|
on Dynamic General Equilibrium |
| By: | Le , Anh H. (Goethe University Frankfurt); Park , Donghyun (Asian Development Bank); Beirne , John (Asian Development Bank); Uddin, Gazi Salah (Linköping University) |
| Abstract: | This paper analyzes the effects of climate change on budgetary sustainability and inequality. Using panel data, the findings suggest that rising climate-related disaster risks raise government debt and undermine fiscal sustainability, with low-income households bearing the brunt of the impact. According to a New Keynesian Dynamic Stochastic General Equilibrium model, disaster risk generates recessions and increases inequality, particularly among “hand-to-mouth” agents. The paper also shows a considerable increase in sovereign debt due to disaster risk, and it recommends targeted transfers while cautioning against the fiscal cost of progressive taxes. |
| Keywords: | climate change; disaster risk; physical risk; heterogeneous agent; fiscal policy |
| JEL: | E20 E31 E32 E44 G12 Q54 |
| Date: | 2024–11–07 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0750 |
| By: | Leanne Nam (University of Bonn) |
| Abstract: | Unemployment leads to large and persistent income losses for workers. Higher unemployment in the labor market therefore has spillover effects on the housing market. This paper studies such spillover effects from both empirical and theoretical perspectives. Using data from the Current Population Survey (CPS), I show that a 1 percentage point increase in unemployment rate leads to a 1.55% decline in housing prices. Theoretically, I develop an overlapping generations model with a housing market. The calibrated model replicates the empirically observed spillover effect for the U.S. economy. Higher income uncertainty is the main driver of the spillover effect, rather than actual income losses. The spillover effect transmits one-third of the welfare losses of workers due to higher unemployment in the labor market to older, retired households by reducing their housing wealth. Younger workers benefit in part by buying houses at depressed prices. The magnitude of the spillover effect is shaped by the demographic structure of the population and the specific age groups affected by unemployment shocks. I find that increasing the generosity of unemployment insurance stabilizes the housing market, although it only partially mitigates the spillover effect. |
| Keywords: | Unemployment, Housing demand, Portfolio choice, Overlapping generations |
| JEL: | G11 R21 E21 E24 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:344 |
| By: | Alvaro Silva; Julian di Giovanni; Muhammed A. Yildirim (Center for International Development at Harvard University); Sebnem Kalemli-Ozcan |
| Abstract: | We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. |
| Keywords: | Russia, Ukraine, China, COVID-19, Inflation |
| Date: | 2023–11 |
| URL: | https://d.repec.org/n?u=RePEc:glh:wpfacu:224 |
| By: | Chafwehé, Boris (Bank of England); Colciago, Andrea (University of Milan-Bicocca); Priftis, Romanos (European Central Bank) |
| Abstract: | This paper introduces a New Keynesian multi-sector industry model that integrates firm heterogeneity, entry, and exit dynamics, while considering energy production from both fossil fuels and renewables. We investigate the effects of a sustained increase in fossil fuel prices on sectoral size, labour productivity, and inflation. A hike in the price of fossil resources results in higher energy prices. Due to ex-ante heterogeneity in energy intensity in production, the profitability of sectors is impacted asymmetrically. As production costs rise, less efficient firms leave the market, while new entrants must display higher idiosyncratic productivity. While this process enhances average labour productivity, it also results in a lasting decrease in the entry of new firms. A central bank with a strong anti-inflationary stance can circumvent the energy price increase and mitigate its inflationary effects by curbing rising production costs. This policy entails a higher impact cost in terms of output and lower average productivity, but leads to a faster recovery in business dynamism. Thus, our results suggest that monetary policy faces a trade-off between stabilising aggregate activity and business dynamism. |
| Keywords: | Energy; productivity; firm entry and exit; monetary policy |
| JEL: | E62 L16 O33 Q43 |
| Date: | 2024–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1091 |
| By: | Kumhof, Michael (Bank of England); Salgado-Moreno, Mauricio (Bank of England) |
| Abstract: | We develop a DSGE model in which commercial banks interact with the central bank through the reserves market, with each other through reserves and interbank markets, and with the real economy through retail loan and deposit markets. Because banks disburse loans through deposit creation, they never face financing risks (being unable to fund new loans), only refinancing risks (being unable to settle net deposit withdrawals in reserves). Permanent quantitative tightening, while reducing the equilibrium real interest rate, has significant negative effects on financial and real variables, by increasing the cost at which reserves-scarce parts of the banking sector create money. Temporary net deposit withdrawals, which affect the funding cost and loan extension of one part of the banking sector at the expense of another part, have highly asymmetric financial and real effects. The quantity and distribution of central bank reserves, and the extent of frictions in the interbank and reserves markets, critically affect the size of these effects, and can matter even in a regime of ample aggregate reserves. Countercyclical reserve injections can help to smooth the business cycle. We find that countercyclical reserve quantity rules can make sizeable contributions to welfare that can reach a similar size to the Taylor rule. |
| Keywords: | Quantitative easing; quantitative tightening; monetary policy; central bank reserves; interbank loans; bank deposits; bank loans; money demand; money supply; credit creation |
| JEL: | E51 E52 E58 |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1090 |
| By: | Blank, Michael (Stanford U); Maghzian, Omeed (Harvard U) |
| Abstract: | Should policymakers aim to directly preserve existing jobs during recessions? The answer depends on whether greater job loss exacerbates labor market frictions more than it facilitates productive labor reallocation. This paper provides new evidence on the former by examining the general equilibrium effects of job destruction—establishment-level employment contractions—on labor market conditions following recessionary shocks. To isolate these labor market spillovers from changes in local productivity, we combine administrative data on employment relationships with variation in the idiosyncratic layoff practices of large firms across local labor markets in the United States. Workers who lose their jobs when local job destruction rates are one percentage point higher than average experience a persistent $700 (1.2%) larger reduction in annual earnings, driven by lower employment in the short term and lower-paying positions in the medium term. These spillover effects account for one-third of the increased costs of job loss in recessions compared to expansions and imply that each marginal job loser imposes an annual cost of approximately $17, 000 on other workers in the same labor market. To explore policy implications, we develop a general equilibrium search model featuring heterogeneous firm productivity, endogenous separations, and human capital depreciation in unemployment. To account for the magnitude and persistence of our spillover estimates, the model requires that an increase in job loss reduces the job-finding rate, limiting workers’ human capital growth and their reallocation to more productive firms. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecl:stabus:4222 |
| By: | Peter Jorgensen; Kevin J. Lansing |
| Abstract: | We show that the fraction of non-reoptimizing firms that index prices to the inflation target, rather than lagged inflation, provides a simple measure of anchoring for short-run expected inflation in a New Keynesian model with full-information rational expectations. Higher values of the anchoring measure imply less sensitivity of rational inflation forecasts to movements in actual inflation. The approximate value of the model’s anchoring measure can be inferred from observable data generated by the model itself, as given by 1 minus the autocorrelation statistic for quarterly inflation. We show that a shift in the collective indexing behavior of firms allows the model to account for numerous features of evolving U.S. inflation behavior since 1960. |
| Keywords: | inflation expectations; Phillips Curve; Indexation (Economics); inflation persistence |
| JEL: | E31 E32 E37 |
| Date: | 2024–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99054 |
| By: | Tselmuun Tserenkhuu; Stephen Kosempel |
| Abstract: | This paper examines the effects of increased life expectancy on the short-run macroeconomic stability of a typical small open economy. We develop a real-business-cycle (RBC) model of a small open economy that is consistent with the main empirical facts of economic fluctuations in open economies. Different from the previous satisfactory open-economy extensions of the baseline RBC model, given its finite lifetimes feature, our framework also helps rationalize some of the key results from recent empirical literature on the relationship between longevity and business cycles. In our model, changes in life expectancy change the planning horizon of individuals and thus affect their intertemporal choices. Consequently, the cyclical volatilities of aggregate variables are also affected. As a numerical exercise, we quantify how increased life expectancy has impacted Canadian business cycle fluctuations over the past forty years. The results indicate that the fluctuations in physical capital, human capital, and consumption all decrease as life expectancy increases. On the other hand, the fluctuation of hours worked, output, and trade balance ratio are found to increase with life expectancy. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1263 |
| 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 |
| Date: | 2024–10–28 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2045 |
| By: | Meghana Gaur; John Grigsby; Jonathon Hazell; Abdoulaye Ndiaye |
| Abstract: | We introduce dynamic incentive contracts into a model of inflation and unemployment dynamics. Our main result is that wage cyclicality from incentives neither affects the slope of the Phillips curve for prices nor dampens unemployment’s response to shocks. The impulse response of unemployment in economies with flexible, procyclical incentive pay is first-order equivalent to that of economies with rigid wages. Likewise, the slope of the Phillips curve is the same in both economies. This equivalence is due to effort fluctuations, which make marginal costs rigid even if wages are flexible. Our calibrated model suggests that 46% of the wage cyclicality in the data arises from incentives, with the remainder attributable to bargaining and outside options. A standard model without incentives calibrated to weakly procyclical wages matches the impulse response of unemployment in our incentive pay model calibrated to strongly procyclical wages. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11273 |
| By: | Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof; Jabłońska, Julia |
| Abstract: | During the COVID-19 pandemic, governments in the euro area sharply increased spending while the European Central Bank eased financing conditions. We use this episode to assess how such a concerted monetary-fiscal stimulus redistributes welfare between various age cohorts. Our assessment involves not only the income side of household balance sheets (mainly direct effects of transfers) but also the more obscure financing side that, to a substantial degree, occurred via indirect effects (with a prominent role of the inflation tax). Using a quantitative life-cycle model, and assuming that the deficit was partly unfunded by future taxes, we document that young households benefited from the stimulus, while middle-aged and older agents mainly paid the bill. Crucially, most welfare redistribution was due to indirect effects related to macroeconomic adjustment that resulted from the stimulus. As a consequence, even though all age cohorts received significant transfers, the welfare of some actually decreased. JEL Classification: E31, E51, E52, H5, J11 |
| Keywords: | COVID-19, fiscal expansion, monetary policy, redistribution |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242998 |
| By: | Jesús Fernández-Villaverde; Galo Nuño; Jesse Perla |
| 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. |
| JEL: | C61 C63 E27 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33117 |
| By: | Christoph Görtz; Christopher Gunn; Thomas A. Lubik |
| Abstract: | We document changes to the pattern of technology shocks and their propagation in post-war U.S. data. Using an agnostic identification procedure, we show that the dominant shock driving total factor productivity (TFP) is akin to a diffusion or news shock and that shock transmission has changed over time. Specifically, the behavior of hours worked is notably different before and after the 1980s. In addition, the importance of technology shocks as a major driver of aggregate fluctuations has increased over time. They play a dominant role in the second subsample, but much less so in the first. We build a rich structural model to explain these new facts. Using impulse-response matching, we find that a change in the stance of monetary policy and the nature of intangible capital accumulation both played dominant roles in accounting for the differences in TFP shock propagation. |
| Keywords: | technology shocks, TFP, business cycles, shock transmission |
| JEL: | E20 E30 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11385 |
| By: | Kazuma Inagaki |
| Abstract: | This paper studies how investment in R&D and export technology amplifies the welfare gains from trade liberalization. I develop a dynamic heterogeneous firm international trade model with investment in productivity-enhancing R&D and export technology. I find that R&D investment combined with a dynamic export technology enhances the welfare gains from trade liberalization. I quantitatively demonstrate that the welfare gain from trade liberalization in the dynamic trade model with elastic R&D is above 30% higher than that with inelastic R&D. By contrast, in a static trade model, the elasticity of R&D has a small impact on welfare gain. These findings suggest that static trade models may provide an even poorer approximation of dynamic trade models than we thought. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1261 |
| By: | Michael P Keane (Institute for Fiscal Studies); Xiangling Liu (University of New South Wales) |
| Date: | 2024–10–21 |
| URL: | https://d.repec.org/n?u=RePEc:ifs:ifsewp:24/48 |