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on Dynamic General Equilibrium |
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Issue of 2024‒02‒19
seventeen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Marcin Bielecki; Marcin Kolasa; Paweł Kopiec |
| Abstract: | We study the effects of labor market institutions (LMIs) in a general equilibrium model with search and matching frictions, endogenous separations, nominal rigidities, and uninsurable unemployment risk. By contrasting the US and EA, which are characterized by different degrees of employment protection and unemployment insurance schemes, we show that these LMIs have important implications for the transmission of standard aggregate demand and (even more so) supply shocks. In particular, if US unemployment benefits were increased during recessions to the levels typically observed in the EA, fluctuations in employment could be significantly reduced, bringing the outcomes close to the case of full unemployment insurance assumed by representative agent models. Similar effects can be obtained by subsidizing wages or introducing partial employment protection during recessions, especially if these are driven by changes in aggregate productivity. |
| Keywords: | labor market institutions, search and matching, heterogeneous agents, unemployment risk, general equilibrium |
| JEL: | D52 E21 E24 E32 J64 J68 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2023096&r=dge |
| By: | Benjamín García; Mario Giarda; Carlos Lizama; Damian Romero |
| Abstract: | We examine the impact of income heterogeneity on macroeconomic dynamics by analyzing households' expenditure decisions across different goods over the business cycle. Using Chilean transaction-level expenditure data, we observe income-dependent systematic variations in expenditure shares over the business cycle, suggesting a relevant role for non-homothetic preferences. We embed these preferences into a Heterogeneous Agent New Keynesian model and analyze their influence on the transmission of fiscal transfers. We find two novel channels associated with non-homotheticities: aggregate consumption sensitivity to income and insurance through expenditure switching. In a calibration for Chile, we find that non-homotheticities lead to substantial amplification of the effects of fiscal transfers of up to fifty percent. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:1000&r=dge |
| By: | Froemel, Maren (Bank of England); Paczos, Wojtek (Cardiff Business School) |
| Abstract: | This paper explores the link between default risk and fiscal procyclicality. We show that countries with higher sovereign risk have a more procyclical fiscal expenditure policy, which is driven mostly by transfers. We build a small open economy model with income inequality, social transfers, and default risk to rationalize this fact. Without default risk transfers are countercyclical, inequality is procyclical, and external debt is used to smooth distortionary taxation. With default risk, transfers account for most of fiscal adjustment because taxation becomes costly for the government. Transfers become procyclical and inequality worsens during times when risk premia are high. We confirm the predictions of the model in the data: in recessions in economies with default risk, transfers take the bigger burden relative to government consumption, whereas the opposite is true in economies with low default risk. |
| Keywords: | fiscal policy, default risk, income inequality, redistribution, emerging markets |
| JEL: | E62 F34 F41 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2024/3&r=dge |
| By: | Jorge Abad (Banco de España); Galo Nuño (Bank for International Settlements); Carlos Thomas (Banco de España) |
| Abstract: | We analyse the impact of introducing a central bank-issued digital currency (CBDC) on the operational framework of monetary policy and the macroeconomy as a whole. To this end, we develop a New Keynesian model with heterogeneous banks, a frictional interbank market, a central bank with deposit and lending facilities, and household preferences for different liquid assets. The model is calibrated to replicate the main monetary and financial aggregates in the euro area. Our analysis predicts that CBDC adoption implies a roughly equivalent reduction in banks’ deposit funding. However, this ‘deposit crunch’ has a rather small effect on bank lending to the real economy, and hence on aggregate investment and GDP. This result reflects the parallel impact of a CBDC on a central bank’s operational framework. For relatively moderate CBDC adoption levels, the reduction in deposits is absorbed by an almost one-to-one fall in reserves at the central bank, implying a transition from a ‘floor’ system – with ample reserves – to a ‘corridor’ system. For larger CBDC adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a ‘ceiling’ system with scarce reserves. |
| Keywords: | central bank digital currency (CBDC), interbank market, search and matching frictions, excess reserves |
| JEL: | E42 E44 E52 G21 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2404&r=dge |
| By: | Schmöller, Michaela; McClung, Nigel |
| Abstract: | This paper studies price stability and debt sustainability when the real rate exceeds trend growth (r > g) in a New Keynesian model with endogenous technology growth through R&D. Under debt-stabilizing ("passive") fiscal policy the Taylor principle is not sufficient for determinacy. Instead, monetary policy should at least aim to raise r − g with persistent inflation in order to stabilize the expectations of households, firms and innovators. Endogenous growth provides a self-financing mechanism for deficits under active fiscal policy; growth provides some backing for the public debt, which reduces the need for debt-stabilizing inflation when current fiscal deficits are not backed by future fiscal surpluses. Because growth creates some fiscal space, a monetary policy that adheres to the Taylor principle combined with active fiscal policy can yield a unique stable equilibrium, provided that the policy permits r−g to fall with inflation. |
| Keywords: | Public Debt, Inflation, Monetary-Fiscal Interaction, Fiscal Theory of the Price Level, Endogenous Growth |
| JEL: | E31 E52 E62 E24 O42 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofrdp:281773&r=dge |
| By: | Paczos, Wojtek (Cardiff Business School); Shakhnov, (†University of Surrey) |
| Abstract: | Sovereigns issue debt on both domestic and foreign markets and the two debts are uncorrelated in the data. Sovereigns default mostly selectively. We propose a theory to rationalize these observations. A government chooses the optimal combination of two debts to smooth consumption, which is subject to output shock and volatile tax distortions. In equilibrium, it mostly relies on domestic debt to smooth the tax wedge and on foreign debt to smooth the output shock. Issuing either debt is less costly than raising taxes, but it is subject to default risk due to the government’s limited commitment. A quantitative, calibrated model with two shocks and two debts replicates well debt-to-GDP ratios, default frequencies, cyclical properties of emerging economies and behavior of aggregates around default episodes. |
| Keywords: | sovereign debt, selective default, debt composition |
| JEL: | F34 G15 H63 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2024/6&r=dge |
| By: | Agustín Arias; Benjamín García; Ignacio Rojas |
| Abstract: | We introduce cognitive discounting into a full fledged monetary DSGE model to cope with the forward guidance puzzle and propose an estimation strategy that relies on system priors to guide the model into delivering data-consistent IRFs for monetary policy and forward guidance shocks. We find that the successful implementation of this behavioral hypothesis crucially hinges on allowing agents to entertain a cognitive discount factor specific for future monetary policy announcements. The estimated model attains a significantly better fit to the data than its rational expectations counterpart, while relying on only slightly modified estimates of structural parameters and substantial degrees of forward guidance discounting. Cognitive discounting of future events triggered by non-forward guidance shocks in our model is limited, and so is its contribution to the improvement of the marginal data density. We further find that professional forecasts are consistent with rational expectations and, thus, not appropriate for the estimation of forward guidance cognitive discounting. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:994&r=dge |
| By: | Herman, Uroš (Aix-Marseille University); Lozej, Matija (Central Bank of Ireland) |
| Abstract: | This paper first provides empirical evidence that labour market outcomes for the less educated, who also tend to be poorer, are substantially more volatile than those for the well-educated, who tend to be richer. We estimate job finding rates and separation rates by educational attainment for several European countries and find that job finding rates are smaller and separation rates larger at lower educational attainment levels. At cyclical frequencies, fluctuations of the job finding rate explain up to 80% of unemployment fluctuations for the less educated. We then construct a stylised HANK model augmented with search and matching and ex-ante heterogeneity in terms of educational attainment. We show that monetary policy has stronger effects when the job market for the less educated and, hence, poorer is more volatile. The reason is that these workers have the most procyclical income coupled with the highest marginal propensity to consume. An expansionary monetary policy shock that increases labour demand disproportionally affects the labour market segment for the less educated, causing a strong increase in consumption. This further amplifies labour demand and increases labour income of the poor even more, amplifying the initial effect. The same mechanism carries over to forward guidance. |
| Keywords: | Heterogeneous agents, Search and matching, Monetary policy, Business cycles, Employment. |
| JEL: | E40 E52 J64 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:10/rt/23&r=dge |
| By: | Coenen, Günter (European Central Bank); Lozej, Matija (Central Bank of Ireland); Priftis, Romanos (European Central Bank) |
| Abstract: | In this paper, we use scenario analysis to assess the macroeconomic effects of carbon transition policies aimed at mitigating climate change. To this end, we employ a version of the ECB’s New Area-Wide Model (NAWM) augmented with a framework of disaggregated energy production and use, which distinguishes between “dirty” and “clean” energy. Our central transition scenario is that of a permanent increase in carbon taxes, which are levied as a surcharge on the price of dirty energy. Our findings suggest that increasing euro area carbon taxes to an interim target level consistent with the transition to a net-zero economy entails a transitory rise in inflation and a lasting, albeit moderate decline in GDP. We show that the short and medium-term effects depend on the monetary policy reaction, the path of the carbon tax increase and its credibility, while expanding clean energy supply is key for containing the decline in GDP. Undesirable distributional effects can be addressed by redistributing the fiscal revenues from the carbon tax increase across households. |
| Keywords: | Climate change, carbon taxation, DSGE model, monetary policy, fiscal policy, euro area. |
| JEL: | C54 E52 E62 H23 Q43 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:8/rt/23&r=dge |
| By: | Xavier Ragot (Sciences Po - Sciences Po); François Legrand (ESC [Rennes] - ESC Rennes School of Business) |
| Abstract: | We compare two approaches in their ability to solve for optimal Ramsey policies in heterogeneous-agent models, considering the optimal provision of a public good. First, the "transition" approach makes the problem tractable by assuming a constant path for the planner's instruments. Second, the "truncation" approach uses a Lagrangian technique, solving the Ramsey problem of a finite state space model that approximates the full model. The truncation approach is shown to compute quantitatively accurate estimates of the actual values of the planner's instruments, whereas a time-inconsistency issue is found to affect the transition approach. |
| Keywords: | Heterogeneous agents optimal Ramsey program transition approach truncation approach aggregate shock D31 D52 E21, Heterogeneous agents, optimal Ramsey program, transition approach, truncation approach, aggregate shock D31, D52, E21 |
| Date: | 2023–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04384031&r=dge |
| By: | Agustín Díaz Casanueva |
| Abstract: | The paper studies the relationship between cognitive ability, education outcomes, wages, and fertility timing, focusing on how cognitive ability influences fertility decisions. First, the paper presents empirical evidence on the relationship between cognitive ability, early pregnancies, and pregnancy intention using NLSY79 data. Second, I build and estimate a life-cycle model to quantify the importance of cognitive ability, wages, marriage, and edu-cation outcomes on women’s fertility. To explain the data, the model needs heterogeneous contraception costs by ability, as the relation between cognitive ability with education and labor opportunities can not explain the relation of cognitive ability with fertility timing. Next, I use the model to analyze how decreasing contraception costs affect early pregnancies and women’s educational outcomes. Finally, I study the mechanism behind the decline in teen pregnancies during the ’90s. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:1001&r=dge |
| By: | Badarinza, Cristian (National University of Singapore); Ramadorai, Tarun (Imperial College Business School and CEPR); Siljander, Juhana (Imperial College Business School); Tripathy, Jagdish (Bank of England) |
| Abstract: | We study the aggregate implications of reference dependent and loss averse preferences in the housing market. Motivated by micro evidence, we embed optimizing homeowners with these preferences into a dynamic search and matching equilibrium model with rich heterogeneity and realistic constraints. We assess the model using large and granular administrative data tracking buyers and sellers in the UK housing market; the predictions match regional and time variation in price growth and transaction volumes. The model shows that behavioral frictions in a decentralized market can link nominal quantities with real outcomes; and reveals that the distribution of potential nominal gains in the housing market is a key policy-relevant statistic. |
| Keywords: | Reference dependence; behavioral frictions; housing |
| JEL: | D12 D91 G51 R21 R31 |
| Date: | 2024–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1054&r=dge |
| By: | Carlos Madeira; João Madeira; Paulo Santos Monteiro |
| Abstract: | We investigate how dissent in the FOMC is affected by structural macroeconomic shocks obtained using a medium-scale DSGE model. We find that dissent is less (more) frequent when demand (supply) shocks are the predominant source of inflation fluctuations. In addition, supply shocks are found to raise private sector forecasting uncertainty about the path of interest rates. Since supply shocks impose a trade-off between inflation and output stabilization while demand shocks do not, our findings are consistent with heterogeneous preferences over the dual mandate among FOMC members as a driver of policy disagreement. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:993&r=dge |
| By: | Xiwen Bai (Tsinghua University); Jesús Fernández-Villaverde (University of Pennsylvania); Yiliang Li (University of International Business and Economics); Francesco Zanetti (University of Oxford) |
| Abstract: | We study the causal effects and policy implications of global supply chain disruptions.We construct a new index of supply chain disruptions from the mandatory automatic identification system data of container ships, developing a novel spatial clustering algorithm that determines real-time congestion from the position, speed, and heading of container ships in major ports around the globe. We develop a model with search frictions between producers and retailers that links spare productive capacity with congestion in the goods market and the responses of output and prices to supply chain shocks. The co-movements of output, prices, and spare capacity yield unique identifying restrictions for supply chain disturbances that allow us to study the causal effects of such disruptions. We document how supply chain shocks drove inflation during 2021 but that, in 2022, traditional demand and supply shocks also played an important role in explaining inflation. Finally, we show how monetary policy is more effective in taming inflation after a global supply chain shock than in regular circumstances. |
| Keywords: | supply chain disruptions, search-and-matching in the goods market, SVAR, state-dependence of monetary policy |
| JEL: | E32 E58 J64 |
| Date: | 2024–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:24-001&r=dge |
| By: | Masashige Hamano (Faculty of Political Science and Economics, Waseda University); Toshihiro Okubo (Faculty of Economics, Keio University) |
| Abstract: | This paper investigates the dynamics specific to various firm cohorts and their implications at an aggregate level. Utilizing a structural model that incorporates entry, exit, and selection of heterogeneous firms, we demonstrate that the dynamics of firms from each generation, and thus the historical economic landscape, can be reconstructed. Moreover, we estimate generation-specific parameters in both demand and supply within our theoretical model, using Japanese data. Our findings reveal that fixed operational costs for firms established immediately after the Second World War are relatively lower compared to subsequent generations of firms, resulting in an increased market congestion for these early-born enterprises. |
| Keywords: | Heterogeneity; fixed cost; business cycles |
| JEL: | D24 E23 E32 L11 L60 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:wap:wpaper:2307&r=dge |
| By: | Jesús Fernández-Villaverde (University of Pennsylvania); Gustavo Ventura (Arizona State University); Wen Yao (Tsinghua University) |
| Abstract: | Due to population aging, GDP growth per capita and GDP growth per working-age adult have become quite different among many advanced economies over the last several decades. Countries whose GDP growth per capita performance has been lackluster, like Japan, have done surprisingly well in terms of GDP growth per working-age adult. Indeed, from 1998 to 2019, Japan has grown slightly faster than the U.S. in terms of per working-age adult: an accumulated 31.9% vs. 29.5%. Furthermore, many advanced economies appear to be on parallel balanced growth trajectories in terms of working-age adults despite important differences in levels. Motivated by this observation, we calibrate a standard neoclassical growth model in which the growth of the working-age adult population varies in line with the data for each economy. Despite the underlying demographic differences, the calibrated model tracks output per working-age adult in most economies of our sample. Our results imply that the growth behavior of mature, aging economies is not puzzling from a theoretical perspective. |
| Keywords: | Demographics, Growth, Developed Economies |
| JEL: | E2 J1 |
| Date: | 2023–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:24-002&r=dge |
| By: | Mr. Andrew Berg; Mr. Edward F Buffie; Mariarosaria Comunale; Mr. Chris Papageorgiou; Luis-Felipe Zanna |
| Abstract: | The current wave of technological revolution is changing the way policies work. This paper examines the growth and distributional implications of three policies when “robot'' capital (a broad definition of robots, Artificial Intelligence, computers, big data, digitalization, networks, sensors and servos) is introduced in a neoclassical growth model. 1) cuts to the corporate tax rate; 2) increases in education spending; and 3) increases in infrastructure investment. We find that incorporating “robot'' capital into the model does make a big difference to policy outcomes: the trickle-down effects of corporate tax cuts on unskilled wages are attenuated, and the advantages of investment in infrastructure, and especially in education, are bigger. Based on our calibrations grounded on new empirical estimates, infrastructure investment and corporate tax cuts dominate investment in education in a "traditional" economy. However, in an economy with “robots” the infrastructure investment dominates corporate tax cuts, while investment in education tends to produce the highest welfare gains of all. The specific results, of course, may depend on the exact modeling of the technological change, but our main results remain valid and can provide more accurate welfare rankings. |
| Keywords: | Technological change; Artificial Intelligence; robots; growth; income distribution; fiscal policy; public investment; education |
| Date: | 2024–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/003&r=dge |