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on Dynamic General Equilibrium |
| By: | Consolo, Agostino; Hänsel, Matthias |
| Abstract: | Since the advent of Heterogeneous Agent New Keynesian (HANK) models, countercyclical unemployment risk has been deemed an important amplification mechanism for business cycles shocks. Yet, the aggregate effects of such “unemployment fears” are hard to pin down. We thus revisit this issue in the context of a rich two-asset HANK model, proposing new ways to isolate their general equilibrium effects and tackle the long-standing challenge of modelling wage bargaining in this class of model. While unemployment fears can exert noticeable aggregate effects, we find their magnitude to depend importantly on the distribution of firm profits. Households’ ability to borrow stabilizes the economy. Our framework has also implications for policy: in the aftermath of an adverse energy price shock, fiscal policy can help reducing the hysteresis effects on unemployment and most households gain if the central bank accommodates an employment recovery at the cost of higher inflation. JEL Classification: D52, E24, E52, J64 |
| Keywords: | alternating offer bargaining, heterogeneous models, monetary and fiscal policy, search and matching models |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242953 |
| By: | Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See |
| Abstract: | We study the positive and normative implications for inflation of employer-to-employer (EE) worker transitions by developing a heterogeneous agent New Keynesian model featuring a frictional labor market with on-the-job search. We find that EE dynamics played an important role in shaping the differential inflation dynamics observed during the Great Recession and COVID-19 recoveries. Despite both recoveries sharing similar unemployment dynamics, the recovery from the Great Recession exhibited subdued EE transitions and inflation dynamics. In our model, the optimal monetary policy involves a strong positive response to EE fluctuations, suggesting that central banks should distinguish between recovery episodes with different EE dynamics even if they have similar unemployment rates. |
| Keywords: | job mobility; monetary policy; HANK model; job search |
| JEL: | E12 E24 E52 J31 J62 J64 |
| Date: | 2024–05–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:98509 |
| By: | Bence Bardóczy; Mateo Velásquez-Giraldo |
| Abstract: | We study the aggregate and distributional effects of monetary policy in a heterogeneous agent New Keynesian model that explicitly represents the life cycle of households. The model matches the age patterns in the level and dispersion of labor income and financial wealth in the U.S. despite the absence of preference heterogeneity and portfolio adjustment costs. Monetary policy affects the consumption of young households mainly through labor income and the consumption of old households mainly through asset returns. More than half of the aggregate consumption response to an expansionary monetary policy shock comes from those below the age of 40. The shock redistributes welfare from the wealthiest old to the poorest young and increases average welfare of most cohorts. |
| Keywords: | Life cycle; Heterogeneous agents new keynesian (hank) models; Monetary policy transmission |
| JEL: | E52 E21 E12 |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-52 |
| By: | Sushant Acharya (CEPR - Center for Economic Policy Research); Edouard Challe (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Keshav Dogra (Federal Reserve Bank of New York) |
| Abstract: | We study optimal monetary policy in an analytically tractable heterogeneous agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from a representative agent benchmark because monetary policy can affect consumption inequality, by stabilizing consumption risk arising from both idiosyncratic shocks and unequal exposures to aggregate shocks. The trade-off between consumption inequality, productive efficiency, and price stability is summarized in a simple linear-quadratic problem yielding interpretable target criteria. Stabilizing consumption inequality requires putting some weight on stabilizing the level of output, and correspondingly reducing the weights on the output gap and price level relative to the representative agent benchmark. |
| Keywords: | New Keynesian Model, Incomplete Markets, Optimal Monetary Policy |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04645687 |
| By: | Bobasu, Alina; Dobrew, Michael; Repele, Amalia |
| Abstract: | We study how monetary policy shapes the aggregate and distributional effects of an energy price shock. Based on the observed heterogeneity in consumption exposures to energy and household wealth, we build a quantitative small open-economy HANK model that matches salient features of the Euro Area data. Our model incorporates energy as both a consumption good for households with non-homothetic preferences as well as a factor input into production with input complementarities. Independently of policy energy price shocks always reduce aggregate consumption. Households with little wealth are more adversely affected through both a decline in labor income as well as negative direct price effects. Active policy responses raising rates in response to inflation amplifies aggregate outcomes through a reduction in aggregate demand, but speeds up the recovery by enabling households to rebuild wealth through higher returns on savings. However, low-wealth households are further adversely affected as they have little savings to rebuild wealth from and instead loose due to further declining labor income. JEL Classification: E52, F41, Q43 |
| Keywords: | energy prices, heterogeneous agents, monetary policy, non-homothetic preferences, open economy model |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242967 |
| By: | Colciago, Andrea; Priftis, Romanos; Chafwehé, Boris |
| Abstract: | This paper introduces a New Keynesian multi-sector industry model that integrates firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We investigate the effects of a sustained increase in fossil fuel prices on sectoral size, labor productivity, and inflation. A hike in the price of fossil resources results in higher energy prices. Due to ex-ante heterogeneity in energy intensity in production, the profitability of sectors is impacted asymmetrically.As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labor productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs. This policy entails a higher impact cost in terms of output and lower average productivity, but leads to a faster recovery in business dynamism. Thus, our results suggest that monetary policy faces a trade-off between stabilizing aggregate activity and business dynamism. JEL Classification: E62, L16, O33, Q43 |
| Keywords: | energy, firm entry and exit, monetary policy, productivity |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242961 |
| By: | Vinci, Francesca; Schang, Christopher |
| Abstract: | The European fiscal governance framework remains incomplete, hindering policy coordination during economic shocks and affecting the transmission of the single monetary policy. High public debt and low public investment worsen resilience across Member States. Many policymakers, institutions, and academics support establishing a central fiscal capacity (CFC) as a solution. Against this backdrop, we propose a framework to assess a CFC in the euro area, aimed at stabilizing the business cycle, promoting sovereign debt sustainability, and reducing procyclicality in public investment. Our two-region DSGE model with a permanent CFC allocates resources based on the relative output gap while earmarking funds for public investment and imposing fiscal adjustment requirements for the high-debt region. The CFC enhances business cycle stabilization for both regions and significantly reduces the welfare cost of fluctuations. We also explore European bond issuance and a supranational investment strategy to address investment needs through European Public Goods. JEL Classification: E12, E32, E62, F45 |
| Keywords: | EU governance, European public goods, macroeconomic stabilisation, public debt sustainability |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242962 |
| By: | Bruch, Jan; Seitz, Franz; Vollmer, Uwe |
| Abstract: | We assess the impact of macroprudential measures on macroeconomic stability using a DSGE model in which firms can access both direct and indirect financing. The model is calibrated with data from the euro area. We compare two different macroprudential rules (time-invariant and counter-cyclical) in the presence of a monetary policy shock and a macroprudential policy shock. We find that the macroprudential rule has little impact on the adjustment dynamics to a monetary and macroprudential shock. Direct financing increases the impact of monetary shocks on the volatility of financial variables but not on output and inflation. Simultaneous monetary policy and macroprudential policy shocks do not alter the reaction of inflation compared to a monetary policy shock but cause permanent output losses. |
| Abstract: | Wir untersuchen die Auswirkungen makroprudenzieller Maßnahmen auf die makroökonomische Stabilität mit Hilfe eines DSGE-Modells, in dem Unternehmen sowohl Zugang zu direkter als auch zu indirekter Finanzierung haben. Das Modell wird mit Daten des Euroraums kalibriert. Wir vergleichen zwei verschiedene makroprudenzielle Regeln (zeitinvariant und antizyklisch) in Gegenwart eines geldpolitischen Schocks und eines makroprudenziellen Schocks. Wir stellen fest, dass die makroprudenzielle Regel kaum Auswirkungen auf die Anpassungsdynamik bei einem geldpolitischen und makroprudenziellen Schock hat. Die direkte Finanzierung erhöht die Auswirkungen von monetären Schocks auf die Volatilität der Finanzvariablen, nicht aber der Produktion und Inflation. Gleichzeitige geldpolitische und makroprudenzielle Schocks verändern die Reaktion der Inflation im Vergleich zu einem geldpolitischen Schock nicht, verursachen aber dauerhafte Produktionsverluste. |
| Keywords: | Monetary Policy, Macruprudential Policy, Inflation, Business Cycle, DSGE |
| JEL: | E12 E31 E32 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hawdps:300658 |
| By: | Joshua Coven; Sebastian Golder; Arpit Gupta; Abdoulaye Ndiaye |
| Abstract: | Property taxes impact the housing distribution across generations. Low property taxes lead to concentrated ownership among elderly empty-nesters, limiting housing for financially constrained young families. Conversely, high property taxes act as a “forced mortgage, ” reducing upfront downpayments and enabling greater homeownership among younger households. We show in an overlapping generations model that raising property taxes in low-tax California to match those in higher-tax Texas increases homeownership in California by 4.6% and among younger households by 7.4% in steady state. Asset taxes can reallocate housing to higher-valuation households in the presence of financial constraints, providing an independent rationale for property taxes. |
| Keywords: | property taxes, housing affordability, housing inequality |
| JEL: | H71 R21 H24 J11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11203 |
| By: | Nakatani, Ryota |
| Abstract: | Using the consumption equivalent welfare gain as social welfare and assuming an automation technology shock, we derive the optimal tax rates for various tax policy instruments in the steady state of the model economy calibrated for the U.S. We find that the optimal capital income tax rate lies between 22 percent and 23 percent under realistic technology shocks, while the tax rate could be higher if the elasticity of substitution between automation-related capital and unskilled workers becomes greater. Another finding is that the optimal labor income tax rate for unskilled workers is lower than that for skilled workers, although the social welfare gain from such optimal labor income tax reform is very small. We also find that the optimal tax rate on automation-related capital is zero due to its large economic distortion in the long run. Furthermore, the redistributive mechanism of the optimal consumption tax depends on the elasticity of substitution between automation-related capital and unskilled workers. Finally, we find that Pareto-efficient optimal tax reform is a combination of raising the capital income tax rate and lowering the consumption tax rate from the status quo. When automation-augmented technological progress is rapid, it is even optimal to rely solely on the capital income tax rate hike as a redistributive tax policy tool. |
| Keywords: | Automation; Optimal Taxation; Capital Income Tax; Labor Income Tax; Consumption Tax; Robot Tax; Tax Mix |
| JEL: | C68 E25 H21 H24 H25 H30 O30 O40 |
| Date: | 2024–06–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121347 |
| 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 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11202 |
| By: | Masek, Frantisek; Zemlicka, Jan |
| Abstract: | We analyze the optimal window length in the average inflation targeting rule within a Behavioral THANK model. The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks, and can also use quantitative easing. We show that the optimal averaging period is infinitely long given a conventional degree of myopia. Finite yet long-lasting windows dominate for higher cognitive discounting; i.e., the makeup property is shown to be qualitatively resistant to deviation from rational expectations. We point out that the optimal window may depend on the speed of return to the target path. We solve the model both locally and globally to disentangle the effects of uncertainty due to the ELB. The welfare loss difference between solution techniques is considerably decreasing in the degree of history dependence. JEL Classification: E31, E32, E52, E58, E71 |
| Keywords: | average inflation targeting, behavioral macroeconomics, heterogeneous agents, monetary policy |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242955 |
| By: | Krenz, Johanna; Tsiaras, Stylianos |
| Abstract: | We estimate the dynamic effects of a high-frequency identified unionwide quantitative easing (QE) shock on real GDP, inflation and unemployment in all euro area countries. We document that the effects of QE are very heterogenous across countries as regards size, significance and timing, especially with respect to GDP and unemployment. Exploiting the panel structure of our dataset, we show that the effect of QE on real GDP is amplified by a larger fraction of liquidity-constrained households in a country. The latter result seems to be driven by the general equilibrium impact of QE on unemployment. |
| Keywords: | Quantitative easing, inequality, LP-IV, DSGE, Household Finance and Consumption Survey (HFCS), Europe |
| JEL: | E52 E58 E24 C23 C26 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:uhhwps:300655 |
| By: | Zhengyang Jiang; Jialu Sun |
| Abstract: | We document shifts in investor composition during quantitative tightening, which suggest that investors adjust their portfolios at different speeds. To understand its implications for bond valuation, we develop a general equilibrium model which highlights the dynamic interaction between heterogeneous investors. In the model, long-term investors have higher risk-taking capacity, but face a portfolio adjustment cost; liquidity traders have lower risk-taking capacity, but can trade freely. Our model predicts a novel overshooting pattern: when the central bank unwinds its bond purchase, slow adjustment by long-term investors requires liquidity traders to absorb the imbalance, who demand a higher risk premium that creates excessive bond price decline and volatility in the short run. As a result, quantitative tightening is not simply a symmetric reversal of quantitative easing. |
| JEL: | E5 G12 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32757 |
| By: | Bergeaud, Antonin (HEC Paris); Cahuc, Pierre (Sciences Po, Paris); Malgouyres, Clément (CREST); Signorelli, Sara (CREST); Zuber, Thomas (Banque de France) |
| Abstract: | Using French administrative data we estimate the wage gap distribution between in-house and temporary agency workers working in the same establishment and the same occupation. The average wage gap is about 3%, but the gap is negative in more than 25% of establishment × occupation cells. We develop and estimate a search and matching model which shows that while the wage gap is largely inefficient, eliminating it reduces efficiency, as it also arises from objective factors that contribute to the efficient allocation of jobs. |
| Keywords: | wage gap, temporary work agency, labor market frictions |
| JEL: | J24 J31 J64 J65 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17124 |
| By: | Hassan Afrouzi; Joel P. Flynn; Choongryul Yang |
| Abstract: | This paper studies how measured beliefs can be used to identify monetary non-neutrality. In a general equilibrium model with both nominal rigidities and endogenous information acquisition, we analytically characterize firms’ optimal dynamic information policies and how their beliefs affect monetary non-neutrality. We then show that data on the cross-sectional distributions of uncertainty and pricing durations are both necessary and sufficient to identify monetary non-neutrality. Finally, implementing our approach in New Zealand survey data, we find that informational frictions approximately double monetary non-neutrality and endogeneity of information is important: models with exogenous information would overstate monetary non-neutrality by approximately 50%. |
| Keywords: | Measured beliefs; Nominal rigidities; Rational inattention; Monetary non-neutrality |
| JEL: | E31 E32 E71 |
| Date: | 2024–07–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-53 |
| By: | Rubén Domínguez-Díaz (BANCO DE ESPAÑA); Samuel Hurtado (BANCO DE ESPAÑA) |
| Abstract: | We use an endogenous growth model calibrated to the Spanish economy to evaluate the effects of a rapid doubling of international prices of brown energy inputs. In the baseline calibration of the model, which resembles the current state of the Spanish economy, this results in a 0.30% drop in GDP on impact. After increasing the share of renewables in the energy mix from 26% to 85%, in line with the 2050 targets for the Spanish economy, the same shock results in a 0.24% fall in GDP on impact, and the recovery is faster: the present discounted value of the full GDP response is reduced by 65%. The three main conclusions that we draw from this exercise are: i) an increase in the share of renewables makes the economy less vulnerable to shocks in international prices of brown energy inputs; ii) this vulnerability reduction is less than proportional: dividing the share of brown energy by approximately five only reduceds the size of the effects on GDP by between 21% and 65%; and iii) the main statistic that determines how much the vulnerability is reduced is not the share of brown energy inputs, but the degree to which final energy prices respond to the shock to brown energy prices. |
| Keywords: | energy prices, green transition, external shocks, carbon tax |
| JEL: | O38 O52 O44 E32 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2425 |
| By: | Michael Sposi; Kei-Mu Yi; Jing Zhang |
| Abstract: | We add to recent evidence on deindustrialization and document a new pattern: increasing industry polarization over time. We assess whether these new features of structural change can be explained by a dynamic open economy model with two primary driving forces, sector-biased productivity growth and sectoral trade integration. We calibrate the model to the same countries used to document our patterns. We find that sector-biased productivity growth is important for deindustrialization by reducing the relative price of manufacturing to services, and sectoral trade integration is important for industry polarization through increased specialization. The interaction of these two driving forces is also essential as increased trade openness transmits global technological change to each country's relative prices, sectoral specialization and sectoral trade imbalances. |
| Keywords: | structural change; international trade; Sector Biased Productivity Growth |
| JEL: | F11 F43 O41 O11 |
| Date: | 2024–08–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddgw:98630 |
| By: | Geromichalos, Athanasios; Wang, Yijing |
| Abstract: | In monetary theory, money is typically introduced as an object that can help agents bypass frictions, such as anonymity and limited commitment. Consequently, common wisdom suggests that if agents had access to more unsecured credit these frictions would become less severe and welfare would improve. In similar spirit, common wisdom suggests that as societies get access to more alternative (to money) payment instruments, i.e., more ways to bypass the aforementioned frictions, welfare would also increase. We show that for a large variety of settings and market structures this common wisdom is not accurate. If the alternative means of payment is sufficient to cover all the liquidity needs of the economy, then indeed the economy will reach maximum welfare. However, if access to this alternative payment system is relatively low to begin with, increasing it can hurt the economy’s welfare, and we characterize in detail the set of parameters for which this result can arise. Our model offers a simple explanation to a recent empirical literature suggesting that increased access to credit is often followed by declined economic activity. |
| Keywords: | monetary-search models, over-the-counter markets, credit, liquidity, welfare |
| JEL: | E31 E43 E52 G12 |
| Date: | 2024–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121388 |
| By: | Wei Jiang; Thomas J. Sargent; Neng Wang |
| Abstract: | Lucas and Stokey (1983) motivated future governments to confirm an optimal tax plan by rescheduling government debt appropriately. Debortoli et al. (2021) showed that sometimes that does not work. We show how a Ramsey plan can always be implemented by adding instantaneous debt to Lucas and Stokey’s contractible subspace and requiring that each continuation government preserve that debt’s purchasing power instantaneously. We formulate the Ramsey problem with a Bellman equation and use it to study settings with various initial term debt structures and government spending processes. We extract implications about tax smoothing and effects of fiscal policies on bond markets. |
| JEL: | E6 H2 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32658 |