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on Dynamic General Equilibrium |
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Issue of 2024‒04‒15
fifteen papers chosen by Christian Zimmermann, Federal Reserve Bank of St. Louis |
| By: | Lawrence B. Dacuycuy (De La Salle University); Fernando T. Aldaba (Ateneo de Manila University) |
| Abstract: | This paper presents an estimable dynamic stochastic general equilibrium (DSGE) model whose major purpose is to deal with the empirics of fiscal policy in the Philippines. We estimated structural parameters using Bayesian methods, some of which have not been estimated for the Philippines. Based on macroeconomic data, which span the period from the second quarter of 2002 to the third quarter of 2021, explicit characterizations of model dynamics due to unanticipated shocks were achieved. The model also showed how informative smoothed shocks are in describing outcomes during the three previous administrations. Finally, the model generated a select number of fiscal multipliers under different scenarios involving monetary accommodation and fiscal stabilization. |
| Keywords: | DSGE, Fiscal policy, Philippines, fiscal rules |
| JEL: | C11 E32 E62 H54 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:agy:dpaper:202405&r=dge |
| By: | Mr. Luis Brandão-Marques; Mr. Roland Meeks; Vina Nguyen |
| Abstract: | When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates. This robust approach, characterized by a "better safe than sorry" philosophy, entails incurring a modest cost to safeguard against a protracted period of deviating inflation. Applied to the post-pandemic period of exceptional uncertainty and elevated inflation, this strategy would have called for a tightening bias. Specifically, a high level of uncertainty surrounding wage, profit, and price dynamics requires a more front-loaded increase in interest rates compared to a baseline scenario which the policymaker fully understands how shocks to those variables are transmitted to inflation and output. This paper provides empirical evidence of such uncertainty and estimates a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the euro area to derive a robust interest rate path for the ECB which serves to illustrate the case for insuring against inflation turning out to have greater persistence. |
| Keywords: | Robust policy; monetary policy; uncertainty; inflation persistence; wage and price dynamics.; Monetary Policy stance; policy rule parameter; price Persistence; IMF working paper 2024/47; inflation expectation; Inflation; Central bank policy rate; Output gap; Wages; Europe; Central and Eastern Europe; Eastern Europe |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/047&r=dge |
| By: | Rodolfo G. Campos; Jesús Fernández-Villaverde; Galo Nuño; Peter Paz |
| Abstract: | We study a new type of monetary-fiscal interaction in a heterogeneous-agent New Keynesian model with a fiscal block. Due to household heterogeneity, the stock of public debt affects the natural interest rate, forcing the central bank to adapt its monetary policy rule to the fiscal stance to guarantee that inflation remains at its target. There is, however, a minimum level of debt below which the steady-state inflation deviates from its target due to the zero lower bound on nominal rates. We analyze the response to a debt-financed fiscal expansion and quantify the impact of different timings in the adaptation of the monetary policy rule, as well as the performance of alternative monetary policy rules that do not require an assessment of the natural rates. We validate our findings with a series of empirical estimates. |
| JEL: | E32 E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32219&r=dge |
| By: | Aleksandra Kolasa (University of Warsaw, Faculty of Economic Sciences) |
| Abstract: | Universal child benefits are an important component of the social protection systems in many developed economies, particularly in Europe. When evaluating their impact, most studies tend to focus primarily on the empirical evidence and short-term effects. However, given their large-scale implementation, such programs can have sizable general equilibrium effects. The aim of this paper is to study the long-run implications of universal child benefits within a theoretical framework that can capture the complexities of household decisions regarding consumption, labor participation, and the timing of children. To this end, I develop an overlapping generations model with idiosyncratic earnings risk, infertility shocks, and endogenous temporal fertility. According to the model simulations, universal child benefits lead to a reduction in the spacing between children and, on average, lower maternal age at childbirth for all births. This, in turn, alleviates some of the negative aggregate effects typically associated with redistributive policies, but has a detrimental impact on the average quality of children. Finally, universal child benefits increase ex-ante welfare by 0.42% of lifetime adult consumption, significantly outperforming broad-based transfer policies not tied to the number of children. |
| Keywords: | universal child benefits, infertility risk, temporal fertility, social welfare, general equilibrium models |
| JEL: | I38 H53 H31 E61 D52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2024-04&r=dge |
| By: | Yuichiro Waki (School of Economics, University of Queensland) |
| Abstract: | The zero liquidity assumption — nobody can borrow or lend in equilibrium because everyone faces a stringent borrowing constraint and because assets are in zero net supply — simplifies analyses of incomplete-market heterogeneousagents macroeconomic models, by making the equilibrium distribution of asset holdings degenerate. However, when combined with the heterogeneous-agents New Keynesian (HANK) models, this assumption implies that aggregate variables exhibit excess sensitivity to targeted fiscal interventions. Specifically, an arbitrarily large contraction of output can occur in response to an arbitrarily smallsized redistribution of income across households. Yet, at the same time, this result is fragile: by relaxing the households’ borrowing constraints, even slightly, the marginal intervention effect on output becomes finite, thereby eliminating the potential for small interventions to have large effects on output. Although the zero liquidity assumption makes HANK models tractable, it should be used with caution when redistribution of income is concerned. |
| Keywords: | Heterogeneous agents; New Keynesian model; zero liquidity; fiscal policy; targeted fiscal intervention |
| JEL: | D10 D15 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uqmrg6:48&r=dge |
| By: | Masao Fukui; Niels Joachim Gormsen; Kilian Huber |
| Abstract: | We show that firms' nominal required returns to capital (i.e., their discount rates) are sticky with respect to expected inflation. Such nominally sticky discount rates imply that increases in expected inflation directly lower firms' real discount rates and thereby raise real investment. We analyze the macroeconomic implications of sticky discount rates using a New Keynesian model. The model naturally generates investment-consumption comovement in response to household demand shocks and higher investment in response to government spending. Sticky discount rates imply that inflation has real effects, even absent other nominal rigidities, making them a distinct source of monetary non-neutrality. At the same time, sticky discount rates make the short-term interest rate less effective at stimulating investment. Optimal monetary policy focuses on inflation expectations and permanently lowers the long-run inflation target in response to expansionary shocks, even when shocks are temporary. |
| JEL: | D22 E22 E23 E31 E32 E43 E44 E52 E58 G12 G31 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32238&r=dge |
| By: | Takuma Kunieda (Kwansei Gakuin University); Akihisa Shibata (Kyoto University) |
| Abstract: | Although many studies in macroeconomics have examined the role of insurance in the presence of income risk, whether aggregate shocks are insurable has not been sufficiently investigated. We present a simple two-period general equilibrium model to show the conditions under which insurance against aggregate shocks works in an economy with constant-elasticity-substitution (CES) production technology and the Greenwood- Hercowitz-Huffman (GHH) utility function (Greenwood et al., 1988). Our theoretical investigation clarifies that only when agents are heterogeneous in their ability or initial wealth can aggregate shocks be insurable. From our quantitative investigation, we find that (i) agents with lower ability enjoy greater welfare improvement from insurance, and as agents’ ability increases, the welfare improvement diminishes, (ii) agents enjoy greater welfare improvement when the damage from disasters is more severe and when the frequency of disasters is greater, and (iii) although the welfare improvement increases as agents’initial wealth increases, the impact of a difference in agents' initial wealth on the difference in the contribution of insurance is very moderate. |
| Keywords: | aggregate shocks, heterogeneous agents, state-contingent claims, incomplete market |
| JEL: | D52 G12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1102&r=dge |
| By: | Vasco Curdia; Fernanda Nechio |
| Abstract: | We assess how within euro area labor mobility impacts economic dynamics in response to shocks. In the analysis we use an estimated two-region monetary union dynamic stochastic general equilibrium model that allows for a varying degree of labor mobility across regions. We find that, in contrast with traditional optimal currency area predictions, enhanced labor mobility can either mitigate or exacerbate the extent to which the two regions respond differently to shocks. The effects depend crucially on the nature of shocks and variable of interest. In some circumstances, even when it contributes to aligning the responses of the two regions, labor mobility may complicate monetary policy tradeoffs. Moreover, the presence and strength of financial frictions have important implications for the effects of labor mobility. If the periphery’s risk premium is more responsive to its indebtedness than our estimates, there are various shocks for which labor mobility may help stabilize the economy. Finally, the euro area’s economic performance following the Global Financial Crisis would not have been necessarily smoother with enhanced labor mobility. |
| Keywords: | monetary unions; labor mobility; credit frictions |
| JEL: | F41 F45 E44 E3 E4 |
| Date: | 2024–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:97975&r=dge |
| By: | Jesús Fernández-Villaverde; Yang Yu; Francesco Zanetti |
| Abstract: | This paper shows the importance of technological synergies among heterogeneous firms for aggregate fluctuations. First, we document six novel empirical facts using microdata that suggest the existence of important technological synergies between trading firms, the presence of positive assortative matching among firms, and their evolution during the business cycle. Next, we embed technological synergies in a general equilibrium model calibrated on firm-level data. We show that frictions in forming trading relationships and separation costs explain imperfect sorting between firms in equilibrium. In particular, an increase in the volatility of idiosyncratic productivity shocks significantly decreases aggregate output without resorting to non-convex adjustment costs. |
| Keywords: | technological synergies, heterogeneous firms, idiosyncratic uncertainty |
| JEL: | C63 C68 C78 E32 E37 E44 G12 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-22&r=dge |
| By: | Baek, Yaein (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Yoon, Sang-Ha (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Hyun Hak (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Lee, Jiyun (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)) |
| Abstract: | 본 연구에서는 빅데이터를 활용하여 경제성장률을 단기 전망하고, 전통적 통계모형 및 구조적 거시모형의 전망과 비교하여 예측 성과를 분석한다. 미국과 한국의 경제성장률을 예측하기 위해 대량의 거시·금융 지표와 머신러닝을 사용하며, 네이버 검색 데이터와 동적모형 평균화 및 선택을 활용하여 한국의 경제성장률을 전망한다. 이를 통해 빅데이터가 경제성장률 예측 성과에 미치는 영향을 살펴본다. 마지막으로 빅데이터 기반의 전망과 소규모 개방경제 동태확률일반균형 모형의 전망을 종합하여 시사점과 향후 경제전망 연구 방향을 제안한다. The economic uncertainties arising from recent global inflation and the Covid-19 pandemic have significantly amplified the importance of accuracy and timeliness in macroeconomic forecasts. To enhance the predictive abilities of models, harnessing all potentially relevant information is crucial. The advent of big data has spurred active exploration in economic forecasting research, leveraging additional data dimensions. Notably, text data such as online searches and news articles are widely employed to extract sentiments of economic agents, thereby monitoring economic and financial conditions. Additionally, machine learning has emerged as a pivotal tool in macroeconomic forecasting because it efficiently processes and analyzes big data. Given the potential benefits of big data for forecasting and the ongoing development of new methodologies, a collective analysis of forecasts based on big data and traditional macroeconomic models is essential. In this study, we analyze the predictive ability of short-term GDP growth rate forecasts based on big data against those generated by traditional statistical and structural macroeconomic models. Given the contrasting characteristics between big data-based forecasting models and structural models, we comprehensively analyze the results of each model and discuss implications for future economic forecasting research. This study largely consists of four parts. In Chapter 2, we utilize a small open economy dynamic stochastic general equilibrium model (SOE-DSGE) to forecast Korea’s GDP growth. This theoretical model serves as a benchmark for comparing against big data-based forecasts. Using a Bayesian framework, the model examines the impacts of various shocks, such as those related to total factor productivity, government spending, monetary policy, foreign demand, and foreign monetary policy. The findings reveal that the response of model variables to external shocks align with real-world outcomes. One of the strengths of the SOE-DSGE model is that it explicitly includes structural shocks, allowing us to analyze not only forecasts but also the effects of economic policies. However, a limitation is its inability to fully leverage available data due to inherent model constraints.(the rest omitted) |
| Keywords: | Economic outlook; economic growth; big data; machine learning; macroeconomic outlook |
| Date: | 2023–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kieppa:2023_024&r=dge |
| By: | Kento Tango; Yoshiyuki Nakazono |
| Abstract: | We propose a new concept of monetary policy shocks: subjective monetary policy shocks. Using a unique survey on both consumption expenditures and forecasts of interest rates, we identify a cross-sectionally heterogeneous monetary policy shock at the micro level. We first distinguish between exogenous and endogenous interest rate changes and define the exogenous component as a subjective monetary policy shock for each household. We then estimate the impulse responses of consumption expenditures to a subjective monetary policy shock. We find the stark contrasts in the dynamics of consumption expenditures between borrowers and lenders; in response to an unexpected rise in interest rates, consumption expenditures by borrowers decrease, whereas those of asset holders increase. We also find large and quick responses of consumption expenditures when households are attentive to interest rates. Our findings support the theoretical prediction of not only heterogeneous agent New Keynesian models, but also behavioral macroeconomics under imperfect information. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:toh:tupdaa:48&r=dge |
| By: | Giorgio Massari (University of Pavia); Luca Portoghese (University of Pavia); Patrizio Tirelli (University of Pavia) |
| Abstract: | We show that popular models of (flight-to-) liquidity shocks rely on strongly counterfactual implications for asset returns and the composition of firms’ liabilities, including the return spread between bank deposits and T-bills and the share of bank loans on corporate debt. We also uncover some counterfactual/implausible interpretations of the Fed’s monetary policy stance during recession periods, as hinted by the estimated gap between policy and natural rates. By including the relevant financial variables as observables in our empirical model, we find that liquidity shocks played a negligible role and became virtually irrelevant after 2010. Our estimates also imply that the slowdown in productivity growth, not liquidity shocks, caused the post-2010 fall in the natural rate. Finally, our estimates provide a quite different interpretation of the monetary policy stance. |
| Keywords: | natural rate of interest, DSGE models, liquidity shocks, flight-to-quality, financial frictions |
| JEL: | C11 C32 C54 E43 E44 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0217&r=dge |
| By: | Dr. Tobias Cwik; Dr. Christoph Winter |
| Abstract: | In the aftermath of the Great Financial Crisis (GFC), central banks from several advanced, small, open economies have used FX interventions (FXI) in order to stimulate inflation, given that their policy rates were very low. We present a quantitative DSGE model that allows us to study the effectiveness of this unconventional monetary policy tool. We apply the model to Switzerland, a country that has seen frequent and sizable central bank interventions. The model implies that FXI are effective and long-lasting: FXI of approximately CHF 27 billion (5% of annual GDP) are necessary to prevent the Swiss franc from appreciating by 1.1%. The effect is stronger the longer the central bank can commit to keep its policy rate constant in response to the inflationary effect of the interventions. We also find that FXI create significant additional leeway for monetary policy in small, open economies. This effect can be shown by the "shadow rate", the policy rate required to keep CPI inflation on its realised path without FXI. This "shadow rate" was up to 1 pp below the realised policy rate and close to -1.5% from 2015 to mid-2022 in Switzerland. Our framework also allows us to study the sensitivity of the shadow rate in an environment in which the policy rate is at (or close to) its lower bound. If the persistence of the policy rate increases at the lower bound, the shadow rate rises in absolute terms. |
| Keywords: | Monetary policy, FX intervention, Shadow rate, DSGE model |
| JEL: | C54 E52 F41 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2024-04&r=dge |
| By: | Gustafsson, Johan (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University) |
| Abstract: | This paper concerns the timing of taxation in an economy with trade unions. By using insights from the industrial organization literature, we show within the framework of an overlapping generations model where agents work in the first period of life and are retired in the second that trade unions can obtain an advantageous bargaining outcome vis-à-vis firms by delegating authority to a negotiator who (i) discounts the future at a higher rate than the union members, and (ii) treats the workers´ labor supply and saving decisions as given. In this context, the timing of taxation of first period labor income matters for wage formation and we show that the welfare can be improved by implementing an income-based pension for retired workers (i.e. a negative delayed income tax) when there is unemployment in equilibrium. We also outline when the welfare can be improved by implementing a positive delayed income tax. Finally, we show that if the trade union delegates authority to a negotiator who recognizes the workers´ labor supply and saving responses, the welfare cannot be improved by implementing a second period tax/pension. |
| Keywords: | Timing of taxation; labor market distortion; pensions |
| JEL: | H21 H55 J51 |
| Date: | 2024–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:1024&r=dge |
| By: | Ichiro Muto (General Manager, Aomori Branch, Bank of Japan (E-mail: ichirou.mutou@boj.or.jp)); Fumitaka Nakamura (Director, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail: fumitaka.nakamura@boj.or.jp)); Makoto Nirei (Professor, Graduate School of Economics, University of Tokyo (E-mail: nirei@e.u-tokyo.ac.jp)) |
| Abstract: | What are the main drivers of the recent increase in wealth concentration in the U.S.? This paper quantifies the role played by digitalization using a tractable model with heterogeneous agents with risk aversion. The model combines (1) digital capital that substitutes for labor in the production process and (2) households' investments in risky digital assets to replicate the asset growth of the wealthy since the 1990s. In the equilibrium, a small number of prosperous households with low risk aversion, i.e., digital entrepreneurs, hold most of the risky digital capital, whereas a large number of risk-averse households rely mainly on labor income. Hence, when digitalization advances, these risk-tolerant households enjoy higher returns from digital capital, further accumulating digital capital disproportionately. Based on the model calibrated to the U.S. economy, we show that digitalization (an increase in digital productivity by 21-43 percent) has contributed to more than about 50 percent of the increase in the share of wealth of the top 1 percent of households and more than about 80 percent of that of the top 0.1 percent of households observed over the last 30 years. Moreover, it explains about 20-40 percent increase in the annual savings of the top 1 percent of households. Finally, the comparative statics on the macroeconomic variables show that while advances in digitalization decrease the labor share by 3-5 percentage points, which is in line with the empirical literature, it also increases wages, meaning that risk- averse households, who rely mainly on labor earnings, also gain some benefits from digitalization. |
| Keywords: | Digitalization, Entrepreneurship, Wealth inequality, Savings inequality |
| JEL: | E21 E22 E24 E25 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:24-e-01&r=dge |