|
on Dynamic General Equilibrium |
| By: | Volha Audzei; Ivan Sutoris |
| Abstract: | In this paper, we investigate whether inflation-targeting monetary policy affects households' incentives to build resilience against energy price shocks. We utilize a stylized heterogeneous agent New Keynesian model with search and matching frictions in the labor market and nominal asset holdings. We modify the model to include energy in consumption and production, and energy conservation capital, so that energy price fluctuations affect both the supply and demand side of the economy. In such a framework, we study the responses of energy conservation to monetary policy, rising energy prices, and their interaction. We find that monetary policy influences energy intensity of consumption through both the intertemporal elasticity of substitution and labor market allocations. Our model predicts that a weaker policy response to rising energy prices is beneficial in terms of welfare to firm owners, borrowers and workers despite higher consumer price inflation. Such a policy stimulates energy conservation, and results in lower energy intensity and higher resilience against energy price fluctuations. We further find that a policy of looking through energy prices does not yield welfare benefits as it underreacts to consumer prices initially, but overreacts in later periods. Ramsey optimal policy predicts a strong immediate rise in the policy rate with a decline afterwards. |
| Keywords: | Distributional aspects of monetary policy, energy intensity of consumption, energy prices, heterogeneous agent New Keynesian models |
| JEL: | E12 E24 E52 Q43 Q50 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2024/4 |
| By: | Hillebrand, Elmar; Hillebrand, Marten |
| JEL: | E62 H21 H23 Q25 Q32 Q54 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302343 |
| By: | Solikin M. Juhro; Denny Lie |
| Abstract: | Should macroprudential policy be countercyclical or procyclical? Using an estimated medium-scale DSGE model with a wide array of shocks, we show that the optimal macroprudential (capital-requirement) response could be procyclical, in contrast to the standard recommendation of a countercyclical response. This finding is due to the existence of many shocks in the economy that imply a trade-off between achieving macroeconomic stability and financial stability. Our main, general finding on the possible desirability of a procyclical macroprudential policy response applies to any economy, even though the model for the analysis is fitted to the Indonesian economy. The only requirements are that there exists a shock that induces a trade-off between the two stability measures and that the objective of the policymakers is to maximize the welfare of economic agents. Under the scenario, the welfare loss from adopting a conventional, countercyclical macroprudential response could be sizeable. |
| Keywords: | monetary policy, macroprudential policy, policy mix, financial system procyclicality, capital requirement, countercyclical or procyclical policy, |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:syd:wpaper:2024-22 |
| By: | Hack, Lukas |
| Abstract: | Under nominal progressive taxation, inflation drives up tax rates if the schedule is not adjusted, leading to bracket creep. To isolate bracket creep from other sources of tax rate changes, I propose a non-parametric decomposition of changes in tax rates. Applying the decomposition to German administrative tax records, I find sizeable bracket creep episodes. While the overall importance of bracket creep has decreased over time due to institutional changes, the post-Covid inflation surge led to a resurgence. I characterize how bracket creep affects labor supply decisions in a partial equilibrium framework. Further, I estimate a theory-consistent measure of bracket creep, the indexation gap, which is used to discipline a New Keynesian model with incomplete markets. The model predicts that a given reduction in inflation via a monetary contraction leads to less output costs in an economy with bracket creep. |
| JEL: | E31 E62 H24 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302373 |
| By: | Ojasvita Bahl; Chetan Ghate; Debdulal Mallick |
| Abstract: | Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse shocks. Such interventions involve a large increase in the procurement and redistribution of agriculture output, which we refer to as a redistributive policy shock. What is the impact of a redistributive policy shock on inflation and the distribution of consumption amongst rich and poor households? We build a two-sector-two-agent NK-DSGE model (2S-TANK) to address these questions. Using Indian data, we estimate the model using a Bayesian approach. We characterize optimal monetary policy. We show that the welfare costs of redistributive policy shocks are substantially higher when non-optimized rules are used to set monetary policy in response to such shocks. |
| Keywords: | TANK models, inflation targeting, emerging market and developing economies, procurement and redistribution, NK-DSGE, welfare costs |
| JEL: | E31 E32 E44 E52 E63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-59 |
| By: | Jesús Fernández-Villaverde (University of Pennsylvania, CEPR and NBER); Kenneth T. Gillingham (Yale University and NBER); Simon Scheidegger (University of Lausanne and E4S) |
| 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. |
| Keywords: | Climate change, integrated assessment model, dynamic stochastic general equilibrium |
| JEL: | C61 E27 Q5 Q51 Q54 Q58 |
| Date: | 2024–09–09 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-024 |
| By: | Lutz Hendricks; Tatyana Koreshkova; Oksana Leukhina |
| Abstract: | This paper studies how college admissions preferences for low income students affect intergenerational earnings mobility. We develop a quantitative model of college choice with quality differentiated colleges. We find that admissions preferences substantially increase low income enrollment in top quality colleges and intergenerational earnings mobility. The associated losses of aggregate earnings are very small. |
| Keywords: | college quality; human capital; intergenerational mobility; income-based admissions |
| JEL: | J24 J31 I23 I26 |
| Date: | 2024–09–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98881 |
| By: | Vardanyan, David (Warwick University) |
| Abstract: | This paper explores the effects of automation and the creation of new tasks on labour market outcomes by incorporating the task-based production of Acemoglu and Restrepo (2018a) into a modified Diamond-Mortensen-Pissarides (DMP) search and matching framework. While the effect on wages aligns with existing literature, the introduction of search frictions offers new insights regarding effects on unemployment. Automation is found to have a dual impact: it displaces workers from routine tasks but simultaneously generates productivity gains which can offset its negative effects. The net impact on unemployment and wages depends on the relative magnitude of these displacement and productivity effects which are analytically derived in the research. In contrast, the creation of new tasks has a more uniformly positive impact, as it both enhances the productivity and reinstates displaced workers, leading to lower unemployment and higher wages. The findings suggest that policies should ensure not to promote excessive automation, where it negatively affect the labour market. In contrast, fostering innovation and task creation can be effective ways to benefiting from technological advancements. |
| Keywords: | Automation ; labour market frictions ; productivity ; technology ; unemployment JEL classifications: E22 ; E24 ; J23 ; J24 ; O33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:wrkesp:79 |
| By: | Maximiliano Dvorkin; Brian Greaney |
| Abstract: | The spatial distribution of wealth in the United States is very heterogeneous, with important differences within and across US states. We study the distribution of wealth in a country and how it is shaped by the characteristics earnings across regions, and by the frictions individuals face to move and reallocate across space. For this, we develop a tractable model of consumption, savings, and location choice with many regions, incomplete markets, and heterogeneous agents facing persistent and transitory income shocks. Our analysis focuses on the role of income shocks, precautionary savings, mobility, and sorting in shaping the geographic distribution of income and wealth over time. Our theory extends the workhorse macroeconomic model of consumption and savings under uncertainty and risk to an economy with multiple labor markets and costly mobility. Despite the complex spatial and individual heterogeneity, we can characterize the optimal consumption, savings, and mobility decisions of workers in closed form. Mobility frictions increase precautionary savings as workers hedge against sharp fluctuations in consumption generated by their mobility decisions. The spatial distribution of wealth is primarily driven by the interaction between persistent income shocks, saving behavior, and worker sorting across locations. The results highlight the importance of accounting for worker mobility and regional heterogeneity in earnings dynamics when studying the spatial distribution of wealth. |
| Keywords: | mobility; precautionary savings; spatial equilibrium; wealth; inequality |
| JEL: | R12 R23 E21 J61 F16 |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:98888 |
| By: | Michael Barnett |
| Abstract: | I study the dynamic, general equilibrium implications of climate-change-linked transition risk on macroeconomic outcomes and asset prices. Climate-change-linked expectations of fossil fuel restrictions can produce a ``run on fossil fuels'' with accelerated production and decreasing spot prices, or a ``reverse run'' with restrained production and increased spot prices. The response depends on the expected economic consequences of the anticipated transition shock, and existing climate policies. Fossil fuel firm prices decrease in each case. I use a novel empirical measure of innovations in climate-related transition risk likelihood to show that dynamic empirical responses are consistent with a ``run on fossil fuel.'' |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.00902 |
| By: | Thiel, Luzie; Schwanebeck, Benjamin |
| JEL: | E50 E52 E58 E61 F41 F45 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302405 |