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on Dynamic General Equilibrium |
| By: | Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott |
| Abstract: | We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll-over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). Unconventional monetary policy, which operates through long-term interest rates, has larger effects on debt maturity but smaller effects on output and inflation than conventional monetary policy. |
| Keywords: | Monetary policy; Investment; Corporate debt; Debt maturity |
| JEL: | E32 E44 E52 |
| Date: | 2024–12–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1402 |
| By: | Jean-Guillaume Sahuc; Frank Smets; Gauthier Vermandel |
| Abstract: | Climate change confronts central banks with two inflationary challenges: climateflation and greenflation. We investigate their implications for monetary policy by developing and estimating a tractable nonlinear New Keynesian Climate model featuring climate damages and mitigation policies for the global economy. We find that mitigation policies aligned with the Paris Agreement result in higher, more persistent inflation than laissez-faire policies. Central banks can attenuate this inflationary pressure by accounting for the rising natural rate of interest, at the cost of lower GDP during the transition. This short-term trade-off ensures long-term macroeconomic stability resulting from a net-zero emission world. |
| Keywords: | Climate change, inflation, monetary policy, E-DSGE model, Bayesian estimation, stochastic growth |
| JEL: | E32 E52 Q50 Q54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-1 |
| By: | Jean-Guillaume Sahuc; Loick Dubois; Gauthier Vermandel |
| Abstract: | We study the general equilibrium effects of carbon permit banking during the transition to a climate-neutral economy by 2050. To this end, we develop an environmental dynamic stochastic general equilibrium model, in which the business sector is regulated by a generic emission trading system (ETS). Firms are authorized to transfer unused permits from one period to the next (banking), but the reverse direction (borrowing) is prohibited. Allowing for positive banking gives firms the opportunity to smooth their permit demand along the business cycle. Applications inspired by recent European Union-ETS regulations underscore the critical role of permit banking in shaping policy outcomes. For example, the 2023 cap reform would result in a more significant reduction in both permit banking and carbon emissions, as well as a 40% to 50% increase in the carbon price compared to pre-reform projections, without substantial additional GDP loss by 2060. Importantly, forgetting about permit banking when assessing cap policies would lead to both a significant underestimation of the total macroeconomic effects and an inaccurate representation of the carbon emission trajectory. |
| Keywords: | Emission trading systems, cap policies, carbon permit banking, environmental real business cycle model, occasionally-binding constraints, nonlinear estimation |
| JEL: | C32 E32 Q50 Q52 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-5 |
| By: | Aleksandar Vasilev (Lincoln International Business School, UK) |
| Abstract: | Habits in leisure ala Kydland and Prescott (1982) are introduced into a real-business-cycle setup augmented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2022). The quantitative importance of the presence of habits in leisure is investigated for cyclical fluctuations in Bulgaria, and the ability of this extension to address the wage-hours puzzle in particular. The quantitative effect of habits in leisure is found to be small, and often working in the wrong direction. Hours and wages vary much less than in data, wages are more pro-cyclical, and hours are counter-cyclical. Habits in leisure mechanism is thus not a good candidate to solve the hours-wages puzzle in business cycle literature. |
| Keywords: | business cycles, habits in leisure, Bulgaria |
| JEL: | E24 E32 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:sko:wpaper:bep-2025-01 |
| By: | Christopher J. Erceg; Jesper Lindé; Mathias Trabandt |
| Abstract: | A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments. We develop a macroeconomic model with nonlinear price and wage Phillips curves, endogenous intrinsic indexation and an unobserved components representation of a cost-push shock that is consistent with these observations. In our model, a persistent large adverse supply shock can lead to a persistent inflation surge while output expands if the central bank follows an inflation forecast-based policy rule and thus abstains from hiking policy rates for some time as it (erroneously) expects inflationary pressures to dissipate quickly. A standard linearized formulation of our model cannot account for these observations under identical assumptions. Our nonlinear framework implies that the standard prescription of "looking through" supply shocks is a good policy for small shocks when inflation is near the central bank's target, but that such a policy may be quite risky when economic activity is strong and large shocks drive inflation well above target. Moreover, our model implies that the economic costs of "going the last mile" – i.e. a tight stance aimed at returning inflation quickly to target – can be substantial. |
| Keywords: | Inflation Dynamics; New Keynesian Model; Inflation Risk; Monetary Policy; Linearized Model; Nonlinear Model; State-Dependent Pricing |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/260 |
| By: | Miroslav Gabrovski; Ioannis Kospentaris; Victor Ortego-Marti (Department of Economics, University of California Riverside) |
| Abstract: | This paper develops a housing search model to analyze the role of realtors in fa- cilitating transactions and shaping housing market liquidity. Motivated by the recent landmark settlement between the National Association of Realtors and home sellers’ associations, we contrast two market structures: a directed search equilibrium, where sellers post prices and fees, and a random search equilibrium, where matched agents bargain the terms of trade bilaterally. A comparison between the two models suggests that the settlement may have unintended consequences that lower buyers’ welfare: ran- dom search features 2.5% higher prices, 17% lower sales, and 23% fewer buyers entering the market than the directed search equilibrium. Our results highlight the importance of explicitly considering realtor entry and market liquidity for a comprehensive evalu- ation of housing market reforms. |
| Keywords: | Housing market; Search and matching; Housing Market Liquidity; Directed Search; Random Search |
| JEL: | E2 E32 E44 G21 R21 R31 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ucr:wpaper:202410 |
| By: | Ludwig, Alexander; Mankart, Jochen; Quintana, Jorge; Wiederholt, Mirko |
| Abstract: | Expectations are central for housing decisions and heterogeneity in expectations is a robust feature of survey data. We study the implications of heterogeneity in house price growth expectations for the level of house prices. We feed the joint empirical distributions of income, wealth and expectations into a calibrated heterogeneous agents housing model. We find that eliminating heterogeneity in house price growth expectations would raise average house prices and amplify house price fluctuations thereby reducing the fit of the model. Without heterogeneity, average house prices would be about 11 percent higher and the boom-bust cycle would be about 41 percent larger. |
| Keywords: | Housing, survey expectations, house price cycles, life-cycle model |
| JEL: | D14 D84 D31 E21 E30 G21 R21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:safewp:306360 |
| By: | Huixin Bi; Andrew Foerster; Nora Traum |
| Abstract: | Central bank asseUsing a two-country monetary-union framework with financial frictions, we study sovereign default and liquidity risks and quantify the efficacy of asset purchases. Default risk increases with government indebtedness and shifts in the fiscal limit perceived by investors. Liquidity risks increase when the default probability affects credit market tightness. The framework indicates that shifts in fiscal limits, more than rising government debt, played a crucial role for Italy around 2012. While both default and liquidity risks can dampen economic and financial conditions, the model suggests that the magnifying effect from liquidity risks can be more consequential. In this context, asset purchases can stabilize economic conditions especially under scenarios of elevated financial stress.t purchases can effectively stabilize economic conditions, especially in scenarios of elevated financial stress. |
| Keywords: | Monetary and fiscal policy interaction; unconventional monetary policy; Regime-Switching Models |
| JEL: | E58 E63 F45 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:99294 |
| By: | Katrina Borovickova; Robert Shimer |
| Abstract: | We develop a random search model with two-sided heterogeneity and match-specific productivity shocks to explain why high-productivity workers tend to work at high-productivity firms despite low-productivity workers gaining about as much from such matches. Our model has two key predictions: i) the average log wage that a worker receives is increasing in the worker's and employer's productivity, with low-productivity workers gaining proportionally more at high-productivity firms and ii) there is assortative matching between a worker's productivity and that of her employer. Selective job acceptance drives these patterns. All workers are equally likely to meet all firms, but workers have higher surplus from meeting firms of similar productivity. The high surplus meetings result in matches more frequently, generating assortative matching. Only the subset of meetings that result in matches are observed in administrative wage data, shaping wages. We show that our findings are quantitatively consistent with recent empirical results. Moreover, we prove this selection is not detected using standard empirical approaches, highlighting the importance of theory-guided empirical work. Our results imply that encouraging high-wage firms to hire low-wage workers may be less effective at reducing wage inequality than wage patterns suggest. |
| Keywords: | Assortative matching; labor market |
| Date: | 2024–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99249 |
| By: | Assa Cohen; Mahyar Kargar; Benjamin Lester; Pierre-Olivier Weill |
| Abstract: | We develop a search-theoretic model of a dealer-intermediated over-the-counter market. Our key departure from the literature is to assume that, when a customer meets a dealer, the dealer can sell only assets that it already owns. Hence, in equilibrium, dealers choose to hold inventory. We derive the equilibrium relationship between dealers’ costs of holding assets on their balance sheets, their optimal inventory holdings, and various measures of liquidity, including bid-ask spreads, trade size, volume, and turnover. Using transaction-level data from the corporate bond market, we calibrate the model to quantitatively assess the impact of post-crisis regulations on dealers’ inventory costs, liquidity, and welfare. |
| Keywords: | Over-the-counter markets; intermediation; liquidity; dealer inventory; financial regulation |
| JEL: | G11 G12 G21 |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:99245 |
| By: | Munseob Lee; Claudia Macaluso; Felipe Schwartzman |
| Abstract: | Our paper addresses the heterogeneous effects of monetary policy on households of different races. The cyclical volatility of real income differs significantly for households of different races and income levels, reflecting differential exposure to fluctuations in employment and consumer prices. All Black households are disproportionately affected by employment fluctuations, whereas price volatility is only particularly pronounced for Black households with income above the national median. The latter face 40 percent higher price volatility than both poorer households of the same race and white households of similar income. To evaluate the effects of policy, we propose a New Keynesian framework with heterogeneous exposure to employment and price volatility. We find that an accommodative monetary stance generates asymmetric outcomes within race groups. Low-income households experience unemployment stabilization benefits, while high-income ones incur real income volatility costs. Differences are especially large among Black households. Reducing the volatility of unemployment by 1 percentage point engenders a 1.17 percentage point reduction in overall income volatility for poorer Black households, but an increase of 0.6 percentage points in income volatility for richer Black households. |
| Keywords: | inflation; monetary policy; Employment and labor markets; economic inequality |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99275 |