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on Dynamic General Equilibrium |
| By: | Kim, Minseong |
| Abstract: | We show that the first-order optimality conditions in the baseline New Keynesian model relating to central bank reserves become invalid due to a corner solution, with future budget constraints plus rational expectation requiring zero central bank reserves today even for a disequilibrium. The use of a multiple-agent variant does not resolve the issue. The corrected understanding of the baseline New Keynesian model supports the MMT view that despite endogenous money, HPM can be crucial for efficacy of monetary and government policies. We leave the question of whether a fully Post-Keynesian analysis invalidates such a conclusion to future works. |
| Date: | 2024–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:dzjsc |
| By: | Manuel González-Astudillo; Juan Guerra-Salas; Avi Lipton |
| Abstract: | We build a small open economy DSGE model to evaluate the macroeconomic e?ects of ?scal consolidations in commodity-exporting countries. The ?scal block includes productive public capital, utility-augmenting government consumption, transfers to hand-to-mouth households, and taxes on labor and capital income as well as consumption. A country risk premium that depends on the level of foreign debt is crucial for the transmission of ?scal policy. This premium in?uences consumption and saving decisions of the ?nancially unconstrained households, and the rest of the economy through general-equilibrium e?ects. We estimate the model with Bayesian methods using data from Ecuador, an economy with a high dependence on oil exports. We then study the macroeconomic e?ects of di?erent tax and expenditure instruments. We consider a full consolidation program following the agreement between Ecuador and the IMF for the 2020-2025 period. The program reduces the country premium, which promotes private investment. Consumption of ?nancially unconstrained households is adversely a?ected by higher labor income taxes, but consumption of hand-to-mouth households increases due to the expansion of government transfers under the program. In aggregate terms, GDP declines by about 1% relative to trend. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1015 |
| By: | Kim, Minseong |
| Abstract: | Typical New Keynesian models assume that the aggregate price level P can be treated as a given constant in firm optimization problems as the number n of firms goes to infinity. We show that this always holds only when there are actually infinitely many firms and not for the infinitely many firms limit. While largely an irrelevant issue for the flexible-price model, it becomes critical for the flexible-price limit of the sticky price model. Although the flexible-price model has a unique equilibrium, there are infinitely many flexible-price limits of the sticky-price model without interventions even in non-nominal real terms. This does not require dynamic effects, such as the binding zero lower bound. We discuss other defenses of the New Keynesian model assumption and find them either implausible or in need of further discussion due to significant deviations from the conventional analysis. |
| Date: | 2024–09–12 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:fvc9x |
| By: | Shalini Mitra; Gareth Liu-Evans |
| Abstract: | This paper investigates the role of an intangible investment technology shock in driving and propagating business cycles. In a dynamic general equilibrium framework with borrowing constrained entrepreneurs, we show that consumption smoothing by entrepreneurs, which is associated with reallocation of physical investment and hours from final goods to intangible investment, is the key mechanism through which aggregate co-movement arises in the model. The reallocation channel is especially strong in the presence of binding financial constraints. We use firm level intangible capital estimates to discipline the model and show that the entrepreneur’s degree of risk aversion, which determines their preference for consumption smoothing given their constant relative risk aversion (CRRA) utility, plays a key role in quantitatively generating the observed joint aggregate business cycle dynamics of output, consumption, investment and hours. For instance, entrepreneurs can display too little or too much risk aversion, in which case aggregate comovement is negated. |
| Keywords: | Intangible investment shock, reallocation, intangible capital, business cycles, aggregate comovement |
| JEL: | E13 E22 E32 O33 |
| Date: | 2024–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:liv:livedp:202414 |
| By: | Jennifer La'O; Wendy A. Morrison |
| Abstract: | We study optimal monetary policy in a general equilibrium economy with heterogeneous agents and nominal rigidities. Households differ in type-specific, state-contingent labor productivity and initial firm ownership, yet markets are complete. The fiscal authority has access to a linear tax schedule with non-state-contingent tax rates and uniform, lump-sum taxes (or transfers). We derive sufficient conditions under which implementing flexible-price allocations is optimal. We then show that when there are fluctuations in relative labor productivity across households, it is optimal for monetary policy to abandon the flexible-price benchmark and target a state-contingent markup. The optimal markup covaries positively with a sufficient statistic for labor income inequality. In a calibrated version of the model, countercyclical earnings inequality implies countercyclical optimal markups. |
| JEL: | D61 D63 E32 E52 E63 H21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32921 |
| By: | Andrew B. Abel; Stavros Panageas |
| Abstract: | We characterize a planner's optimal allocation of consumption and capital in an overlapping generations model with exogenous government purchases, privately-observed idiosyncratic shocks to the depreciation rate of capital, and a proportional cost of reversing investment to transform used capital to consumption. We show how a package of various taxes and government bonds can finance government purchases and support the same balanced growth path as in the planner's optimum. The optimal tax rate on capital income implements the planner's optimal (but incomplete) sharing of idiosyncratic depreciation risks, while respecting the private nature of these risks. |
| JEL: | E6 H2 H6 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32961 |
| By: | Serdar Birinci; Kurt See |
| Abstract: | We digitize state-level and time-varying unemployment insurance (UI) laws on initial eligibility, payment amount, and payment duration and combine them with microdata on labor market outcomes to estimate UI eligibility, take-up, and replacement rates at the individual level. We document how levels of income and wealth affect unemployment risk, eligibility, take-up, and replacement rates both upon job loss and over the course of unemployment spells. We evaluate whether these empirical findings are important for shaping UI policy design using a general equilibrium incomplete markets model combined with a frictional labor market that matches our empirical findings. We show that a nested alternative model that fails to match these findings yields a substantially less generous optimal UI policy compared to the baseline model. Our empirical results are also relevant for researchers estimating the effects of UI policy changes on labor market outcomes. |
| Keywords: | unemployment insurance; fiscal policy; household behavior; job search |
| JEL: | E24 H31 J64 J65 |
| Date: | 2024–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98801 |
| By: | Lydia Cox; Jiacheng Feng; Gernot Müller; Ernesto Pastén; Raphael Schoenle; Michael Weber |
| Abstract: | The jointly optimal monetary and fiscal policy mix in a multi-sector New Keynesian model with sectoral government spending and productivity shocks entails a separation of roles: Sectoral government spending optimally adjusts to sectoral output gaps and inflation rates---a policy supported by evidence from sectoral federal procurement data. Monetary policy optimally focuses on aggregate stabilization, but deviates from a zero-inflation target; in a model calibration to the U.S., however, it effectively approximates a zero-inflation target. Because monetary policy is a blunt instrument and government spending trades off stabilization against the optimal-level public good provision, the first best is not achieved. |
| JEL: | E32 E62 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32914 |
| By: | Bulent Guler; Yasin Kürsat Önder; Temel Taskin (-) |
| Abstract: | This paper studies debt and default dynamics under alternative disclosure arrangements in a sovereign default model. The government can access both observable and hidden debt. We show, both theoretically and quantitatively, that when debt is not fully disclosed, the government does not internalize the full effects of hidden debt choices on bond prices, thereby reducing the cost of holding hidden debt. We find that switching to a full disclosure regime shifts the portfolio from hidden to observable debt, exacerbating the debt dilution problem. Thus, contrary to conventional wisdom, this switch generates welfare losses. |
| Keywords: | Hidden debt, Debt disclosure, Sovereign debt, Sovereign default, Sovereign-to- sovereign lending |
| JEL: | E31 F34 F45 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1094 |
| By: | Dean Corbae; Andrew Glover; Michael Nattinger |
| Abstract: | We develop a simple equilibrium model of rental markets for housing in which eviction occurs endogenously. Both landlords and renters lack commitment; a landlord evicts a delinquent tenant if they do not expect total future rent payments to cover costs, while tenants cannot commit to paying more rent than they would be able or willing to pay given their outside option of searching for a new rental. Renters who are persistently delinquent are more likely to be evicted and pay more per quality-adjusted unit of housing than renters who are less likely to be delinquent. Evictions due to a tenant’s inability to pay are never socially efficient, and lead to lower quality investment in housing and too few vacancies relative to the socially optimal allocation. Government policies that restrict landlords’ ability to evict can improve welfare relative to laissez-faire, but a full moratorium on evictions only raises welfare when it is temporarily adopted in response to a large adverse shock. Finally, rent support can effectively eliminate evictions even without covering all missed rent and delivers significantly larger gains than eviction restrictions. |
| JEL: | E60 R31 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32898 |
| By: | Benjamín García; Mario Giarda; Carlos Lizama; Ignacio Rojas |
| Abstract: | Households in emerging economies are subject to significant income risk and have low access to financial markets. Leveraging multiple administrative microdata sources, this paper documents significant heterogeneity in asset holdings, income, and income cyclicality across the distribution of Chilean households, as well as considerable income risk. Considering this evidence, we compare the transmission mechanisms between Heterogeneous-Agent New-Keynesian models with search and matching (SAM) and sticky wage frictions (SW), and between one-liquid-asset (OA) and two-asset (TA) specifications. We propose a decomposition of consumption responses into direct, indirect, average, and cross-sectional effects. We show that the transmission mechanisms depend on the labor market setup: in SAM-OA the transmission operates through average and direct effects, while in SW-OA it is through cross-sectional effects. Assets also matter, the transmission in the SW-TA has stronger direct and average effects than SW-OA. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1013 |
| By: | Pavel Brendler; Moritz Kuhn; Ulrike I. Steins |
| Abstract: | Differences in household saving rates are a key driver of wealth inequality. But what determines these differences in saving rates and wealth accumulation? We provide a new answer to this longstanding question based on new empirical evidence and a new modeling framework. In the data, we decompose U.S. household wealth into its main portfolio components to document two new empirical facts. First, the variation in wealth by income is mainly driven by differences in participation in asset markets rather than by the amounts invested. Wealth differences are a matter of to have or not to have. Second, the large heterogeneity in asset market participation closely follows observed differences in access to asset markets. Combining these two facts, we develop a new model of life-cycle wealth accumulation in which income-dependent market access is the key driver of differences in asset market participation and saving rates by income. The calibrated model accurately captures the joint distribution of income and wealth. Eliminating heterogeneity in access to asset markets increases wealth accumulation in the bottom half of the income distribution by 32%. Facilitating access to employer-sponsored retirement accounts improves broad-based wealth accumulation in the U.S. economy. Historical data support the model’s prediction. |
| Keywords: | Wealth inequality; Labor market heterogeneity; Household portfolios |
| JEL: | D31 E21 H31 |
| Date: | 2024–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmoi:98835 |
| By: | Mauricio Calani; Lucas Rosso |
| Abstract: | This paper studies how differences in portfolio choice across households help explain the highly unequal wealth distribution seen in the data. It has been well documented that participation rates in investment in risky assets are substantially smaller than the ones predicted in standard models of portfolio choice. Also, both participation rates and risky shares are highly increasing in wealth. However, both features are usually absent in workhorse models of wealth accumulation. We introduce portfolio choice and adjustment frictions into an otherwise standard model of household saving behavior. Calibrating it to U.S. household-level data, we show that the model is able to provide a better fit of the wealth distribution while being consistent with well-known facts of households’ portfolio choices. In particular, the model explains roughly half of the gap between top wealth shares predicted by traditional models of wealth accumulation (e.g. Aiyagari, 1994) and the data. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1016 |
| By: | Nicoletta Batini; Luigi Durand |
| Abstract: | We build a two-block general equilibrium model that accounts for Nature by including, alongside man-made capital, natural capital defined as a variety of ecosystem goods and services essential to economic activity. Natural capital is unevenly distributed, displays critical thresholds or ’tipping points’ beyond which the ecosystem is irreversibly altered, and contributes to the evolution of productivity. We show that: (1) when natural capital is abundant, it is optimal to deplete some and conserve some, but less depletion should occur if there is a critical threshold beyond which Nature is irreversibly altered; (2) subsidizing the conservation of Nature makes long-run growth stronger and more sustainable in Nature-rich and Nature-poor countries alike, but implies lower consumption globally in the short run. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1014 |
| By: | Andrew Glover; Jose Mustre-del-Rio |
| Abstract: | In the late 1990s, nearly 7 percent of young college graduates moved across state lines every year. These workers enjoyed 30 percent higher earnings three years after moving relative to similar stayers, but their gains were not immediate, amounting to only 7 percent in the first year post-move. By the mid-2010s, mobility fell by more than half, and average earnings gains among movers fell and became more front-loaded. At the same time, debt increased among all young college graduates. We propose a model of geographic mobility with incomplete markets, where moving to a new state can deliver earnings gains that are either front- or back-loaded. Incomplete markets and high interest rates on debt reduce workers’ acceptance of back-loaded opportunities, even if they have the same present-discounted increase in earnings as front-loaded opportunities. We find that lower potential gains account for most of the decline in mobility across periods, but that the lower initial wealth of young college graduates also reduced their mobility. The wealth effect on mobility is especially strong for poor individuals, so wealth changes generate an endogenous increase in income inequality later in the life cycle. Consistently, we find that tax-financed debt forgiveness policies generate higher mobility and earnings growth for low-wealth individuals and are, on average, welfare-increasing. |
| Keywords: | education; consumer economics; macroeconomic activity |
| JEL: | D60 E21 E44 |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:98815 |
| By: | Alvaro Aguirre |
| Abstract: | This paper builds a model of heterogenous agents, incomplete markets and idiosyncratic shocks extended with a political mechanism that allows for realistic party competition. Higher inequality leads to more disperse policy preferences, to which parties respond endogenously distancing themselves from median voter preferences. The polarization of party proposals leads to greater uncertainty before elections, as well as greater policy switches after them, with significant macroeconomic effects. Results are in line with previous empirical evidence linking inequality, polarization and macroeconomic performance. The model is solved introducing political quasi-aggregation, and can be extended to analyze different economic policies and alternative political institutions. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1011 |
| By: | Jesús Fernández-Villaverde; Kenneth Gillingham; Simon Scheidegger |
| Abstract: | There is a rapidly advancing literature on the macroeconomics of climate change. This review focuses on developments in the construction and solution of structural integrated assessment models (IAMs), highlighting the marriage of state-of-the-art natural science with general equilibrium theory. We discuss challenges in solving dynamic stochastic IAMs with sharp nonlinearities, multiple regions, and multiple sources of risk. Key innovations in deep learning and other machine learning approaches overcome many computational challenges and enhance the accuracy and relevance of policy findings. We conclude with an overview of recent applications of IAMs and key policy insights. |
| JEL: | C61 E27 Q5 Q51 Q54 Q58 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32963 |