|
on Dynamic General Equilibrium |
|
Issue of 2024‒02‒26
sixteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Adjemian, Stéphane; Juillard, Michel; Karamé, Fréderic; Mutschler, Willi; Pfeifer, Johannes; Ratto, Marco; Rion, Normann; Villemot, Sébastien |
| Abstract: | Dynare is a software platform for handling a wide class of economic models, in particular dynamic stochastic general equilibrium (DSGE) and overlapping generations (OLG) models. The models solved by Dynare include those relying on the rational expectations hypothesis, wherein agents form their expectations about the future in a way consistent with the model. But Dynare is also able to handle models where expectations are formed differently: on one extreme, models where agents perfectly anticipate the future; on the other extreme, models where agents have limited rationality or imperfect knowledge of the state of the economy and, hence, form their expectations through a learning process. Dynare offers a user-friendly and intuitive way of describing these models. It is able to perform simulations of the model given a calibration of the model parameters and is also able to estimate these parameters given a dataset. Dynare is a free software, which means that it can be downloaded free of charge, that its source code is freely available, and that it can be used for both non-profit and for-profit purposes. |
| Keywords: | Dynare; Numerical methods; Perturbation; Rational expectations |
| JEL: | C5 C6 C8 |
| Date: | 2024–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:080&r=dge |
| By: | Mr. Manuk Ghazanchyan; Mr. Alexei Goumilevski; Mr. Alex Mourmouras |
| Abstract: | This paper examines the welfare effects of automation in neoclassical growth models with and without intergenerational transfers. In a standard overlapping generations model without such transfers, improvements in automation technologies that would lower welfare can be mitigated by shifts in labor supply related to demographics or pandemics. With perfect intergenerational transfers based on altruism, automation could raise the well-being of all generations. With imperfect altruism, fiscal transfers (universal basic income) and public policies to expand access to education opportunities can alleviate much of the negative effect of automation. |
| Keywords: | Automation; Aging; Altruism; Fiscal Policy; Education; Overlapping Generations |
| Date: | 2024–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/011&r=dge |
| By: | Tryggvi Gudmundsson; Chris Jackson; Mr. Rafael A Portillo |
| Abstract: | We study the global inflation surge during the pandemic recovery and the implications for aggregate and sectoral Phillips curves. We provide evidence that Phillips curves shifted up and steepened across advanced economies, and that differences in the inflation response across sectors imply the relative price of goods has been pro-cyclical this time around rather than a-cyclical as during previous cycles. We show analytically that these three features emerge endogenously in a two-sector new-Keynesian model when we introduce unbalanced recoveries that run against a supply constraint in the goods sector. A calibrated exercise shows that the resulting changes to the output-inflation relation are quantitatively important and improve the model's ability to replicate the inflation surge during this period. |
| Keywords: | Inflation; Phillips Curves; COVID-19 |
| Date: | 2024–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/007&r=dge |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission. |
| Keywords: | central bank research; international financial markets; monetary policy transmission |
| JEL: | E44 E52 F36 F42 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-3&r=dge |
| By: | Krenz, Johanna |
| Abstract: | What are the effects of financial integration on global comovement? Using a standard two-country DSGE model, I show that in response to country-specific supply shocks higher exposure to foreign assets leads to lower cross-country output correlations, while the opposite is true for country-specific demand shocks. I argue that an important, yet overlooked, transmission channel originates in the interplay between financial integration and terms of trade movements in response to the shocks hitting the economy. The transmission channel is independent of whether the agents who hold the foreign assets are financially constrained or not. |
| Keywords: | Business cycle comovement, Financial cycle comovement, Financial integration, Demand versus supply shocks, Terms of trade, Transfer Problem, Balance sheet effect |
| JEL: | E30 E44 F41 F44 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:uhhwps:281784&r=dge |
| By: | François Le Grand; Xavier Ragot (Sciences Po - Sciences Po) |
| Abstract: | We present a refinement of the uniform truncation method of LeGrand and Ragot (2022) to solve heterogeneous-agent models with aggregate shocks. The method consists in providing a finite state-space representation of such economies by truncating idiosyncratic histories. The innovation compared to the uniform method is to allow for truncated histories of different lengths. This offers a finer representation when needed, while considerably reducing the model dimensionality. The method reproduces the steady-state distribution of any heterogeneousagent model and solves for its dynamics in the presence of aggregate shocks. As the uniform method, the refined method can be solved using perturbation methods and hence implemented with standard software, such as Dynare. We show that the refined truncation method provides accurate results that improve on those of the uniform method. |
| Keywords: | Heterogeneous agents, Truncation method, Aggregate shocks |
| Date: | 2022–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04384033&r=dge |
| By: | Esposito, Federico; Hassan, Fadi |
| Abstract: | We analyze the role of trade credit and financial frictions in the propagation of international trade shocks along the supply chain. First, we show empirically that exposure to import competition from China increased the use of trade credit in the U.S. Then, we use a multi-country input-output trade model with borrowing constraints, trade credit, and endogenous employment to quantify the general equilibrium effects of such increase, characterizing the different channels at work. Borrowing constraints amplify the negative consequences of the China shock on employment, but introducing trade credit reduces these losses by 8%-27%, depending on the tightness of the constraints. |
| Keywords: | trade credit; trade shocks; financial frictions; borrowing constraints; employment |
| JEL: | E10 E44 F14 F15 F16 G20 |
| Date: | 2023–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121378&r=dge |
| By: | Enisse Kharroubi; Enisse Kharroubi and Frank Smets |
| Abstract: | Following evidence on the role of firm profits in the current inflation surge, we develop a New Keynesian model where profit-driven inflation stems from the presence of reservation profits on the supply side. We use this framework to investigate the positive and normative implications of cost push shocks, focusing on energy price shocks. We first show that these shocks lead to inefficiently large supply contractions and thereby inefficiently large (profit-driven) inflation, as firms which retrench do not internalise the social costs of doing so. Second, we show that optimal monetary policy follows a pecking order. It first aims at shielding the supply side from the fallout of the shock, thereby undoing the negative retrenchment externality. It then splits the burden of the shock between supply and demand, when insulating the supply side is too costly. Finally, when the energy price shock is very large, monetary policy loses traction. Budget-neutral fiscal interventions, e.g. redistribution from high- to low-income households and/or from high- to low-profit firms, can then restore monetary policy effectiveness. |
| Keywords: | energy price shocks, price stickiness, reservation profits, optimal monetary policy, corporate tax |
| JEL: | D21 E23 E31 E32 E52 E62 H24 H25 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1167&r=dge |
| By: | Gene Kindberg-Hanlon; Michael Girard |
| Abstract: | The Beveridge curve shifted substantially higher in the United States following the start of the COVID pandemic. In 2022, vacancies reached record highs across all sectors while unemployment fell to pre-pandemic lows. At the same time, the pandemic has resulted in severe labor shortages, and we estimate that the labor force was approximately 2 million below trend at the start of 2023. We exploit state-level data in the United States to find that lower immigration, higher excess mortality due to COVID, and falling older-worker labor force participation were associated with larger upward shifts in the Beveridge curve. We also find that states that had a larger employment concentration in contact-intensive sectors had larger upward shifts in their Beveridge curve. While the effect of sectoral reallocation and rehiring has been shown in theoretical models to lift the Beveridge curve, we show that worker shortages also result in an upward shift in the Beveridge curve if they increase the marginal product of labor. This result holds in a search and matching model with on-the-job search, but does not hold without on-the-job search. |
| Keywords: | Beveridge Curve; COVID |
| Date: | 2024–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/008&r=dge |
| By: | Pavel Vikharev (Bank of Russia, Russian Federation); Anna Novak (Bank of Russia, Russian Federation); Andrei Shulgin (Bank of Russia, Russian Federation) |
| Abstract: | The paper explores the mutual influence of inequality and monetary policy. The model introduces household heterogeneity in terms of access to the financial market and intertemporal preferences. The parameters are calibrated and estimated based on both Russia's microdata (including RLMS-HSE and HBS) and macro statistics. We have shown that the introduction of households with no access to the financial market has only a slight impact on the transmission of a monetary policy shock, while its secondary effects help amplify the action of most structural shocks. The behavior of wealthy hand-to-mouth households amplifies the response of macroeconomic variables to the monetary policy shock but has a slight impact on these variables' responses to most of the other structural shocks. We have identified non-structural inequality shocks at the bottom and the top of the Lorenz curve. As a result, we have found that the mutual influence of inequality and monetary policy is limited. The interest rate immediate response to changes in the Gini consumption index equals 0.1 for inequality shocks and 10 for a monetary policy shock. We have demonstrated that the shocks at the top of the Lorenz curve cause a more persistent response from the economy, whereas the shock at the bottom of the Lorenz curve. On first approximation, only one integral inequality indicator can be used to study the role of inequality in a business cycle. The relative consumption dynamics for specified household groups is not a conclusive indicator of either pro- or disinflationary policy, but it provides additional data to help identify structural shocks. |
| Keywords: | monetary policy, inequality, THRANK, inequality shock, hand-to-mouth, Russia, Lorenz curve, household heterogeneity, Wealthy HtM |
| JEL: | E21 E44 E52 E58 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps113&r=dge |
| By: | Federico S. Mandelman; Mehra Mishita; Hewei Shen |
| Abstract: | This paper studies the impact of skilled immigration policy frictions in the United States on technology-intensive firms by age cohorts. We use firm-level data and a general equilibrium model with endogenous firm entry and exit. The empirical results show that skilled immigration policy frictions directly influence young firm dynamics in technology-intensive sectors by affecting firm survival. Our general equilibrium model incorporates skilled foreign labor and immigration policy frictions that mimic the H-1B policy and matches the age distribution of firms in high-technology sectors, showing also that increased entry of younger firms leads to a greater exit of older firms. |
| Keywords: | skilled immigration; start-ups; high-technology firms; firm dynamics |
| JEL: | F22 M13 |
| Date: | 2024–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:97726&r=dge |
| By: | Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Andreas Schrimpf (Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen); Yuan Zhang (Shanghai University of Finance and Economics) |
| Abstract: | We develop a continuous time general equilibrium model with intermediaries at the heart of international financial markets. Global intermediaries bargain with households and extract rents from providing access to foreign claims. By tilting state prices, intermediaries’ market power breaks monetary neutrality and makes international risksharing inefficient. Despite having zero net positions, markups charged by intermediaries significantly distort international asset prices and exchange rate dynamics and their response to shocks. Our model can reproduce patterns consistent with several well-known exchange rate puzzles, such as deviations from Uncovered and Covered Interest Parity. All equilibrium quantities are derived in closed form, allowing us to pin down the underlying economic mechanisms explicitly. |
| Keywords: | Financial Intermediation, Exchange Rates, Uncovered Interest Parity, Covered Interest Parity Deviations |
| JEL: | E44 E52 F31 F33 G13 G15 G23 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2401&r=dge |
| By: | Phoebe Tian |
| Abstract: | This paper examines inefficiencies arising from a lack of long-term contracting in small business lending in China. I develop and estimate a dynamic model where firms repeatedly interact with the same lender. All loans are short-term. Collateral can be used to deter a strategic default by a firm, but the lender cannot recover the full value of the collateral in the case of a default. The endogenous contract terms—including interest rates, loan size and collateral—reflect a firm’s probability of default in equilibrium. Learning drives the dynamics of contract terms because a firm’s profitability type is unknown. Long-term contracts improve welfare mainly by mitigating the incentives for a firm to default. |
| Keywords: | Financial institutions |
| JEL: | D83 D86 G21 L14 L26 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-2&r=dge |
| By: | Monisankar Bishnu; S Chandrasekhar; Srinivasan Murali |
| Abstract: | India, on top of having a large gender gap in labour force participation, also experienced a significant decline in participation rate of women in the recent years. In order to understand, and to decompose the gender gap and the decline in female labour force participation into demand and supply side factors, we present an equilibrium joint search model of couples with gender-specific wage offers and home productivities. In this heterogeneous agents setup, our counterfactual exercises show that, gender disparities in labour demand can account for only 6.4% of the level difference, while the differential trends in labour demand can explain around 35% of the decline in female participation over time. We find that the increase in average household income driven by a large increase in male wages compared to female wages, reduced the need for women to supplement the family income, in turn causing them to drop out of the labour force. |
| Keywords: | labour force participation, gender gap, household search, home production |
| JEL: | E24 J22 J64 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-08&r=dge |
| By: | Xiwen Bai; Jesús Fernández-Villaverde; Yiliang Li; Francesco Zanetti |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-09&r=dge |
| By: | Nicholas Lawson (Department of Economics, University of Quebec in Montreal) |
| Abstract: | In recent decades, there has been a lengthy debate about the fiscal costs or benefits of immigration, and much of the literature has found fiscal impacts that are close to zero. However, these studies have ignored the possibility that immigrants may be victims of wage discrimination in the labour market, despite evidence of such discrimination in various countries. In the presence of such discrimination, existing estimates of the fiscal impact of immigration will be biased: if immigrants are paid less than their marginal products, then someone else is receiving that income ? mostly likely the firm?s owners or other workers ? and paying taxes on it, and that fiscal benefit is ignored by a model that disregards discrimination. In this paper, I evaluate the quantitative importance of this mechanism, by calibrating a search-and-matching model to Canadian data and simulating the fiscal impact of increases in immigration. When the model and calibration omits wage discrimination against immigrants, the average fiscal impact of immigration is negative, but it becomes positive if discrimination explains the wage gaps between natives and immigrant workers: at an economy-wide level, an annual fiscal cost of about $3 billion in the absence of discrimination becomes a fiscal benefit of about $4 billion in the presence of discrimination. My results indicate that wage discrimination against immigrants could significantly affect our estimates of the fiscal impact of immigration. |
| Keywords: | discrimination, immigration, fiscal benefits |
| JEL: | H27 J61 J79 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:grc:wpaper:24-01&r=dge |