|
on Dynamic General Equilibrium |
| By: | Pauline Gandré; Margarita Rubio |
| Abstract: | Macroprudential policy is traditionally characterized by countercyclical rules responding to credit variables. In this paper, we augment macroprudential rules with additional indicators, including the credit spread. First, we empirically assess the validity of this extra variable by providing evidence on the correlation of a credit spread measure with credit booms. Then, we explicitly introduce this variable into a Dynamic Stochastic General Equilibrium (DSGE) model. We use our model to determine to which extent having countercyclical macroprudential measures also responding to credit spreads may be welfare improving, for both a capital requirement ratio (CRR) rule and a loan-to-value (LTV) rule. We find that the spread is a relevant indicator for credit-supply measures but not for borrower-based ones. For the latter, an additional response to house prices is more appropriate. We also find that the augmented rules deliver more financial stability, but at the expense of more inflation volatility, which reduces the welfare of the savers. Overall, the augmented rules improve welfare. |
| Keywords: | Credit spreads, financial stability, macroprudential policy. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcfc:2024/05 |
| By: | Hecker, Dominik; Jang, Hun; Rubio, Margarita; Verona, Fabio |
| 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: | countercyclical capital buffers, macroprudential policy, model comparison, structural models, model uncertainty, robust rule |
| JEL: | E32 E44 E47 E60 G20 G28 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:305273 |
| By: | Andrianady, Josué R. |
| Abstract: | This paper investigates the estimation of productivity and preference shocks using a DSGE model. In the absence of government and international trade, this simplified framework provides a clear view of the internal dynamics of a closed economy. We analyze the impact of these shocks on consumption, investment, and economic growth. The results indicate that productivity shocks have lasting effects, while preference shocks lead to transitory variations. These findings offer insights into the dynamics of economies without external interactions. |
| Keywords: | productivity shock, preference shock, DSGE model, closed economy, economic dynamics. |
| JEL: | C0 C02 E2 E22 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122575 |
| By: | Chamon Wieles; Jan Kwakkel; Willem L. Auping; Jan Willem van den End |
| Abstract: | We analyse shock and parameter uncertainty in a Dynamic Stochastic General Equilibrium (DSGE) model by exploratory modelling and analysis (EMA). This method evaluates in a novel way the performance of monetary policy under deep uncertainty about the shock and model parameters. Scenarios are designed based on the outcomes of interest for the policymaker. We assess the performance of different policies on their objectives in the scenarios. This maps out the policy trade-offs and supports the central bank in making robust policy decisions. We find that in response to a negative supply shock, policies with low interest rate smoothing and a strong response to inflation most obviously contribute to price stability under deep uncertainty. |
| Keywords: | Monetary policy; Scenarios; Exploratory modelling; Deep uncertainty |
| JEL: | E52 E58 G12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:818 |
| By: | Fan, Simon (Lingnan University); Pang, Yu (Macau University of Science and Technology); Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | This paper develops an overlapping generations model analyzing parenting choices from a life cycle perspective. Young parents educate their children to foster their human capital development. Strict discipline requires minimal time from parents yet but can strain intergenerational relations. Pedagogical practice preserves familial bonds but demands significant time and effort, adversely affecting parental income. As parents age, they desire caregiving support from their adult children, who may bring earlier conflicts with their parents into the care environment. We suggest that the prevalence of strict discipline declines when the probability of living into old adulthood increases. We then incorporate health investments into the model to endogenize longevity and investigate the transitional dynamics of life expectancy, parenting styles, and human capital stock. Moreover, we examine how the interaction between parenting styles and monetary transfers induces children’s provision of eldercare in a bargaining framework. We characterize multiple stationary Markov perfect equilibria, shedding light on the observed diversity in parenting across different cultures. |
| Keywords: | Parenting ; longevity ; old-age support ; human capital ; health investment |
| JEL: | I19 I21 J14 |
| Date: | 2024–06–22 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2024018 |
| By: | Nikolas Schiozer; Gilberto Tadeu Lima; Michel Alexandre |
| Abstract: | There is considerable evidence that pricing behavior is persistently heterogeneous across firms. We explore hybrid DSGE-ABM macrodynamics in which imperfectly competitive firms have limited information about market conditions and periodically revise (and possibly switch) their pricing strategies. Firms choose a pricing heuristic out of a set of alternatives including a cost-based heuristic with a standard markup, a cost-based heuristic with a quality-adjusted markup, and a heuristic of following the pricing behavior of competitors. For merely illustrative purposes, we employ the method of simulated moments to calibrate the model with quarterly data for the U.S. economy. The model qualitatively reproduces several stylized facts concerning the strategic pricing behavior of firms, such as the persistence of heterogeneity in pricing heuristics and price stickiness. Thus, embedding some tenets of the agent-based modeling (ABM) approach, such as that interacting heterogeneous firms evolutionarily learn and adapt to the environment, into a dynamic stochastic general equilibrium (DSGE) model allows it to qualitatively reproduce to a considerable extent the persistent heterogeneity in pricing behavior across firms without compromising its ability to also reproduce several stylized macroeconomic facts. |
| Keywords: | Pricing behavior; heterogeneous behavior; agent-based model; dynamic stochastic general equilibrium model |
| JEL: | C63 D21 D90 E70 |
| Date: | 2024–11–05 |
| URL: | https://d.repec.org/n?u=RePEc:spa:wpaper:2024wpecon26 |
| By: | Michael Gilraine, James Graham and Angela Zheng (Simon Fraser University) |
| Abstract: | While rising house prices are known to benefit existing homeowners, we document a new channel through which house price shocks have intergenerational wealth e ects. Using panel data from school zones within a large U.S. school district, we find that higher local house prices lead to improvements in local school quality, thereby increasing children's human capital and future incomes. We quantify this housing wealth channel using an overlapping generations model with neighborhood choice, spatial equilibrium, and endogenous school quality. We find that housing market shocks generate large intergenerational wealth effects that account for around one third of total housing wealth effects. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:sfu:sfudps:dp24-07 |
| By: | Peter Karadi; Anton Nakov; Galo Nuño; Ernesto Pastén; Dominik Thaler |
| Abstract: | We study the Ramsey optimal monetary policy within the Golosov and Lucas (2007) state-dependent pricing framework. The model provides micro-foundations for a nonlinear Phillips curve: the sensitivity of inflation to activity increases after large shocks due to an endogenous rise in the frequency of price changes, as observed during the recent inflation surge. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to reduce inflation and stabilize the frequency of price adjustments. When facing total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability, similar to the prescription in the standard Calvo (1983) model. |
| Keywords: | state-dependent pricing, large shocks, nonlinear Phillips curve, optimal monetary policy |
| JEL: | E31 E32 E52 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11372 |
| By: | Abdoulaye Ndiaye; Kyle Herkenhoff; Abdoulaye Cissé; Alessandro Dell'Acqua; Ahmadou A. Mbaye |
| Abstract: | This paper studies the welfare effects associated with the provision of unemployment insurance (UI) benefits when formal workers represent only a small proportion of the labor market and informal workers can submit fraudulent claims for UI benefits. We develop a model that incorporates these features and also allows for varying degrees of enforcement and funding sources. We then estimate the model’s key parameters by conducting a custom labor force survey in Senegal. We show that the moral hazard response to the UI benefits among workers is small and their liquidity gains are large: an extra dollar of UI benefits yields a consumption-equivalent gain of 50–80 cents, which exceeds comparable U.S. estimates by a factor of 10–20. We then show that the welfare gains depend on the program design: UI funded through payroll taxes is effective and feasible as long as the ratio of formal workers to the benefit level is sufficiently high, while UI funded through consumption taxes generally offers lower welfare benefits but is more resistant to fraudulent claims. Our study highlights the welfare importance of the design of UI financing and suggests large liquidity and consumption smoothing gains of UI in contexts with high informality and potential fraud. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11271 |
| By: | Silvana Tenreyro; Ludovica Ambrosino; Jenny Chan |
| Abstract: | How does trade fragmentation affect inflationary pressures? What is the response of monetary policy needed to sustain inflation at target? To answer these questions, we develop a heterogeneous agent, open-economy model featuring imperfect international risk-sharing. The model captures both the demand and supply side effects of fragmentation. It illustrates how the impact of fragmentation on inflationary pressures and the appropriate policy response depends not only on the direct effect of higher import prices on supply but, crucially, on how aggregate demand adjusts in response to lower real incomes and productivity stemming from fragmentation. |
| Keywords: | monetary policy, trade fragmentation, open economies, inflation, heterogeneity, globalisation |
| JEL: | F12 F15 F41 F62 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1225 |
| By: | Matías Moretti; Lorenzo Pandolfi; Mr. German Villegas Bauer; Mr. Sergio L. Schmukler; Tomás Williams |
| Abstract: | We present evidence of inelastic demand for risky sovereign bonds and explore its implications for optimal government debt policies. Using monthly changes in the composition of a major international bond index, we identify flow shocks unrelated to fundamentals that shift the available bond supply. From these shocks, we estimate an inverse demand elasticity of -0.30 and show that it increases with countries’ default risk. We formulate a sovereign debt model with endogenous default and inelastic investors, calibrated to our empirical estimates. By penalizing additional borrowing, an inelastic demand acts as a disciplining device that reduces default risk and bond spreads. |
| Keywords: | inelastic financial markets; institutional investors; international capital markets; sovereign debt |
| Date: | 2024–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/227 |
| By: | Maximilian Gödl; Isabel Gödl-Hanisch |
| Abstract: | The recent surge in inflation led many unions and firms to alter their bargaining and wage-setting policies. Using novel German firm-level survey data, we document the extent of state dependence in wage setting across firms and workers during periods of high and low inflation. We find state dependence along the extensive and intensive margins: the average duration of wage agreements shortens from 14.2 to 12.9 months, and the adjustment per pay round increases from 2-4% to 4-6%. We complement these findings with newly compiled union-level panel data on collective bargaining outcomes. We show that the observed state dependence can be rationalized in menu cost and Calvo models of wage setting with heterogeneous firms. We examine the implications of state-dependent wage setting for the long-run effects of trend inflation, the transmission of monetary policy shocks, and the slope of the Phillips curve in an otherwise standard New Keynesian model. |
| Keywords: | state-dependent wage setting, New Keynesian model, heterogeneous firms, Phillips curve |
| JEL: | E24 E31 E50 E60 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11319 |
| By: | Bhavesh Garg (Indian Institute of Technology Ropar, India) |
| Abstract: | This paper employs a two-economy model, which incorporates New Keynesian features, to examine the impact of a coronavirus disease (COVID-19) induced supply shock on economic recovery in large net oil-importing Asian countries. It examines whether and to what extent monetary and fiscal policies are effective in mitigating such supply shock risks. Our calibrations and estimations reveal that a COVID-19 induced supply shock negatively impacted both the global and domestic economies alike and delayed their economic recovery. Specifically, shocks to total factor productivity and world output negatively affected domestic macroeconomic variables such as domestic output, inflation rate, interest rate, and government expenditure, amongst others. We show that monetary and fiscal policies efficiently mitigate the adverse effects arising from the supply shock. |
| Keywords: | COVID-19, supply shock, two-economy model, NK-DSGE, monetary policy, fiscal policy |
| JEL: | C63 D58 E47 E52 E62 |
| Date: | 2023–12–22 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2023-20 |
| By: | Hanno Foerster; Tim Obermeier; Bastian Schulz |
| Abstract: | We investigate how job displacement affects whom men marry and study implications for marriage market matching theory. Leveraging quasi-experimental variation from Danish establishment closures, we show that job displacement leads men to break up if matched with low-earning women and to re-match with higher earning women. We use a general search and matching model of the marriage market to derive several implications of our empirical findings: (i) husbands’ and wives’ incomes are substitutes rather than complements in the marriage market; (ii) our findings are hard to reconcile with one-dimensional matching, but are consistent with multidimensional matching; (iii) a substantial part of the cross-sectional correlation between spouses’ incomes arises spuriously from sorting on unobserved characteristics. We highlight the relevance of our results by simulating how the effect of rising individual-level inequality on between-household inequality is shaped by marital sorting. |
| Keywords: | marriage market, sorting, search and matching, multidimensional heterogeneity |
| JEL: | D10 J12 C78 D83 J31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11387 |