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on Dynamic General Equilibrium |
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Issue of 2024‒06‒10
eighteen papers chosen by |
| By: | Krueger, Dirk; Ludwig, Alexander; Popova, Irina |
| Abstract: | We evaluate the aggregate, distributional and welfare consequences of alternative government education policies to encourage college completion, such as making college free and improving funding for public schooling. To do so, we construct a general equilibrium overlapping generations model with intergenerational linkages, a higher education choice as well as a multi-stage human capital production process during childhood and adolescence with parental and government schooling investments. The model features rich cross-sectional heterogeneity, distinguishes between single and married parents, and is disciplined by US household survey data on income, wealth, education and time use. Studying the transitions induced by unexpected policy reforms we show that the "free college" and the "better schools" reform generate significant welfare gains, which take time to materialize and are lower in general than in partial equilibrium. It is optimal to combine both reforms: tuition subsidies make college affordable even for children from poorer parental backgrounds and better schools increase human capital thereby reducing dropout risk. |
| Keywords: | education spending, public transfers, welfare benefits, inequality, poverty, intergenerational persistence |
| JEL: | D15 D31 E24 I24 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:icirwp:294852&r= |
| By: | Andrew Binning (The Treasury) |
| Abstract: | Fiscal multipliers provide a way of quantifying the GDP gain for a given (discretionary) fiscal policy intervention. I compute government consumption multipliers for New Zealand, in normal times and when monetary policy is constrained at the effective lower bound, using an estimated monetary-fiscal dynamic stochastic general equilibrium model. Quantifying the impact of discretionary fiscal policy is important when considering the design of fiscal support packages to offset future economic downturns. I calculate multipliers under a number of different monetary policy assumptions when imposing the lower bound on interest rates. I investigate the range of results implied by the model and the features of the policy and economic environments that lead to larger government consumption multipliers. I find that estimated government consumption multipliers are larger when interest rates are at the lower bound, but still smaller than 1, when entry and exit to the lower bound are determined by both economic conditions and the central bank’s reaction function. This implies increases in government consumption crowd out other expenditure. When the central bank can commit to holding interest rates fixed for 2 or more years, independent of economic conditions, government consumption multipliers can exceed 1. Factors that amplify demand shocks are more likely to increase multipliers, especially at the lower bound, though these features may be undesirable for macroeconomic stabilisation more generally. Larger government consumption multipliers are not an end in themselves, rather the size of the multipliers can influence the design of discretionary policy programmes. |
| Keywords: | Government consumption multipliers; monetary policy; effective lower bound; prior predictive analysis; Monte Carlo filtering |
| JEL: | C11 E52 E62 E63 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nzt:nztwps:24/01&r= |
| By: | Nicolas Abad (LERN, University of Rouen Normandy); Johanna Etner (EconomiX, Univ Paris Nanterre,); Natacha Raffin (University Paris-Saclay, ENS Paris-Saclay, Centre for Economics at Paris-Saclay, 91190, Gif-sur-Yvette); Thomas Seegmuller (Aix Marseille Univ, CNRS, AMSE, Marseille, France) |
| Abstract: | We use an overlapping generations model with physical and human capital, and two reproductive periods to explore how fertility decisions may differ in response to economic incentives in early and late adulthood. In particular, we analyze the interplay between fertility choices—related to career opportunities—and wages, and investigate the role played by work experience and investment in both types of capital. We show that young adults postpone parenthood above a certain wage threshold and that late fertility increases with work experience. The long run trend is either to converge to a low productivity equilibrium, involving high early fertility, investment in physical capital and relatively low income, or to a high productivity equilibrium, where households postpone parenthood to invest in their human capital and work experience, with higher late fertility and higher levels of income. A convergence to the latter state would explain the postponement of parenthood and the mitigation or slight reversal of fertility decrease in some European countries in recent decades. |
| Keywords: | fertility, postponement, work experience, overlapping generations |
| JEL: | E21 J11 J13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2416&r= |
| By: | Alice Albonico; Guido Ascari; Qazi Haque |
| Abstract: | We estimate a medium-scale DSGE model for the Euro Area allowing and testing for indeterminacy since the introduction of the euro until mid-2023. Our estimates suggest that monetary policy in the euro area was passive, leading to indeterminacy and self-fulfilling dynamics. Indeterminacy dramatically alters the transmission of fundamental shocks, particularly for inflation whose responses are inconsistent with standard economic theory. Inflation increases following a positive supply or a negative demand shock. Consequently, demand shocks look like supply shocks and vice versa, making the dynamics of the model under indeterminacy challenging to interpret. However, this finding is not robust across different assumptions on the way the sunspot shock is specified in the estimation. Both under determinacy and indeterminacy, the model estimates a natural rate of interest that turned positive after the recent inflation episode. |
| Keywords: | monetary policy, indeterminacy, euro area, business cycle fluctuations, inflation |
| JEL: | E32 E52 C11 C13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:535&r= |
| By: | Christopher Erceg (Monetary and Capital Markets Department, IMF); Marcin Kolasa (Monetary and Capital Markets Department, IMF); Jesper Lindé (Monetary and Capital Markets Department, IMF); Haroon Mumtaz (School of Economics & Finance, Queen Mary University London); Pawel Zabczyk (Monetary and Capital Markets Department, IMF) |
| Abstract: | We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the onlyeffective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates. |
| Keywords: | Monetary Policy, Quantitative Easing, International Spillovers |
| JEL: | C54 E52 E58 F41 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:978&r= |
| By: | Eunseong Ma (Yonsei University) |
| Abstract: | Approximately half of U.S. employees adhere to the constraints of the traditional 40-hour work week. This study examines implications of this standardized work schedule. To this end, a novel heterogeneous-agent model is developed, incorporating a wage penalty function faced by households when working fewer hours than a specific threshold. The calibrated model captures the salient features of the empirical distribution of hours worked, with a notable spike at the 40-hour mark. The study reveals the 40-hour work week as a critical determinant of both micro and macro labor supply elasticities. It yields a small micro elasticity with heterogeneity across households, while the macro elasticity is larger, making the extensive margin more influential. Moreover, the 40-hour work week plays a significant role in shaping earnings inequality over the business cycle. Ultimately, this paper uncovers the vulnerability of households constrained by this work schedule to the adverse effects of business cycle fluctuations. |
| Keywords: | 40-hour work week, labor supply elasticity, wage penalty function, welfare effect of business cycles |
| JEL: | E24 E32 J21 J22 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2024rwp-225&r= |
| By: | Boris Chafwehé; Andrea Colciago; Romanos Priftis |
| Abstract: | This paper proposes a New Keynesian multi-sector industry model incorporating firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We examine the impacts of a sustained fossil fuel price hike on sectoral size, labor productivity, and inflation. Final good sectors are ex-ante heterogeneous in terms of energy intensity in production. For this reason, a higher relative price of fossil resources affects their profitability asymmetrically. Further, it entails a substitution effect that leads to a greener mix of resources in the production of energy. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs while promoting sectoral reallocation. While this entails a higher impact cost in terms of output and lower average productivity, it leads to a faster recovery in business dynamism in the medium-term. |
| Keywords: | Energy, productivity, firm entry and exit, monetary policy. |
| JEL: | E62 L16 O33 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:534&r= |
| By: | Thierry Magnac (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | We review a tractable model of human capital investments that can accommodate lots of heterogeneity and we investigate its compatibility with some job search and equilibrium wage models that have been proposed in the literature. We show that the log wage equation derived from the combination of these set-ups is additively separable in the process of human capital investments and the dynamic effects of the job ladder under a few conditions among which strict liquidity constraints and exogeneity of search are prominent. This is the case in particular with the popular model proposed by Bagger, Fontaine, Postel-Vinay and Robin [2014] in which the predicted wage equation can be generalized to accommodate richer heterogeneous effects due to endogenous human capital accumulation. |
| Abstract: | Nous présentons un modèle simple d investissements en capital humain qui peut tenir compte d une grande hétérogénéité entre agents, et nous étudions sa compatibilité avec certains modèles de recherche d emploi et de salaire d équilibre qui ont été proposés dans la littérature. Nous montrons que l équation de salaire en logarithme dérivée de la combinaison de ces modèles est additivement séparable dans le processus d investissement en capital humain et les e¤ets dynamiques de l échelle des emplois sous certaines conditions parmi lesquelles gurent des constraintes de liquidité strictes et l exogénéité de la recherche d emploi. C est le cas en particulier du modèle populaire proposé par Bagger, Fontaine, Postel-Vinay et Robin [2014] dans lequel l équation de salaire prédite peut être généralisée pour tenir compte d e¤ets hétérogènes plus riches dus à l accumulation endogène de capital humain. |
| Keywords: | Human capital, Job search, Wage inequalities, Applied econometrics, Capital humain, Recherche d emploi, Inégalités de salaires, Econométrie appliquée |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04555926&r= |
| By: | Lukas Boer; Mr. Jaewoo Lee |
| Abstract: | We estimate shocks that explain most of the variation in the current account at business cycle frequencies and over the long run. We then explore, using a standard open-economy macro model, which macroeconomic shocks are behind the empirical dominant drivers of the current account at business-cycle frequency. Rather than financial shocks or aggregate shocks to supply or demand, shocks to the relative demand between home and foreign goods are found to play a pivotal role in current account dynamics. |
| Keywords: | Current Account; Exchange Rates; Relative Demand; Open- Economy Model |
| Date: | 2024–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/092&r= |
| By: | Yuliya Rychalovska; Sergey Slobodyan; Raf Wouters |
| Abstract: | The use of survey information on inflation expectations as an observable in a DSGE model can substantially refine identification of the shocks that drive inflation. Optimal integration of the survey information improves the model forecast for inflation and for other macroeconomic variables. Models with expectations based on an Adaptive Learning setup can exploit survey information more efficiently than their Rational Expectations counterparts. The resulting time-variation in the perceived inflation target, in inflation persistence and in the sensitivity of inflation to various shocks provide a rich and consistent description of the joint dynamics of realized and expected inflation. Our framework produces a reasonable interpretation of the post-Covid inflation dynamics. Our learning model successfully identifies the more persistent nature of the recent inflation surge. |
| Keywords: | Inflation, Expectations, Survey data, Adaptive Learning, DSGE models |
| JEL: | C5 D84 E3 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp781&r= |
| By: | N. Edward Coulson (University of California, Irvine); Thao Le (Georgia State University); Victor Ortego-Marti (Department of Economics, University of California Riverside); Lily Shen (Clemson University) |
| Abstract: | We utilize state-level differences in the legal relationship between landlords and tenants to estimate their impact on rental housing affordability. We construct a Tenant Rights Index (TRI) spanning 1997 to 2016 to assess its effects on eviction rates and rental market outcomes. Increased TRI correlates with higher median rent, lower vacancy rates, and increased homelessness. To rationalize our findings, we develop a search and matching model of the rental market with free entry of both landlords and tenants, and an endogenous eviction mechanism. In our environment, more stringent eviction regulations reduce evictions and raise the relative demand for housing. However, stricter regulations also lead to higher rents and lower vacancy rates. We calibrate the model to the US rental market to quantitatively assess the mechanism in our model. An increase in eviction costs has a larger impact on the eviction rate and market tightness, with a relatively smaller effect on rents and vacancy rates. Our findings suggest that while stringent regulations may reduce evictions, they could lead to unintended consequences such as inflated house prices and heightened homelessness. Policymakers must carefully balance these potential drawbacks against the goal of tenant protection to avoid exacerbating existing housing affordability challenges. |
| Keywords: | Tenant Rights, Eviction, Rent Affordability, Landlord-Tenant Laws |
| JEL: | I38 K25 R13 R28 R31 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:202404&r= |
| By: | Mauricio Barbosa-Alves (University of Minnesota); Javier Bianchi (Federal Reserve Bank of Minneapolis); César Sosa-Padilla (University of Notre-Dame/NBER) |
| Abstract: | This paper investigates how a government should manage international reserves whenit faces the risk of a rollover crisis. We ask, should the government accumulate reservesor reduce debt to make itself less vulnerable? We show that the optimal policy entailsinitially reducing debt, followed by a subsequent increase in both debt and reserves asthe government approaches a safe zone. Furthermore, we uncover that issuing additionaldebt to accumulate reserves can lead to a reduction in sovereign spreads. |
| Keywords: | International reserves, sovereign debt, rollover crises. |
| JEL: | E4 E5 F32 F34 F41 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:321&r= |
| By: | Jonathan J Adams (Department of Economics, University of Florida) |
| Abstract: | The Behavioral Expectations Equilibrium Toolkit (BEET) is a toolkit for solving stochastic dynamic macroeconomic models with behavioral expectations in MATLAB. BEET itself is not a model-solver; for that task, it uses existing methods. Rather, BEET is a wrapper that transforms a behavioral expectations model into one that can be solved using tools designed for rational expectations. |
| JEL: | C60 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ufl:wpaper:001012&r= |
| By: | Pierre Beck; Pablo Garcia-Sanchez; Alban Moura; Julien Pascal; Olivier Pierrard |
| Abstract: | This technical report provides an introduction to solving economic models using deep learning techniques. We offer a simple yet rigorous overview of deep learning methods and their applicability to economic modeling. We illustrate these concepts using the benchmark of modern macroeconomic theory: the stochastic growth model. Our results emphasize how various choices related to the design of the deep learning solution affect the accuracy of the results, providing some guidance for potential users of the method. We also provide fully commented computer codes. Overall, our hope is that this report will serve as an accessible, useful entry point to applying deep learning techniques to solve economic models for graduate students and researchers interested in the field. |
| Keywords: | Solutions of DSGE models, deep learning, artificial neural networks |
| JEL: | C45 C60 C63 E13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp184&r= |
| By: | Sylvain Leduc; Zheng Liu |
| Abstract: | We study the implications of trade uncertainty for reshoring, automation, and U.S. labor markets. Rising trade uncertainty creates incentive for firms to reduce exposures to foreign suppliers by moving production and distribution processes to domestic producers. However, we argue that reshoring does not necessarily bring jobs back to the home country or boost domestic wages, especially when firms have access to labor-substituting technologies such as automation. Automation improves labor productivity and facilitates reshoring, but it can also displace jobs. Furthermore, automation poses a threat that weakens the bargaining power of low-skilled workers in wage negotiations, depressing their wages and raising the skill premium and wage inequality. The model predictions are in line with industry-level empirical evidence. |
| Keywords: | offshoring; reshoring; automation; robots; uncertainty; unemployment; wages; productivity |
| JEL: | F41 E24 J64 O33 |
| Date: | 2024–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:98206&r= |
| By: | Lawrence Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen |
| Abstract: | This paper investigates what features of an economy determine whether convergence under learning is fast or slow. In all of the models that we consider, people's beliefs about model outcomes are central determinants of those outcomes. We argue that under certain circumstances, convergence of a learning equilibrium to the rational expectations equilibrium can be so slow that policy analysis based on rational expectations is very misleading. We also develop new analytic results regarding rates of convergence in learning models. |
| JEL: | E12 E39 E70 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32358&r= |
| By: | Porcellacchia, Davide; Sheedy, Kevin D. |
| Abstract: | In financial crises, the premium on liquid assets such as US Treasuries increases alongside credit spreads. This paper explains the link between the liquidity premium and spreads. We present a theory of endogenous bank fragility arising from a coordination friction among bank creditors. The theory’s implications reduce to a single constraint on banks, which is embedded in a quantitative macroeconomic model to investigate the transmission of shocks to spreads and economic activity. Shocks that reduce bank net worth exacerbate the coordination friction. In response, banks lend less and demand more liquid assets. This drives up both credit spreads and the liquidity premium. By mitigating the coordination friction, expansions of public liquidity reduce spreads and boost the economy. Empirically, we identify high-frequency exogenous variation in liquidity by exploiting the time lag between auction and issuance of US Treasuries. We find a causal effect on spreads in line with the calibrated model. JEL Classification: E41, E44, E51, G01, G21 |
| Keywords: | bank-lending channel, bank runs, liquid assets |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242939&r= |
| By: | Stephen Ayerst; Loren Brandt; Diego Restuccia |
| Abstract: | In less developed economies the allocation of factor inputs to more productive farms is often hindered. To analyze how distortions to factor reallocation affect farm dynamics and agricultural productivity, we develop a model of heterogeneous farms that make cropping choices and invest in productivity improvements. We calibrate the model using detailed farm-level panel data from Vietnam, exploiting regional differences in agricultural institutions and outcomes. We focus on south Vietnam and quantify the effect of higher measured distortions in the North on farm choices and agricultural productivity. We find that the higher distortions in north Vietnam reduce agricultural productivity by 41%, accounting for 61% of the observed 2.5-fold difference between regions. Moreover, two-thirds of the productivity loss is driven by farms' choice of lower productivity crops and reductions in productivity-enhancing investment, which more than doubles the productivity loss from static misallocation. |
| Keywords: | Farm dynamics, productivity, size, distortions, misallocation, Vietnam. |
| JEL: | O11 O14 O4 |
| Date: | 2024–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-775&r= |