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on Dynamic General Equilibrium |
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Issue of 2024‒06‒17
sixteen papers chosen by |
| By: | Joshua Brault |
| Abstract: | In this paper, I develop a population-based Markov chain Monte Carlo (MCMC) algorithm known as parallel tempering to estimate dynamic stochastic general equilibrium (DSGE) models. Parallel tempering approximates the posterior distribution of interest using a family of Markov chains with tempered posteriors. At each iteration, two randomly selected chains in the ensemble are proposed to swap parameter vectors, after which each chain mutates via Metropolis-Hastings. The algorithm results in a fast-mixing MCMC, particularly well suited for problems with irregular posterior distributions. Also, due to its global nature, the algorithm can be initialized directly from the prior distributions. I provide two empirical examples with complex posteriors: a New Keynesian model with equilibrium indeterminacy and the Smets-Wouters model with more diffuse prior distributions. In both examples, parallel tempering overcomes the inherent estimation challenge, providing extremely consistent estimates across different runs of the algorithm with large effective sample sizes. I provide code compatible with Dynare mod files, making this routine straightforward for DSGE practitioners to implement. |
| Keywords: | Econometric and statistical methods, Economic models |
| JEL: | C11 C15 E10 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-13&r= |
| By: | Dirk Krueger; Alexander Ludwig; Irina Popova |
| 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. |
| JEL: | D15 D31 E24 I24 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32467&r= |
| By: | Marco Lorusso (University of Perugia, Newcastle University Business School); Francesco Ravazzolo (BI Norwegian Business School, Free University of Bozen-Bolzano, Italy); Claudia Udroiu (Free University of Bozen-Bolzano, Italy) |
| Abstract: | In this paper, we investigate the use of money supply issued by the central bank to support expansionary fiscal interventions. We develop and estimate a New Keynesian model using US data for the sample 1960Q1 - 2019Q4. We conduct a quantitative counterfactual analysis to assess the effects of a fiscal stimulus that does not result in an increase in public debt, as it is financed by money supply. Our impulse response analysis indicates that both increases in government spending and transfers that are monetary financed have positive effects on private consumption, investment and output. However, the expansionary impact of monetary-financed fiscal shocks comes at a cost: an increase in inflation. Our sub-sample analysis indicates that monetary-financed fiscal stimuli would have had a greater positive impact on the economy during the Great Moderation. Lastly, we find that as the debt burden increases, the positive effects of a monetary-financed fiscal stimulus diminish |
| Keywords: | Fiscal Policy, Monetary Policy, Bayesian Estimation. |
| JEL: | C11 E32 E52 E62 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps105&r= |
| By: | Martin, Ertl (Institute for Advanced Studies Vienna, Austria); Rabitsch, Katrin (Vienna University of Economics and Business) |
| Abstract: | We explore the natural rate of interest, shortly r*, in emerging economies. If economic growth originates from convergence, then growth, say, from technological progress will be lower than we ï¬ nd in the data and, hence, r* will be lower. Ignoring convergence upwardly biases our estimates of r*. We extend the New Keynesian small open economy model to take account of convergence. The model is estimated with Bayesian techniques for four emerging economies in Central and Eastern Europe: Poland, Czech Republic, Hungary and Romania. The estimation process is informed by empirical evidence about a rapid catch-up of our example economies during the period from 2003 to 2019. We conï¬ rm the decline in r* over the last decades. When we account for capital deepening, we ï¬ nd meaningful differences with non-negligible implications for monetary policy. |
| Keywords: | natural rate of interest; convergence; New Keynesian DSGE model; Central and Eastern Europe |
| JEL: | E3 E4 E5 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihswps:number55&r= |
| By: | Ricciutelli, Francesco |
| Abstract: | Recent research unveiled the heterogeneous effects of rising energy prices for low-income and high-income European households, as they tend to purchase distinct consumption baskets. We explore the effects of energy inflation on consumption inequality in a Two-Agent New Keynesian (TANK) model with an exogenous energy sector, and look for the optimal monetary policy response to an energy price shock. We find that rising energy prices widen consumption inequality through the expansions of inflation and income gaps. The effects of a maximizing welfare monetary policy are partially approximated by a core inflation targeting Taylor rule. |
| Keywords: | TANK Models; Energy; Consumption Inequality; Monetary Policy |
| JEL: | E52 I14 Q43 |
| Date: | 2024–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120899&r= |
| By: | James Graham |
| Abstract: | I study a novel institutional feature of Australian housing markets: the widespread use of mortgage offset accounts. These accounts reduce mortgage interest costs and increase the liquidity of mortgage balances. I build a heterogeneous agent life-cycle model of the Australian housing market to study who benefits from these accounts and by how much. Households in middle age, with high incomes, and with more expensive houses are most likely to use offset accounts and derive larger benefits from their use. I show that a social planner could maintain mortgage profitability, improve household welfare, and more evenly distribute benefits by adjusting the price structure of offset accounts. |
| Keywords: | housing, mortgage, offset account, hetereogeneous agents, life-cycle model |
| JEL: | E21 E44 G21 G51 R21 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-35&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:een:camaaa:2024-34&r= |
| By: | Alvaro Silva; Julian di Giovanni; Muhammed A. Yildirim (Center for International Development at Harvard University); Sebnem Kalemli-Ozcan |
| Abstract: | We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. |
| Keywords: | Russia, Ukraine, China, COVID-19, Inflation |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:cid:wpfacu:440&r= |
| 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 |
| JEL: | E52 E58 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11092&r= |
| By: | Olena Kostyshyna; Tolga Özden; Yang Zhang |
| Abstract: | Elevated inflation can threaten the credibility of central banks and increase the risk that inflation expectations do not remain anchored. Wage-price spirals might develop in such an environment, and high inflation could become entrenched. We quantitively assess the risks of a wage-price spiral occurring in Canada over history by using a medium-scale dynamic stochastic general equilibrium model enhanced with heterogenous expectation and learning. This mechanism generates time-varying propagation of inflationary shocks that improves forecasting performance of inflation and wage growth. Central bank credibility is endogenous in our model and depends on several notions of the learning mechanism. Weaker credibility and a higher risk of inflation expectations not remaining anchored increase the risk of a wage-price spiral. |
| Keywords: | Business fluctuations and cycles; Credibility; Inflation and prices; Monetary policy |
| JEL: | E00 E7 E47 C22 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-14&r= |
| By: | Andrés Blanco; Andres Drenik; Christian Moser; Emilio Zaratiegui |
| Abstract: | We develop a theory of labor markets with four features: search frictions, worker productivity shocks, wage rigidity, and two-sided lack of commitment. Inefficient job separations occur in the form of endogenous quits and layoffs that are unilaterally initiated whenever a worker's wage-to-productivity ratio moves outside an inaction region. We derive sufficient statistics for the labor market response to aggregate shocks based on the distribution of workers' wage-to-productivity ratios. These statistics depend on the incidence of inefficient job separations and are linked to readily available microdata on wage changes and worker flows between jobs. |
| JEL: | E31 E52 J64 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32409&r= |
| By: | Michael Boutros; Andrej Mijakovic |
| Abstract: | In the United States, 30% of households are coholders who simultaneously borrow on credit cards and hold liquid assets. This generates a rich distribution of gross wealth positions that underpins the distribution of net wealth often used to calibrate macroeconomic models. We show that, beyond their role in constructing net wealth, gross positions in liquid assets and liquid debt are important in determining how households consume, save, and repay debt in response to positive income shocks. We build a quantitative model that generates the coholding observed in the data and matches observed marginal propensities to consume, save, and repay debt. The model highlights that fiscal transfers are more effective in stimulating demand if targeted at households with low gross positions instead of low net liquid wealth, while debt relief is less effective overall in the short run but achieves large consumption gains in the long run. |
| Keywords: | Central bank research; Fiscal policy; Monetary policy; Economic models |
| JEL: | E21 E44 E62 G51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-16&r= |
| By: | Stephen McKnight (El Colegio de México); Laura Povoledo (University of the West of England) |
| Abstract: | We document important differences between developed and emerging market economies relating to the cyclical behaviour of international relative prices and quantities. In emerging markets, imports are more volatile than exports, the terms of trade is less volatile, and net exports are strongly countercyclical. While the terms of trade is procyclical in developed countries, it is generally acyclical or weakly countercyclical in emerging economies. We develop a two-sector small open economy model with an endogenous terms of trade and compare three mechanisms in an attempt to account for the empirical evidence: trend productivity shocks, interest-rate shocks in the presence of financial frictions, and informality. We find that trend productivity shocks is the most important mechanism in replicating the cyclical behaviour observed for the terms of trade and net exports. |
| Keywords: | Emerging Markets, Business Cycles, Terms of Trade, Net Exports, Informality |
| JEL: | E32 F41 F44 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:emx:ceedoc:2024-02&r= |
| By: | Fabrice Collard (Toulouse School of Economics); Patrick Feve (Toulouse School of Economics); Alain Guay (University of Quebec in Montreal) |
| Abstract: | This paper studies the impact of Higher Order Belief (HOB) shocks, representing shifts in agents’ beliefs about others’ beliefs, on macroeconomic outcomes. The dynamic causal effects of these shocks are identified by leveraging a combination of a proxy-VAR approach and DSGE-based instruments. Our findings suggest that HOB shocks are indeed a key driver of the business cycle and account for a sizeable share of the observed business cycle volatility. Finally, our identification approach ensures that these shocks are not confounded with other structural/fundamental shocks. |
| Keywords: | Higher Order Beliefs, Business cycles, proxy-VAR, DSGE |
| JEL: | C32 E32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bbh:wpaper:24-03&r= |
| By: | Adam Hallengreen (Department of Economics, University of Copenhagen); Thomas H. Joergensen (Department of Economics, University of Copenhagen); Annasofie M. Olesen (Department of Economics, University of Copenhagen) |
| Abstract: | In this guide, we introduce the limited commitment model of dynamic household bargaining behavior over the life cycle. The guide is intended to make the limited commitment model more accessible to researchers who are interested in studying intra-household allocations and divorce over the life cycle. We mitigate computational challenges by providing a flexible base of code that can be customized and extended to the specific use case. The main contribution is to discuss practical implementation details of the model class, and provide guidance on how to efficiently solve limited commitment models using state-of-the-art numerical methods. The setup and solution algorithm is presented through a stylized example of dynamic consumption allocation and includes accompanying Python and C++ code used to generate all results. |
| Keywords: | Household Bargaining, limited commitment, life cycle, couples, numerical dynamic programming |
| JEL: | D13 D15 C61 C63 C78 |
| Date: | 2024–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kucebi:2409&r= |
| By: | Adam Hallengreen (Department of Economics, University of Copenhagen); Thomas H. Joergensen (Department of Economics, University of Copenhagen); Annasofie M. Olesen (Department of Economics, University of Copenhagen) |
| Abstract: | The computational time required to solve and estimate dynamic economic models is one of the main constraints in empirical research. The Endogenous Grid Method (EGM) proposed by Carroll (2006) is known to offer impressive speed gains over more traditional stochastic dynamic programming methods, such as Value Function Iterations (VFI). However, existing EGM implementations implicitly require an analytical expression for the inverse marginal utility, which is not known in many interesting cases. We propose a simple and fast approach, which we refer to as the interpolated EGM (iEGM), that can be applied even when the inverse marginal utility is not known analytically. We show through two applications that the iEGM inherits the speed andaccuracy of the EGM and that our approach is an order of magnitude faster than traditionalapproaches. |
| Keywords: | Endogenous grid method, dynamic programming, numerical methods, limited commitment |
| JEL: | D13 D15 C61 C63 C78 |
| Date: | 2024–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kucebi:2411&r= |