|
on Dynamic General Equilibrium |
|
Issue of 2024‒07‒29
nine papers chosen by |
| By: | Stancu, Stefania |
| Abstract: | This study investigates the effectiveness of fiscal policy in macroeconomic stabilization during the COVID-19 health crisis through a Dynamic Stochastic General Equilibrium (DSGE) model, incorporating financial frictions and using Romanian empirical data from 2007-2020. We analyse the impact of a consumption and labour demand shock similar to the ones occurring during the COVID-19 health crisis and explore how discretionary fiscal measures can modulate their effects. The findings suggest that increased government spending during the economic downturns of COVID-19 appears to mitigate some of the adverse effects, particularly on output and investment. While consumption does not seem to benefit significantly from fiscal stimulus, public spending helps to moderate declines in output and bolsters investment, especially in scenarios with a financial accelerator. |
| Keywords: | fiscal policy, DSGE model, COVID-19, financial accelerator |
| JEL: | E2 E62 H12 H3 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121322&r= |
| By: | Davide Debortoli; Jordi Galí |
| Abstract: | We analyze the merits and limitations of simple tractable New Keynesian models (RANK and TANK) in accounting for the aggregate predictions of Heterogenous Agent New Keynesian models (HANK). By means of comparison of a number of nested HANK models, we investigate the role played by (i) idiosyncratic income risk, (ii) a binding borrowing constraint, and (iii) a portfolio choice between liquid and illiquid assets. We argue that the effects of household heterogeneity can be largely understood looking at the differential behavior of two types of households: hand-to-mouth and unconstrained. We find that a suitably specified and calibrated TANK model (which abstracts from idiosyncratic income risk) can capture reasonably well the aggregate implications of household heterogeneity and the main channels through which it operates. That ability increases in the presence of a policy rule that emphasizes inflation stability. In the limiting case of a strict inflation targeting policy, heterogeneity becomes irrelevant for the determination of aggregate output. |
| JEL: | E32 E52 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32557&r= |
| By: | Marco Del Negro; Keshav Dogra; Pranay Gundam; Donggyu Lee; Brian Pacula |
| Abstract: | This post and the next discuss the distributional effects of inflation and inflation stabilization through the lenses of a theoretical model—a Heterogeneous Agent New Keynesian (HANK) model. This model combines the features of New Keynesian models that have been the workhorse for monetary policy analysis since the work of Woodford (2003) with inequality in wealth and income at the household level following the seminal contribution of Kaplan, Moll, and Violante (2018). We find that while inflation hurts everyone, it hurts the poor in particular. When the source of inflation is a supply shock, fighting inflation aggressively hurts the poor even more, however, while the opposite is true for demand shocks, as discussed in the companion post. |
| Keywords: | HANK model; heterogenous agent New Keynesian (HANK); monetary policy; inflation; inequality |
| JEL: | E12 E31 E52 D31 |
| Date: | 2024–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98471&r= |
| By: | Kliem, Martin; Kriwoluzky, Alexander; Müller, Gernot J.; Scheer, Alexander |
| 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: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299242&r= |
| By: | Miguel A. Mascarúa Lara |
| Abstract: | What are the effects on the labor market and aggregate income of frictions that restrict women's labor decisions that impede labor participation and composition being equal between men and women? To answer this question, I develop an occupational general equilibrium model with heterogeneous agents facing gender-based restrictions in labor participation and job selection. Then, I include an endogenous distribution of the size of formal and informal establishments and workers to replicate the Mexican data. Finally, I use the ENOE to calibrate the model and estimate gender-based frictions in the labor market in states and regions of Mexico and their effect on aggregate income. According to the model, aggregate income could increase by 4.3% without women's restrictions to entrepreneurship and by 32.1% without restrictions to entry and entrepreneurship. In addition, the southern states would witness the largest increases. |
| Keywords: | Misallocation;female entrepreneurship;gender frictions;informality |
| JEL: | J16 J70 O17 O40 O10 O50 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-05&r= |
| By: | Fueki, Takuji; Hürtgen, Patrick; Walker, Todd B. |
| Abstract: | Financial institutions, especially in Europe, hold a disproportionate amount of domestic sovereign debt. We examine the extent to which this home bias leads to capital misallocation in a real business cycle model with imperfect information and fiscal stress. We assume banks can hold sovereign debt according to a zero-risk weight policy and contrast this scenario to one in which banks weight the sovereign debt according to default probabilities. Banks are assumed to miscalculate the probability of a disaster state due to moral hazard and imperfect monitoring. This distortion pushes the economy away from the first-best allocation. We show that the zero risk weight policy exacerbates these distortions while a non-zero risk-weight improves allocations. The welfare costs associated with zero-risk weight policies are large. Households are willing to give up 3.2 percent of their consumption to move to the first-best allocation, whereas in the economy with non-zero risk-weights households are willing to give up only 1.2 percent of their consumption to move to the first-best allocation. |
| Keywords: | Zero-Risk Weight, Fiscal Limit, Macroprudential Regulation, Sovereign-Bank Nexus, Fiscal Stress |
| JEL: | E61 E62 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299238&r= |
| By: | Yoon, Sang-Ha (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)) |
| Abstract: | In the era of big data, economists are exploring new data sources and methodologies to improve economic forecasting. This study examines the potential of big data and machine learning in enhancing the predictive power of international macroeconomic forecasting models. The research utilizes both structured and unstructured data to forecast Korea's GDP growth rate. For structured data, around 200 macroeconomic and financial indicators from Korea and the U.S. were used with machine learning techniques (Random Forest, XGBoost, LSTM) and ensemble models. Results show that machine learning generally outperforms traditional econometric models, particularly for one-quarter-ahead forecasts, although performance varies by country and period. For unstructured data, the study uses Naver search data as a proxy for public sentiment. Using Dynamic Model Averaging and Selection (DMA and DMS) techniques, it incorporates eight Naver search indices alongside traditional macroeconomic variables. The findings suggest that online search data improves predictive power, especially in capturing economic turning points. The study also compares these big data-driven models with a Dynamic Stochastic General Equilibrium (DSGE) model. While DSGE offers policy analysis capabilities, its in-sample forecasts make direct comparison difficult. However, DMA and DMS models using search indices seem to better capture the GDP plunge in 2020. Based on the research findings, the author offers several suggestions to maximize the potential of big data. He stresses the importance of discovering and constructing diverse data sources, while also developing new analytical techniques such as machine learning. Furthermore, he suggests that big data models can be used as auxiliary indicators to complement existing forecasting models, and proposes that combining structural models with big data methodologies could create synergistic effects. Lastly, by using text mining on various online sources to build comprehensive databases, we can secure richer and more real-time economic data. These suggestions demonstrate the significant potential of big data in improving the accuracy of international macroeconomic forecasting, particularly emphasizing its effectiveness in situations where the economy is undergoing rapid changes. |
| Keywords: | International Macroeconomic Forecasting Model; Big Data |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kiepwe:2024_018&r= |
| By: | Paul Castillo; Mr. Ruy Lama; Juan Pablo Medina |
| Abstract: | Financial dollarization is considered a source of macroeconomic instability in many emerging economies. Dollarization constrains the ability of central banks to stimulate output during economic downturns. In contrast to the conventional monetary transmission mechanism, a monetary policy loosening in a dollarized economy leads to a currency depreciation, adverse balance sheet effects, and a contraction in investment and output growth. In this paper we evaluate the role of foreign exchange reserves in facilitating macroeconomic stabilization in a financially dollarized economy. We first show empirically that foreign exchange intervention in response to capital outflows can largely reduce the volatility of output and the real exchange rate in dollarized economies. We then develop a small open economy model with foreign currency debt and balance sheets effects. Our quantitative model shows that an active foreign exchange intervention policy is sufficient for offsetting the output volatility associated with financial dollarization. These results can explain the prevalence of low macroeconomic volatility in some dollarized economies (Christiano et al., 2021) and they highlight the role of foreign exchange reserves in reducing the welfare costs of dollarization. |
| Keywords: | Foreign Exchange Intervention; Global Financial Cycle; Financial Dollarization; Balance Sheet Effects; Emerging Economies. |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/127&r= |
| By: | Khalil, Makram; Lewis, Vivien |
| Abstract: | Price setting has become more flexible following a string of large adverse shocks (Covid-19, the Ukraine War). We argue that a shift to a high-uncertainty regime incentivizes firms to invest in their ability to adjust prices. We formalize this idea in a general equilibrium model with endogenous price flexibility and entry-exit. Faced with higher productivity uncertainty, firms set prices more flexibly. This improves their resilience, reducing exit and output losses in response to negative supply shocks. Uncertainty regarding monetary policy has similar effects. We show that higher monetary policy uncertainty can be welfare-improving when productivity shocks are large. |
| Keywords: | entry, exit, price flexibility, supply shocks, uncertainty |
| JEL: | E22 E31 E32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299235&r= |