|
on Dynamic General Equilibrium |
|
Issue of 2024‒03‒18
nineteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Schult, Christoph |
| Abstract: | I estimate a dynamic stochastic general equilibrium (DSGE) model for the United States that incorporates oil market shocks and risk shocks working through credit market frictions. The findings of this analysis indicate that risk shocks play a crucial role during the Great Recession and the Dot-Com bubble but not during other economic downturns. Credit market frictions do not amplify persistent oil market shocks. This result holds as long as entry and exit rates of entrepreneurs are independent of the business cycle. |
| Keywords: | financial frictions, NK-DSGE models, oil price, recessions, risk |
| JEL: | E32 E37 E44 Q43 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:283617&r=dge |
| By: | Hagiwara, Takefumi |
| Abstract: | This study investigates the conflicting effects of a debt-financed fiscal policy on endogenous growth in an overlapping generations model with public capital and debt. Although an accumulation of public capital enhances the production efficiency of private capital, it also impedes private capital accumulation by distorting savings allocations through public debt issuance. With a low deficit ratio, the fiscal policy brings new equilibria to an unstable economy. Meanwhile, a debt-financed fiscal policy with a higher deficit ratio causes a fiscal collapse and secular stagnation. |
| Keywords: | Fiscal Sustainability; Public Debt; Public Capital; Secular Stagnation |
| JEL: | E62 H54 H62 O40 |
| Date: | 2024–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120201&r=dge |
| By: | Nigar Hashimzade; Oleg Kirsanov; Tatiana Kirsanova; Junior Maih |
| Abstract: | This paper presents a framework for empirical analysis of dynamic macroeconomic models using Bayesian filtering, with a specific focus on the state-space formulation of New Keynesian Dynamic Stochastic General Equilibrium (NK DSGE) models with multiple regimes. We outline the theoretical foundations of model estimation, provide the details of two families of powerful multiple-regime filters, IMM and GPB, and construct corresponding multiple-regime smoothers. A simulation exercise, based on a prototypical NK DSGE model, is used to demonstrate the computational robustness of the proposed filters and smoothers and evaluate their accuracy and speed. We show that the canonical IMM filter is faster than the commonly used Kim and Nelson (1999) filter and is no less, and often more, accurate. Using it with the matching smoother improves the precision in recovering unobserved variables by about 25%. Furthermore, applying it to the U.S. 1947-2023 macroeconomic time series, we successfully identify significant past policy shifts including those related to the post-Covid-19 period. Our results demonstrate the practical applicability and potential of the proposed routines in macroeconomic analysis. |
| Keywords: | Markov switching models, filtering, smoothing |
| JEL: | C11 C32 C54 E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10941&r=dge |
| By: | Gustafsson, Johan (Department of Economics, Umeå University) |
| Abstract: | The present paper studies how to encourage longer careers by reducing labor income taxes for older workers. The analysis relies on numerical experiments within a general equilibrium overlapping generations model that is calibrated to an average OECD economy. I find that the policy can delay retirement and increase tax revenue if treatment occurs close to, and before, the preferred retirement age. A non-trivial share of the increased post-treatment labor supply can be explained by the substitution of hours worked from the pre-treatment career to the post-treatment career. Lowering the treatment age only leads to small changes in the aggregate labor supply, but is increasingly costly for the government in terms of forgone revenue. Tax shifting toward higher consumption taxes always increases welfare, while tax shifting toward higher capital or labor income taxes paid by younger workers only increases welfare if treatment occurs sufficiently late in the career. |
| Keywords: | age-dependent taxation; OLG model; retirement |
| JEL: | E21 H24 J22 |
| Date: | 2024–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:1023&r=dge |
| By: | Lin, Alessandro; Peruffo, Marcel |
| Abstract: | We propose a novel methodology for solving Heterogeneous Agents New Keynesian (HANK) models with aggregate uncertainty and the Zero Lower Bound (ZLB) on nominal interest rates. Our efficient solution strategy combines the sequence-state Jacobian methodology in Auclert et al. (2021) with a tractable structure for aggregate uncertainty by means of a two-regimes shock structure. We apply the method to a simple HANK model to show that: 1) in the presence of aggregate non-linearities such as the ZLB, a dichotomy emerges between the aggregate impulse responses under aggregate uncertainty against the deterministic case; 2) aggregate uncertainty amplifies downturns at the ZLB, and household heterogeneity increases the strength of this amplification; 3) the effects of forward guidance are stronger when there is aggregate uncertainty. JEL Classification: D14, E44, E52, E58 |
| Keywords: | computational methods, liquidity traps, monetary policy, new-Keynesian models, zero lower bound |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242911&r=dge |
| By: | Alessandro Moro (Bank of Italy); Valerio Nispi Landi (Bank of Italy) |
| Abstract: | Using a DSGE model, we study the macroeconomic consequences of a foreign central bank digital currency (CBDC) being available to residents in a small open economy. We find that a gradual and permanent increase in domestic households' preference for a foreign CBDC leads to a structural reduction in economic activity, especially when the CBDC is designed to be similar to domestic deposits. Imposing capital flow management measures on outflows, relaxing macroprudential policy, or selling foreign reserves can help smooth the transition. A Taylor rule that targets PPI inflation is more effective in limiting the disruptive effects than CPI targeting or an exchange-rate peg. We also show that an economy with a large stock of foreign CBDC is better shielded from exogenous increases in the interest rate on foreign debt if the CBDC remuneration remains constant. |
| Keywords: | central bank digital currency, DSGE model, open economy macroeconomics, financial globalization |
| JEL: | E44 E58 F38 F41 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1416_23&r=dge |
| By: | Martin F. Hellwig (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | For overlapping-generations models with multiple assets and without labour, welfare assessments of equilibrium allocations depend on whether the certainty equivalents of the one-period-ahead marginal rates of return on assets that are held are larger or smaller than the population growth rate. Conditional on the period and the history up to that period, the equilibrium values of these certainty equivalents are the same for all assets held and equal to the riskless rate if a riskless asset is held. If population growth is uncertain, the standard of comparison is the certainty equivalent of the population growth rate when interpreted as the marginal rate of return on an additional asset. |
| Keywords: | Dynamic Inefficiency, overlapping-generations models, First Welfare Theorem, certainty-equivalents criterion |
| JEL: | D15 D61 E21 E22 E62 H30 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2024_08&r=dge |
| By: | Stelios 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. |
| Keywords: | Official lending; Lockdowns; Inequality; Sovereign debt |
| JEL: | E58 E20 F44 F34 E60 |
| Date: | 2024–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:97773&r=dge |
| By: | Alberto Cavallo; Francesco Lippi; Ken Miyahara |
| Abstract: | We leverage the inflation upswing of 2022 and various granular data sets to identify robust price setting patterns following a large supply shock. We show that the frequency of price changes increases dramatically after a large shock. We setup a parsimonious New Keynesian model and calibrate it to fit the steady state data before the shock. The model features a significant component of state-dependent decisions, implying that large cost shocks incite firms to react more swiftly than usual, resulting in a rapid pass-through to prices—large shocks travel fast. Understanding this feature is crucial for interpreting recent inflation dynamics. |
| Keywords: | sticky prices, supply shocks, passthrough, generalized hazard function |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:198&r=dge |
| By: | Anna Bartocci (Bank of Italy); Alessandro Cantelmo (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy) |
| Abstract: | We evaluate the 'robust' monetary policy rate tightening in response to a stagflationary shock of uncertain magnitude using a medium-scale New Keynesian model. Under uncertainty, the tightening should generally be milder than under no uncertainty in order to 'perform well' in different states of the world. The results hold true especially when financial tensions materialize under an excessive tightening of monetary policy. On the contrary, if the policy response to large stagflationary shocks is perceived as insufficient in a context of high inflation persistence, then the tightening of monetary policy should be as strong as in the case of no uncertainty. |
| Keywords: | monetary policy, uncertainty, robustness, minimax, bayesian decision making. |
| JEL: | E52 E58 E61 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1433_23&r=dge |
| By: | Grill, Michael; Popescu, Alexandra; Rancoita, Elena |
| Abstract: | Climate-related risks are due to increase in coming years and can pose serious threats to financial stability. This paper, by means of a DSGE model including heterogeneous firms and banks, financial frictions and prudential regulation, first shows the need of climate-related capital requirements in the existing prudential framework. Indeed, we find that without specific climate prudential policies, transition risk can generate excessive risk-taking by banks, which in turn increases the volatility of lending and output. We further show that relying on microprudential regulation alone would not be enough to account for the systemic dimension of transition risk. Implementing macroprudential policies in addition to microprudential regulation, leads to a Pareto improvement. JEL Classification: D58, E58, E61, Q54 |
| Keywords: | prudential regulation, transition risk, financial frictions |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242910&r=dge |
| By: | Francesco Corsello (Bank of Italy); Marianna Riggi (Bank of Italy) |
| Abstract: | Energy price shocks broaden inflation inequality, measured by the gap between consumer prices for households at the bottom and top of the expenditure distribution, which is due to different consumption baskets. We provide a VAR-based quantification of the impact of energy shocks on inflation inequality. We then develop and estimate a general equilibrium two-agent model with imported energy to rationalize the empirical results and show why this effect becomes stronger when monetary policy responds aggressively to inflation. Indeed, though less affluent consumers too benefit from the containment of inflation resulting from monetary policy action, they do so to a lesser extent than more affluent ones, given the relatively lower share of consumption spent on items whose prices are sensitive to cyclical conditions. Our results call for the need to complement the monetary policy response with targeted fiscal measures. |
| Keywords: | energy shocks, inflation inequality, VAR, dynamic general equilibrium, two-agent model |
| JEL: | E31 E32 E50 E52 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1429_23&r=dge |
| By: | Vincenzo Cuciniello (Bank of Italy); Claudio Michelacci (EIEF); Luigi Paciello (EIEF) |
| Abstract: | Business creation subsidies are a means for reducing firm debt and bankruptcy risk. Do they work? To answer the question, we consider a general equilibrium model where firms are financially constrained at entry and borrow in a competitive market by issuing long-term debt. A subsidy stimulates entry and market competition, which increases the bankruptcy rate of incumbent firms. If the subsidy is paid out ex ante to finance start-up expenditures, the subsidy reduces the debt and the bankruptcy rate of start-ups; if paid out ex post as a refund for start-up expenditures, the subsidy crowds out the equity rather than the debt of start-ups and their bankruptcy rate also increases. The model is calibrated to match North-South differences across Italian provinces. The optimal subsidy in the South is paid out entirely ex ante and yields an increase in welfare equivalent to almost one percent of consumption. When the same subsidy is paid out ex post as a proportion of 60 per cent, it results in a welfare loss of a similar amount. We discuss the implications for the ‘I Stay in the South’ policy recently introduced in Italy. |
| Keywords: | Firm dynamics, overborrowing, ratchet effect |
| JEL: | E44 E62 G32 G33 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1424_23&r=dge |
| By: | Borys Grochulski; Zhu Wang |
| Abstract: | We construct a model of home search and buying in the U.S. housing market and evaluate the commission paid to homebuyers' agents. In the model, as in reality, homebuyers enjoy free house showings without having to pay their agents out of pocket. Buyers' agents receive a commission equal to 3% of the house price only after a home is purchased. We show this compensation structure deviates from cost basis and may lead to elevated home prices, overused agent services, and prolonged home searches. Based on the model, we discuss policy interventions that may improve housing search efficiency and social welfare. |
| Keywords: | Search and matching; Housing market; Real estate commission |
| JEL: | D4 L1 L8 R3 |
| Date: | 2024–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:97893&r=dge |
| By: | Andrea Teglio (Department of Economics, Ca’ Foscari University of Venice); Michele Catalano (Department of Economics, Ca’ Foscari University of Venice); Marko Petrovic (University of Valencia) |
| Abstract: | The neoclassical growth model is extended to include limitations in the forecasting capability of a rational individual, who can predict the future state of the economy only for a short time horizon. Long-term predictions are formulated according to uninformed expectations, relying solely on myopic information about short-run dynamics, such as assuming a future persistent growth rate. Steady-state results are obtained in the case of iso-elastic utility and Cobb-Douglas technology. The model, characterized by forecasting errors and subsequent corrections, exhibits global stability and has relevant implications for welfare and policy. It is analyzed in comparison to the Solow–Swan model and the Ramsey model. Our approach, incorporating behavioral assumptions within a standard optimization rule, successfully yields explicit analytical solutions for the policy function in the neoclassical model. This strategy may also be extended to various modeling streams, including DSGE and HANK models. |
| Keywords: | Expectations, Neoclassical growth, Bounded rationality, Myopic behavior, Dynamic optimization, Time inconsistency |
| JEL: | C61 D83 D84 E21 E25 E71 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2024:05&r=dge |
| By: | Ayse Dur; Andrew Glover; Jacek Rothert |
| Abstract: | We highlight the welfare effect of policies that balance global current accounts when households face uninsurable income risk and borrowing constraints. Subsidizing savings in debtor economies reduces current account imbalances and raises the welfare of almost all citizens by increasing world capital, raising wages, and improving insurance for low-wealth households. The same balancing of current accounts is achieved by taxing savings in lender economies; however, this policy hurts most households by reducing global capital. These results suggest that balancing global imbalances may be a positive byproduct of raising investment rates, especially in debtor countries. |
| Keywords: | global imbalances; incomplete markets; heterogeneity |
| JEL: | E2 E44 F32 F36 F4 |
| Date: | 2024–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:97779&r=dge |
| By: | Winston Wei Dou; Yan Ji; Di Tian; Pengfei Wang |
| Abstract: | We develop an endogenous growth model with heterogeneous firms facing financial frictions, where misallocation emerges explicitly as a crucial endogenous state variable and plays a significant role in driving economic growth through the valuation channel. The model illustrates that transient macroeconomic shocks affecting misallocation can yield persistent effects on aggregate growth. In equilibrium, slow-moving misallocation endogenously generates long-run uncertainty about economic growth by distorting innovation decisions. When agents hold recursive preferences, misallocation-driven low-frequency growth fluctuations result in substantial risk premia in capital markets and large losses in consumer welfare. Employing a misallocation measure motivated by the model, we substantiate our findings with empirical evidence showing that misallocation effectively captures low-frequency fluctuations in both aggregate growth and asset returns. |
| JEL: | L11 O30 O40 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32147&r=dge |
| By: | Daniele Angelini (University of Konstanz); Stefan Niemann (University of Konstanz); Florian Roeser (University of Konstanz) |
| Abstract: | We analyze the policy trade-offs facing fiscal policy in a dynamic growth model with au-tomation, education choice, and human capital formation. Although beneficial for economic growth, automation contributes to wage inequality. When human capital formation is affected by government spending, fiscal policy can enhance welfare through a coordinated increase in labor and robot taxes. The composition of taxes financing spending on transfers and educa-tion is key in determining the effects on economic growth and inequality, as the robot tax is the more redistributive instrument. We calibrate our model to the US economy and determine the welfare-maximizing tax policy. Optimality requires an initial reduction in the robot tax to foster automation-driven growth, followed by its gradual increase to address widening inequal-ity. Education subsidies can be welfare-improving if they are financed through the labor tax without compromising higher education spending. Finally, we explore robustness under private contributions to higher education. |
| Keywords: | Automation; Education; Human capital; Innovation-driven growth; Inequality; Policy responses |
| JEL: | E23 E25 H23 H52 O31 O33 O40 |
| Date: | 2024–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:2401&r=dge |
| By: | Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Hongwei Mei (Department of Mathematics and Statistics, Texas Tech University, Lubbock, TX 79409, USA); Rui Wang (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA) |
| Abstract: | For a heterogeneous agent model with aggregate shocks, the seminal paper by Krusell and Smith (1998) provides an equilibrium framework depending only on the (conditional) mean wealth rather than the wealth distribution of all agents, which is referred to as approximate aggregation for their prototype model. Their result can be obtained through the analysis of a forward-backward system consisting of the Hamilton-Jacobi-Bellman equation, the Fokker-Planck equation, and some constraint. Different from the existing literature, this paper proposes a statistical method to verify whether a heterogeneous agent model features approximate aggregation in the scenario that only one agent's wealth together with the aggregate shocks is observable over time. Our main approach lies in studying a model specification testing problem for the evolution of the wealth (i.e. the Fokker-Planck equation) in some appropriate parametric family featuring approximate aggregation. The key challenge stems from the partially observed information where the wealth distribution of all agents is infeasible. To overcome this difficulty, first, a novel two-step estimate is proposed for estimating the parameter in the parametric family. Then, several testing statistics are constructed, and their asymptotic properties are established, which in turn provides several testing rules. Finally, some Monte Carlo simulations are conducted to illustrate the finite sample performance of the proposed tests. |
| Keywords: | Heterogeneous agent model with aggregate shocks, Approximate aggregation; Model specification test; Equilibrium estimator; Partial observation. |
| JEL: | C12 C13 E20 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:202405&r=dge |