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on Dynamic General Equilibrium |
| By: | Javier Bianchi; Alisdair McKay; Neil Mehrotra |
| Abstract: | A persistent rise in rents has kept inflation above target in many advanced economies. Optimal policy in the standard New Keynesian (NK) model requires policy to stabilize housing inflation. We argue that the basic architecture of the NK model—that excess demand is always satisfied by producers—is inappropriate for the housing market, and we develop a matching framework that allows for demand rationing. Our findings indicate that the optimal response to a housing demand shock is to stabilize inflation in the non-housing sector while disregarding housing inflation. Our results hold exactly in a version of the model with costless search and quantitatively in a version with housing search costs calibrated to match US data on housing tenure, vacancy rates, and the size of the real estate sector. |
| Keywords: | Housing; Monetary policy; Stabilization policy; Inflation |
| JEL: | E24 E30 E52 |
| Date: | 2024–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmwp:99022 |
| By: | Dominik Hecker; Hun Jang; Margarita Rubio; Fabio Verona |
| Abstract: | In this paper, we design countercyclical capital buffer rules that perform robustly across a wide range of Dynamic Stochastic General Equilibrium (DSGE) models. These rules offer valuable guidance for policymakers uncertain about the most appropriate model(s) for decision-making. Our results show that robust rules call for a relatively restrained response from macroprudential authorities. The cost of insuring against model uncertainty is moderate, emphasizing the practicality of following these robust countercyclical capital buffer rules in uncertain economic environments. Keywords: |
| Keywords: | countercyclical capital buffers, macroprudential policy, model comparison, structural models, model uncertainty, robust rule |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcfc:2024/04 |
| By: | Tatiana Kirsanova; Campbell Leith; Ding Liu |
| Abstract: | We develop a New Keynesian model augmented with a rich description of fiscal policy, including debt maturity structure, where two policymakers- an independent inflation-averse central bank and a (potentially) populist fiscal authority- interact strategically. Central bank independence initially improves inflation outcomes, but this results in reduced fiscal discipline and increased debt. Eventually this leads to inflation lying above pre-independence levels. Introducing a ‘flight-to-safety’ regime, which suppresses the interest rates households require to hold government debt, and a conventional regime, where their time preferences return to normal, allows us to explore how changes in the natural rate can dramatically affect debt dynamics and inflation outcomes. The model offers an explanation of the buildup of government debt since the financial crisis and the subsequent emergence of significant inflation |
| Keywords: | New Keynesian Model; Central Bank Independence; Government Debt; Monetary Policy; Fiscal Policy; Time Consistency. |
| JEL: | E31 E43 E62 E63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_10 |
| By: | Justin Bloesch; Seung Joo Lee; Jacob P. Weber |
| Abstract: | We develop a novel, tractable New Keynesian model where firms post wages and workers search on the job, motivated by microeconomic evidence on wage setting. Because firms set wages to avoid costly turnover, the rate that workers quit their jobs features prominently in the model’s wage Phillips curve, matching U.S. empirical evidence. We then examine the response of wages to cost-of-living shocks, i.e., shocks that raise the price of household’s consumption goods but do not affect the marginal product of labor. Such shocks pass through to wages only to the extent that higher cost of living improves workers’ outside options, such as competing jobs or unemployment, relative to their current job. However, higher cost of living lowers real wages at all jobs evenly, and unemployment is rarely a credible outside option. We conclude that wage posting and on-the-job search limit the scope for pass-through from prices to wages. |
| Keywords: | monopsony; inflation; cost-of-living shocks; on-the-job search |
| JEL: | E31 E52 J6 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98927 |
| By: | Bocquet, L. |
| Abstract: | How fast do labor markets adjust to technology shocks? This paper introduces a novel network-based framework to model skill frictions between occupations. Using expert data on skills, I construct a network of occupations and find it is sparse, divided in clusters of similar occupations with 'bridge occupations' linking distinct clusters. Leveraging French administrative data, I show that workers transitioning through these 'bridges' move to occupations with higher wages and lower unemployment. Next, I build a tractable model of job search with networked labor markets, and demonstrate that bridge occupations significantly affect reallocation speed, with slow reallocation creating large adjustment costs. I then augment the model with quantitative extensions, leveraging hat-algebra methods to solve counterfactuals without having to estimate large numbers of parameters. Calibrated to French data, the model predicts that robot adoption induces slow reallocation, around 40 quarters, and that this sluggish reallocation reduces welfare gains by approximately 40%- an order of magnitude higher than previous estimates. However, policies targeting bridge occupations can speed-up reallocation, and much more so than policies targeting tight occupations directly. These findings highlight the crucial role of the occupation network in shaping reallocation dynamics and provide new insights for the design of labor market policies. |
| Date: | 2024–10–28 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2427 |
| By: | Sebastian Heise; Jeremy Pearce; Jacob P. Weber |
| Abstract: | Good measures of labor market tightness are essential to predict wage inflation and to calibrate monetary policy. This paper highlights the importance of two measures of labor market tightness in determining wage growth: the quits rate, and vacancies per effective searcher (V/ES)—where searchers include both employed and non-employed job seekers. Amongst a broad set of indicators of labor market tightness, we find that these two measures are independently the most strongly correlated with wage inflation and also predict wage growth well in out-of-sample forecasting exercises. Conversely, transitory shocks to productivity have little impact on wage growth. Finally, we find little evidence of a nonlinearity in the relationship between wage growth and labor market tightness. These results are generally consistent with the predictions of a New Keynesian DSGE model where firms have the power to set wages and workers search on the job (Bloesch, Lee, and Weber, 2024). |
| Keywords: | Phillips curve; wage-inflation Phillips curve; labor market slack; labor market tightness; on-the-job search |
| JEL: | E3 J6 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:98935 |
| By: | Jésus Fernández-Villaverde; Kenneth T. Gillingham; Simon Scheidegger; Jesús Fernández-Villaverde; Kenneth Gillingham |
| 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 Q50 Q51 Q54 Q58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11346 |
| By: | Servaas Storm (Delft University of Technology) |
| Abstract: | Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that "we don't think that the recent experience justifies throwing out existing models of wage-price dynamics." This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses. |
| Keywords: | Inflation; science of monetary policy; output gap; unemployment gap; vacancy ratio; inflation expectations; wage-price spiral; non-linear Phillips curve. |
| JEL: | E0 E5 E6 E62 O23 I12 J08 |
| Date: | 2024–03–29 |
| URL: | https://d.repec.org/n?u=RePEc:thk:wpaper:inetwp220 |
| By: | Fleischhacker, Jan |
| Abstract: | In this paper, I explore how fiscal policy decisions relate to the business cycle and, building on that, how the effects of policy interventions may vary depending on when policy is conducted in the business cycle. To assess this, I estimate a small to medium-sized DSGE model with expressive non-linear fiscal and monetary rules using a higher-order approximation. The estimation procedure employed in this paper combines several existing approaches developed by Herbst and Schorfheide (2016), Jasra et al. (2010), Buchholz, Chopin and Jacob (2021) and Amisano and Tristani (2010) to trade off computation time and inference quality. The model is estimated using Sequential Monte Carlo techniques to estimate the posterior parameter distribution and particle filter techniques to estimate the likelihood. Together, the estimation procedure reduces the estimation from weeks to days by up to 94%, depending on the comparison basis. To assess the behaviour of the effects of fiscal policy interventions, I sample impulse responses conducted along the historical data. The results present time-varying policy rules in which the effects of fiscal shocks go through deep cycles depending on the initial conditions of the economy. Among the set of fiscal instruments, government consumption goes through the most persistent cycles in its effectiveness in stimulating output. In particular, the effects of government consumption stimulus are estimated to be more effective during the financial crisis and, later, the Covid crisis, while being less effective in periods of above steady state output like the early 2000s. Relating the effects of specific stimulating shocks to the initial conditions using regression techniques, I show that fiscal policy is more effective at stimulating output if the interest rate and debt are low. Furthermore, the effects of government consumption are estimated to be increasing in output while tax cuts are decreasing. As a last contribution, I explore how the behaviour of the central bank and government varies depending on the business cycle by analysing sampled policy rule gradients constructed on historical data. For the central bank, the results show that in phases of high output growth, the central bank puts more emphasis on controlling inflation and less on output. As the economy shifts into crisis, the central bank reduces its focus on inflation and shifts towards bringing output growth back to target. For the fiscal side, the behaviour is heavily governed by the current debt level, and, for example, during the high debt periods of the 1990s, labour taxation became increasingly responsive to debt to stabilize the budget. |
| Keywords: | DSGE fiscal policy non-linear state-space business cycle particle filter bayes SMC MH RWMH Kalman state-dependend |
| JEL: | C1 C11 C4 C5 C6 E62 |
| Date: | 2024–10–23 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122497 |
| By: | Pascal Michaillat |
| Abstract: | Immigration is often blamed for increasing unemployment among local workers. However, standard models, such as the neoclassical model and the Diamond-Mortensen-Pissarides matching model, inherently assume that immigrants are absorbed into the labor market without affecting local unemployment. This paper presents a more general model of migration that allows for the possibility that not only the wages but also the unemployment rate of local workers may be affected by the arrival of newcomers. This extension is essential to capture the full range of potential impacts of labor migration on labor markets. The model blends a matching framework with job rationing. In it, the arrival of new workers can raise the unemployment rate among local workers, particularly in a depressed labor market where job opportunities are limited. On the positive side, in-migration helps firms fill vacancies more easily, boosting their profits. The overall impact of in-migration on local welfare varies with labor market conditions: in-migration reduces welfare when the labor market is inefficiently slack, but it enhances welfare when the labor market is inefficiently tight. |
| JEL: | E24 E32 J2 J6 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33047 |
| By: | Josep Pijoan-Mas (CEMFI AND CEPR); Pau Roldan-Blanco (BANCO DE ESPAÑA, CEMFI AND UNIVERSIDAD AUTÓNOMA DE BARCELONA) |
| Abstract: | We study the effects of dual labor markets (i.e. the co-existence of fixed-term and open-ended contracts) on the allocation of workers within and across firms, the equilibrium distribution of firms, aggregate productivity, and welfare. Using rich Spanish administrative data, we document that the use of fixed-term contracts is very heterogeneous across firms within narrowly defined sectors. In particular, there is a strong relationship between the share of temporary workers and firm size, which is positive when looking at within-firm variation but negative when looking at the variation between firms. To explain these facts, we use a directed search model of multi-worker firms, with ex-ante firm heterogeneity in technology types, and ex-post firm heterogeneity in transitory productivity, the composition of employment by contract type (fixed-term or open-ended) and human capital accumulated on the job. In counterfactual exercises, we find that limiting the use of fixed-term contracts decreases the share of temporary employment and increases aggregate productivity, but it also reduces total employment and leads to an overall decline in total output and welfare. The increase in productivity comes from an improved selection of firms, which more than offsets an increased misallocation of workers across firms. |
| Keywords: | dual labor markets, temporary contracts, firm dynamics, unemployment |
| JEL: | D83 E24 J41 L11 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2442 |
| By: | Mistak, Jakub; Ozkan, F. Gulcin |
| Abstract: | This paper examines the asymmetry in global spillovers from Fed policy across tightening versus easing episodes several examples of which have been on display since the global financial crisis (GFC). We build a dynamic general equilibrium model featuring: (i) occasionally binding collateral constraints in the financial sector with significant cross-border exposure; and (ii) global supply chains, allowing us to match the asymmetry of spillovers across contractionary versus expansionary monetary policy shocks. We find clear asymmetries in the transmission of US monetary policy, with significantly larger spillovers during contractionary episodes under both conventional and unconventional monetary policy changes. Our results also reveal that the greater the size of international credit and supply chain networks and the policymakers’ aversion to exchange rate fluctuations in the rest of the world, the greater the spillover effects of US monetary policy shocks. JEL Classification: E52, F41, E44 |
| Keywords: | capital flows, emerging markets, monetary policy, spillovers, supply chains |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242995 |
| By: | Kirill Moiseev |
| Abstract: | In countries with a growing number of elderly and a shrinking workforce, one of which is Russia, it becomes impossible to maintain a solidary pension system and a need to switch to a more stable funded system appears. This paper analyzes various scenarios of Russia's transition to such a system. This is the first study on the Russian economy in which an Overlapping Generations Model is used to simulate the pension transition. It is demonstrated that in the long term, the transition to a funded system slightly reduces the welfare of pensioners, and during the transition, the situation of pensioners deteriorates strongly. However, it is also important to emphasize that the transition imposes a heavy burden on all generations living during the reform, they are forced to consume less and greatly change their savings, while also often starting to work more. Such conclusions are made concerning average population cohorts, and the results may not be the same for different groups of individuals within these cohorts. In different scenarios, the pension system transition can cause both economic growth and economic recession, as well as a corresponding increase or decrease in wages and consumption. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.14004 |
| By: | Jesús Fernández-Villaverde (University of Pennsylvania, CEPR and NBER); Galo Nuno (Banco de Espana, CEPR, CEMFI); Jesse Perla (University of British Columbia) |
| Abstract: | We argue that deep learning provides a promising avenue for taming the curse of dimensionality in quantitative economics. We begin by exploring the unique challenges posed by solving dynamic equilibrium models, especially the feedback loop between individual agents’ decisions and the aggregate consistency conditions required by equilibrium. Following this, we introduce deep neural networks and demonstrate their application by solving the stochastic neoclassical growth model. Next, we compare deep neural networks with traditional solution methods in quantitative economics. We conclude with a survey of neural network applications in quantitative economics and offer reasons for cautious optimism. |
| Keywords: | Deep learning, quantitative economics |
| JEL: | C61 C63 E27 |
| Date: | 2024–10–29 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-034 |
| By: | Steven J. Davis; Pawel Krolikowski |
| Abstract: | Using innovative longitudinal data from a survey of unemployment insurance (UI) recipients, we test several implications of a canonical job search model for reservation wages during unemployment spells. First, consistent with the model, we find that reservation wages fall faster when UI benefit durations are shorter. However, workers set their initial reservation wages higher, and adjust them slower, relative to model predictions. Second, workers' expectations—elicited at the beginning of their unemployment spell—about how their reservation wage will evolve if they remain unemployed are largely congruent with reservation wage realizations, as assumed in the canonical model. Third, our data on expectations and realizations suggest that dynamic selection over the unemployment spell is inconsequential for our results. Fourth, higher wages on workers' lost jobs, relative to predictions from a Mincerian wage regression, hasten the expected and realized declines in reservation wages over the unemployment spell. Finally, reservation wages are a more powerful predictor of re-employment wages than wages on the previous job. |
| Keywords: | job search; unemployment benefits; survey of job losers; worker expectations |
| JEL: | E24 J31 J63 J64 |
| Date: | 2024–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99015 |
| By: | Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan |
| Abstract: | We show that standard menu cost models cannot simultaneously reproduce the dispersion in the size of micro-price changes and the extent to which the fraction of price changes increases with inflation in the U.S. time-series. Though the Golosov and Lucas (2007) model generates fluctuations in the fraction of price changes, it predicts too little dispersion in the size of price changes and therefore little monetary nonneutrality. In contrast, versions of the model that reproduce the dispersion in the size of price changes and generate stronger monetary non-neutrality predict a nearly constant fraction of price changes. |
| Keywords: | Menu costs; Inflation; Fraction of price changes |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-76 |
| By: | Edgar Avalos; Jose Maria Barrero; Elwyn Davies; Leonardo Iacovone; Jesica Torres |
| Abstract: | We study business uncertainty in high- versus low-volatility environments by surveying over 31, 000 managers across 41 countries. We elicit subjective probability distributions for future own-firm sales and measure firm-level uncertainty with their mean absolute deviations. Analogously, we measure realized volatility using absolute forecast errors. We establish two new facts. (1) Subjective uncertainty and realized volatility both decline with GDP per capita. (2) Managers underestimate volatility everywhere (they are overprecise), but more so in low-volatility rich countries. We build a heterogeneous-firm dynamic model and show that our facts imply larger TFP gaps between the US and developing/emerging economies. In the model, high volatility generates investment and growth opportunities in poor countries. But high uncertainty and low overprecision slow reallocation and pull down poor-country output. Quantitatively, the volatility effect dominates, so we infer 30 to 40% lower TFP in poor countries to reconcile their high volatility and low GDP per capita. |
| Keywords: | managers, uncertainty, volatility, aggregate TFP, real options, development accounting |
| JEL: | D84 G31 G32 E22 E23 O11 D25 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11368 |