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on Dynamic General Equilibrium |
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Issue of 2024‒07‒08
twenty papers chosen by |
| By: | Suzanne Bellue; Lukas Mahler |
| Abstract: | We study the long-run aggregate, distributional, and intergenerational effects of school tracking—the allocation of students to different types of schools—by incorporating school track decisions into a general-equilibrium heterogeneous-agent overlapping generations model. The key innovation in our model is the skill production technology during school years with tracking. School tracks endogenously differ in their pace of instruction and the students’ average skills. We show analytically that this technology can rationalize reduced-form evidence on the effects of school tracking on the distribution of end-of-school skills. We then calibrate the model using representative data from Germany, a country with a very early school tracking policy by international standards. Our calibrated model shows that an education reform that postpones the tracking age from ten to fourteen generates improvements in intergenerational mobility but comes at the cost of modest losses in aggregate human capital and economic output, reducing aggregate welfare. This efficiency-mobility trade-off is rooted in the effects of longer comprehensive schooling on learning and depends crucially on the presence of general equilibrium effects in the labor market. Finally, counterfactual analyses suggest that policies that reduce the parental influence in the school track choice can increase both social mobility and aggregate economic output, improving aggregate welfare. |
| Keywords: | Intergenerational Mobility, Education Tracking, Inequality, Efficiency |
| JEL: | E24 I24 J24 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_546&r= |
| By: | Nigar Hashimzade; Oleg Kirsanov; Tatiana Kirsanova; Junior Maih |
| Abstract: | This paper presents a framework for empirical analysis of dynamic macroeconomic models using Bayesian filltering, with a specific focus on the state-space formulation of New Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) models with multiple regimes. We outline the theoretical foundations of model estimation, provide the details of two families of powerful multiple-regime filters, IMM and GPB, and construct corresponding multiple regime smoothers. A simulation exercise, based on a prototypical NK DSGE model, is used to demonstrate the computational robustness of the proposed filters and smoothers and evaluate their accuracy and speed. We show that the canonical IMM filter is faster than the commonly used Kim and Nelson(1999) filter and is no less, and often more, accurate. Using it with the matching smoother improves the precision in recovering unobserved variables by about 25%. Furthermore, applying it to the U.S. 1947-2023 macroeconomic time series, we successfully identify significant past policy shifts including those related to the post-Covid-19 period. Our results demonstrate the practical applicability and potential of the proposed routines in macroeconomic analysis. |
| Keywords: | Markov switching models, Filtering, Smoothing |
| JEL: | C11 C32 C54 E52 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_01&r= |
| By: | Simon J. Heiler |
| Abstract: | Incentives to search for employment vary systematically with age and idiosyncratic labor productivity. These variations should be accounted for when designing UI policy, yet conditioning on related factors can be difficult or infeasible in practice. Using a life cycle model with endogenous human capital accumulation, idiosyncratic labor risk, and permanent differences in worker productivity, I analyze optimal UI policies. I find that for the U.S. an age-and-type-dependent policy generates welfare gains equal to 0.3 percentage points of consumption in all states and periods relative to a constant a replacement rate. Moreover, I demonstrate that about 80% of the gains from conditioning replacement rates on age only and about 60% of the welfare gains from conditioning on age and productivity can be generated by the current U.S. UI system. This can be achieved by substantially raising the benefit floor, a feature of the U.S. UI system that is largely ineffective in its current implementation. |
| Keywords: | Unemployment Insurance, Worker Heterogeneity, Lifecycle |
| JEL: | J65 E24 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_545&r= |
| By: | Hans Gersbach; Jean-Charles Rochet; Ernst-Ludwig von Thadden |
| Abstract: | This paper characterizes optimal fiscal policy in a growth model with incomplete markets, heterogeneous agents (households and entrepreneurs), and idiosyncratic productivity risk. Entrepreneurs run risky production, which they cannot finance optimally because of an agency problem. In the second-best optimum, they issue continuously traded bonds. Households invest in private and public debt. The government has to finance an exogenous expenditure flow and maximizes a weighted sum of the welfare of entrepreneurs and households. We show that any constrained Pareto optimal allocation can be decentralized as a competitive equilibrium by issuing an appropriate amount of public debt, combined with suitable wealth taxation. Positive public expenditure shocks leave the optimal debt-to-GDP ratio unaffected and increase tax rates. Such shocks also determine whether r g in equilibrium, with different dynamics and fiscal sustainability in the two regimes. |
| Keywords: | Incomplete Financial Markets, Heterogeneous Agents, Debt, Taxes, Interest, Growth, Ponzi Games |
| JEL: | D31 D43 D52 D63 E21 E44 E62 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_544&r= |
| By: | Paul Beaudry; Paolo Cavallino; Tim Willems |
| Abstract: | This paper adds life-cycle features to a New Keynesian model and shows how this places financial wealth at the center of consumption/saving decisions, thereby enriching the determinants of aggregate demand and affecting the transmission of monetary policy. As retirement preoccupations strengthen, the potency of conventional monetary policy declines and depends more on the response of asset prices (supporting central banks closely monitoring the impact of monetary policy on asset prices). Especially “low/high for long” policies are shown to often have only muted effects on economic activity due to offsetting income and substitution effects of interest rates, in a way that can be compounded by Quantitative Easing. We also show why the presence of life-cycle forces can favor a monetary policy strategy which stabilizes asset prices in response to financial shocks. Being explicit about the role of retirement savings in aggregate demand therefore offers new perspectives on several aspects of monetary interventions. |
| JEL: | E21 E43 E52 G51 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32511&r= |
| By: | Elena Capatina; Gary Hansen; Minchung Hsu |
| Abstract: | This paper compares the impact of long term care (LTC) risk on single and married households and studies the roles played by informal care (IC), consumption sharing within households, and Medicaid in insuring this risk. We develop a life-cycle model where individuals face survival and health risk, including the possibility of becoming highly disabled and needing LTC. Households are heterogeneous in various important dimensions including education, productivity, and the age difference between spouses. Health evolves stochastically. Agents make consumption-savings decisions in a framework featuring an LTC statedependent utility function. We find that household expenditures increase significantly when LTC becomes necessary, but married individuals are well insured against LTC risk due to IC. However, they still hold considerable assets due to the concern for the spouse who might become a widow/widower and can expect much higher LTC costs. IC significantly reduces precautionary savings for middle and high income groups, but interestingly, it encourages asset accumulation among low income groups because it reduces the probability of meanstested Medicaid LTC. |
| Keywords: | Long Term Care, Household Risk, Precautionary Savings, Medicaid |
| JEL: | D91 E21 H31 I10 I38 J14 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:acb:cbeeco:2024-697&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 |
| Date: | 2024–09 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2024-09&r= |
| By: | Egemen Eren; Timothy Jackson; Giovanni Lombardo |
| Abstract: | Is there a role for central bank balance sheet policies away from the effective lower bound on interest rates? We extend the canonical DSGE model with financial frictions to include a fully specified central bank balance sheet. We find that the balance sheet size and composition can play a macroprudential role in improving the efficacy of monetary policy. The optimal balance-sheet policy aims at affecting duration risk held by banks in order to increase their resilience to shocks. Optimal short-run balance sheet policies bring no additional advantage to using the policy rate alone provided the optimal long-run balance sheet is already in place. Our results also highlight a key role for government debt maturity and bank regulation in determining optimal central bank balance sheets. |
| Keywords: | optimal monetary policy, central bank balance sheet, government debt, reserves, financial frictions, macroprudential. |
| JEL: | E42 E44 E51 E52 G21 |
| Date: | 2024–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:liv:livedp:202408&r= |
| By: | Luca Pensieroso (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Alessandro Sommacal (University of Verona); Gaia Spolverini (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | We provide a historical decomposition of fertility in the United States by family type. We find that intergenerational coresidence was systematically associated with lower fertility than nuclear families, with the difference shrinking over time. This pattern is robust to controlling for several demographic and socioeconomic confounders. We build a simple, analytical model and show that a theory featuring both endogenous fertility and endogenous coresidence can rationalise the observed cross-family fertility difference. Simulations from a calibrated dynamic general equilibrium version of the model show that the model has the right qualitative behaviour, and is quantitatively meaningful. Using individual data, we discuss (and dismiss) several potential alternative explanations. |
| Date: | 2024–05–06 |
| URL: | https://d.repec.org/n?u=RePEc:ctl:louvir:2024006&r= |
| 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. |
| Keywords: | idiosyncratic earnings risk, higher-order earnings risk, non-Gaussian shocks, incomplete markets models, consumption insurance |
| JEL: | E24 J24 J31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11135&r= |
| By: | Christian Bayer; Ralph Luetticke; Maximilian Weiss; Yannik Winkelmann |
| Abstract: | The “histogram method” (Young, 2010), while the standard approach for analyzing distributional dynamics in heterogeneous agent models, is linear in optimal policies. We introduce a novel method that captures nonlinearities of distributional dynamics. This method solves the distributional dynamics by interpolation instead of integration, which is made possible by making the grid endogenous. It retains the tractability and speed of the histogram method, while increasing numerical efficiency even in the steady state and producing significant economic differences in scenarios with aggregate risk. We document this by studying aggregate investment risk with a third-order solution using perturbation techniques. |
| Keywords: | Numerical Methods, Distributions, Heterogeneous Agent Models, Linearization |
| JEL: | C46 C63 E32 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_548&r= |
| By: | Gorkem Bostanci; Guillermo Ordoñez |
| Abstract: | Stock markets play a dual role: help allocate capital by conveying information about firms’ fundamentals and provide liquidity by quickly turning stocks into cash. We propose a trading model in which these two roles are endogenously related: more intensive use of stocks for liquidity affects both the information and the noise about fundamentals contained in prices. We structurally estimate stock price informativeness for several countries and show that it sharply declines when the banking system has trouble providing liquidity. We incorporate this module into a dynamic general equilibrium model to study the real effects of this mechanism through capital misallocation across heterogeneous firms. Calibrating the model for the US, we show that, due to less informative stock markets, the output loss is 43% larger if recessions are accompanied by liquidity distress. |
| JEL: | D53 D82 E32 G11 G12 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32501&r= |
| By: | James Graham; Avish Sharma |
| Abstract: | How does monetary policy affect the homeownership rate? A monetary contraction may have contrasting effects on ownership due to rising interest rates, falling incomes, and lower house prices. To investigate, we build a heterogeneous household life-cycle model with housing tenure decisions, mortgage finance, and an exogenous stochastic process to capture the macroeconomic effects of monetary policy. Following a contractionary shock, homeownership initially falls due to rising mortgage rates, but rises over the medium term given falling house prices. We also show that differences in mortgage credit conditions, mortgage flexibility, and household expectations formation can amplify homeownership dynamics following a shock. |
| Keywords: | Homeownership; monetary policy; interest rates; house prices; heterogeneous households |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:syd:wpaper:2024-11&r= |
| By: | Giulio Fella; Martin B. Holm; Thomas Michael Pugh |
| Abstract: | We use administrative data for Norway to estimate an incomplete-market life cycle model of retired singles and couples with a bequest motive, health-dependent utility, and uncertain longevity and health. We allow the parameters of the bequest utility to differ between households with and without offspring. Our estimates imply a very strong utility of residual wealth (bequest motive), in line with the estimates by Lockwood (2018). The bequest motive accounts for approximately three-quarters of aggregate wealth at age 85. More surprisingly, we estimate similar utility of residual wealth for households with and without offspring. that the utility of residual wealth represents forces beyond an altruistic bequest motive. |
| Keywords: | Economic models; Fiscal policy; Housing; Labour markets |
| JEL: | D11 D12 D14 E21 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-21&r= |
| By: | Claudio Daminato; Luigi Pistaferri |
| Abstract: | A recent literature argues that persistent heterogeneity in wealth returns ("type dependence") as well as a positive association with wealth levels ("scale dependence") play an important role for explaining features of the wealth distribution, especially its extreme concentration at the top. In contrast, traditional models of wealth accumulation emphasize the role of persistent differences in labor earnings. Using panel data from the PSID, we first document that a common unobserved component (which we interpret as the endowment of cognitive and non-cognitive skills of an individual) drives persistent heterogeneity in both wealth returns and labor earnings. We embed these features of the joint wealth return-earnings process in a life-cycle model of consumer behavior and show that ignoring them would dramatically understate average returns for people at the top of the wealth distribution as well as the level and rise of consumption inequality over the life cycle. |
| JEL: | E21 G51 J24 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32490&r= |
| By: | Elin Halvorsen; Joachim Hubmer; Serdar Ozkan; Sergio Salgado |
| Abstract: | CORRECT ORDER OF AUTHORS: Hubmer, Halvorsen, Salgado, Ozkan. We use 1993--2015 Norwegian administrative panel data on wealth and income to study lifecycle wealth dynamics. By employing a novel budget constraint approach, we show that at age 50 the excess wealth of the top 0.1%, relative to mid-wealth households, is accounted for by higher saving rates (38%), inheritances (34%), returns (23%), and labor income (5%). One-fourth of the wealthiest---the "New Money"---start with negative wealth but experience rapid wealth growth early in life. Relative to the "Old Money, " the New Money are characterized by even higher saving rates, returns, and labor income. We use these dynamic facts to test six commonly used models of wealth inequality. Although these models can generate the high concentration of wealth seen in the cross-section, they tend to put too much weight on (accidental) bequests and fail to capture the contribution of the New Money. A model with heterogeneous returns that decrease in wealth, and non-homothetic preferences is consistent with the new facts on the dynamics of wealth accumulation. |
| Keywords: | wealth inequality; lifecycle wealth dynamics; rate of return heterogeneity; bequests; saving rate heterogeneity |
| JEL: | D14 D15 E21 |
| Date: | 2024–06–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98371&r= |
| By: | Joshua Brault; Qazi Haque; Louis Phaneuf |
| Abstract: | Taylor rules and their implications for monetary policy analysis can be misleading if the inflation target is held fixed while being in fact time-varying. We offer a theoretical analysis showing why assuming a fixed inflation target in place of a time-varying target can lead to a downward bias in the estimated policy rate response to the inflation gap and wrong statistical inference about indeterminacy. Our analysis suggests the bias is stronger in periods where inflation target movements are large. This is confirmed by simulation evidence about the magnitude of the bias obtained from a New Keynesian model featuring positive trend inflation. We further estimate medium-scale NK models with positive trend inflation and a time-varying inflation target using a novel population-based MCMC routine known as parallel tempering. The estimation results confirm our theoretical analysis while favouring a determinacy outcome for both pre and post-Volcker periods and shedding new light about the type of rule the Fed likely followed. |
| Keywords: | Taylor rule estimation, time-varying inflation target, omitted variable bias |
| JEL: | E50 E52 E58 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-39&r= |
| By: | Roshen Fernando |
| Abstract: | Climate change continues to be an existential threat to humanity. With intrinsic linkages to the natural environment, food and energy supply chains are two fundamental channels via which climate risks could spill over into the economy. This paper explores the global economic consequences of the physical climate impacts on agriculture and energy. Firstly, we construct a range of chronic and extreme climate risk indicators. Secondly, we incorporate those climate risk indicators, alongside the historical data on global agriculture and energy, in machine learning algorithms to estimate the historical responsiveness of agriculture and energy to climate risks. Thirdly, we project agriculture and energy production changes under three Shared Socioeconomic Pathways (SSPs). Finally, the derived shocks are introduced as economic shocks to the G-Cubed model, which is a global multisectoral intertemporal general equilibrium model. We evaluate the G-Cubed model simulation results for various economic variables, including real GDP, consumption, investment, exports and imports, real interest rates, and sectoral production. We observe substantial losses to all economies and adjustments to consumption and investment under the SSPs. The losses worsen with warming. Developing countries are disproportionately affected. However, we observe the potential for double dividends from transitioning to sustainable livestock production and renewable energy sources, preventing further warming and physical damages, and enhancing the resilience of food and energy supply chains to climate risks. |
| Keywords: | climate change, extreme events, physical climate risks, macroeconomics, CGE, DSGE, machine learning |
| JEL: | C51 C53 C54 C55 C68 F41 Q51 Q54 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-37&r= |
| By: | Mishel Ghassibe |
| Abstract: | I develop a tractable dynamic sticky-price model, where input-output linkages are formed endogenously. The model delivers cyclical properties of networks that are consistent with those I estimate using sectoral and firm-level data, conditional on identified real and nom- inal shocks. A novel source of state dependence in nominal rigidities arises: the strength of complementarities in price setting and monetary non-neutrality increase in the number of suppliers optimally chosen by firms. As a result, the model simultaneously rationalizes the following observed non-linearities in monetary transmission. First, there is cycle dependence: the magnitude of real GDP’s response to a monetary shock is procyclical. Second, there is path dependence: non-neutrality of real GDP is higher following previous periods of loose monetary policy. Third, there is size dependence: larger monetary contractions shrink the net- work and generate a less than proportional decrease in GDP relative to smaller contractions. |
| Keywords: | monetary transmission; state dependence; endogenous production networks |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1449&r= |
| By: | Ana Moreno-Maldonado; Clara Santamaria |
| Abstract: | Since 1980, college graduates have increasingly sorted into the downtowns of U.S. cities. This led to urban revival, a process that involves fast growth in income and housing prices downtown. Motivated by the observation that young childless households concentrate downtown, we link urban revival to delayed childbearing. As college graduates postpone parenthood, more of them are childless when young and locate downtown. Estimating a dynamic model of fertility timing and within-city location choices, we find delayed childbearing accounts for 52% of urban revival. The impact of changes in fertility choices is amplified by the response of housing prices and amenities. |
| Keywords: | Residential choice, Fertility Timing, Amenities, Welfare Inequality |
| JEL: | J13 R21 R23 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_550&r= |