflation in both advanced and emerging market economies. While the standard textbook result suggest that monetary policy is much more effective than fiscal policy in battling inflation in open economies due to the exchange rate channel, we show that a tighter fiscal stance is notably more effective in the current situation. This is so because when many countries currently need to tighten the policy stance simultaneously, the exchange rate channel does not provide monetary policy with an edge over fiscal policy. We also show that fiscal consolidation can be helpful in small open emerging markets and developing economies by reaffirming their commitment to price stability, and by putting the fiscal house in order which reduces risk premiums and strengthens the currency. Furthermore, we show that spillovers from major economies can be more adverse from tighter monetary policy. By applying a two-agent New Keynesian modeling framework with unconstrained and hand-to-mouth households, we show that any adverse effects of tighter fiscal policy (relative to tighter monetary policy) on consumption inequality can be handled with a combination of general spending cuts and targeted transfers to vulnerable households. |
| Keywords: | Policy Coordination; Monetary Policy; Fiscal Policy; High Inflation |
| Date: | 2023–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/260&r=dge |
| By: | Dario Caldara; Francesco Ferrante; Matteo Iacoviello; Andrea Prestipino; Albert Queraltó |
| Abstract: | We use historical data and a calibrated model of the world economy to study how a synchronous monetary tightening can amplify cross-border transmission of monetary policy. The empirical analysis shows that historical episodes of synchronous tightening are associated with tighter financial conditions and larger effects on economic activity than asynchronous ones. In the model, a sufficiently large synchronous tightening can disrupt intermediation of credit by global financial intermediaries causing large output losses and an increase in sacrifice ratios, that is, output lost for a given reduction in inflation. We use this framework to show that there are gains from coordination of international monetary policy. |
| Keywords: | Monetary Policy; Inflation; International Spillovers; Financial Frictions; Open Economy Macroeconomics; Panel Data Estimation |
| JEL: | C33 E32 E44 F42 |
| Date: | 2023–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1384&r=dge |
| By: | Gaillard, Alexandre; Hellwig, Christian; Wangner, Philipp; Werquin, Nicolas |
| Abstract: | We provide evidence that the distributions of consumption, labor income, wealth, and capital income exhibit asymptotic power-law behavior with a strict ranking of upper tail inequality, in that order, from the least to the most unequal. We show analytically and quantitatively that the canonical heterogeneous-agent model cannot replicate the proper ranking and mag-nitudes of these four tails simultaneously. Mechanisms addressing the wealth concentration puzzle in these models through return heterogeneity lead to a mirror consumption concen-tration puzzle. We match the cross-sectional data on these four Pareto tails by positing a combination of non-homothetic, wealth-dependent preferences and scale-dependent returns to capital. We underscore the importance of these results by showing that all four dimensions of top inequality jointly determine the long-run elasticity that governs the revenue-maximizing capital tax rate. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:128768&r=dge |
| By: | Eric Smith |
| Abstract: | This paper assesses wage setting and wage dynamics in a search and matching framework where (i) workers and firms on occasion meet multilaterally; (ii) workers can recall previous encounters with firms; and (iii) firms cannot commit to future wages and workers cannot commit to not searching on the job. The resulting progression of wages (from firms paying just enough to keep their workers) yields a compensation structure consistent with well established but difficult to reconcile observations on pay dynamics within jobs at firms. Along with wage tenure effects, serial correlation in wage changes and wage growth are negatively correlated with initial wages. |
| Keywords: | wage dynamics, stock-flow matching, on-the-job search, no commitment |
| JEL: | J31 J63 J64 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10788&r=dge |