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on Dynamic General Equilibrium |
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Issue of 2024‒05‒06
ten papers chosen by |
| By: | Sergio Villalvazo |
| Abstract: | This paper studies the cross-sectional dimension of Fisher’s debt-deflation mechanism that triggers Sudden Stop crises. Analyzing microdata from Mexico, we show that this dimension has macroeconomic implications that operate via opposing effects. We propose a small open economy, asset-pricing model with heterogeneous-agents and aggregate risk to measure the effects of inequality during crises. In contrast to a representative-agent model, heterogeneity generates persistent current account reversals with smaller drops in asset prices and larger drops in consumption driven by the leveraged households. Moreover, in a lower inequality calibration, we find that crises are less severe, as observed in the data. |
| Keywords: | Inequality; Sudden Stops; Debt-deflation; Asset-pricing; Household leverage |
| JEL: | D31 E21 E44 F32 F41 G01 |
| Date: | 2024–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1388&r=dge |
| By: | Tomohiro Hirano; Alexis Akira Toda |
| Abstract: | This paper provides a detailed analysis of the local determinacy of monetary and non-monetary steady states in Tirole (1985)'s classical two-period overlapping generations model with capital and production. We show that the sufficient condition for local determinacy in endowment economies provided by Scheinkman (1980) does not generalize to models with production: there are robust examples with arbitrary utility functions in which the non-monetary steady state is locally determinate or indeterminate. In contrast, the monetary steady state is locally determinate under fairly weak conditions. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.13222&r=dge |
| By: | Créchet, Jonathan (University of Ottawa); Lalé, Etienne (York University, Canada); Tarasonis, Linas (Bank of Lithuania) |
| Abstract: | Cross-country employment differences are concentrated among women, the youth, and older individuals. In this paper, we document how worker flows between employment, unemployment, and out of the labor force vary by gender and age and contribute to aggregate employment differences across a large panel of European countries. We then build a life-cycle Diamond-Mortensen-Pissarides model capturing the salient features of our data. Key elements of the model are an extensive margin (i.e., labor force participation) and intensive margin (i.e., variable intensity) of search effort. The model attributes a major role to the production technology in driving differences in aggregate employment, while labor-market policies play a minor role. Search effort substantially amplifies the effects of technology across gender and age groups and is a prominent proximate cause of the cross-country variation in aggregate employment. |
| Keywords: | employment, unemployment, labor force participation, life cycle, worker flows, labor market institutions |
| JEL: | E02 E24 J21 J64 J82 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16878&r=dge |
| By: | Issam Samiri |
| Abstract: | I propose a general equilibrium model with endogenous defaults and a banking sector operating under a Value-at-Risk constraint. Analytical examination reveals that (a) the Value-at-Risk rule introduces a risk premium on bank lending, (b) this risk premium fluctuates with the business cycle, amplifying the impact of real shocks, and (c) bank leverage also fluctuates with real shocks, but its cyclical behaviour depends on the shocks' effects on default expectations, credit demand, and the bank's balance sheet. Assuming TFP shocks as the sole exogenous source of fluctuation, the model quantitatively replicates realistic fluctuations in banks' leverage, equity, lending, and credit spreads. |
| Keywords: | RBC, Value-at-Risk, bank leverage, Credit Spreads, Financial Frictions |
| JEL: | E13 E32 E44 G21 G32 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:555&r=dge |
| By: | Mariano Kulish; James Morley; Nadine Yamout; Francesco Zanetti |
| Abstract: | We examine the relevance of Dutch Disease through the lens of an open-economy multisector model that features unemployment due to labor market frictions. Bayesian estimates for the model quantify the effects of both business cycle shocks and structural changes on the unemployment rate. Applying our model to the Australian economy, we find that the persistent rise in commodity prices in the 2000s led to an appreciation of the exchange rate and fall in net exports, resulting in upward pressure on unemployment due to sectoral shifts. However, this Dutch Disease effect is estimated to be quantitatively small and offset by an ongoing secular decline in the unemployment rate related to decreasing relative disutility of working in the non-tradable sector versus the tradable sector. The changes in labor supply preferences, along with shifts in household preferences towards non-tradable consumption that are akin to a process of structural transformation, makes the tradable sector more sensitive to commodity price shocks but a smaller fraction of the overall economy. We conclude that changes in commodity prices are not as relevant as other shocks or structural changes in accounting for unemployment even in a commodity-rich economy like Australia. |
| Keywords: | Dutch Disease, commodity prices, unemployment, structural change, structural transformation. |
| Date: | 2024–08 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2024-08&r=dge |
| By: | Marcos Valli Jorge; Angelo M Fasolo; Silvio Michael de Azevedo Costa |
| Abstract: | This paper examines the dynamic behavior of the Brazilian economy under policy regimes aimed at controlling pollutant emissions and limiting environmental damage. Greenhouse gas (GHG) emissions are assumed to be of two types: carbon from fossil resources burning for energy generation (i.e., thermoelectric) or carbon and non-carbon outputs from production processes (i.e., methane from cattle). Firms optimally decide on the demand for fossil and green energy, as the level of effort dedicated to abating emissions coming from production processes. Two alternative policies for emissions, which include emissions taxation (fixed cost) and emission permits trade (quantity caps), are introduced into an open-economy DSGE model for the Brazilian economy. Departing from the estimated parameters of the original version of the model, ratios in the new block of equations for the energy and emissions are calibrated using sectoral data, and some elasticities are set to reproduce the sensibility to some shocks implicit in the NGFS scenarios (Net Zero 2050). Simulations indicate neither of the emissions policies can induce transition in the energy matrix without a green investment policy. The approach adopted here is a first step in building a macroeconomic model capable of challenging scenarios from more specialized models dedicated to energy and emissions by better assessing possible effects and feedback related to the iterations with macroeconomic dynamics. Despite the difficulties concerning the limited availability of data in higher frequency, results indicate those modeling approaches are sufficiently flexible to incorporate the main aspects of energy and emission, serving as valuable tools for policy analysis. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:591&r=dge |
| By: | Oliver Pfäuti; Fabian Seyrich; Jonathan Zinman |
| Abstract: | Business cycle models often abstract from persistent household heterogeneity, despite its potentially significant implications for macroeconomic fluctuations and policy. We show empirically that the likelihood of being persistently financially constrained decreases with cognitive skills and increases with overconfidence thereon. Guided by this and other micro evidence, we add persistent heterogeneity in cognitive skills and overconfidence to an otherwise standard HANK model. Overconfidence proves to be the key innovation, driving households to spend instead of precautionary save and producing empirically realistic wealth distributions and hand-to-mouth shares and MPCs across the income distribution. We highlight implications for various fiscal policies. |
| JEL: | D01 D91 E03 E2 E21 E22 E32 E62 G51 H31 H6 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32305&r=dge |
| By: | Yuichi Furukawa (Chuo University and RIETI); Tat-kei Lai (IESEG School of Management, Univ. Lille, CNRS UMR 9221 - LEM - Lille Economie Management); Kenji Sato Sato (Osaka Metropolitan University) |
| Abstract: | This study develops a new dynamic general equilibrium model to explore the role of people’s love of novelty as a cultural preference in innovation and innovation-based growth. The model considers (a) an infinitely lived representative consumer who has standard love-of-variety preferences for differentiated products and additional love-of-novelty preferences for new products, and (b) technological progress driven by two costly and time-consuming innovation activities, new product development and existing product development. We demonstrate that consumers’ love of novelty is a source of innovation-based growth, wherein economies with a moderate love of novelty can achieve innovation and long-run growth through endogenous cycles between periods in which new product development is active and those in which existing product development is active. However, if love of novelty preference is too weak or too strong, the economy is caught in an underdevelopment trap with less innovation and no long-run growth. We also provide some suggestive empirical evidence that supports our theoretical predictions. |
| Keywords: | Cultural preferences, macro-based behavioral economics; innovation and growth cycles; endogenous growth; underdevelopment traps |
| JEL: | E71 O40 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e202406&r=dge |
| By: | Fatih Guvenen; Serdar Ozkan; Rocio Madera |
| Abstract: | Recent empirical studies document that the distribution of earnings changes displays substantial deviations from lognormality: in particular, earnings changes are negatively skewed with extremely high kurtosis (long and thick tails), and these non-Gaussian features vary substantially both over the life cycle and with the earnings level of individuals. Furthermore, earnings changes display nonlinear (asymmetric) mean reversion. In this paper, we embed a very rich “benchmark earnings process” that captures these non-Gaussian and nonlinear features into a lifecycle consumption-saving model and study its implications for consumption dynamics, consumption insurance, and welfare. We show four main results. First, the benchmark process essentially matches the empirical lifetime earnings inequality—a first-order proxy for consumption inequality—whereas the canonical Gaussian (persistent-plus-transitory) process understates it by a factor of five to ten. Second, the welfare cost of idiosyncratic risk implied by the benchmark process is between two-to-four times higher than the canonical Gaussian one. Third, the standard method in the literature for measuring the pass-through of income shocks to consumption—can significantly overstate the degree of consumption smoothing possible under non-Gaussian shocks. Fourth, the marginal propensity to consume out of transitory income (e.g., from a stimulus check) is higher under non-Gaussian earnings risk. |
| JEL: | E24 E60 J31 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32298&r=dge |
| By: | Malak Kandoussi (EPEE, Université Paris-Saclay, University of Evry) |
| Abstract: | This paper focuses on examining the impact of working from home on labor market outcomes using an extension of the search and matching model. The objective is to address the data gap to (i) explain the increase in the share of remote workers following the COVID-19 crisis; (ii) investigate the effects of this shift on labor market outcomes in two distinct areas; and (iii) assess the potential benefits of working from home in reducing inequalities between urban and rural regions. We show that although the Post-COVID economy suffers from the increase in commuting costs, both the decrease in the disutility in remote work and the increase in productivity of remoters offset this negative impact. We also show that when the disutility of remote work is sufficiently low, it lowers unemployment and wage inequalities between the urban and rural areas. Finally, we analyze the welfare of unemployed workers and economic wealth. It highlights the benefits of reducing remote work disutility. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:23-09&r=dge |