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on Dynamic General Equilibrium |
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Issue of 2024‒04‒01
thirteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Hinterlang, Natascha; Martin, Anika; Röhe, Oke; Stähler, Nikolai; Strobel, Johannes |
| Abstract: | Climate change and climate policy will have far-reaching economic implications, thereby also posing new challenges for macroeconomic analysis. This is partly because climate risks have an important global dimension. Moreover, climate change and climate polices are likely to affect different economic sectors to varying degrees. Hence, in order to adequately gauge the macroeconomic implications of climate risks, models with sufficient regional and sectoral differentiation are needed. Against this background, we developed the environmental multi-sector dynamic stochastic general equilibrium model EMuSe. This paper presents the main features of the benchmark closed-economy flexible-price model, an open-economy extension of the model, a variant of the model with price-setting frictions and selected applications to illustrate key transmission channels. In order to give those who are interested the opportunity to gain more experience with EMuSe, the model codes are published together with this documentation. |
| Keywords: | climate risks, DSGE, production linkages, sectoral heterogeneity |
| JEL: | E3 E6 F4 H3 Q5 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubtps:280900&r=dge |
| By: | Giorgio Fabbri (Univ. Grenoble Alpes, CNRS, INRAE, Grenoble INP, GAEL); Marie-Louise Leroux (Departement des Sciences Economiques, ESG-UQAM; CORE, Louvain-la-Neuve; CESifo, Munich); Paolo Melindi-Ghidi (Aix-Marseille Univ., CNRS, AMSE, Marseille, France); Willem Sas (University of Stirling; Hasselt University; CESifo, Munich; UCLouvain & KU Leuven) |
| Abstract: | This paper develops an overlapping generations model that links a public health system to a pay-as-you-go (PAYG) pension system. It relies on two assumptions. First, the health system directly finances curative health spending on the elderly. Second, public pensions partially depend on health status by introducing a component indexed to society's average level of old-age disability. Reducing the average disability rate in the economy then lowers pension benefits as the need to finance long-term care services also drops. We study the effects of introducing such a 'comprehensive' Social Security system on individual decisions, capital accumulation, and welfare. We first show that health investments can boost savings and capital accumulation under certain conditions. Second, if individuals are sufficiently concerned with their health when old, it is optimal to introduce a health-dependent pension system, as this will raise social welfare compared to a system where pensions are not tied to the society's average level of old-age disability. Our analysis thus highlights an important policy recommendation: making PAYG pension schemes partially health-dependent can be beneficial to society. |
| Keywords: | Curative Health Investments, PAYG Pension System, Disability, overlapping generations, long-term care |
| JEL: | H55 I15 O41 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2407&r=dge |
| By: | Suzanne Bellue (Crest-Ensae) |
| Abstract: | In the United States, less-educated parents tend to allocate little time to parentchild activities, reside in disadvantaged neighborhoods, and underestimate the relevance of parental inputs for later outcomes. This paper proposes a social learning mechanism that can lead to socioeconomic differences in parental beliefs and decisions. The key elements are young adults learning through the observations of older people within their neighborhood but being prone to erroneous inferences by imperfectly correcting for selection induced by residential segregation. I incorporate the social learning mechanism in a quantitative spatial and overlapping generations model of human capital accumulation and parental decisions. Once calibrated to the United States, the model accurately captures both targeted and non-targeted parental behavior across socioeconomic groups. It displays relatively modest levels of erroneous beliefs, contributing to a 3% increase in income inequality (measured by the income Gini index) and a 14% reduction in social mobility (measured by the income rank-rank coefficient). Ahousing voucher policy improves the neighborhood quality of eligible families, raising children’s future earnings. When the policy is scaled up, long-run and general equilibrium responses in parental beliefs amplify the effects of the policy, reducing inequality and improving social mobility. |
| Keywords: | Neighborhood, Education, Human Capital, Learning, Social Mobility |
| JEL: | D13 D62 D83 E24 J13 R2 |
| Date: | 2024–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2024-07&r=dge |
| By: | Benny Kleinman (University of Chicago); Ernest Liu (Princeton University and NBER); Stephen J. Redding (Princeton University, NBER and CEPR); Motohiro Yogo (Princeton University and NBER) |
| Abstract: | We generalize the closed-economy neoclassical growth model (CNGM) to allow for costly goods trade and capital flows with imperfect substitutability between countries. We develop a tractable, multi-country, quantitative model that matches key features of the observed data (e.g., gravity equations for trade and capital holdings) and is well suited for analyzing counterfactual policies that affect both goods and capital market integration (e.g., U.S.-China decoupling). We show that goods and capital market integration interact in non-trivial ways to shape impulse responses to counterfactual changes in productivity and goods and capital market frictions and the speed of convergence to steady-state. |
| Keywords: | Economic Growth, International Trade, Capital Flow |
| JEL: | F10 F21 F60 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:318&r=dge |
| By: | Yener Altunbas (Bangor University); Xiaoxi Qu (Bangor University); John Thornton (University of East Anglia) |
| Abstract: | We present and estimate a Bernanke et al. (1999)-type dynamic general equilibrium model modified to allow the authorities to use monetary and fiscal policy to shape bank behavior in support of climate goals. In the model, central bank refinancing and reserve requirements are employed to support bank lending for environmentally friendly projects at lower rates of interest than for other projects. At the same time, fiscal policy supports green bank lending through loan guarantees, which also reduces the relative cost of borrowing by green firms. Under reasonable parameters of the model, rediscount lending is shown to be the most effective policy tool for directing bank lending to support climate goals |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:310&r=dge |
| By: | Lise Clain-Chamosset-Yvrard (Univ. Lyon, Universit´e Lumi`ere Lyon 2, GATE UMR 5824); Xavier Raurich (Departament d’Economia and CREB, Universitat de Barcelona); Thomas Seegmuller (Aix-Marseille Univ., CNRS, AMSE, Marseille, France) |
| Abstract: | In this paper, we provide a simple framework to show the existence of stationary bubbles on dividend-yielding financial assets. These bubbles are compatible with a positive stationary fundamental value, rather than requiring its collapse in the long run. This result is obtained in an exchange overlapping generations economy with vintage financial assets that depreciate over time. New assets are introduced in each period, ensuring a constant aggregate supply of financial assets. Depreciation introduces a gap between the return of bubbles and the rate at which the dividends are discounted. Because the return of bubble can be lower or equal to the growth rate, we can have stationary equilibria with both a positive bubble and a positive fundamental value. Finally, our framework also allows us to discuss the role of the substitutability between financial assets on the level of bubbles and fundamental values. |
| Keywords: | Rational bubbles, financial assets, fundamental value |
| JEL: | E21 E44 G12 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2408&r=dge |
| By: | Mariano Kulish (University of Sydney); Nadine Yamout (American University of Beirut) |
| Abstract: | We study the fiscal policy response to a slowdown in trend growth using an estimated open economy stochastic growth model. For equilibria to exist, fiscal policy must respond to the slowdown ensuring that the government budget constraint holds in the low growth regime. The slowdown reduces welfare but sets off a significant endogenous response of the private sector that increases capital accumulation and operates as an automatic stabilizer. If fiscal policy keeps the provision of public goods per capita constant, the slowdown gives rise to a pleasant fiscal arithmetic which requires either tax cuts or a higher target debt-to-GDP ratio for the government budget constraint to hold in the long run. We discuss the implications of different fiscal responses involving increasing per capita public spending and varying speeds of adjustment. |
| Keywords: | Open economy, trend growth, fiscal policy, real business cycles, estimation, structural breaks |
| JEL: | E30 F43 H30 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:308&r=dge |
| By: | Jesús Fernández-Villaverde; Oren Levintal |
| Abstract: | We study the distributional effects of asset returns using a heterogeneous-agent model estimated to match the joint distribution of wealth and returns. In the model, endogenous portfolio decisions play a key role through their impact on households' wealth accumulation. We find substantial welfare effects of changes in asset returns. A permanent decline of one percentage point in expected returns increases the consumption share of the top 10% by 6% permanently. Our findings suggest that lower returns increase inequality, which contradicts Piketty's (2014) r-g formula. To resolve this contradiction, we derive a generalized formula that includes the consumption/wealth ratio and which is consistent with our empirical and theoretical findings. Nonetheless, wealth inequality within the Pareto tail is fairly insensitive to asset returns. Instead, inequality between the Pareto tail and the lower range of the distribution responds strongly to asset returns through their differential effects on active savings relative to wealth. Simulations suggest that asset price dynamics can explain the main variations in U.S. top wealth shares since the 1960s. |
| JEL: | E0 E20 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32182&r=dge |
| By: | Achim Hagen; Gilbert Kollenbach |
| Abstract: | We study the interaction of climate policies and investments into fossil and renewable energy generation capacity if policies are set by democratically elected governments and can lead to stranded assets. We develop an overlapping generations model, where elections determine carbon taxation and green investment subsidies, and individuals make investments into fossil and renewable capacity. We find that some fossil investments become stranded assets, if the party offering the higher carbon tax is unexpectedly elected. In contrast, if the individuals have perfect foresight, there are no stranded assets, climate damages are fixed and carbon taxation only serves redistributive purposes. Then, there is either no or prohibitive carbon taxation and energy generation completely relies on renewables in the latter case. Green investment subsidies can be used by governments to bind the hands of their successor. If the party representing the young generation is in power, it can use a high subsidy to reduce or even avoid potentially stranded assets in the next period. With endogenous reelection probability, we show that this party can also use investment subsidies strategically to influence the elections. The party that represents the old generation abstains from both types of climate policies to avoid a redistribution of income towards the young generation. |
| Keywords: | Stranded Assests, Political Economy, Fossil Fuel, Renewable Energy, Carbon Tax, Investment Subsidy |
| JEL: | D72 H23 Q54 Q58 |
| Date: | 2024–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdp:dpaper:0033&r=dge |
| By: | Cars Hommes (Canadian Economic Analysis, Bank of Canada; CeNDEF, Amsterdam School of Economics, University of Amsterdam; Tinbergen Institute, Amsterdam); Stefanie J. Huber (Department of Economics, University of Bonn; ECONtribute Research Cluster); Daria Minina (CeNDEF, Amsterdam School of Economics, University of Amsterdam); Isabelle Salle (Department of Economics, University of Ottawa; Macro and International Economics, Amsterdam School of Economics, University of Amsterdam; Tinbergen Institute, Amsterdam) |
| Abstract: | This paper brings novel insights into group coordination and price dynamics in complex environments. We implement an overlapping-generation model in the lab, where the output dynamics is given by the well-known chaotic quadratic map. This model structure allows us to study previously unexplored parameter regions where the perfect-foresight dynamics exhibits chaotic dynamics. This paper highlights three key findings. First, the price converges to the simplest equilibria, namely the monetary steady state or the two-cycle, in all markets. Second, we document a novel and intriguing finding: we observe a non-monotonicity of the behavior when complexity increases. Convergence to the two-cycle occurs for the intermediate parameter range, while both the extreme scenarios of a simple stable two-cycle and highly non-linear dynamics (with chaos) lead to coordination on the steady state in the lab. All indicators of coordination and convergence significantly exhibit this non-monotonic relationship in the learning-to-forecast experiments and this non-monotonicity persists in the learning-to-optimize design. Third, convergence in the learning-to-optimize experiment is more challenging to achieve: coordination on the two-cycle is never observed, although the two-cycle Pareto-dominates the steady state in our design. |
| Keywords: | Overlapping-generation (OLG) models, Complexity, Learning, Equilibria se- lection, Laboratory experiments |
| JEL: | E70 E17 C92 C62 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:283&r=dge |
| By: | Chaoran Chen; Zhigang Feng; Jiaying Gu |
| Abstract: | This paper identifies a "health premium" of insurance coverage that the insured is more likely to stay healthy or recover from unhealthy status. We introduce this feature into the prototypical macro-health model and estimate the baseline economy by matching the observed joint distribution of health insurance purchase, health status and income over the life cycle. Quantitative analysis reveals that an individual’s insurance status has substantial and persistent impact on health, which will be reinforced by and subsequently amplify the feedback effect of health on labor earnings and income inequality. Providing "Universal Health Coverage" would narrow health and life expectancy gaps, with a mixed effect on income distribution in absence of any additional redistribution of income or wealth. |
| Keywords: | Health Insurance, Health Disparity, Income Distribution, Health Care Policy. |
| JEL: | E21 E60 G51 I14 O15 |
| Date: | 2024–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-767&r=dge |
| By: | Matthias H\"ansel |
| Abstract: | How does public debt matter for price stability? If it is useful for the private sector to insure idiosyncratic risk, government debt expansions can increase the natural rate of interest and create inflation. As I demonstrate using a tractable model, this holds in the presence of an active Taylor rule and does not require the absence of future fiscal consolidation. Further analysis using a full-blown 2-asset HANK model reveals the quantitative magnitude of the mechanism to crucially depend on the structure of the asset market: under standard assumptions, the effect of public debt on the natural rate is either overly strong or overly weak. Employing a parsimonious way to overcome this issue, my framework suggests relevant effects of public debt on inflation under active monetary policy: In particular, persistently elevated public debt may make it harder to go the last "mile of disinflation" unless central banks explicitly take its effect on the neutral rate into account. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.00471&r=dge |
| By: | Man Chon Iao; Yatheesan J. Selvakumar |
| Abstract: | We propose an indirect inference strategy for estimating heterogeneous-agent business cycle models with micro data. At its heart is a first-order vector autoregression that is grounded in linear filtering theory as the cross-section grows large. The result is a fast, simple and robust algorithm for computing an approximate likelihood that can be easily paired with standard classical or Bayesian methods. Importantly, our method is compatible with the popular sequence-space solution method, unlike existing state-of-the-art approaches. We test-drive our method by estimating a canonical HANK model with shocks in both the aggregate and cross-section. Not only do simulation results demonstrate the appeal of our method, they also emphasize the important information contained in the entire micro-level distribution over and above simple moments. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.11379&r=dge |