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on Dynamic General Equilibrium |
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Issue of 2024‒03‒11
fourteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Yongquan Cao; Vitor Gaspar; Mr. Adrian Peralta Alva |
| Abstract: | This paper quantifies the costs of a permanent increase in debt to GDP. We employ a deterministic, overlapping generations model with two assets and no risk of default. The two assets are public debt and private (productive) capital. We assume that the return on private capital equals the interest rate on public debt plus an exogenously given spread. Employing a analytical version of the model we show an example in which a permanent rise in the public debt ratio leads to a significant reduction in steady-state GDP even as r |
| Keywords: | Crowding out; public debt |
| Date: | 2024–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/010&r=dge |
| By: | Katrin Assenmacher; Massimo Ferrari Minesso; Arnaud Mehl; Maria Sole Pagliari |
| Abstract: | We develop a two-country DSGE model with financial frictions to study the transi- tion from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-cost- free means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption and output. We use non-linear solution meth- ods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand. |
| Keywords: | Central bank digital currency, open-economy DSGE models, steady- state transition, occasionally binding constraints |
| JEL: | E50 E58 F30 F41 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:803&r=dge |
| By: | Gerke, Rafael; Giesen, Sebastian; Lozej, Matija; Röttger, Joost |
| Abstract: | Heterogeneous-agent New Keynesian models with sticky nominal wages usually assume that wage-setting unions demand the same amount of hours from all households. As a result, unions do not take account of the fact that (i) households are heterogeneous in their willingness to work, and that (ii) some households might have to work more hours than they would like to. In this paper, we consider two departures from the standard modelling approach. First, we consider a model version in which unions can demand different hours from different households, directly taking household heterogeneity into account. In this case, we show that unions find it optimal to ration hours worked for all households, such that nobody works more than desired. Compared to the standard case in which all households work the same amount by assumption, the response of output, wages and inflation to monetary policy shocks becomes notably less pronounced. This attenuation reflects that hours worked respond differently across the income distribution. The second model version we consider maintains the assumption that all households work the same amount but prohibits unions from requiring any household to work more than it would like to. This modification substantially lowers the effective stickiness of nominal wages, resulting in markedly different wage and inflation dynamics. |
| Keywords: | Heterogeneous households, HANK, labour supply, nominal wage rigidity, monetary policy |
| JEL: | D31 E21 E24 E31 E52 E58 J22 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:282992&r=dge |
| By: | Elena Capatina; Gary Hansen; Minchung Hsu |
| Abstract: | This paper compares the impact of long term care (LTC) risk on single and married households and studies the roles played by informal care (IC), consumption sharing within households, and Medicaid in insuring this risk. We develop a life-cycle model where individuals face survival and health risk, including the possibility of becoming highly disabled and needing LTC. Households are heterogeneous in various important dimensions including education, productivity, and the age difference between spouses. Health evolves stochastically. Agents make consumption-savings decisions in a framework featuring an LTC statedependent utility function. We find that household expenditures increase significantly when LTC becomes necessary, but married individuals are well insured against LTC risk due to IC. However, they still hold considerable assets due to the concern for the spouse who might become a widow/widower and can expect much higher LTC costs. IC significantly reduces precautionary savings for middle and high income groups, but interestingly, it encourages asset accumulation among low income groups because it reduces the probability of meanstested Medicaid LTC. |
| Keywords: | Long Term Care, Household Risk, Precautionary Savings, Medicaid |
| JEL: | D91 E21 H31 I10 I38 J14 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2023-697&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. |
| JEL: | E40 E5 F30 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32128&r=dge |
| By: | Frankovic, Ivan; Kolb, Benedikt |
| Abstract: | We show the importance of emission disclosure for climate policies in a DSGE model for the euro area. A low-carbon energy and a fossil energy sector contribute to production and are financed by balance-sheet constrained intermediaries. The underestimation of emissions from fossil energy firms (imperfect disclosure) provides them with too much funding. While improving disclosure in isolation has limited effects, it proves most beneficial in connection with higher carbon taxes: Improving disclosure by 20 percentage points reduces GDP costs of a carbon tax by 13%. For a carbon tax increase of 50 euro/ton CO2, this implies an average GDP benefit of 47 bn euro over six years. |
| Keywords: | emission disclosure, climate-related disclosure, climate policy, carbon taxation, E-DSGE, financial frictions |
| JEL: | D82 E17 G11 G14 G18 H23 Q43 Q58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:282981&r=dge |
| By: | Qazi Haque; Oscar Pavlov; Mark Weder |
| Abstract: | The rise of market power in the last decades is primarily driven by the largest firms. We propose a theory of these superstar firms in which their technology involves the ability to produce multiple products. Superstars interact with smaller competitors and market share reallocations and product creation generate heterogeneous markup dynamics across firms. Higher market shares of superstars increase the parameter space for macroeconomic indeterminacy. Bayesian estimation of the general equilibrium model suggests the importance of the endogenous amplification of the product creation channel and animal spirits play a non-trivial role in driving U.S. business cycles. |
| Keywords: | superstars, multi-product firms, business cycles, animal spirits, Bayesian estimation |
| JEL: | E32 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-15&r=dge |
| By: | Goulder, Lawrence H. (Resources for the Future); Long, Xianling; Qu, Chenfei; Zhang, Da |
| Abstract: | China’s recently launched CO2 emissions trading system, already the world’s largest, aims to contribute importantly to global reductions in greenhouse gas emissions. The system, a tradable performance standard (TPS), differs importantly from cap and trade (C&T), the principal approach used in other countries. We offer a dynamic general equilibrium assessment of this new venture, employing a model that uniquely considers institutional and fiscal features of China’s economy that influence economy-wide policy costs and distributional impacts.Key findings include the following. The TPS’s environmental benefits exceed its costs by a factor of five when only the climate benefits are considered and by a significantly higher factor when health benefits from improved air quality are included. Its interactions with China’s fiscal system substantially affect its costs relative to those of C&T. Employing a single benchmark for the electricity sector would lower costs by over a third relative to the existing four-benchmark system but increase the standard deviation of percentage income losses across provinces by more than 60 percent. Introducing an auction as a complementary source of allowance supply can lower economywide costs by at least 30 percent. |
| Date: | 2024–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:rff:dpaper:dp-24-02&r=dge |
| By: | Euihyun Bae; Andrew Hodge; Miss Anke Weber |
| Abstract: | This paper studies how and why inflation expectations have changed since the emergence of Covid-19. Using micro-level data from the University of Michigan Survey of Consumers, we show that the distribution of consumer expectations at one-year and five-ten year horizons has widened since the surge of inflation during 2021, along with the mean. Persistently high and heterogeneous expectations of consumers with less education and lower income are mainly responsible. A simple model of adaptive learning is able to mimic the change in inflation expectations over time for different demographic groups. The inflation expectations of low income and female consumers are consistent with using less complex forecasting models and are more backward-looking. A medium-scale DSGE model with adaptive learning, estimated during 1965-2022, has a time-varying solution that produces lower forecast errors for inflation than a variant with rational expectations. The estimated model interprets the surge of inflation in 2021 mainly as the result of a price markup shock, which is more persistent and requires a larger and more persistent monetary policy response than under rational expectations. |
| Keywords: | Inflation Expectations; Learning; Forecasting |
| Date: | 2024–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/025&r=dge |
| By: | Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Sarah Nandnaba (Department of Economics, Ecole normale superieure (ENS) Paris-Saclay, 91190 Gif-sur-Yvette, France); Wei Jiang (School of Economics, University of Kent, Canterbury, Kent, CT2 7PE, United Kingdom) |
| Abstract: | We develop an overlapping generations endogenous growth model characterized by climate change, with the latter being specified as a fraction of output lost due changes in temperature anomalies. We show that growth dynamics arise in this model when changes in temperature anomalies is a positive function current economic growth, with this theoretical specification motivated through extensive empirical analyses involving 167 countries over a long span of historical data covering 1851 to 2018. In particular, two distinct oscillatory growth dynamics emerge: one convergent and the other divergent, contingent on the strength of the response of global warming, i.e., changes in temperature anomalies to current economic growth. Our theoretical results suggest that policy makers should be cognizant of the fact that unless economic growth is “green†, rapid global warming can would put economies in a fluctating divergent balanced growth. |
| Keywords: | Climate change, endogenous growth, dynamics |
| JEL: | C23 O41 Q54 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202404&r=dge |
| By: | Clancy, Daragh; Smith, Donal; Valenta, Vilém |
| Abstract: | Policymakers around the world are encouraging the local production of key inputs to reduce risks from excessive dependencies on foreign suppliers. We analyse the macroeconomic effects of supply chain reorientation through localisation policies, using a global dynamic general equilibrium model. We proxy non-tariff measures, such as the stricter enforcement of regulatory standards, which reduce import quantity but do not directly alter costs and prices. These measures have, so far, been a key component of attempts to reshore production and are an increasingly popular trade policy instrument in general. Focusing on the euro area, we find that localisation policies are inflationary, imply transition costs and generally have a negative long-run effect on aggregate domestic output. The size (and sign) of the impact depends on whether these policies are implemented unilaterally or induce a retaliation from trade partners, and the extent to which they reduce domestic competition and productivity. We provide some recommendations for policymakers considering implementing a localisation agenda. JEL Classification: F13, F41, F45, F62 |
| Keywords: | general equilibrium, reshoring, strategic autonomy |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242903&r=dge |
| By: | Francesco Agostinelli; Domenico Ferraro; Xincheng Qiu; Giuseppe Sorrenti |
| Abstract: | This paper studies the mechanisms and the extent to which parental wage risk passes through to children’s skill development. Through a quantitative dynamic labor supply model in which two parents choose whether to work short or long hours or not work at all, time spent with children, and child-related expenditures, we find that income risk impacts skill accumulation, permanently lowering children’s skill levels. To the extent that making up for cognitive skill losses during childhood is hard—as available evidence suggests—uninsurable income risk can negatively impact the labor market prospects of future generations. |
| Keywords: | wage risk, household labor supply, child development, social insurance |
| JEL: | D10 J13 J22 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10914&r=dge |
| By: | Olivier Cardi; Fatma Hoke; Romain Restout |
| Abstract: | By exploiting the downward trend of profits' taxation observed in OECD countries which is rooted into international competition to attract capital, we identify exogenous variations in the corporate income tax rate. Estimating a SVAR model with long-run restrictions for a panel of eleven OECD countries over 1973-2017, we find that a permanent decline in profits' taxation leads to significant technology improvements which are concentrated in traded industries. The corporate tax cut has also an expansionary effect on hours concentrated in non-traded industries. The country-split shows that technology significantly improves in English-speaking and Scandinavian countries only while hours persistently increase only in continental European countries. To account for the dynamic effects of a corporate tax cut, we consider a two-sector open economy model with tradables and non-tradables and endogenous technology decisions where both capital and technology can be used more intensively. The model can account for the magnitude of technology improvements we estimate empirically as long as the traded sector is intensive in R&D, experiences low costs in the use of the stock of knowledge and also highly benefits from international R&D spillover. While large elasticities of utilization-adjusted-TFP w.r.t. the domestic and international stock of knowledge must be assumed in English-speaking and Scandinavian countries, in accordance with our estimates, we have to allow for sticky wages in continental European countries to account for our evidence. |
| Keywords: | Corporate taxation, SVAR, Open economy, Endogenous technological change, R&D, Hours worked, Tradables and non-tradables, Labor reallocation, Wage stickiness |
| JEL: | E23 E62 F11 F41 H25 O33 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:408700700&r=dge |
| By: | Tryfonas Christou (European Commission - JRC); Francesca Crucitti (European Commission - JRC); Abián García Rodríguez (European Commission - JRC); Nicholas Lazarou (European Commission - JRC); Simone Salotti (European Commission - JRC) |
| Abstract: | This paper presents a macroeconomic evaluation of the impact of the Horizon 2020 funds, carried out using the spatial dynamic general equilibrium model RHOMOLO. The policy disbursement data used to feed the model relate to the actual use of the funds over the period 2014-2021, so this is considered an ex-post evaluation. The model simulations suggest that the GDP gains in 2021 for the European Union as a whole would be up to 0.19% compared to the hypothetical baseline with no innovation policy. The GDP gains are also expected to be significant after the end of the 2014-2020 programming period, due to the positive effects of process and product innovations resulting from Horizon 2020 funding. The effects gradually diminish due to the gradual obsolescence of the new knowledge and innovations generated by the policy intervention. The model results also reveal significant interregional spillovers in some, but not all, countries of the Union. |
| Keywords: | innovation policy, regional growth, general equilibrium. |
| JEL: | C68 O30 R13 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:termod:202401&r=dge |