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on Dynamic General Equilibrium |
| By: | Saki Bigio; Akira Ishide |
| Abstract: | This paper reformulates the New Keynesian model to incorporate output adjustments through the extensive margin. Shifting from adjustments through the intensive to the extensive employment margin, the model introduces predetermined output, altering key properties of the New Keynesian framework. First, the Taylor principle is inverted: stability is achieved when nominal rates respond less than one-for-one with inflation. Second, the model significantly alters the output responses to changes in monetary policy. We argue that this represents a challenge and an opportunity for the literature. Sticky information allows the model to correct the sign of impulse responses. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:apc:wpaper:205 |
| By: | Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos |
| Abstract: | This paper quanti.es the future implications of repayment of bailout loans received by Greece from the EU in the previous decade. These debt obligations amount today to 240 billion euros or 70% of the country’s total public debt and have to be repaid by 2070. This is investigated in a dynamic general equilibrium model calibrated to the Greek economy, in which fiscal policy is conducted under the rules of the new fiscal governance framework and quantitative monetary policy is subject to the rules of the Eurosystem. Our simulations show that, other things equal, repayment will have recessionary implications in the years to come, although the magnitude of these unpleasant implications will depend on how much privately-held public debt rises as the EU-held public debt falls. We then search for ways to mitigate these recessionary effects. While NGEU/RRF funds as they take place at the moment, as well as a new hypothetical support from the ES in the form of more quantitative easing are found to have small and/or temporary ben-eficial effects only, our simulations show that what can really help is an improvement in total factor productivity. |
| Keywords: | international loans, fiscal policy, monetary regimes |
| JEL: | F34 E62 E42 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11519 |
| By: | Joseph E. Stiglitz |
| Abstract: | Capitalism since its inception has been marked by large fluctuations. The resulting episodic unemployment has been very costly. This paper provides an overview of alternative theories. Standard models (such as DSGE) have not provided insights into the causes of the fluctuations and the shocks buffeting the economy, which contrary to what they assume, are largely endogenous; they have not provided an understanding of how and why the economy amplifies shocks and makes their effects at times so persistent or how and why there may be oscillatory behavior, rather than a smooth convergence back to some (temporary) equilibrium. Accordingly, they do not give guidance on how to make deep downturns—those that really matter—less frequent, shallower, and less costly. By contrast, there are alternative, new models, often building on older Keynesian foundations, with heterogenous capital goods and heterogeneous agents, interacting with each other in imperfect markets and fragile networks, with endogenous innovation in an ever-evolving economy, with deep uncertainty. These theories, with endogenously driven fluctuations, provide greater insights in the causes and nature of fluctuations, and better policy guidance. |
| JEL: | C62 D84 E12 E32 E44 N30 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33218 |
| By: | Stefano Carattini; Garth Heutel; Givi Melkadze; Inès Mourelon |
| Abstract: | Transition risk – the financial stability risk related with decarbonization – is a major source of concern. The literature has so far only studied transition risk caused by carbon tax shocks. This paper explores other potential sources of transition risk: two other policy sources – subsidies to abatement or to green producers – and two preference-based sources – a shock to consumer preferences and a shock to investor preferences. We develop an environmental dynamic stochastic general equilibrium model that includes a frictional financial sector, and we consider macroprudential policy responses to transition risks. These different shocks have different effects on the possibility of transition risk and lead to different macroprudential policy implications. |
| JEL: | E32 E60 G18 Q43 Q58 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33275 |
| By: | Bergeaud, Antonin (HEC Paris); Cahuc, Pierre (National Institute of Statistics and Economic Studies (INSEE)); Malgouyres, Clément (Institut des politiques publiques (PSE)); Signorelli, Sara (Japan Science and Technology Agency (JST)); Zuber, Thomas (Banque de France) |
| Abstract: | Using French administrative data we estimate the wage gap distribution between in-house and temporary agency workers working in the same establishment and the same occupation. The average wage gap is about 3%, but the gap is negative in more than 25% of establishment × occupation cells. We develop and estimate a search and matching model which shows that while the wage gap is largely inefficient, eliminating it reduces efficiency, as it also arises from objective factors that contribute to the efficient allocation of jobs. |
| Keywords: | wage gap; temporary work agency; labor market frictions |
| JEL: | J24 J31 J64 J65 |
| Date: | 2024–07–10 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1527 |
| By: | Yakhin, Yossi |
| Abstract: | The paper introduces foreign exchange interventions (FXIs) into a standard New-Keynesian small open economy model. It solves for the optimal FXI policy, suggests an implementable policy rule, and studies the transmission mechanism of FXIs. Relying on the portfolio balance channel, deviations from the uncovered interest rate parity (UIP) reflect financial inefficiencies. Therefore, a policy rule that stabilizes the UIP premium moves the economy toward its optimal allocation, regardless of the type of shocks it faces. Augmenting the rule with foreign reserves smoothing further improves welfare. The paper discusses the conditions under which strict targeting of the UIP premium is optimal. FXIs are transmitted by affecting the UIP premium. Purchasing foreign reserves increases the UIP premium, thereby raising the effective return home agents face and depreciating the domestic currency. Consequently, domestic demand contracts and export expands. The results are robust to a variety of modeling alternatives for the financial sector. |
| Keywords: | Foreign Exchange Interventions; Policy Rule; UIP Premium; Monetary Policy; Open Economy Macroeconomics |
| JEL: | E44 E58 F30 F31 F41 G15 |
| Date: | 2024–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122948 |
| By: | Saki Bigio; Nicolas Caramp; Dejanir Silva; Dejanir H. Silva |
| Abstract: | We append the expectation of a monetary-fiscal reform into a standard New Keynesian model. If a reform occurs, monetary policy will temporarily aid debt sustainability through a temporary burst in inflation. The anticipation of a possible reform links debt levels with inflation expectations. As a result, interest rates have two effects: they influence demand and affect expected inflation in opposite directions. The expectations effect is linked to the impact of interest rates on public debt. While lowering inflation in the short term is possible through demand control, inflation tends to rise again due to its impact on inflation expectations (sticky inflation). Optimal monetary policy may allow low real interest rates after fiscal shocks, temporarily breaking away from the Taylor principle. We assess whether the Federal Reserve’s “staying behind the curve” was the right strategy during the recent post-pandemic inflation surge. |
| Keywords: | monetary policy, monetary-fiscal coordination, inflation expectations |
| JEL: | E31 E52 E63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11495 |
| By: | Andreas Irmen |
| Abstract: | A balanced growth path that accounts for a decline in hours worked per worker approximates the evolution of today’s industrialized countries since 1870. This stylized fact is explained in an OLG-model featuring two-period lived individuals equipped with per-period utility functions of the generalized log-log type proposed by Boppart and Krusell (2020) and a neoclassical production sector. Technological progress drives real wages up and expands the amount of consumption goods. The value of leisure increases, and the supply of hours worked declines. Technological progress moves a poor economy out of a regime with low wages and an inelastic supply of hours worked into a regime with high wages and a declining supply of hours worked. The balanced growth path is unique and stable. In the high wage regime, the equilibrium difference equation is available in closed form. A balanced growth path with declining hours worked may also be obtained with endogenous technological progress as in Romer (1986). |
| Keywords: | technological change, comparative economic development, endogenous labor supply, neoclassical endogenous growth, OLG-model |
| JEL: | D15 J22 O33 O41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11492 |
| By: | Moritz Drechsel-Grau; Fabian Greimel |
| Abstract: | This paper studies whether the interplay of social comparisons in housing and rising income inequality contributed to the household debt boom in the US between 1980 and 2007. We develop a tractable macroeconomic model with general social comparisons in housing to show that changes in the distribution of income affect aggregate housing demand, aggregate debt and house prices if (and only if) social comparisons are asymmetric. In the empirically relevant case of upward-looking comparisons, rising inequality can rationalize a substantial share of the observed housing and debt boom. |
| Keywords: | mortgages, housing boom, social comparisons, consumption networks, external habits, keeping up with the Joneses |
| JEL: | D14 D31 E21 E44 E70 R21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11565 |
| By: | RAJAONARISON, Njakanasandratra R. |
| Abstract: | This article assesses the effectiveness of fiscal policy in Madagascar by analyzing the impact of expansionary policies, such as increased public spending and tax cuts, on economic growth, aggregate demand, and macroeconomic stability. Using a calibrated DSGE model, the study explores how different fiscal interventions and spending affect household consumption, private investment, and national production within the context of Madagascar's structural challenges. Findings indicate that tax reductions stimulate private consumption and investment, while increases in operational spending more significantly boost national production. Error variance analysis suggests that, for Madagascar, a policy focused on public spending may be more effective than simply reducing taxes. The study concludes with recommendations for more efficient budget management to reduce reliance on external financing and promote strategic investments for economic recovery |
| Keywords: | politique budgétaire, DSGE, Madagascar |
| JEL: | E62 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122857 |
| By: | Aloisio Araujo; Juan Pablo Gama; Timothy J. Kehoe |
| Abstract: | We study the dynamic properties of the wealth distribution in an overlapping generations model with warm-glow bequests and heterogeneous attitudes towards risk. Some dynasties of agents are risk averters, and others are risk lovers. Agents can invest in two types of Lucas trees. The two types of trees are symmetric in the sense that one type has a high return in states where the other has a return of zero. This symmetry allows risk averters to perfectly ensure their future income and eliminates aggregate uncertainty in the model. Furthermore, risk lovers take extreme portfolio positions, which make it easy for us to characterize the evolution of their wealth holdings over time. We show that the model has an equilibrium in which the aggregate wealth distribution converges to a unique invariant distribution. The invariant distribution of wealth of the risk lovers has fat tails for high bequest rates. The existence of fat tails is endogenously generated by the behavior of risk lovers rather than by the exogenous existence of fat tails in the endowments or in the returns of the assets. |
| JEL: | C62 D51 D53 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33298 |
| By: | Acedański, Jan; Dąbrowski, Marek A. |
| Abstract: | This paper provides novel insights into the Feldstein-Horioka puzzle. The famous finding of Feldstein and Horioka (1980) is that despite perfect international capital mobility, domestic saving does not flow among countries to equalise yields but instead is tightly related to domestic investment. We observe that the link between empirical results and their theoretical foundations rarely goes beyond the saving-investment identity, and the research is dominated by empirical approaches coupled with advanced econometric techniques. This paper harnesses open economy macroeconomic models to demonstrate that the saving-retention coefficient informs about the relative importance of shocks rather than the degree of international capital mobility. Using the Monte Carlo experiments and the open economy RBC model, we show that the dominance of spending and foreign shocks moves the distribution of the estimated coefficient towards zero, whereas the prevalence of investment (productivity) shocks shifts the distribution towards one. On the empirical side, we proxy shocks to saving with debt and current account surprises constructed from the IMF's forecasts and employ them to instrument the saving ratio. Using the CCE estimator, we uncover that, in line with the theoretical framework, the saving-retention coefficient is significantly lower in the instrumental variable regressions than in the regressions without instruments. Finally, we replicate the puzzling finding that investment-saving correlations are higher in advanced economies than in emerging market economies only in a few regressions without instrumentation and demonstrate that the difference disappears when the endogeneity of the saving rate is adequately remedied. |
| Keywords: | Feldstein-Horioka puzzle; capital mobility; capital flows; open economy macroeconomics; saving and investment |
| JEL: | E44 F32 F41 G15 |
| Date: | 2024–11–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122800 |
| By: | Hassan Afrouzi; Andrés Blanco; Andrés Drenik; Erik Hurst |
| Abstract: | In this paper, we develop a model that combines elements of modern macro labor theories with nominal wage rigidities to study the consequences of unexpected inflation on the labor market. The slow and costly adjustment of real wages within a match after a burst of inflation incentivizes workers to engage in job-to-job transitions. Such dynamics after a surge in inflation lead to a rise in aggregate vacancies relative to unemployment, associating a seemingly tight labor market with lower average real wages. Calibrating with pre-2020 data, we show the model can simultaneously match the trends in worker flows and wage changes during the 2021-2024 period. Using historical data, we further show that prior periods of high inflation were also associated with an increase in vacancies and an upward shift in the Beveridge curve. Finally, we show that other “hot labor market” theories that can cause an increase in the aggregate vacancy-to-unemployment rate have implications that are inconsistent with the worker flows and wage dynamics observed during the recent inflationary period. Collectively, our calibrated model implies that the recent inflation in the United States, all else equal, reduced the welfare of workers through real wage declines and other costly actions, providing a model-driven reason why workers report they dislike inflation. |
| JEL: | E24 E31 J30 J63 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33233 |
| By: | Jyotsana Kala; Lucie Lebeau; Lu Wang |
| Abstract: | We study the dynamic interplay between monetary policy and market power in a decentralized monetary economy. Building on Choi and Rocheteau (2024), our key innovation is to model rent seeking as a process that takes time, allowing market power to evolve gradually. Our model predicts that a gradual reduction in the nominal interest rate causes a simultaneous increase in rent-seeking effort and producers’ market power, consistent with the stylized correlation observed in the U.S. over the last few decades. Producer entry can however reverse this relation in the short run, and neutralize it in the long run. Indeterminacy and hysteresis emerge when consumers benefit from valuable outside options, with short-run monetary policy shocks potentially locking the economy into high- or low-market-power equilibria in the long run. |
| Keywords: | search; money; market power; monetary policy |
| JEL: | D82 D83 E40 E50 |
| Date: | 2025–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99409 |
| By: | Dibiasi, Andreas (Aix Marseille University); Mikosch, Heiner (ETH Zürich); Sarferaz, Samad (ETH Zurich); Steinbach, Armin (HEC Paris) |
| Abstract: | In a novel survey, we study how German senior government officials systematically adjust fiscal policy in response to economic shocks, focusing on their fiscal responses to a contractionary monetary policy shock. Using randomized vignette treatments, we examine how officials update GDP and inflation expectations under fiscal and monetary policy shock scenarios and assess their preferred fiscal adjustments. Our findings show that officials predominantly respond by increasing debt and reducing spending, with tax increases playing a minor role, often combining multiple fiscal instruments. Counterfactual analysis reveals that officials’ reasoning aligns with key insights from the Heterogeneous Agent New Keynesian literature. |
| Keywords: | Fiscal policy; Monetary policy; Fiscal-monetary interaction; Expectation formation; Survey experiment |
| JEL: | D83 E52 E62 E63 |
| Date: | 2024–10–02 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1531 |
| By: | Stefania Albanesi |
| Abstract: | Women’s labor force participation rose rapidly in the post-war period in the United States until the mid-1990s when it flattened out. I examine the impact of this change in trend in female labor supply on aggregate business cycles both empirically and with a quantitative real business cycle model that incorporates gender differences. I show that the rise in women’s participation played a substantial role in the Great Moderation, and not allowing for gender differences leads to incorrect inference on the sources of this phenomenon. I also show that the discontinued growth in female labor supply starting in the 1990s played a substantial role in the jobless recoveries following the 1990-1991, 2001 and 2007-2009 recessions. Moreover, it reduced aggregate hours and output growth during the late 1990s and mid 2000s expansions. I also find that the growth in women’s employment added substantially to TFP growth. These results suggest that continued sustained growth in women’s employment after the early 1990s would have significantly improved economic performance in the United States. |
| Keywords: | Women's employment; Business cycles; Great moderation; Jobless recoveries |
| JEL: | E17 E32 E37 J11 J21 |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmoi:99403 |
| By: | Casas, Pablo; Christou, Tryfonas; García Rodríguez, Abián; Heidelk, Tillmann; Lazarou, Nicholas Joseph; Monfort, Philippe; Salotti, Simone |
| Abstract: | We analyse the macroeconomic impact of the European cohesion policy investments deployed during the 2014-2020 programming period on the basis of simulations carried out with the spatial dynamic general equilibrium model called RHOMOLO. We use the latest data on actual expenditures including the €50 billion falling under the REACT-EU programme extending the response to the COVID-19 crisis. We quantify the direct and indirect effects of the policy in the NUTS 2 regions of the European Union within a 20-year time frame. The results suggest that the impact of the policy is sizeable, especially in the less developed regions. Accordingly, regional disparities are shown to decrease due to the policy intervention. The investments have a positive impact on the European GDP, which is almost 0.6% higher in 2023 compared to a scenario without cohesion policy. |
| Keywords: | Cohesion policy, REACT-EU, regional growth, regional development, general equilibrium modelling. |
| JEL: | C68 R13 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122873 |