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on Dynamic General Equilibrium |
| By: | Bence Bardóczy; Jae W. Sim; Andreas Tischbirek |
| Abstract: | We study the consequences of shocks to the household wealth distribution in dynamic general equilibrium by characterizing the rate at which excess wealth is depleted. Analytical results link the aggregate decumulation rate to the distribution of the additional balances, micro intertemporal marginal propensities to consume, and general equilibrium feedback. A quantitative heterogeneous agent New Keynesian model matches the depletion path of the excess savings built up during the COVID-19 pandemic across the income distribution. The model predicts a substantial but steadily waning boost to consumption and explains up to 40 percent of the surge in inflation observed in 2020 and 2021. |
| Keywords: | Excess savings; Heterogeneous agent New Keynesian (HANK) models; Incomplete markets; Household portfolios; Inflation dynamics; COVID-19 pandemic |
| JEL: | E21 E31 E32 E52 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-62 |
| By: | Dirk Krueger (University of Pennsylvania, CEPR and NBER); Alexander Ludwig (Goethe University); Irina Popova (University of Bonn) |
| Abstract: | We evaluate the aggregate, distributional and welfare consequences of alternative government education policies to encourage college completion, such as making college free and improving funding for public schooling. To do so, we construct a general equilibrium overlapping generations model with intergenerational linkages, a higher education choice as well as a multi-stage human capital production process during childhood and adolescence with parental and government schooling investments. The model features rich cross-sectional heterogeneity, distinguishes between single and married parents, and is disciplined by US household survey data on income, wealth, education and time use. Studying the transitions induced by unexpected policy reforms we show that the “free college” and the “better schools” reform generate significant welfare gains, which take time to materialize and are lower in general than in partial equilibrium. It is optimal to combine both reforms: tuition subsidies make college affordable even for children from poorer parental backgrounds and better schools increase human capital thereby reducing dropout risk. |
| Keywords: | education spending, public transfers, welfare benefits, inequality, poverty, intergenerational persistence |
| JEL: | D15 D31 E24 I24 |
| Date: | 2024–08–18 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-023 |
| By: | Daniel Wheadon; Gonzalo Castex; George Kudrna; Alan Woodland |
| Abstract: | We investigate the effects of self-control preferences on household life cycle decisions, macroeconomic outcomes, and the roles they play in determining optimal means testing of public old-age pensions. To that end, we develop a stochastic overlapping generations model with heterogeneous households that have Gul-Pesendorfer self-control preferences. First, we show that in economies with higher self-control costs lifetime savings diminish, while labor supply and retirement are postponed to later ages. Hence, the fiscal burden to fund the public pension system increases. Second, we examine the effects of increasing self-control costs in the context of age pension means testing with alternative taper rates at which the pension benefit is withdrawn. We show that there is a negative relationship between self-control costs and taper rates, i.e., populations with higher self-control costs prefer lower taper rates. We find that if self-control costs are sufficiently high, a universal pension with a zero taper rate may be optimal. |
| Keywords: | self-control preferences, public pensions, progressivity, labor supply, life-cycle, stochastic OLG model |
| JEL: | C68 D15 D91 H2 H55 J22 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-57 |
| By: | Dirk Krueger (University of Pennsylvania, CEPR and NBER); Fulin Li (Texas A&M University); Harald Uhlig (University of Chicago, CEPR and NBER) |
| Abstract: | This paper characterizes the transition dynamics of a continuous-time neoclassical production economy with capital accumulation in which households face idiosyncratic income risk and cannot commit to repay their debt. Therefore, even though a full set of contingent claims that pay out conditional on the realization of idiosyncratic shocks is available, the equilibrium features imperfect insurance and a non-degenerate crosssectional consumption distribution. When household labor productivity takes two values, one of which is zero, and the utility function is logarithmic, we characterize the entire transition dynamics induced by unexpected technology shocks, including the evolution of the consumption distribution, in closed form. Thus, the model constitutes an analytically tractable alternative to the standard incomplete markets general equilibrium Aiyagari (1994) model by retaining its physical environment, but replacing the incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously due to limited commitment. |
| Keywords: | Idiosyncratic Risk, Limited Commitment, Transition Path, MIT Shock |
| JEL: | E21 D11 D91 G22 |
| Date: | 2024–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-020 |
| By: | Tibor Hlédik; Joana Madjoska; Mite Miteski; Mr. Jan Vlcek |
| Abstract: | This paper presents a calibrated DSGE model of the economy of North Macedonia that was developed at the National Bank of the Republic of North Macedonia (NBRNM) within a technical assistance project delivered jointly by the International Monetary Fund (IMF) and the Czech National Bank (CNB). The model structure reflects the specific characteristics of the economy of North Macedonia. Namely, it is a small open economy DSGE model featuring a fixed exchange rate regime functioning in an economy experiencing structural changes over time. The paper provides a detailed overview of the theoretical structure of the model, including optimization problems of economic agents and first-order optimality conditions. A particular emphasis is put on model calibration, as well as on model evaluation, including the analysis of impulse responses, shock decompositions and historical in-sample simulation. Compared to other empirical papers focusing on DSGE models, our approach explicitly includes additional trends and wedges needed to capture non-stationary great ratios as well as the Balassa-Samuelson effect. The model has been developed to complement the existing analytic tools used at the NBRNM for policy analyses and to improve the understanding of the underlying drivers of the business cycle of the domestic economy. |
| Keywords: | DSGE model; calibration; economy of North Macedonia; fixed exchange rate |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/187 |
| By: | El Khalifi, Ahmed; Ouakil, Hicham |
| Abstract: | We examine the implications of different redistribution policy reforms in Morocco, considering taxation, and based on a dynamic general equilibrium model of three agents: households, firms and Ricardian government. Consequently, a policy that supports public investment guarantees significant social welfare gains, and has a positive multiplier effect on output and tax revenue. However, in the presence of a highly government-dependent population -which behaves like the hand-to-mouth population-, this policy destroys social welfare, through the effect of reducing other expenditure on this population. To counteract this negative impact, authorities can provide additional lump-sum transfers to this population. The paper also presents indifference curves (iso-output and iso-income tax) associating spending and taxes. A change in any tax could have negative effects on the economy if not combined with a new redistribution of public spending. On the other hand, reducing such a tax followed by a change in spending policy could have positive economic effects (on output, tax revenue and social welfare), and the gains are very high in the case of consumption taxes and employer payroll taxes. |
| Keywords: | Public spending; Ricardian households; Government-dependent households; Taxes; Indifference curves; Welfare cost. |
| JEL: | H21 H31 H42 |
| Date: | 2024–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121891 |
| By: | Dirk Krueger (University of Pennsylvania, CEPR and NBER); Harald Uhlig (University of Chicago, CEPR and NBER) |
| Abstract: | This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which agents can insure against idiosyncratic income risk by trading state-contingent assets, subject to limited commitment constraints that rule out short-selling. For an N-state Poisson labor productivity process we characterize the household consumption-asset allocation, stationary asset distribution and aggregate capital supply. When production is Cobb-Douglas, productivity takes two values, of which one is zero, and agents have log-utility, the equilibrium interest rate, capital stock and consumption distribution is given in closed form. We therefore provide a tractable alternative to the Aiyagari incomplete markets model. |
| Keywords: | Idiosyncratic Risk, Limited Commitment, Stationary Equilibrium |
| JEL: | E21 D11 D91 G22 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-021 |
| By: | Pirovano, Mara; Azzone, Michele |
| Abstract: | We examine the issue of the appropriate selection of macroprudential instruments according to the vulnerabilities identified and the policymakers’ objectives using a version of the 3D DSGE model following Mendicino et al. (2020) and Hinterschweiger et al. (2021) calibrated for the euro area. We consider a broad set of macroprudential instruments, including broad and sectoral countercyclical capital requirements, LTV and LTI limits and assess their transmission channels as well as their effectiveness in mitigating rising broad and sectoral vulnerabilities. We find that sectoral instruments are most effective to increase bank resilience to sectoral risks, limiting spillover effects. LTI limits are superior to LTV limits in containing the growth of mortgage credit and household indebtedness. Finally, we find that macroprudential policy is better suited than monetary policy to address emerging real estate-related imbalances. JEL Classification: E44, E58, G21, G28 |
| Keywords: | banking regulation, countercyclical capital buffer, DSGE, financial stability, macroprudential policy |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242979 |
| By: | Mavrigiannakis, Konstantinos; Sakkas, Stelios |
| Abstract: | This paper aims at assessing quantitatively the macroeconomic impact of EU sanctions against Russia for the economy of Cyprus. To this end, we use a medium-scale micro-founded DSGE model of a small open economy participating in a currency union like the euro area calibrated to the economy of Cyprus. The model features two sectors of production, namely the tradable and the non-tradable one. In this model, EU sanctions influence the sanctioning economy (i.e. Cyprus) through a mix of foreign shocks that hit in principle the tradable sector. In particular, to mimic the economic environment (namely, how all this started in 2022), we analyze first the effects of an energy-type shock modeled as a standard cost-push shock on imported goods. In turn, we add to this economic environment the impact of policy reactions like EU sanctions against Russia. In this context and given the strong trade ties of Cyprus with Russia we model sanctions as two simultaneous negative exogenous shocks, that is, a temporary decrease in the exported goods reflecting primarily reductions observed in tourism and financial services, and inward foreign direct investment (FDI). Contrary to the mild impacts reported in the literature for the majority of EU countries we find non negligible adverse effects for the economy of Cyprus which range from -1.28% to -3.36% in terms of average output loss in the short run. Given Cyprus’s vulnerable external position we show that the impact of sanctions depend crucially on the degree of tightening financing conditions which are likely to hit particularly more countries with high initial current account deficits and debt stocks. |
| Keywords: | Cyprus; economic sanctions; trade disintegration |
| JEL: | F16 F51 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125336 |
| By: | Mariano Kulish (School of Economics, University of Sydney); James Morley (School of Economics, University of Sydney); Yamout Nadine (Department of Economics, American University of Beirut); Zanetti Francesco (Department of Economics, 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. Bayesianestimates 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 onunemployment 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: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:336 |
| By: | Givens, Gregory; Tavoy, Reid |
| Abstract: | Postwar data reveals significant co-movement between net firm entry and private consumption conditional on a government spending shock. We construct and estimate an equilibrium model that matches this observation both in a qualitative sense and with an eye towards replicating the quantitative effects over time. Our model combines endogenous entry subject to sunk costs with unemployment arising from unobservable effort. Key to its success is an insurance design that partially protects workers against job risk. This feature allows aggregate consumption to increase through compositional changes in the labor force while amplifying the procyclical response of firm entry. |
| Keywords: | Government Spending; Consumption; Entry; Unemployment Insurance |
| JEL: | E22 E24 E32 E62 J41 |
| Date: | 2024–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121894 |
| By: | Paz-Pardo, Gonzalo; Castellanos, Juan; Hannon, Andrew |
| Abstract: | We build a model of the aggregate housing and rental markets in which houseprices and rents are determined endogenously. Households can choose their housingtenure status (renters, homeowners, or landlords) and the size of their homes dependingon their age, income and wealth. We use our model to study the impact of changesin credit conditions on house prices, rents and household welfare. We analyse theintroduction of policies that limited loan-to-value (LTV) and loan-to-income (LTI) ratiosof newly originated mortgages in Ireland in 2015 and find that, consistent with empiricalevidence, they mitigate house price growth but increase rents. Homeownership ratesdrop, and young and middle-income households are negatively affected by the reform.An unexpected permanent rise in real interest rates has similar effects – by makingmortgages more expensive and alternative investments more attractive for landlords, itincreases rents relative to house prices. JEL Classification: D15, E21, E30, E51, G51 |
| Keywords: | credit conditions, homeownership, house prices, life-cycle, macro-prudential policy, rental prices |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242977 |
| By: | Miescu, Mirela (Lancaster University); Mumtaz, Haroon (Queen Mary University); Theodoridis, Konstantinos (Cardiff Business School) |
| Abstract: | This paper employs Threshold (T)VAR models to investigate the asymmetric impact of oil supply news shocks, analysing variations in both the size and direction of the shocks. Our findings reveal that large and adverse oil shocks exert a stronger effect on real activity, labour market indicators, and risk variables compared to small and favourable shocks. Interestingly, we observe no asymmetry in the response of prices and monetary policy to oil shocks of different magnitudes and signs. Using a theoretical nonlinear model and predictive prior analysis, we demonstrate that search and matching labour frictions cause the risk of becoming unemployed to increase after an oil shock. This rise in unemployment risk triggers strong precautionary savings motives, which increase with the size of the shock, leading to asymmetric responses in real economic and labour market variables, whereas price indicators and the policy rate do not exhibit such nonlinearities consistently with the empirical findings. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2024/18 |
| By: | Kazuya Kamiya; So Kubota |
| Abstract: | We propose a standard search and bargaining model with divisible money, in which only the random matching market opens and the generalized Nash bargaining settles each trade. Assuming fixed production costs, we analytically characterize a tractable equilibrium, called a pay-all equilibrium, and prove its existence. Each buyer pays all the money holding as a corner solution to the bargaining problem and each seller produces a positive amount of goods as an interior solution. The bargaining power parameter affects the distribution of the money holdings and possibly induces economic inefficiency. We propose a redistributional monetary transfer that adjusts the bargaining outcome and improves the allocation efficiency. Moreover, we analyze a temporary expansion of the money supply that increases social welfare through a redistribution. |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:53 |
| By: | Andersen, Torben M.; Bhattacharya, Joydeep; Liu, Qing |
| Abstract: | A classic result in dynamic public economics says that for a dynamically-efficient overlapping-generations economy, there is no long-run welfare role for unfunded, pay-as-you-go (PAYG) pensions. Subsequently, the literature has shown that if agents are sufficiently myopic or present-biased, a welfare rationale arises only when agents wish to but cannot borrow (“borrowing constraint”) against future pensions – their private, voluntary retirement savings are zero. In this paper, we extend the scope of the results mentioned above. We prove that a positive optimal pension cannot coexist with a positive private retirement saving under standard preferences without the borrowing constraint. The same is true under myopia. Co-existence may obtain under the self-control and temptation preferences popularized by Gul and Pesendorfer (2004). |
| Date: | 2024–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:isu:genstf:202409052109480000 |