|
on Dynamic General Equilibrium |
| By: | Oh, Joonseok; Picco, Anna Rogantini |
| Abstract: | Households' income heterogeneity is important to explain consumption dynamics in response to aggregate macro uncertainty: an increase in uncertainty generates a consumption drop that is stronger for income poorer households. At the same time, labor markets are strongly responsive to macro uncertainty as the unemployment rate and the job separation rate rise, while the job finding rate falls. A heterogeneous agent New Keynesian model with search and matching frictions in the labor market can account for these empirical findings. The mechanism at play is a feedback loop between income poorer households who, being subject to higher unemployment risk, contract consumption more in response to heightened uncertainty, and firms that post fewer vacancies following a drop in demand. JEL Classification: E12, E31, E32, J64 |
| Keywords: | HANK and SaM, households' income heterogeneity, precautionary savings |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242971 |
| By: | Holtemöller, Oliver; Sardone, Alessandro |
| Abstract: | In this paper, we discuss how environmental damage and emission reduction policies affect the conduct of monetary policy in a two-sector (clean and dirty) dynamic stochastic general equilibrium model. In particular, we examine the optimal response of the interest rate to changes in sectoral inflation due to standard supply shocks, conditional on a given environmental policy. We then compare the performance of a nonstandard monetary rule with sectoral inflation targets to that of a standard Taylor rule. Our main results are as follows: first, the optimal monetary policy is affected by the existence of environmental policy (carbon taxation), as this introduces a distortion in the relative price level between the clean and dirty sectors. Second, compared with a standard Taylor rule targeting aggregate inflation, a monetary policy rule with asymmetric responses to sector-specific inflation allows for reduced volatility in the inflation gap, output gap, and emissions. Third, a nonstandard monetary policy rule allows for a higher level of welfare, so the two goals of welfare maximization and emission minimization can be aligned. |
| Keywords: | climate change, environmental policy, inflation, macroeconomic stabilization, monetary policy |
| JEL: | E32 E52 E58 Q54 Q58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:301153 |
| By: | Babette Jansen (University of Antwerp); Roland Winkler (Friedrich Schiller University Jena, and University of Antwerp) |
| Abstract: | We consider a two-agent New Keynesian model with savers and hand-to-mouth households with quasi-separable utility functions as introduced by Bilbiie (2020a). This framework allows for separate parameterization of consumption-hours complementarity and income effects on labor supply. We examine how variations in the size of income effects, the degree of non-separability between consumption and hours worked, and the share of hand-to-mouth households impact aggregate dynamics and determinacy properties of interest rate rules. Complementarity between consumption and hours worked and small income effects can reverse the Taylor principle and result in expansionary monetary contractions. |
| Keywords: | Heterogeneity, Monetary policy, Nonseparable preferences, Real indeterminacy, Taylor principle, TANK |
| JEL: | E32 E52 E58 E44 E24 |
| Date: | 2024–08–23 |
| URL: | https://d.repec.org/n?u=RePEc:jrp:jrpwrp:2024-006 |
| By: | Yunho Cho; James Morley; Aarti Singh |
| Abstract: | Using household survey data for the U.S. and Australia, we quantify the role of taxes and transfers in providing consumption insurance against income risk. While the two countries differ substantially in their degree of tax and transfer progressivity and the extent to which it reduces the variability of disposable income, we find using a semi-structural model of income, net taxes, and consumption that the overall role of taxes and transfers in affecting the elasticity of consumption with respect to permanent income shocks is similar, with an estimated 5.4 percentage point reduction for the U.S. versus 4.8 for Australia. We interpret this result using a stylized life-cycle model with incomplete markets. Counterfactual analysis for a calibrated version of the structural model shows that, while higher progressivity increases the role of taxes in providing consumption insurance, these effects are partially mitigated by less self-insurance given higher marginal tax rates. The level of wealth relative to income also reduces the effects of progressivity on consumption insurance. Thus, higher wealth-to-income ratios in Australia can explain why, despite higher progressivity, the impact of taxes and transfers on consumption insurance is similar to the U.S. |
| Keywords: | progressive taxes, redistributive transfers, consumption insurance, incomplete markets |
| JEL: | C13 C33 D12 D14 D15 E21 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-52 |
| By: | Fatih Guvenen; Rocio Madera; Serdar Ozkan |
| Abstract: | CORRECT ORDER OF AUTHORS: Fatih Guvenen, Serdar Ozkan, and Rocio Madera. The order of coauthors has been assigned randomly using AEA’s Author Randomization Tool. 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: | 2024–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98700 |
| By: | Antonin Bergeaud (HEC Paris - Ecole des Hautes Etudes Commerciales, CEP - LSE - Centre for Economic Performance - LSE - London School of Economics and Political Science, CEPR - Center for Economic Policy Research); Pierre Cahuc (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics, CEPR - Center for Economic Policy Research); Clément Malgouyres (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, IPP - Institut des politiques publiques); Sara Signorelli (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics); Thomas Zuber (Centre de recherche de la Banque de France - Banque de France); Isaiah Andrews; Stéphane Bonhomme; Philippe Choné; Simon Jäger; Moritz Kuhn; Pat Kline; Thomas Le Barbanchon; Fabien Postel-Vinay; Roland Rathelot |
| 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% in favor of in-house workers, 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, Labour market frictions |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:hal:ipppap:hal-04673773 |
| By: | Dr. Gabriel Züllig; Valentin Grob |
| Abstract: | We investigate how the level of corporate leverage affects firms' investment response to monetary policy shocks. Based on novel aggregate time series estimates, leverage acts amplifying, whereas in the cross section of firms, higher leverage predicts a muted response to monetary policy. We use a heterogeneous firm model to show that in general equilibrium, both empirical findings can be true at the same time: When the average firm has lower leverage and therefore reduces its investment demand more strongly after a contractionary shock, the price of capital declines sharply, which incentivizes all firms regardless of their leverage to invest relatively more, muting the aggregate decline of investment. We provide empirical evidence supporting this hypothesis. Overall, if there are general equilibrium adjustments to shocks, effects estimated by exploiting cross-sectional heterogeneity in micro data can differ substantially from the macroeconomic elasticities, in our example even in terms of their sign. |
| Keywords: | Firm heterogeneity, State dependence, Financial frictions, General equilibrium |
| JEL: | D22 E32 E44 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:snb:snbwpa:2024-08 |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We derive these results from a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies. |
| JEL: | F31 F41 F62 F65 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32810 |
| By: | Tomohiro Hirano |
| Abstract: | Throughout history, many countries have repeatedly experienced large swings in asset prices, which are usually accompanied by large fluctuations in macroeconomic activity. One of the characteristics of the period before major economic fluctuations is the emergence of new financial products; the situation prior to the 2008 financial crisis is a prominent example of this. During that period, a variety of structured bonds, including securitized products, appeared. Because of the high returns on such financial products, many economic agents were involved in them for speculative purposes, even if they were riskier, producing macro-scale effects. With this motivation, we present a simple macroeconomic model with financial speculation. Our model illustrates two points. First, stochastic fluctuations in asset prices and macroeconomic activity are driven by the repeated appearance and disappearance of risky financial assets, rather than expansions and contractions in credit availability. Second, in an economy with sufficient borrowing and lending, the appearance of risky financial assets leads to decreased productive capital, while in an economy with severely limited borrowing and lending, it leads to increased productive capital. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.05047 |