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on Dynamic General Equilibrium |
| By: | Sandra Batten; Stephen Millard |
| Abstract: | We build an open economy Dynamic Stochastic General Equilibrium model with energy and use it to simulate the impact of different climate policies – specifically the introduction of a carbon tax and bans on petrol or gas usage by households – on macroeconomic variables. We show how the introduction of a carbon tax leads to falls in both households' consumption of energy and firms' use of energy in production, while also having the effect of shifting the production of electricity from fossil fuels to renewable sources. The effects of a ban on household consumption of petrol or gas depend crucially on the elasticity of substitution between different energy sources in consumption. For very low elasticities of substitution, a ban on petrol or gas usage also led households to cut down on their use of electricity, whereas for larger elasticities of substitution, households switched into electricity. Regardless of the elasticity of substitution, aggregate consumption fell on impact in response to the bans before rising over time. GDP and the gross output of non-energy fall in response to both a carbon tax and a ban on petrol or gas consumption by households. Finally, both policies result in a temporary increase in inflation and a tightening in monetary policy. |
| Keywords: | Climate Change, Dynamic Stochastic General Equilibrium, Carbon Tax, Climate policy, Energy, Energy policy, Renewable energy, Macroeconomics, UK economy |
| JEL: | Q28 Q38 Q43 Q48 Q58 E32 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:553&r=dge |
| By: | Cristiano Cantore (Sapienza University of Rome); Edoardo Leonardi |
| Abstract: | How does the monetary and fiscal policy mix alter households’ saving incentives? And what are the resulting implications on the evolution and stabilization of the economy? To answer these questions, we build a heterogenous agents New Keynesian model where 3 different types of agents can save in assets with different liquidity profiles to insure against idiosyncratic risk. Policy mixes affect saving incentives differently according to their effect on the liquidity premium- the return difference between less liquid assets and public debt. We derive an intuitive analytical expression linking the liquidity premium with consumption differentials amongst different types of agents. Our analysis highlights the presence of two competing forces on the liquidity premium: a self-insurance-driven demand channel and a policy-driven supply channel. We show that the relative strength of the two is tightly linked to the policy mix in place and the type of business cycle shock hitting the economy. |
| Keywords: | monetary-fiscal interaction, liquidity, government debt, HANK |
| JEL: | E12 E52 E62 E58 E63 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2406&r=dge |
| By: | Moritz Kuhn; Iourii Manovskii; Xincheng Qiu |
| Abstract: | Spatial differences in labor market performance are large and highly persistent. Using data from the United States, Germany, and the United Kingdom, we document striking similarities across these countries in the spatial differences in unemployment, vacancies, and job filling, finding, and separation rates. The novel facts on the geography of vacancies and job filling are instrumental in guiding and disciplining the development of a theory of local labor market performance. We find that a spatial version of a Diamond-Mortensen-Pissarides model with endogenous separations and on-the-job search quantitatively accounts for all the documented empirical regularities. The model also quantitatively rationalizes why differences in job-separation rates have primary importance in inducing differences in unemployment across space while changes in the job-finding rate are the main driver in unemployment fluctuations over the business cycle. |
| Keywords: | Unemployment; Search and matching; Vacancies; Local labor markets |
| JEL: | J64 E24 E32 R13 J63 |
| Date: | 2024–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:97900&r=dge |
| By: | Kortelainen, Mika |
| Abstract: | We study the effect of quantitative tightening both without forward guidance and with higher for longer guidance. This is done by simulating quantitative tightening strategies in a dynamic stochastic general equilibrium model estimated with the euro area data. Quantitative tightening is quantified by a bond supply shock that raises the long-term term premium. Initially, we assume that quantitative tightening comes without forward guidance, meaning that central bank does not communicate any information regarding the future path of the policy rate. Subsequently, we consider quantitative tightening with forward guidance which is communicated through a higher for longer pledge. In addition, this higher for longer pledge is assumed to be fully credible. We find that if credible, quantitative tightening implemented with forward guidance in the form a higher for longer pledge can tighten monetary policy, albeit a little. |
| Keywords: | monetary policy, quantitative tightening, forward guidance |
| JEL: | E52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:284721&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 state-dependent 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 means-tested Medicaid LTC. |
| JEL: | D16 E21 H31 J14 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32196&r=dge |
| By: | Rustam Jamilov; Alexandre Kohlhas; Oleksandr Talavera; Mao Zhang |
| Abstract: | We propose an empirically-motivated theory of business cycles, driven by fluctuations in sentiment towards a small number of firms. We measure firm-level sentiment with computational linguistics and analyst forecast errors. We find that 50 firms can account for over 70% of the unconditional variation in U.S. sentiment and output over the period 2006-2021. The “Granular Sentiment Index”, measuring sentiment towards the 50 firms, is dominated by firms that are closer to the final consumer, i.e. are downstream. To rationalize our findings, we embed endogenous information choice into a general equilibrium model with heterogeneous upstream and downstream firms. We show that attention centers on downstream firms because they act as natural “information agglomerators”. When calibrated to match select moments of U.S. data, the model shows that orthogonal shocks to sentiment of the 20% most downstream firms explain more than 90% of sentiment-driven (and 20% of total) aggregate fluctuations. |
| Date: | 2024–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:1034&r=dge |
| By: | Michał Brzoza-Brzezina; Julia Jabłońska; Marcin Kolasa; Krzysztof Makarski |
| Abstract: | During the COVID-19 pandemic, governments in the euro area sharply increased spending, while the European Central Bank eased financing conditions. We use this episode to assess how such a concerted monetary-fiscal stimulus redistributes welfare between various age cohorts. Our assessment involves not only the income side of household balance sheets (mainly direct effects of transfers), but also the more obscure financing side that, to a substantial degree, occurred via indirect effects (with a prominent role of the inflation tax). Using a quantitative life-cycle model, we document that young households benefited from the stimulus, while the bill was mainly paid by middle-aged and older agents. Crucially, most welfare redistribution was due to indirect effects related to macroeconomic adjustment that resulted from the stimulus. As a consequence, even though all age cohorts received significant transfers, welfare of some actually decreased. |
| Keywords: | COVID-19; Fiscal expansion, Monetary policy, Redistribution |
| JEL: | E31 E51 E52 H5 J11 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2024097&r=dge |
| By: | Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of a small open economy to examine the behavior of money, prices, and output under the gold standard. In particular, we formally analyze Hume’s celebrated price-specie flow mechanism. Our framework incorporates the influence of international trade on the money supply in the Home country through gold flows. In the short run, a positive correlation exists between the quantity of money and the price level. Additionally, we demonstrate that money is non-neutral during the transition to the steady state, which has implications for welfare. While the gold standard exposes the Home country to short-term fluctuations in money, prices, and output caused by external shocks, it ensures long-term price stability as the quantity of money and prices only temporarily deviate from their steady-state levels. We discuss the importance of policy coordination for achieving efficiency under the gold standard and consider the role of fiat money in this environment. We also develop a version of the model with two large economies. |
| Keywords: | Gold standard; specie flows; non-neutrality of money; long-run price stability; inelastic money supply |
| JEL: | E42 E58 G21 |
| Date: | 2024–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:97882&r=dge |
| By: | Yan Bai; José-Víctor Ríos-Rull; Kjetil Storesletten |
| Abstract: | We provide a macroeconomic theory where demand for goods has a productive role. A search friction prevents perfect matching between producers and potential customers. Larger demand induces more search, which in turn increases GDP and measured TFP. We embed the product-market friction in a standard neoclassical model and estimate it using Bayesian techniques. Business cycles are driven by preference shocks, true technology shocks, and investment-specific shocks. Preference shocks have qualitatively similar effects as true productivity shocks. These shocks account for a large share of the fluctuations in consumption, GDP, and measured TFP and can be identified using shopping time data. |
| JEL: | E21 E22 E30 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32169&r=dge |
| By: | Villeneuve, Stéphane; Biais, Bruno; Gersbach, Hans; Rochet, Jean-Charles; von Thadden, Ernst-Ludwig |
| Abstract: | We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. The state variables of the mechanism design problem are aggregate capital and the distribution of continuation utilities across agents. This gives rise to a Bellman equation in an infinite dimensional space, which we solve with mean-field techniques. We fully characterize the optimal mechanism and show that the level of risk agents must be exposed to for incentive reasons is decreasing in their initial outside utility. We extend classical welfare theorems by showing that any incentive-constrained optimal allocation can be implemented as an equilibrium allocation, with appropriate money issuance and wealth taxation by the principal. |
| Date: | 2024–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129131&r=dge |