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on Dynamic General Equilibrium |
| By: | Adrien Auclert; Matthew Rognlie; Ludwig Straub |
| Abstract: | In the past decade, a new paradigm for fiscal and monetary policy analysis has emerged, combining the canonical macro model of income and wealth inequality with the New Keynesian model. These Heterogeneous-Agent New Keynesian (“HANK”) models feature new transmission channels and allow for the joint study of aggregate and distributional effects. We review key developments in this literature through the lens of a unified “canonical HANK model”. Monetary and balanced-budget fiscal policy have similar aggregate effects as in the standard new Keynesian model, while deficit-financed fiscal policy is much more expansionary. We discuss the split between direct and indirect effects of policy, and also the implications of cyclical income risk, maturity structure, nominal assets, behavioral frictions, and many other extensions to the model. Throughout, we highlight the benefits of using sequence-space methods to solve and analyze this class of models. |
| JEL: | D1 E21 E31 E32 E43 E52 E62 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32991 |
| By: | Arpan Chakraborty |
| Abstract: | Modern macroeconomic models, particularly those grounded in Rational Expectation Dynamic Stochastic General Equilibrium (DSGE), operate under the assumption of fully rational decision-making. This paper examines the impact of behavioral factors, particularly 'animal spirits' (emotional and psychological influences on economic decisions) and 'inflation extrapolators', on the communication index/sentiment index of the US Federal Reserve. Utilizing simulations from a behavioral New Keynesian model alongside real-world data derived from Federal Reserve speeches, the study employs an Auto-Regressive Distributed Lag (ARDL) technique to analyze the interplay between these factors. The findings indicate that while the fraction of inflation extrapolators do not significantly affect the Fed's sentiment index, various aspects of animal spirits exert a notable impact. This suggests that not only is the US output gap influenced by animal spirits, but the Federal Reserve's communication is also substantially shaped by these behavioral factors. This highlights the limitations of rational expectation DSGE models and underscores the importance of incorporating behavioral insights to achieve a more nuanced understanding of economic dynamics and central bank communication. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.10938 |
| By: | Kasper Kragh Balke; Markus Karlman; Karin Kinnerud |
| Abstract: | This paper considers optimal taxation of housing capital. To this end, we employ a life-cycle model calibrated to the U.S. economy, where asset holdings and labor productivity vary across households, and tax reforms lead to changes in house and rental prices, wages, and interest rates. We find that the optimal property tax in the long run is considerably higher than today. A higher property tax leads to a reallocation from housing to business capital, which in turn increases wages and reduces interest rates. These equilibrium effects allow for an improved consumption smoothing over the life cycle, due to progressive earnings taxes and lower borrowing costs. However, most current households would incur substantial welfare losses from an implementation of a higher property tax, since house prices fall, and a majority own their home. Hence, when accounting for transitional dynamics, it is not clear that a higher property tax is feasible or preferred. |
| Keywords: | Housing, Property tax, Life cycle, general equilibrium |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bbq:wpaper:0010 |
| By: | Wright, Jacob (University of Minnesota); Zheng, Angela (McMaster University) |
| Abstract: | Across all education levels, policymakers are using the re-sorting of students to diversify the socioeconomic composition of student bodies. We study how these integration policies interact, using a heterogeneous agent overlapping generations model featuring multiple periods of human capital development. Households sort into public schools through housing location, and into college via a competitive admissions process. Quality of schools and colleges are endogenous through peer effects. At the public school level, we simulate an integration policy that randomly shifts students across schools. For college, we consider an income-based affirmative action policy. Public school integration weakens the link between residential location and school quality, increasing intergenerational mobility by 2.5%. On the other hand, the college policy decreases intergenerational mobility by 0.7%: when the high-quality college reserves seats for low-income students, it makes college more competitive, which increases sorting at the public school level. In fact, an integration policy that combines public school re-sorting and college affirmative action leads to minimal changes in upwards mobility. |
| Keywords: | intergenerational mobility, sorting, integration |
| JEL: | I2 R23 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17301 |
| By: | Annika Bacher; Philipp Grübener; Lukas Nord |
| Abstract: | This paper provides novel evidence that the added worker effect – labor force entry upon spousal job loss – is substantially stronger for young than old households. Using a life cycle model of two-member households in a frictional labor market, we study whether this age-dependency is driven by heterogeneous needs for or availability of spousal insurance. Our framework endogenizes asset and human capital accumulation, as well as arrival rates of job offers, and is diciplined against U.S. micro data. By means of counterfactuals, we find a strong complementarity across both margins: A large added worker effect requires both high spousal earnings potential (human capital) relative to the primary earner and limited access to other means of self insurance (assets). Together, both margins can account for the observed age differential in the added worker effect. The model predicts substantial crowding out of spousal labor supply by unemployment benefit extensions among young households, in line with their stronger need for spousal insurance |
| Keywords: | Unemployment, search, added worker effect, life cycle, family insurance |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bbq:wpaper:0012 |
| By: | Ángelo Gutiérrez-Daza |
| Abstract: | Empirical evidence suggests consumers rely on their shopping experiences to form beliefs about inflation. In other words, they "learn by shopping". I introduce this empirical observation as an informational friction in the New Keynesian model and use it to study its consequences for the transmission of aggregate shocks and the design of monetary policy. Learning by shopping anchors households' beliefs about inflation to its past, causing disagreement with firms over the value of the real wage. The discrepancy allows nominal shocks to have real effects and makes the slope of the Phillips curve a function of the monetary policy stance. As a result, a more hawkish monetary policy reduces the volatility and persistence of inflation, increases the degree of anchoring of households' inflation expectations, and flattens the slope of the Phillips curve of the economy. |
| Keywords: | Inflation;Inflation Expectations;Monetary Policy;Business Cycle;Informational Frictions |
| JEL: | D84 E31 E32 E52 E58 E70 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-12 |
| By: | Alexander Bick; Adam Blandin; Richard Rogerson |
| Abstract: | We document large differences in lifetime hours of work using data from the NLSY79 and argue that these differences are an important source of inequality in lifetime earnings. To establish this we develop and calibrate a rich heterogeneous agent model of labor supply and human capital accumulation that allows for heterogeneity in preferences for work, initial human capital and learning ability, as well as idiosyncratic shocks to human capital throughout the life-cycle. Our calibrated model implies that almost 20 percent of the variance in lifetime earnings is accounted for by differences in lifetime hours of work, with 90 percent of this effect due to heterogeneity in preferences. Higher lifetime hours contribute to lifetime earnings via two channels: a direct channel (more hours spent in production at given productivity) and a human capital channel (more hours spent investing in human capital, which increases future productivity). Between a third and a half of the effect of lifetime hours on lifetime earnings is due to the human capital channel. Our model implies that policies that limit long hours have important effects on both the mean and variance of lifetime earnings. |
| JEL: | D15 E20 J22 J24 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32997 |
| By: | Kasper Kragh Balke; Markus Karlman; Karin Kinnerud |
| Abstract: | This paper studies how down-payment requirements for house purchases affect households’ saving and housing decisions, and the implications for macroeconomic policy. Using a quantitative model, we find that households not only postpone homeownership when the down-payment constraint is higher, but they also delay when they start saving for the house. We show analytically that this result holds under standard assumptions for households’ earnings and preferences. The changes to saving and portfolio choices affect the distribution of liquidity-constrained households, which in turn impacts aggregate responses to policy. Specifically, the cash-flow channel of monetary policy is reduced, and it becomes increasingly important to direct fiscal transfers at low-income households to achieve the largest consumption response. We also find that a stricter down-payment requirement is associated with substantial welfare costs, especially for high-income households |
| Keywords: | down-payment requirement, heterogeneous households, housing, life cycle, loan-to-value constraint, marginal propensity to consume |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bbq:wpaper:0011 |
| By: | Timo Boppart; Per Krusell; Jonna Olsson |
| Abstract: | A production efficiency perspective naturally leads to the prescription that more productive individuals should work more than less productive individuals. Yet, systematic differences in actual hours worked across high- and low-wage individuals are barely noticeable. We highlight that the insurance available to households is an important determinant behind this fact. Using a dynamic heterogeneous-agent model with insurance frictions, income effects calibrated to match aggregate hours across time and space, and financial frictions that deliver realistic wealth dispersion, we report stark effects of insurance: perfect insurance would raise aggregate labor productivity by 9.6 percent and decrease hours worked by 7.7 percent. |
| JEL: | E0 E2 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32977 |
| By: | Pablo Garcia; Pascal Jacquinot; ÄŒrt LenarÄ iÄ; Kostas Mavromatis; Niki Papadopoulou; Niki Papadopoulou |
| Abstract: | We analyze the economic impact of the green transition in the euro area by extending the Euro Area and Global Economy (EAGLE) model with green and brown energy sectors. Energy goods are consumed as final goods by households and as inputs by intermediate goods firms. A carbon tax manifests itself as an adverse cost-push shock. Without subsidies to green energy firms, the green transition is limited to household expenditure switching towards green energy goods. When authorities direct subsidies to green energy firms a strong supply effect in the market for green energy is triggered lowering its price and boosting the intermediate good sector’s demand for green energy inputs. When carbon taxes are raised globally, the recession in the euro area deepens while inflationary pressures amplify, triggered partly by a weakening of the euro. Taxes on brown capital investment are also contractionary but lead to a decline in inflation. In this case, subsidies to investment in green capital can mitigate the recession and are essential to trigger a switch towards green energy consumption goods and inputs. |
| Keywords: | climate policy; Carbon Taxation; Monetary Policy; Fiscal Policy; Euro Area; DSGE modeling |
| JEL: | C53 E32 E52 F45 H30 Q48 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:816 |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets. These shocks differ in their induced comovements between exchange rates, interest rates, and quantities. A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand, reflected in persistent interest rate differentials, account for 75% of the variance in the dollar/G10 exchange rate. Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises. |
| JEL: | E44 F31 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32976 |
| By: | Guilio Fella; Martin B. Holm; Thomas M. Pugh |
| Abstract: | We use administrative data for Norway to estimate an incomplete-market life-cycle model of retired singles and couples with a bequest motive, health-dependent utility, and uncertain longevity and health. We allow the parameters of the bequest utility to differ between households with and without offspring. Our estimates imply a very strong utility of residual wealth (bequest motive), in line with the estimates by Lockwood (2018). The bequest motive accounts for approximately three-quarters of aggregate wealth at age 85. More surprisingly, we estimate similar utility of residual wealth for households with and without offspring. We interpret this as, prima facie, evidence that the utility of residual wealth represents forces beyond an altruistic bequest motive. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bbq:wpaper:0008 |
| By: | Ella Getz Wold; Knut Are Aastveit; Eirik Eylands Brandsaas; Ragnar Enger Juelsrud; Gisle James Natvik |
| Abstract: | We use Norwegian micro data and a life-cycle model with housing to study how wealth transmits across generations through the housing market. A mediation analysis reveals large housing gaps based on parental wealth. A shift-share IV-analysis using stock market returns supports a causal interpretation. Using the timing of intra-family deaths, we further show that housing outcomes when young are important determinants of later-in-life wealth. Nearly 15% of intergenerational wealth persistence occurs through the housing market, making housing equally important as the combined impact of parental wealth via a broad range of offspring characteristics, including income and education. |
| Keywords: | Housing market, intergenerational wealth, wealth inequality |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bbq:wpaper:0013 |