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on Dynamic General Equilibrium |
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Issue of 2024‒08‒12
eleven papers chosen by |
| By: | Edgar Silgado-Gómez (BANCO DE ESPAÑA) |
| Abstract: | This paper investigates the impact and the transmission of uncertainty regarding the future path of government finances on economic activity. I first employ a data-rich approach to extract a novel proxy that captures uncertainty surrounding public finances, which I refer to as sovereign uncertainty, and demonstrate that the estimated measure exhibits distinct fluctuations from macro-financial and economic policy uncertainty indices. Next, I analyse the behaviour of sovereign uncertainty shocks and detect the presence of significant and long-lasting negative effects in the financial and macroeconomic sectors using state-of-the-art identification strategies, within the context of a Bayesian vector autoregression framework. I show that a shock to sovereign uncertainty differs from a macro-financial uncertainty shock originating from disturbances in the private sector —while the former persistently dampens the economy in the medium run, the latter displays a short-lived response in real activity. Lastly, I study the role of sovereign uncertainty in a New Keynesian dynamic stochastic general equilibrium model augmented with recursive preferences and financial intermediaries. I find that a sovereign uncertainty shock in the model is able to capture the empirical slowdowns in economic aggregates if monetary policy decisions are directly influenced by the shock. The model also emphasizes the importance of financial frictions in transmitting the effects of sovereign uncertainty shocks and highlights the minor role played by nominal rigidities. |
| Keywords: | sovereign uncertainty index, government finances, economic activity, event-based identification, Bayesian VARs, non-linear DSGE models |
| JEL: | C32 E32 E44 E60 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2423 |
| By: | Girstmair, Stefan |
| Abstract: | This paper examines determinacy properties in a multi-country open economy framework, focusing on the impacts of dominant currency pricing (DCP), producer currency pricing (PCP), and local currency pricing (LCP) on monetary policy effectiveness. Utilizing a New Keynesian model with three symmetric economies, each guided by Taylor rules, the study extends the framework of Gopinath et al. (2020) to analyze how these pricing paradigms interact with central bank policies to achieve economic stability. The investigation highlights that higher economic openness amplifies interactions among central banks’ policies, complicating the attainment of determinacy. DCP significantly constrains policy parameters ensuring determinacy, particularly in open economies. Conversely, PCP and LCP offer relatively larger determinacy regions, allowing for greater domestic policy control. The findings emphasize the critical role of pricing paradigms and economic openness in formulating effective monetary policies. This study provides essential insights for central banks and policymakers in enhancing global economic stability through tailored policy recommendations based on the chosen pricing paradigm. |
| Keywords: | Determinacy; Taylor rule; Three-country new Keynesian model; Pricing paradigms; Openness |
| JEL: | E31 E52 E58 F33 F4 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:082 |
| By: | Kohei Hasui (Aichi University); Tomohiro Sugo (Bank of Japan.); Yuki Teranishi (Keio University) |
| Abstract: | This paper shows that the Fed’s exit strategy works as optimal monetary policy in a liquidity trap. We use the conventional new Keynesian model including a recent inflation persistence and confirm several similarities between optimal monetary policy and the Fed’s monetary policy. The zero interest rate policy continues even after inflation rates are sufficiently accelerated over the 2 percent target and hit a peak. Under optimal monetary policy, the zero interest rate policy continues until the second quarter of 2022 and the Fed terminates it one quarter earlier. Eventually, inflation rates exceed the target rate for over three years until the latest quarter. The policy rates continue to overshoot the long-run level to suppress high inflation rates. Furthermore, high inflation rates under optimal monetary policy can explain about 70 percent of the inflation data for 2021 and 2022 years. However, these are still lower than the inflation data. This is because optimal monetary policy raises the policy rates faster than the Fed does. The remaining 30 percent of inflation rates can be constrained by the Fed’s more aggressive monetary policy tightening after the zero interest rate policy. |
| Keywords: | liquidity trap; optimal monetary policy; inflation persistence; forward guidance |
| JEL: | E31 E52 E58 E61 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:upd:utmpwp:051 |
| By: | Luigi Bocola; Alessandro Dovis; Kasper Jørgensen; Rishabh Kirpalani |
| Abstract: | This paper uses high frequency data to detect shifts in financial markets' perception of the Federal Reserve stance on inflation. We construct daily revisions to expectations of future nominal interest rates and inflation that are priced into nominal and inflation-protected bonds, and find that the relation between these two variables-positive and stable for over twenty years-has weakened substantially over the 2020-2022 period. In the context of canonical monetary reaction functions considered in the literature, these results are indicative of a monetary authority that places less weight on inflation stabilization. We augment a standard New Keynesian model with regime shifts in the monetary policy rule, calibrate it to match our findings, and use it as a laboratory to understand the drivers of U.S. inflation post 2020. We find that the shift in the monetary policy stance accounts for half of the observed increase in inflation. |
| JEL: | E58 G13 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32620 |
| By: | Elnura Baiaman kyzy (HIAS, Hitotsubashi University, Japan); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies, GRIPS, Japan; Rimini Centre for Economic Analysis) |
| Abstract: | This paper proposes a novel Laplace based solution to nonlinear DSGE models that has a closed form likelihood. We implicitly use a nonlinear approximation to the policy function that is invertible with respect to the shocks, implying that in the approximation the shocks can be recovered uniquely from some of the control variables. Using perturbation methods and a Lagrange inversion formula we are able to calculate the derivatives of the likelihood and construct the Laplace based solution. In contrast with previous likelihood-based approaches, the method used here requires neither the introduction of linear shocks nor simulation to evaluate the likelihood. Using US data we estimate linear and nonlinear variants of a well-known neoclassical growth model with and without time-varying variances. We find that a nonlinear heteroscedastic model has a much better empirical performance. Furthermore, our models allow us to ascertain that the monetary policy shock causes 95% of the time changes in economic uncertainty. |
| Keywords: | Economic Uncertainty, Time-Varying Volatility, Risk-Premium, Higher-Order Approximation |
| JEL: | E0 C63 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:24-11 |
| By: | Elisa Belfiori; Daniel R. Carroll; Sewon Hur |
| Abstract: | We study climate policy in an economy with heterogeneous households, two types of goods (clean and dirty), and a climate externality from the dirty good. Using household expenditure and emissions data, we document that low-income households have higher emissions per dollar spent than high-income households, making a carbon tax regressive. We build a model that captures this fact and study climate policies that are neutral with respect to the income distribution. A central feature of these policies is that resource transfers across consumers are ruled out. We show that the constrained optimal carbon tax in a heterogeneous economy is heterogeneous: Higher-income households face a higher rate. Our main result shows that when the planner is limited to a uniform carbon tax, the tax follows the Pigouvian rule but is lower than the unconstrained carbon tax. Finally, we embed this model into a standard incomplete markets framework to quantify the policy effects on the economy, climate and welfare, and we find a Pareto-improving result. The climate policy is welfare-improving for every consumer. |
| Keywords: | carbon tax; inequality; consumption; welfare; climate change |
| JEL: | D62 H23 Q54 |
| Date: | 2024–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddgw:98565 |
| By: | Andrea Colciago; Marco Membretti |
| Abstract: | We study the labor market effects of Temporary Barriers to Entry (TBEs). Esti- mates from a mixed-frequency Bayesian VAR show that TBEs: (i) reduce job creation by new entrants, but boost it for incumbent firms; (ii) persistently increase employ- ment concentration in large firms; (iii) temporarily reduce unemployment, but are recessionary in the long run; and (iv) mainly result from federal regulation. We build a macroeconomic model, featuring firm heterogeneity, endogenous entry and exit, and labor market frictions, which successfully reproduces the VAR evidence. The model shows that TBEs temporarily boost short-run economic activity by favoring existing firms, but are ultimately costly. Policy measures aimed at protecting incumbent firms, even if temporary, entail welfare costs. |
| Keywords: | Job Creation; Reallocation; Unemployment; Heterogeneous firms; BVAR |
| JEL: | C13 E32 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:813 |
| By: | Charles de Beauffort (Economics and Research Department, National Bank of Belgium); Boris Chafwehé (Bank of England); Rigas Oikonomou (UCLouvain and University of Surrey) |
| Abstract: | When taxes do not sufficiently adjust to government debt levels, the Fiscal Theory of the Price Level predicts that other variables, such as inflation and output gap, must adjust to ensure the solvency of public finances. We study the role of optimal debt maturity portfolios in this context, using a New Keynesian model with both demand and supply-side shocks. Our paper offers new analytical insights into the mechanisms through which debt maturity composition affects the trade-off between inflation and output gap: The Persistence, Discounting and Hedging channels. Our findings, based on a rich prior predictive analysis indicate that the key driving force behind optimal portfolio decisions is the Hedging channel. Moreover, the optimal maturity composition of debt is driven primarily by the supply side shocks, rather than by demand shocks. Finally, our results indicate that optimal debt management is a significant margin to complement monetary policy in stabilizing inflation when debt solvency is an important constraint |
| Keywords: | Monetary and fiscal policy, Government debt management, Fiscal theory. |
| JEL: | E31 E52 E58 E62 C11 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202407-450 |
| By: | Federico S. Mandelman; Yang Yu; Francesco Zanetti; Andrei Zlate |
| Abstract: | We document a steady decline in low-skilled immigration that began with the onset of the Great Recession in 2007, which was associated with labor shortages in low-skilled service occupations and a decline in the skill premium. Falling returns to high-skilled jobs coincided with a decline in the educational attainment of native-born workers. We develop and estimate a stochastic growth model with endogenous immigration and training to account for these facts and study macroeconomic performance and welfare. Lower immigration leads to higher wages for low-skilled workers and higher consumer prices. Importantly, the decline in the skill premium discourages the training of native workers, persistently reducing aggregate productivity and welfare. Stimulus policies during the COVID-19 pandemic, amid a widespread shortage of low-skilled immigrant labor, exacerbated the rise in consumer prices and reduced welfare. We show that the 2021-2023 immigration surge helped to partially alleviate existing labor shortages and restore welfare. |
| Keywords: | immigration, skill premium, task upgrading, heterogeneous workers |
| JEL: | F16 F22 F41 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-46 |
| By: | Thorsten Drautzburg (Federal Reserve Bank of Philadelphia); Jesus Fernandez-Villaverde (University of Pennsylvania, NBER, and CEPR); Pablo Guerron-Quintana (Boston College and ESPOL); Dick Oosthuizen (University of Pennsylvania) |
| Abstract: | We propose a new tool to filter non-linear dynamic models that does not require the researcher to specify the model fully and can be implemented without solving the model. If two conditions are satisfied, we can use a flexible statistical model and a known measurement equation to back out the hidden states of the dynamic model. The first condition is that the state is sufficiently volatile or persistent to be recoverable. The second condition requires the possibly non-linear measurement to be sufficiently smooth and to map uniquely to the state absent measurement error. We illustrate the method through various simulation studies and an empirical application to a sudden stops model applied to Mexican data. |
| Keywords: | filtering, limited information, non-linear model, dynamic equilibrium model, sudden stops |
| JEL: | C32 C53 E37 E44 O11 |
| Date: | 2024–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-016 |
| By: | Shangshang Li |
| Abstract: | This paper evaluates gains from international monetary policy cooperation between the financial center and periphery countries in a two-country open economy model consistent with global financial cycles. Compared to the non-cooperative Nash equilibrium, the optimal cooperative equilibrium robustly fails to benefit both countries simultaneously. The financial periphery is more likely to gain from cooperation if it raises less foreign currency debt or is relatively small. These results also hold when considering the transitional gains and losses of moving from non-cooperation to cooperation. The uneven distribution of gains from cooperation persists when both countries adopt implementable policy rules with and without cooperation. Nevertheless, both countries gain when transitioning from the Nash to the cooperative implementable rules. Regardless of the financial center's policy, rules responding to the exchange rate dominate over purely inward-looking rules for the financial periphery. |
| Keywords: | policy cooperation, global financial cycle, currency mismatch |
| JEL: | F34 E52 F42 E44 E58 E61 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:wsr:wpaper:y:2024:m:07:i:199 |