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on Dynamic General Equilibrium |
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Issue of 2024‒06‒24
twenty papers chosen by |
| By: | Lasha Arevadze (Macroeconomic Research Division, National Bank of Georgia); Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Saba Metreveli (Macroeconomic Research Division, National Bank of Georgia); Giorgi Tsutskiridze (Macroeconomic Research Division, National Bank of Georgia); Tamar Mdivnishvili (Macroeconomic Research Division, National Bank of Georgia); Nika Khinashvili (PhD candidate, Geneva Graduate Institute.) |
| Abstract: | Last couple of decades of research has significantly advanced New Keynesian DSGE modeling. While each of such models faces its own important limitations, it can still contribute to robust policy analysis as long as we consolidate relevant macroeconomic features in it and remain conscious of the limitations. With this paper we are introducing a DSGE model for Georgia with features relevant for Emerging Market Economies (EMEs), characterized with large number of real and nominal imperfections. While some model features are already standard to existing DSGE frameworks, we also emphasize aspects particularly relevant to EMEs. These include dominant currency invoicing, forward premium puzzle, breakdown of Ricardian equivalence, impaired expenditure switching mechanism, decoupled domestic and imported price levels impacting real exchange rate trend, and other non-stationarities. Additionally, we distinguish between global financial centers and other trade partner economies. This LEGO model with these building blocks is planned to be expanded further with other properties in the future to make the model suitable for analyzing FX interventions and macroprudential policies, in addition to monetary and fiscal policies. The model is intended to become the workhorse model for macro-financial analysis in Georgia, representing a key addition to the NBG’s existing FPAS, though its adaptability can extend to other country contexts as well. |
| Keywords: | Non-tradable sticky prices; Monetary policy credibility; Core inflation |
| JEL: | E10 E31 E52 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:aez:wpaper:2024-02&r= |
| By: | Francesco Ferlaino |
| Abstract: | This study examines the redistribution effects of a conventional monetary policy shock among households in the presence of production-side financial frictions. A Heterogeneous Agents New Keynesian model featuring a financial accelerator is built after empirical evidence for consumption inequality. The results show that the presence of financial frictions significantly increases the magnitude of the Gini coefficient of wealth and other wealth inequality measures after contractionary monetary policy, compared to a scenario in which such frictions are inactive, proving that firms’ financial characteristics affect household wealth inequality. Consumption dynamics are also affected: financial frictions have a significant impact on how households consume and save after a monetary contraction, because they rely differently on labor income to smooth consumption. The relative increase in consumption inequality confirms the empirical results obtained in this study. |
| Keywords: | heterogeneous agents, financial frictions, monetary policy, New Keynesian models, inequalities, proxy-SVAR. |
| JEL: | C32 E12 E21 E44 E52 G51 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:538&r= |
| By: | Ida, Daisuke; Okano, Mitsuhiro; Hoshino, Satoshi |
| Abstract: | This note examines the role of stock price stabilization in a small open new Keynesian model. We show that stabilizing stock prices is desirable to attain a unique rational expectations equilibrium and that the open economy effect has a significant impact on the determinacy condition. |
| Keywords: | Stock prices; Monetary policy rules; Terms of trade; Indeterminacy; Taylor principle; |
| JEL: | E52 E58 F41 |
| Date: | 2024–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:121050&r= |
| By: | Tänzer, Alina |
| Abstract: | This paper contributes a multivariate forecasting comparison between structural models and Machine-Learning-based tools. Specifically, a fully connected feed forward nonlinear autoregressive neural network (ANN) is contrasted to a well established dynamic stochastic general equilibrium (DSGE) model, a Bayesian vector autoregression (BVAR) using optimized priors as well as Greenbook and SPF forecasts. Model estimation and forecasting is based on an expanding window scheme using quarterly U.S. real-time data (1964Q2:2020Q3) for 8 macroeconomic time series (GDP, inflation, federal funds rate, spread, consumption, investment, wage, hours worked), allowing for up to 8 quarter ahead forecasts. The results show that the BVAR improves forecasts compared to the DSGE model, however there is evidence for an overall improvement of predictions when relying on ANN, or including them in a weighted average. Especially, ANNbased inflation forecasts improve other predictions by up to 50%. These results indicate that nonlinear data-driven ANNs are a useful method when it comes to macroeconomic forecasting. |
| Keywords: | Artificial Intelligence, Machine Learning, Neural Networks, Forecast Comparison/ Competition, Macroeconomic Forecasting, Crises Forecasting, Inflation Forecasting, Interest Rate Forecasting, Production, Saving, Consumption and Investment Forecasting |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:295733&r= |
| By: | Tomohiro HIRANO; Alexis Akira Toda |
| Abstract: | We analyze equilibrium housing prices in an overlapping generations model with perfect housing and rental markets. The economy exhibits a two-stage phase transition: as the income of home buyers rises, the equilibrium regime changes from fundamental to bubble possibility, where fundamental and bubbly equilibria can coexist. With even higher incomes, fundamental equilibria disappear and housing bubbles become a necessity. Even with low current incomes, housing bubbles may emerge if home buyers have access to credit or have high future income expectations. Contrary to widely-held beliefs, fundamental equilibria in the possibility regime are inefficient despite housing being a productive non-reproducible asset. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:24-009e&r= |
| By: | Sushant Acharya; Jess Benhabib |
| Abstract: | We show that in Heterogeneous-Agent New-Keynesian (HANK) economies with countercyclical risk the natural interest rate is endogenous and co-moves with output, leaving the economy susceptible to self-fulfilling fluctuations. Unlike in Representative-Agent New-Keynesian models, the Taylor principle is not sufficient to guarantee uniqueness of equilibrium in HANK if risk is even mildly countercyclical. In fact, we prove that multiple bounded-equilibria exist, no matter how strongly monetary policy responds to changes in inflation. Neither inertial rules nor rules which respond to output-gap fluctuations can resolve this indeterminacy. Instead, to implement a unique equilibrium, policy must stabilize endogenous natural rate fluctuations. |
| JEL: | E31 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32462&r= |
| By: | Martin Kliem; Alexander Kriwoluzky; Gernot J. Müller; Alexander Scheer |
| Abstract: | Financial repression lowers the return on government debt and contributes, all else equal, towards its liquidation. However, its full effect on the debt-to-GDP ratio hinges on how repression impacts the economy at large because it alters investment and saving decisions. We develop and estimate a New Keynesian model with financial repression. Based on U.S. data for the period 1948–1974, we find, consistent with earlier work, that repression was pervasive but gradually phased out. A model-based counterfactual shows that GDP would have been 5 percent lower, and the debt-to-GDP ratio 20 percentage points higher, had repression not been phased out. |
| Keywords: | Financial repression, Government debt, Interest rates, Banks, Regulation, Bayesian estimation |
| JEL: | H63 E43 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2075&r= |
| By: | Jaccard, Ivan |
| Abstract: | The evidence suggests that monetary policy transmission is asymmetric over the business cycle. Interacting financing frictions with a preference for liquidity provides an explanation for this fact. Our mechanism generates monetary asymmetries in a model that jointly reproduces a set of asset market and business cycle facts. Accounting for the joint dynamics of asset prices and business cycle fluctuations is key; in a variant of the model that is unable to produce realistic macro-finance implications, monetary asymmetries disappear. Our results suggest that asymmetries in the transmission mechanism critically depend on the macro-finance implications of monetary policy models, and that resorting to nonlinear techniques is not sufficient to detect monetary asymmetries. |
| Keywords: | Money Demand; Nonlinear Solution Methods; Asset Pricing in DSGE Models; Term Premium; Stochastic Discount Factor |
| JEL: | E31 E44 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:081&r= |
| By: | Francesco Zanetti; Mariano Kulish; James Morley; Nadine Yamout |
| 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. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:24-011e&r= |
| By: | Maideu-Morera, Gerard |
| Abstract: | The European Sovereign debt crises (2010-2012) showcased how excessive private leverage can threaten sovereign debt sustainability, making the existing fiscal rules targeting only public debt insufficient. In this paper, I study the optimal joint design of fiscal rules and macroprudential policies with sovereign default risk. I first consider a stylized two-period model of a small open economy where both the local government and a representative household borrow internationally. A central authority internal-izes externalities from sovereign default by the local government and designs fiscal rules and macroprudential policies. The model yields two insights: (i) it provides a novel rationale for macroprudential policies, and (ii) sovereign debt limits that are a function of the quantity of private debt (private-debt-dependent fiscal rules) can im-plement the optimal allocation. Then, I generalize these results to a multiperiod model with heterogeneous households, aggregate risk, and a rich asset structure. Finally, I calibrate a quantitative version of the model to compute the private-debt-dependent fiscal rules and the size of the macroprudential wedges. |
| Keywords: | Fiscal rules; macroprudential policy; sovereign default; endogenous borrowing constraints; economic unions |
| JEL: | F34 F41 F45 E44 G28 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129336&r= |
| 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. |
| Keywords: | Household heterogeneity, cognitive skills, overconfidence, financial constraints, fiscal policy, HANK |
| JEL: | D91 E21 E62 E71 G51 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2080&r= |
| By: | Eskelinen, Maria; Gibbs, Christopher G.; McClung, Nigel |
| Abstract: | New Keynesian models generate puzzles when confronted with the zero lower bound (ZLB) on nominal interest rates (e.g. the forward guidance puzzle or the paradox of flexibility). We show that these puzzles are absent in simple and medium-scale models when monetary policy approximates optimal policy, even loosely. The standard approach to modeling monetary policy at the ZLB does not approximate the policy a rational inflation targeting central bank would choose at the ZLB. It is this disconnect that is responsible for the puzzles. The puzzles, therefore, are best thought of as the plausible predictions of implausible monetary policy rather than implausible predictions to plausible monetary policy. We show how to write monetary policy rules that capture the same policy objective with and without the ZLB. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofrdp:295739&r= |
| By: | Kaan Celebi; Werner Roeger; Paul J. J. Welfens |
| Abstract: | This paper re-evaluates the US external deficit which has considerably widened over the 1990s. US safe asset provision to the rest of the world is the dominant explanation for the persistent nature of the US external deficit. We suggest that apart from the safe asset hypothesis, there is an important role for technology shocks originating in US multinational companies that have a strong foreign direct investment presence. It is shown that technology shocks that increase the market value of FDI assets are loosening the sustainability constraint on the trade balance and therefore generate persistent trade balance deficits. Our analysis suggests that this channel can explain why the US tech-boom in the 1990s has contributed significantly to the increase of the US current account deficit and its duration. Technology shocks have been neglected as a reason for longer lasting current account deficits since for these shocks, standard open economy DSGE models can only generate temporary external deficits. We show that our enhanced DSGE-model – covering both trade and FDI – not only matches well the dynamics of the US external balance but can also account for the observed evolution of FDI related components of the external balance. In particular, US technology shocks can match the increase in net FDI income and a rising FDI capital balance. Our analysis suggests that FDI flows and their determinants should play a more important role in monitoring external imbalances by international organizations. |
| Keywords: | Foreign direct investment, current account imbalance, USA, DSGE, technology shocks |
| JEL: | D5 F21 F23 F32 O3 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2074&r= |
| By: | Iacopo Morchio; Christian Moser |
| Abstract: | Using linked employer-employee data from Brazil, we document a large gender pay gap due to women working at lower-paying employers with better nonpay attributes. To interpret these facts, we develop an equilibrium search model with endogenous firm pay, amenities, and hiring. We provide a constructive proof of identification of all model parameters. The estimated model suggests that amenities are important for both men and women, that compensating differentials explain half of the gender pay gap, and that there are significant output and welfare gains from eliminating gender differences. However, equal-treatment policies fail to achieve those gains. |
| JEL: | E24 J16 J31 J32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32408&r= |
| By: | Stephie Fried; Kevin Novan; William B. Peterman |
| Abstract: | This paper develops a general equilibrium lifecycle model to explore the welfare and inequality implications of different ways to return carbon tax revenue back to households. We find that the welfare maximizing rebate uses two thirds of carbon-tax revenue to reduce the distortionary tax on capital income while using the remaining one third to increase the progressivity of the labor-income tax. This recycling approach attains higher welfare and more equality than the lump-sum rebate approach preferred by policymakers as well as the approach originally prescribed by economists __ which called exclusively for reductions in distortionary taxes. |
| Keywords: | Carbon tax; inequality; overlapping generations; Revenue recycling |
| JEL: | Q58 E62 H21 H23 |
| Date: | 2024–05–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:98314&r= |
| By: | Fève, Patrick; Collard, Fabrice; Guay, Alain |
| 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: | 2024–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129351&r= |
| By: | Mr. Tobias Adrian; Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Roger McLeod; Mr. Romain M Veyrune; Pawel Zabczyk |
| Abstract: | Central banks have come under increasing criticism for large balance sheet losses associated with quantitative easing (QE), and some observers have also argued that QE helped fuel the post-COVID-19 inflation boom. In this paper, we reconsider the conditions under which QE may be warranted considering the recent high inflation experience. We emphasize that the merits of QE should be evaluated based on the macroeconomic stimulus it provides and its effects on the consolidated fiscal position, and not simply on central bank profits or losses. Using an open economy DSGE model with segmented asset markets, we show how QE can provide a sizeable boost to output and inflation in a deep recession and improve the consolidated fiscal position—even if the central bank experiences considerable losses. However, the commitment-based features of QE and the possibility that upside inflation risks are bigger than recognized pre-pandemic call for more caution in using QE closer to full employment. We then consider how central banks might modify their policies for allocating profits to the government in light of large-scale losses. In short, we suggest that a more forward-looking and risk-based approach may be desirable in helping protect central bank financial autonomy and ultimately independence. |
| Keywords: | Monetary policy; quantitative easing; central bank remittances; forward guidance |
| Date: | 2024–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/103&r= |
| By: | Mr. Pau Rabanal; M. Belen Sbrancia |
| Abstract: | The recent increase of inflation globally has led to a renewed interest in understanding the link between inflation and wages. In Uruguay, the presence of centralized wage bargaining and indexation practices raises the question as to what extent wage growth dynamics can make the response of inflation to shocks more persistent. We use a medium-scale DSGE model which incorporates indexation in the wage setting equation to analyze the interactions between wage setting behavior and other macroeconomic variables, as well as the role of monetary policy. The analysis suggests that wage indexation increases the persistence of the response of inflation to domestic and foreign shocks, it also affects the monetary policy transmission mechanism and the severity of the trade-offs faced by the central bank. |
| Keywords: | Wage Setting; Inflation Persistence; Monetary Policy |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/105&r= |
| By: | Stephie Fried |
| Abstract: | This paper develops a macro heterogeneous-agent model to quantify the distributional impacts of higher temperatures in the US. Households adapt to temperature by using energy and equipment for heating and cooling. A key insight is that temperature acts as a transfer from nature, augmenting household income by the value of heating or cooling provided by nature. The welfare effects of climate change vary substantially with income, increasing welfare inequality in the colder parts of the US. This heterogeneity results from the effects of climate change on transfers from nature and on households’ extensive-margin decisions to purchase heaters and air conditioners. |
| Keywords: | climate change; heterogeneous-agent model; temperature; welfare effects |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:98315&r= |
| By: | Rubing Li; Arun Sundararajan |
| Abstract: | The emergence of the branded recommerce channel - digitally enabled and branded marketplaces that facilitate purchasing pre-owned items directly from a manufacturer's e-commerce site - leads to new variants of classic IS and economic questions relating to secondary markets. Such branded recommerce is increasingly platform-enabled, creating opportunities for greater sustainability and stronger brand experience control but posing a greater risk of cannibalization of the sales of new items. We model the effects that the sales of pre-owned items have on market segmentation and product durability choices for a monopolist facing heterogeneous customers, contrasting outcomes when the trade of pre-owned goods takes place through a third-party marketplace with outcomes under branded recommerce. We show that the direct revenue benefits of branded recommerce are not their primary source of value to the monopolist, and rather, there are three indirect effects that alter profits and sustainability. Product durability increases, a seller finds it optimal to forgo marketplace fees altogether, and there are greater seller incentives to lower the quality uncertainty associated with pre-owned items. We establish these results for a simple two-period model as well as developing a new infinite horizon model with overlapping generations. Our paper sheds new insight into this emerging digital channel phenomenon, underscoring the importance of recommerce platforms in aligning seller profits with sustainability goals. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.09023&r= |