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on Dynamic General Equilibrium |
| By: | Girstmair, Stefan |
| Abstract: | This paper investigates the importance of including data on new housing supply in Dynamic Stochastic General Equilibrium (DSGE) models in forecasting the Great Financial Crisis (GFC), focusing on the U.S. While existing models have added a financial sector and real estate sector, they have largely overlooked housing supply. I develop an extended DSGE model that includes both the financial sector and endogenous housing supply and show that forecasting accuracy significantly improves when data on new houses is included. Robustness checks confirm the importance of these additions to the model. The findings highlight the necessity of combining model extension and housing supply data for accurate forecasting during economic crises. I identify negative housing demand shocks and escalating adjustment costs as primary drivers of the GFC, propagating into the real economy and accelerating through the financial sector. Additionally, this paper addresses the zero lower bound challenge in modeling forward guidance using a regime change approach. JEL Classification: E17, E32, E37, R21, R31 |
| Keywords: | Bayesian estimation, DSGE, housing, model projection |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242895&r=dge |
| By: | Ortiz, Marco; Inca, Arthur; Solf, Fabrizio |
| Abstract: | Nominal GDP targeting (NGDP) rules have gained attention as a potential alternative to traditional models of monetary policy. In this paper, we extend the analysis of the welfare implications of NGDP rules within a New Keynesian model with nominal price and wage rigidities. Using a welfare function derived from the utility of consumers, we compare the NGDP target with a domestic inflation target, a CPI inflation target, and a Taylor rule in a small open economy scenario. Our simulations reveal that NGDP rules confer advantages on a central bank when the economy faces supply shocks, while their performance against demand shocks is comparable to that of a CPI target rule. These findings suggest that NGDP targeting could be a useful policy framework for central banks seeking to enhance their ability to stabilize the economy. |
| Keywords: | Nominal GDP targeting, optimal monetary policy, General equilibrium, open economy macroeconomics. |
| JEL: | E31 E32 E52 F41 |
| Date: | 2024–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119999&r=dge |
| By: | Martin Beraja; Nathan Zorzi |
| Abstract: | Stimulus checks have become an increasingly important policy tool in recent U.S. recessions. How does the households' marginal propensity to spend (MPX) vary as checks become larger? To quantify this size-dependence in the MPX, we augment a canonical model of durable spending by introducing a smooth adjustment hazard. We discipline this hazard by matching a rich set of micro moments. We find that the MPX declines slowly with the size of checks. In contrast, the MPX is flatter in a purely state-dependent model of durables, and declines sharply in a two-asset model of non-durables. Finally, we embed our spending model into an open-economy heterogeneous-agent New-Keynesian model. In a typical recession, a large check of $2, 000 increases output by 25 cents per dollar, compared to 37 cents for a $300 check. Large checks thus remain effective but extrapolating from the response out of small checks overestimates their impact. |
| JEL: | C0 E0 H0 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32080&r=dge |
| By: | Jorge Abad; Galo Nuño; Carlos Thomas |
| Abstract: | We analyze 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 CBDC on the 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’ one. For larger CBCD adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a ‘ceiling’ one with scarce reserves. |
| Keywords: | central bank digital currency, interbank market, search and matching frictions, excess reserves |
| JEL: | E42 E44 E52 G21 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10896&r=dge |
| By: | Jonathan J Adams (Department of Economics, University of Florida) |
| Abstract: | How should policymakers respond to mistakes made by agents without rational expectations? I demonstrate in a general setting that the optimal policy is determined by a sufficient statistic: agents' belief distortion or "sentiment". This result is both simple and only semi-structural: in order to calculate policy from the sentiment, the policymaker does not need to know the whole macroeconomic model. They only need to know how sentiments and policies distort decisions. Crucially, they do not even need to know how expectations are formed; they only need to measure them. Next, I study several examples. In a behavioral RBC model, the optimal policy is to tax capital when agents are overly optimistic about future returns. In a behavioral New Keynesian model, the optimal policy is raise interest rates when agents misperceive the economy to be running hot. I conclude by arguing for policymakers to focus on estimating sentiments in the data. |
| JEL: | E52 E61 E70 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ufl:wpaper:001011&r=dge |
| By: | Christian Keuschnigg (University of St.Gallen, Institute of Economics (FGN-HSG)); Michael Kogler (German Council of Economic Experts); Johannes Matt (London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | How do banks’ lending decisions influence firm turnover and creative destruction? We develop a dynamic general equilibrium model in which banks restructure loans with high default risk, thereby releasing funds for new lending and forcing firms with poor prospects to close down. By reducing banks’ reliance on external funds, loan restructuring lowers the equilibrium interest rate, which stimulates firm creation. We derive analytical and quantitative results from the model calibrated to German data: A lower cost of loan liquidation (e.g., improved insolvency laws) accelerates firm entry and exit, and boosts aggregate capital productivity mainly by incentivizing more active credit reallocation. Restructuring also complements policies that aim at stimulating firm creation (e.g., R&D subsidies) as it mitigates a crowding-out of entry via the interest rate. |
| Keywords: | Creative destruction, reallocation, bank credit, productivity |
| JEL: | E23 E44 G21 O4 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2404&r=dge |
| By: | Guimarães, Luis; Lourenço, Diogo |
| Abstract: | What is the impact of replacing conditional welfare programs with a Universal Basic Income (UBI) that costs the same? We answer this question using a general-equilibrium model with incomplete markets that accounts for three imperfections of conditional programs: incomplete take-up, illegitimate transfers, and administrative costs. We find that these imperfections, particularly incomplete take-up, substantially affect welfare. We also find that replacing the conditional programs with a UBI would increase capital stock, employment, and output, and lower inequality. Yet, the welfare effect of a UBI is not clear-cut. Aggregate welfare would fall in our benchmark, but a moderately larger UBI would be preferable to an equal expansion of conditional programs, especially for the least educated. |
| Keywords: | Universal Basic Income; Welfare System; Take-up; Illegitimate Transfers; Administrative Costs; Labor Market Flows. |
| JEL: | D52 E21 H24 J21 J64 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119964&r=dge |
| By: | Suzane Bellue |
| Abstract: | In the United States, less-educated parents tend to choose lower levels of parental inputs, they reside in bad neighborhoods and allocate little time to parent-child activities. I propose a spatial overlapping generation model of parental decisions about time and neighborhood quality with imperfect information and social learning. Specifically, young agents learn about the relevance of parental inputs through observing their neighbors. Crucially, however, they are prone to misinferences as they may not be able to perfectly correct for selection induced by income segregation. I calibrate the model using several United States representative datasets. The calibrated model matches targeted and non-targeted parental behavior moments across socioeconomic groups. I find a relatively modest level of parental delusion that increases inequality by 3% (income Gini index) and social immobility by 12% (intergenerational rank-rank). A housing voucher policy improves the neighborhood quality of eligible families, raising children’s future earnings. When scaling up the policy, long-run and general equilibrium responses in parental beliefs amplify the policy effects. Inequality reduces, and intergenerational mobility improves. |
| Keywords: | neighborhood, education, human capital, learning, social mobility |
| JEL: | D13 D62 D83 E24 I2 J13 R2 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_472&r=dge |
| By: | Stefan Hohberger; Adrian Ifrim; Beatrice Pataracchia; Marco Ratto |
| Abstract: | We investigate the empirical implications of myopic behaviour within an estimated medium-scale macroeconomic DSGE model. Our analysis provides a comprehensive and agnostic examination of the macroeconomic outcomes when households’ and firms’ beliefs deviate from rational expectations, as proposed by Gabaix (2020). The estimation on US data proposes a strong preference towards cognitive discounting and suggests: (i) an improvement in overall model fit and forecasting performance, (ii) more stimulative fiscal policy, (iii) demand shocks resembling uncertainty shocks where consumption and investment co-move, and (iv) a diminished efficacy of monetary policy. Notably, our empirical results support the presence of rational price setters. |
| Keywords: | myopic behaviour, DSGE, rational expectation, Bayesian estimation, US business cycle |
| JEL: | E17 E62 E63 E70 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-11&r=dge |