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on Dynamic General Equilibrium |
| By: | González, Beatriz; Nuño, Galo; Thaler, Dominik; Albrizio, Silvia |
| Abstract: | This paper analyzes the link between monetary policy and capital misallocation in a New Keynesian model with heterogeneous firms and financial frictions. In the model, firms with a high return to capital increase their investment more strongly in response to a monetary policy expansion, thus reducing misallocation. This feature creates a new time-inconsistent incentive for the central bank to engineer an unexpected monetary expansion to temporarily reduce misallocation. However, price stability is the optimal timeless response to demand, financial or TFP shocks. Finally, we present firm-level evidence supporting the theoretical mechanism. JEL Classification: E12, E22, E43, E52, L11 |
| Keywords: | capital misallocation, financial frictions, firm heterogeneity, monetary policy |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242890&r=dge |
| By: | Stelios S. Fourakis; Loukas Karabarbounis |
| Abstract: | Advanced economies borrowed substantially during the Covid recession to fund their fiscal policy. The Covid recession differed from the Great Recession in that sovereign debt markets remained calm and spreads barely responded. We study the experience of Greece, the most extreme manifestation of the puzzling behavior of spreads during Covid. We develop a small open economy model with long-term debt and default, which we augment with official lenders, heterogeneous households and sectors, and Covid constraints on labor supply and consumption demand. The model is quantitatively consistent with the observed boom-bust cycle of Greece before Covid and salient observations on macro aggregates, government debt, and the sovereign spread during Covid. The spread is stable despite a rise in external borrowing during Covid, because lockdowns were perceived as transitory and the bailouts of the 2010s had tilted the composition of debt at the beginning of Covid away from defaultable private debt. The ECB's policy of purchasing debt in secondary markets during Covid did not stabilize spreads so much, but allowed the government to provide transfers that reduced inequality. |
| JEL: | E20 E58 E60 F34 F44 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32044&r=dge |
| By: | Kleinman, Benny; Liu, Ernest; Redding, Stephen J.; Yogo, Motohiro |
| Abstract: | We generalize the closed-economy neoclassical growth model (CNGM) to allow for costly goods trade and capital flows with imperfect substitutability between countries. We develop a tractable, multi-country, quantitative model that matches key features of the observed data (e.g., gravity equations for trade and capital holdings) and is well suited for analyzing counterfactual policies that affect both goods and capital market integration (e.g., U.S.-China decoupling). We show that goods and capital market integration interact in non-trivial ways to shape impulse responses to counterfactual changes in productivity and goods and capital market frictions and the speed of convergence to steady-state. |
| Keywords: | economic growth; international trade; capital flows |
| JEL: | F10 F21 |
| Date: | 2023–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121381&r=dge |
| By: | Taeyoung Doh; Choongryul Yang |
| Abstract: | We set- up a two-sector New Keynesian model with input-output linkages to study the persistently high inflation during the post-COVID-19 period. We include multiple shocks as well as several amplification channels of these shocks in a parsimonious model to quantify the relative importance of each factor. We calibrate the model to match the pre-COVID-19 data and alter parameters governing 1) the fiscal rule, 2) inflation feedback in the monetary policy rule, 3) elasticity of substitution among intermediary inputs in production, and 4) the size of a sectoral demand shift shock to explain the post-COVID-19 data. We obtain estimates of shocks in the model to fit goods inflation data during the post-COVID-19 period and use aggregate inflation to test the model’s ability to explain the recent inflationary episode. Although aggregate demand shocks and a sectoral demand shift shock have played a significant role in the initial inflation surge during 2021, the propagation of these shocks into the persistently high aggregate inflation was also helped by lower inflation feedback in the monetary policy response relative to the pre-COVID-19 period. Compared with other changes in parameters, this alteration of the monetary policy rule best fits the level and persistence of the post-COVID-19 aggregate inflation. While lowering the elasticity of substitution among intermediary inputs can match the level of inflation, it does a poorer job of explaining the persistence of inflation compared with allowing changes in the monetary policy rule. |
| Keywords: | inflation persistence; COVID-19; sectoral reallocation; inflation feedback; production friction |
| JEL: | E62 E63 |
| Date: | 2023–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:97656&r=dge |
| By: | Richard Audoly |
| Abstract: | I study the labor market risks associated with being self-employed. I document that the self-employed are subject to larger earnings fluctuations than employees and that they frequently transition into unemployment. Given that the self-employed are not eligible to unemployment insurance, I analyze the provision of benefits targeted at these risks using a calibrated search model with (i) precautionary savings, (ii) work opportunities in paid and self-employment, and (iii) skill heterogeneity. This exercise suggests that extending the current U.S. unemployment insurance scheme to the self-employed comes with a clear increase in the transition rate from self-employment to unemployment and an unequal benefits-to-contributions ratio across skill groups. At the calibrated parameters, the self-employed in the middle of the skill distribution lose welfare. |
| Keywords: | self-employment; unemployment insurance; earnings dynamics |
| JEL: | J40 J64 J65 |
| Date: | 2024–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97625&r=dge |
| By: | Gadi Barlevy; R. Jason Faberman; Salil Gadgil; Bart Hobijn; Aysegul Sahin |
| Abstract: | We discuss how the relative importance of factors that contribute to movements of the U.S. Beveridge curve has changed from 1960 to 2023. We review these factors in the context of a simple flow analogy used to capture the main insights of search and matching theories of the labor market. Changes in inflow rates, related to demographics, accounted for Beveridge curve shifts between 1960 and 2000. A reduction in matching efficiency, that depressed unemployment outflows, shifted the curve outwards in the wake of the Great Recession. In contrast, the most recent shifts in the Beveridge curve appear driven by changes in the eagerness of workers to switch jobs. We argue that, while the Beveridge curve is a useful tool for relating unemployment and vacancies to inflation, the link between these labor market indicators and inflation depends on whether and why the Beveridge curve shifted. Therefore, a careful examination of the factors underlying movements in the Beveridge curve is essential for drawing policy conclusions from the joint behavior of unemployment and job openings. |
| Keywords: | Beveridge curve; Inflation; Job openings; Unemployment |
| JEL: | E52 J6 J20 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:97659&r=dge |
| By: | Nobuyuki Hanaki; Yuta Takahashi |
| Abstract: | We present and conduct a novel experiment on a multi-period beauty contest game motivated by the canonical New-Keynesian model. Participants continuously provide forecasts for prices spanning multiple future periods. These forecasts determine the price for the current period and participants’ payoffs. Our findings are threefold. First, the observed prices in the experiment deviate more from the rational expectations equilibrium prices under strategic complementarity than under strategic substitution. Second, participants’ expectations respond to announcements of future shocks on average. Finally, participants employ heuristics in their forecasting; however, the choice of heuristic varies with the degree of strategic complementarity. |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1213r&r=dge |
| By: | Katerina Petrova |
| Abstract: | This paper studies large sample classical and Bayesian inference in a prototypical linear DSGE model and demonstrates that inference on the structural parameters based on a Gaussian likelihood is unaffected by departures from Gaussianity of the structural shocks. This surprising result is due to a cancellation in the asymptotic variance resulting into a generalized information equality for the block corresponding to the structural parameters. The underlying reason for the cancellation is the certainty equivalence property of the linear rational expectation model. The main implication of this result is that classical and Bayesian Gaussian inference achieve a semi-parametric efficiency bound and there is no need for a “sandwich-form” correction of the asymptotic variance of the structural parameters. Consequently, MLE-based confidence intervals and Bayesian credible sets of the deep parameters based on a Gaussian likelihood have correct asymptotic coverage even when the structural shocks are non-Gaussian. On the other hand, inference on the reduced-form parameters characterizing the volatility of the shocks is invalid whenever the structural shocks have a non-Gaussian density and the paper proposes a simple Metropolis-within-Gibbs algorithm that achieves correct large sample inference for the volatility parameters. |
| Keywords: | DSGE models; generalized information equality; sandwich form covariance |
| JEL: | C11 C12 C22 |
| Date: | 2024–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97624&r=dge |
| By: | Federico S. Mandelman; Yang Yu; Francesco Zanetti; Andrei Zlate |
| Abstract: | We document a slowdown in low-skilled immigration that began around the onset of the Great Recession in 2007, which was associated with a subsequent rise in low-skilled wages, a decline in the skill premium, and labor shortages in service occupations. Falling returns to education also coincided with a decline in the educational attainment of native workers. We then develop and estimate a stochastic growth model with endogenous immigration and training to rationalize these facts. Lower immigration leads to higher wages for low-skilled workers but also to higher consumer prices and lower aggregate consumption. Importantly, the decline in the skill premium reduces the incentive to train native workers and hurts aggregate productivity over time, which reduces welfare. We assess the implications of stimulus policies implemented during the COVID-19 pandemic and show that the shortage of low-skilled immigrant labor amplified the increase in consumer prices, partially eroding the effectiveness of stimulus. |
| Keywords: | international labor migration; skill premium; task upgrading; heterogeneous workers |
| JEL: | F16 F22 F41 |
| Date: | 2024–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:97633&r=dge |
| By: | Agustín Díaz Casanueva |
| Abstract: | This paper studies how parent-child interactions and altruism impact college financial support and outcomes. It analyzes how parents adjust their consumption levels based on their children’s income and how children’s consumption shocks affect parent consumption. Using a dynastic overlapped generations model, the study explores how future transfers from parents to children influence college graduation rates. The findings show that parent transfers reduce the cost of attending college, but also lower children’s college returns. Altruism increases graduation rates for low-ability children with wealthy parents and explains most of the graduation gap between low-ability children with wealthy and poor parents. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:1005&r=dge |
| By: | Fernández-Villaverde, Jesús; Schilling, Linda; Uhlig, Harald |
| Abstract: | This paper shows the existence of a central bank trilemma. When a central bank is involved in financial intermediation, either directly through a central bank digital currency (CBDC) or indirectly through other policy instruments, it can only achieve at most two of three objectives: a socially eÿcient allocation, financial stability (i.e., absence of runs), and price stability. In particular, a commitment to price stability can cause a run on the central bank. Implementation of the socially optimal allocation requires a commitment to inflation. We illustrate this idea through a nominal version of the Diamond and Dybvig (1983) model. Our perspective may be particularly appropriate when CBDCs are introduced on a wide scale. JEL Classification: E58, G21 |
| Keywords: | bank runs, CBDC, central bank digital currency, currency crises, financial intermediation, inflation targeting, monetary policy, spending runs |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242888&r=dge |