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on Dynamic General Equilibrium |
| By: | Meyer-Gohde, Alexander |
| Abstract: | I provide a solution method in the frequency domain for multivariate linear rational expectations models. The method works with the generalized Schur decomposition, providing a numerical implementation of the underlying analytic function solution methods suitable for standard DSGE estimation and analysis procedures. This approach generalizes the time-domain restriction of autoregressive-moving average exogenous driving forces to arbitrary covariance stationary processes. Applied to the standard New Keynesian model, I find that a Bayesian analysis favors a single parameter log harmonic function of the lag operator over the usual AR(1) assumption as it generates humped shaped autocorrelation patterns more consistent with the data. |
| Keywords: | DSGE, solution methods, spectral methods, Bayesian estimation, general exogenous processes |
| JEL: | C32 C62 C63 E17 E47 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:302176 |
| By: | Tomohiro Hirano (Royal Holloway, University of London; Centre for Macroeconomics (CFM)); Alexis Akira Toda (University of California San Diego) |
| Abstract: | We analyze equilibrium housing prices in an overlapping generations model with perfect housing and rental markets. The economy exhibits a two-stage phase transition: as the income of home buyers rises, the equilibrium regime changes from fundamental to bubble possibility, where fundamental and bubbly equilibria can coexist. With even higher incomes, fundamental equilibria disappear and housing bubbles become a necessity. Even with low current incomes, housing bubbles may emerge if home buyers have access to credit or have high future income expectations. Contrary to widely-held beliefs, fundamental equilibria in the possibility regime are inefficient despite housing being a productive non-reproducible asset. |
| Keywords: | bubble, expectations, housing, phase transition, welfare |
| JEL: | D53 G12 R21 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2427 |
| By: | Seo, Jinyoung (Wake Forest University, Economics Department) |
| Abstract: | I show that Treasuries’ role as hedge assets is determined by the level of trend inflation and the conduct of monetary policy, using a Generalized New Keynesian habit model. A novel prediction from the model is that when trend inflation is high, nominal bonds exhibit a positive correlation with stock returns, making them risky assets. As trend inflation rises, inflation becomes more countercyclical because any transitory inflation generates temporary output loss due to endogenous cost-push effects, which emerge under positive trend inflation. When countercyclical inflation prevails, bond returns drop when stocks underperform, leading to a positive bond-stock correlation. The model explains the shift in US bond-stock correlation from positive to negative in 1997 as a consequence of stabilized trend inflation. |
| Keywords: | Bond-stock correlation; trend inflation; monetary policy; output gap-inflation correlation; bond risk premium |
| JEL: | E31 E43 E44 E52 G12 |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:ris:wfuewp:0115 |
| By: | Luisa Corrado (DEF, University of Rome "Tor Vergata"); Stefano Grassi (DEF, University of Rome "Tor Vergata"); Aldo Paolillo (DEF, University of Rome "Tor Vergata"); Francesco Ravazzolo (Free University of Bozen-Bolzano) |
| Abstract: | This work studies the turbulent confluence of two major events - the COVID-19 pandemic and the Russian invasion of Ukraine - both of which caused significant disruptions in global energy demand and macroeconomic variables. We propose and estimate a two-sector Dynamic Stochastic General Equilibrium model that incorporates both crude and refined energy sources, thus combining together the multifaceted dynamics of the energy sector, where crude elements like oil, coal, and gas are intertwined with other production components. The model describes the transmission of energy shocks through complementarities in production and consumption, as a mechanism that amplifies the fluctuations of the business cycle. We find that the impact of price shocks on oil, coal, and gas accounts for 32% of the increase in the general price level between 2021:Q1 and 2022:Q4, and that oil and gas price shocks contributed most significantly. Finally, we discuss the case in which energy shocks can be Keynesian supply shocks. |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:582 |
| By: | Mariano Kulish (University of Sydney); James Morley (University of Sydney); Nadine Yamout (American University of Beirut); Francesco Zanetti (University of Oxford) |
| Abstract: | We examine the relevance of Dutch Disease through the lens of an open-economy multisector model that features unemployment due to labor market frictions. Bayesian estimates for the model quantify the effects of both business cycle shocks and structural changes on the unemployment rate. Applying our model to the Australian economy, we find that the persistent rise in commodity prices in the 2000s led to an appreciation of the exchange rate and fall in net exports, resulting in upward pressure on unemployment due to sectoral shifts. However, this Dutch Disease effect is estimated to be quantitatively small and offset by an ongoing secular decline in the unemployment rate related to decreasing relative disutility of working in the non-tradable sector versus the tradable sector. The changes in labor supply preferences, along with shifts in household preferences towards non-tradable consumption that are akin to a process of structural transformation, makes the tradable sector more sensitive to commodity price shocks but a smaller fraction of the overall economy. We conclude that changes in commodity prices are not as relevant as other shocks or structural changes in accounting for unemployment even in a commodity-rich economy like Australia. |
| Keywords: | Dutch Disease, commodity prices, unemployment, structural change, structural transformation |
| JEL: | E52 E58 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2420 |
| By: | Federico S. Mandelman (Federal Reserve Bank of Atlanta); Yang Yu (Shanghai Jiao Tong University); Francesco Zanetti (University of Oxford; Centre for Economic Policy Research (CEPR)); Andrei Zlate (Federal Reserve Board) |
| 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: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2429 |
| By: | Shantanu Bagchi (Department of Economics, Towson University) |
| Abstract: | This paper uses a stylized overlapping-generations model to examine the effect of aggregate (or business cycle) risk on the macroeconomic and welfare implications of Social Security. In this model framework, unfunded public pensions provide partial insurance against inter- and intra-generational risks that are uninsured due to incomplete markets. I find that in this environment, Social Security’s macroeconomic and welfare effects are considerably smaller than those in a framework without aggregate risk, and that the persistence of the aggregate shock process is an important determinant of this difference. I also find that aggregate risk changes how the redistribution implicit in Social Security's benefit-earnings rule interacts with its inter- generational risk sharing mechanism. |
| Keywords: | Social Security, aggregate risk, business cycles, incomplete markets, intergenerational risk. |
| JEL: | E21 E62 H55 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tow:wpaper:2024-11 |
| By: | Wouter J. Den Haan (London School of Economics (LSE); Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)); Tiancheng Sun (University of Edinburgh) |
| Abstract: | Although investment in inventories significantly impacts GDP fluctuations, inventories are often omitted from business-cycle models due to their complex cyclical behavior. We incorporate finished-goods inventories into a New Keynesian framework by introducing a tractable microfounded “sell friction.” Our approach simplifies existing approaches by avoiding product-specific idiosyncratic shocks while capturing the essence of the popular stockout avoidance motive. Specifically, firms strategically accumulate inventories by bringing more products to the market than they anticipate selling, thereby boosting expected sales. Our setup automatically generates key stylized facts such as the countercyclical nature of the inventory-sales ratio and the greater volatility of output compared to sales under business cycles driven by monetary-policy (demand) shocks. A novel aspect of our analysis is the recognition of an inventory good as an asset and that cyclical fluctuations of its value play a key role following supply shocks. Specifically, the value of an inventory good is robustly countercyclical in our model when the productivity-growth process mirrors the observed positive autocorrelation. This ensures that the model also robustly replicates stylized inventory facts in response to productivity (supply) shocks, which has been a challenge in the literature. Using inventory and sales data to discipline the model, we find that productivity shocks account for a large fraction of GDP fluctuations, ranging from 62.5% to 94%. Furthermore, the goods-market friction yields non-trivial effects on the magnitude of aggregate fluctuations, underscoring the importance of incorporating inventories into macroeconomic models. |
| Keywords: | Search friction, goods and service sector, TFP and monetary-policy shocks |
| JEL: | E32 G31 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2426 |
| By: | Frantisek Masek (National Bank of Slovakia); Jan Zemlicka (University of Zurich) |
| 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 infinity for a moderate myopia. Finite yet long-lasting windows dominate for stronger 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 depends on the speed of return to the target path when myopia plays a bigger role. We quantify the welfare effect of uncertainty due to the ELB (downward inflation bias) and show how it varies across window lengths and cognitive discounting degrees. |
| JEL: | E31 E32 E52 E58 E71 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1108 |
| By: | Valentin Grob and Gabriel Züllig |
| 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: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:irn:wpaper:24-04 |
| By: | Mary Ann Bronson; Daniel Haanwinckel; Maurizio Mazzocco |
| Abstract: | How do different income taxation systems affect household decisions and welfare? We answer this question by first documenting the strong labor supply disincentives for secondary earners of the U.S. tax system and by using variations from the Bush Tax Cuts to assess their effects on intra-household specialization. We then develop a lifecycle model incorporating labor supply, marriage and divorce decisions with limited commitment, household production, human capital accumulation, and assortative mating. After estimating and validating the model with various datasets, we evaluate four tax systems: a U.S.-like income-splitting system, an individual taxation system, a flexible general joint system, and an income-splitting system with secondary-earner deductions. We find that the individual taxation system provides higher welfare than income splitting but increases inequality. The general joint system offers the highest welfare but is complex to implement. The income-splitting system with a secondary-earner deduction improves welfare and reduces inequality while maintaining simplicity. |
| JEL: | H2 H3 J1 J2 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32861 |
| By: | Maria Teresa Punzi (Singapore Management University) |
| Abstract: | This paper analyses the effectiveness of macroprudential policy on macro-financial fluctuations when the government enforces carbon pricing to reduce carbon emissions and achieve the net-zero target. A carbon tax policy alone can reduce carbon emissions by 2030, but at the cost of a deep and prolonged recession, with consequential financial instability due to a higher probability of default on entrepreneurs in the brown sector. This result suggests that carbon pricing should be coupled with complementary policies, such as macroprudential policy. In particular, differentiated LTV ratios and differentiated capital requirements that penalise the brown sector in favour of the green sector tend to decrease the probability of default in the green sector and encourage green lending in supporting the transition to a green economy. However, such policies have little contribution in offsetting the negative impact on the macroeconomy. More stringent levels of prudential regulations are needed to reduce the fall in GDP and consumption. More specifically, the “one-forone†prudential capital requirements on fossil fuel financing can effectively reduce defaults and move to a greener economy. |
| JEL: | E32 E44 E52 G18 G50 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1107 |
| By: | Eirik E. Brandsaas; Jens Kvaerner |
| Abstract: | Partial Ownership (PO), which allows households to buy a fraction of a home and rent the remainder, is increasing in many countries with housing affordability challenges. We incorporate an existing for-profit PO contract into a life-cycle model to quantify its impact on homeownership, households’ welfare, and its implications for financial stability. We have the following results: 1) PO increases homeownership rates. 2) Willingness to pay increases with housing unaffordability and is highest among low-income and renting households. 3) PO increases aggregate debt as renters become partial owners but also reduces the average leverage ratios as indebted homeowners become partial owners. |
| Keywords: | Partial Homeownership; Housing Affordability; Financial Innovation; Financial Stability |
| JEL: | G28 G23 E20 R20 E21 |
| Date: | 2024–08–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-70 |