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on Dynamic General Equilibrium |
| By: | Ken-ichi Hashimoto (Kobe University); Ryonghun Im (Kwansei Gakuin University); Takuma Kunieda (Kwansei Gakuin University); Akihisa Shibata (Kyoto University) |
| Abstract: | By applying a simple dynamic general equilibrium model without exogenous shocks inhabited by infinitely lived capitalists and workers, we show that a higher degree of relative risk aversion can destabilize an economy. In traditional real business cycle (RBC) theory, a higher degree of relative risk aversion dampens the amplitude of the consumption fluctuations caused by exogenous shocks through consumption smoothing. However, a higher degree of relative risk aversion combined with a high degree of elasticity of the marginal product of capital can also lead to the emergence of a nonlinear mechanism that causes endogenous business fluctuations. The nontrivial steady state loses stability due to the higher degree of relative risk aversion; thus, endogenous business fluctuations can occur. This result suggests that for a deeper understanding of boom-bust cycles, researchers should merge exogenous and endogenous business fluctuations when investigating economies. |
| Keywords: | Automation; endogenous business fluctuations, relative risk aversion, dynamic general equilibrium, instability. |
| JEL: | E1 E2 E3 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1110 |
| By: | Yasutaka Ogawa (Keio University, Economics) |
| Abstract: | In this paper, I quantify the effects of the increase in part-timers on the flattening wage Phillips curve in Japan. Specifically, I formulate the New Keynesian DSGE model which explicitly incorporates two different types of labour forces, which are fulltime labour and part-time labour, and their unemployment considering the structural change of the increase in part-timers. I employ estimation with Japan’s data using Bayesian techniques and obtain plausible results for structural and policy parameters. Then I do a counterfactual simulation without the structural change and compare it with baseline estimation. I find that roughly 30% of the wage Phillips curve flattening in Japan has been ascribed to the increase in part-timers. |
| Keywords: | wage Phillips curve, wage growth, unemployment, DSGE models, structural change |
| JEL: | C51 E24 E31 L16 |
| Date: | 2024–12–26 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:2024-028 |
| By: | Pawel Krolikowski; Andrew H. McCallum |
| Abstract: | We study uniform tariffs in a general equilibrium dynamic model with search frictions between heterogeneous exporting producers and importing retailers. We analytically characterize unilateral import tariffs that maximize domestic welfare. Search frictions lower these tariffs because of market thickness effects, which reinforce aggregate production nonconvexities. A calibration using 2016 U.S. and Chinese data suggests that optimal U.S. unilateral and Nash equilibrium tariffs with baseline search frictions are 10 ppt. below those in a model with reduced search frictions. Changes in welfare in response to changes in tariffs are smaller in the model with baseline search frictions than in the model with reduced frictions. In the Nash equilibrium with baseline search frictions, U.S. (Chinese) tariffs are 17 (8) ppt. higher and welfare is 0.1 (0.9) percent lower relative to 2016 tariff levels. |
| Keywords: | optimal tariffs; trade policy; efficiency; search; welfare; social planner |
| JEL: | C78 D62 D83 F12 F13 |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99459 |
| By: | Stefan Wöhrmüller |
| Abstract: | This paper studies how credit shocks affect the pass-through of idiosyncratic productivity shocks to consumption. Using a heterogeneous-agent incomplete-markets model I simulate two different credit shock dynamics as observed in credit panel data, a permanent and a mean-reverting one, and measure consumption insurance along the entire transition path. I show that consumption insurance against idiosyncratic productivity shocks drops on impact for both kind of credit shocks, while they imply qualitative different consumption insurance paths in the medium run. Importantly, I find that these paths differ by current wealth holdings. Asset-poor households experience the largest decrease in consumption insurance, whereas asset-rich households actually have access to more consumption insurance subsequent to a credit shock. Finally, endogenous labor supply attenuates these dynamics. |
| Keywords: | consumption insurance; credit shocks; incomplete markets |
| JEL: | D31 D52 E21 E44 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:825 |
| By: | Masashige Hamano (Waseda university, Tokyo, JP and Université du Luxembourg (Extramural Research Fellow)); Yuki Murakami (Waseda University, Tokyo, JP) |
| Abstract: | This paper characterizes the optimal government spending policy in a collateral- constrained small open economy, where inefficiencies in borrowing decisions arise due to pecuniary externalities. In this setting, government spending plays a crucial role in maintaining financial stability. When the borrowing constraint binds, the optimal response involves fiscal stimulus, which mitigates the effects of pecuniary externalities and prevents the amplification of the debt-deflation mechanism. The optimal time-consistent policy helps prevent recessionary shocks from triggering financial crises and sharp reversals in the current account. Additionally, when capital controls are optimally combined with government spending, households are incentivized to accumulate precautionary savings more effectively. The welfare gain from capital controls is smaller when government spending is optimally chosen. We demonstrate that a feasible government spending policy, which maintains a constant ratio to GDP, approximates the optimal policy and achieves a second-best outcome. |
| Keywords: | Small open economy; financial crises; optimal government spending. |
| JEL: | F41 F44 E44 G01 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:luc:wpaper:25-02 |
| By: | Ávila-Montealegre, Oscar; Bauhoff, Sebastian; Botero, Jesús; Giles Álvarez, Laura; León-Moncada, Santiago; Larrahondo, Cristhian; Lozano-Espitia, Luis Ignacio; Melo-Becerra, Ligia Alba; Ortiz-Hoyos, José Luis; Rodríguez-Ávila, Jesús |
| Abstract: | This study analyzes the macroeconomic and fiscal effects of greater efficiency in medicines procurement in Colombia, using both static (computable) and dynamic general equilibrium models. The findings indicate that implementing an efficient drug procurement policy could reduce the total health system spending, with potential savings of up to 8.4% in the short term and up to 10.8% in the long term. These savings could be reinvested within the health system, allocated to other sectors, or used to reduce tax burden on capital, consumption, or social contributions. The latter option would increase production by up to 1.1%, investment by 1.7% and consumption by 0.8%. Potential measures to achieve such efficiency gains include promoting and purchasing generic drugs, conducting joint procurement, and implementing price regulation. |
| Keywords: | Medications; Health expenditure; Health system; Colombia; Taxes; General equilibrium models; Pharmaceutical policy |
| JEL: | C68 D58 E26 H21 H51 I11 I18 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:rie:riecdt:110 |
| By: | Axelle Ferriere (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Gaston Navarro (Federal Reserve Board) |
| Abstract: | Historically, large changes in U.S. government spending induced fiscal efforts that were not all alike, with some using more progressive taxes than others. We develop a heterogeneous-agent New Keynesian model to analyse how the distribution of taxes across households shapes spending multipliers. The model yields empirically realistic distributions in marginal propensities to consume and labour elasticities, which result in lower responsiveness to tax changes for higher-income earners. In turn, multipliers are larger when spending is financed with higher tax progressivity—that is, when the tax burden falls more heavily on higher-income earners. This result is historically material. We estimate that, on average, tax rates increased more for top-income than for bottom-income earners after a spending shock. Thus, the typical U.S. spending shock was financed with higher tax progressivity. We further exploit the historical variation in the financing of spending to estimate progressivity-dependent multipliers, which we find consistent with the model. |
| Keywords: | Fiscal stimulus, Government spending, Transfers, Heterogeneous agents |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04849051 |
| By: | Lino Galiana (Institut national de la statistique et des études économiques (INSEE)); Lionel Wilner (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper embeds a structural model of private wealth accumulation over the life cycle within a dynamic microsimulation model designed for long‐run projections of pensions. In such an environment, the optimal savings path results from consumption smoothing and bequests motives, on top of the mortality risk. Preferences are estimated based on a longitudinal wealth survey through a method of simulated moments. Simulations issued from these estimations replicate quite well a private wealth that is more concentrated than labor income. They enable us to compute "augmented" standards of living including capital income, hence to quantify both the countervailing role played by private wealth to earnings dropout after retirement and the impact of the mortality risk in this regard. |
| Keywords: | Microsimulation, Intertemporal Consumer Choice, Life-cycle, Inequality, C63 C88 D15 Microsimulation Intertemporal Consumer Choice Life-cycle Inequality, C63, C88, D15 Microsimulation |
| Date: | 2024–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04799408 |
| By: | Saki Bigio; Nicolas Caramp; Dejanir 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. |
| JEL: | E31 E52 E63 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33190 |
| By: | Gauti B. Eggertsson; Finn D. Schüle |
| Abstract: | In standard New Keynesian models, future interest rate cuts have larger effects than current cuts—this is called the forward guidance puzzle. We argue that the forward guidance puzzle is not a puzzle. We show the puzzle arises from an implausibly large monetary regime change, exceeding anything in U.S. history since the Great Depression. By calibrating our model to four regime changes during the U.S. Great Depression, disciplined by changes in long-term bond yields, we find the model’s predictions are broadly consistent with historical data. |
| JEL: | E40 E5 E50 N0 N12 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33180 |
| By: | Yuki Uchida (Faculty of Economics, Seikei University); Tetsuo Ono (Graduate School of Economics, Osaka University) |
| Abstract: | This study examines the limitations of political equilibrium in fiscal policy formation by short-sighted governments that represent only the currently living generations, as compared to an allocation determined by a long-lived planner who values both current and future generations. Using an overlapping-generations model calibrated to Germany, Japan, and the United Kingdom, we evaluate the role of the Golden Rule of Public Finance (GR), which restricts deficit financing to public investment. The findings reveal that (i) reduced GR compliance shifts fiscal burdens from middle-aged voters to future generations and older adults, resulting in spillover effects; (ii) GR compliance is significantly influenced by the elasticity of public capital to investment, preferences for public goods, and GDP growth rates; and (iii) non-compliance with the GR causes political equilibrium to diverge from the planner’s optimal allocation. |
| Keywords: | Fiscal Rule; Golden Rule of Public Finance; Probabilistic Voting; Overlapping Generations; Political Distortions |
| JEL: | D70 E62 H63 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:osk:wpaper:2501 |
| By: | Katarína Borovičková; 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. |
| JEL: | J31 J64 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33184 |
| By: | Dück, Alexander; Verona, Fabio |
| Abstract: | We offer a contribution to the analysis of optimal monetary policy. The standard approach to determine what policy rule a central bank should follow is to take a single structural model and minimize the unconditional volatilities of inflation and real activity. In this paper, we propose monetary policy rules that perform robustly across a broad range of structural models, focusing on minimizing volatility at the frequencies most relevant for policymakers' stabilization goals. Our findings indicate that robust rules, which account for model uncertainty, advocate significantly less aggressive policy responses. Moreover, incorporating frequency-specific stabilization preferences further moderates the optimal policy actions. Ignoring model uncertainty imposes significant costs, while the cost of insuring against this uncertainty is relatively low. This cost-benefit analysis strongly supports adopting a robust-model approach to monetary policy. |
| Keywords: | monetary policy rules, policy evaluation, model comparison, model uncertainty, frequency domain, design limits, DSGE models |
| JEL: | C49 E32 E37 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:308813 |
| By: | Benjamin Schwanebeck (Fern Universität in Hagen); Luzie Thiel (University of Kassel) |
| Abstract: | Household heterogeneity has been shown to be an important driver of aggregate demand. In this research, we demonstrate that it also impacts the supply side. We build a model in which heterogeneous households vary in their extent to which they supply production factors (labor and capital). Our model offers novel results about the consequences of inequality for the supply side, showing that (i) inequality distorts the factor allocation leading to higher marginal costs, and (ii) inequality becomes part of the Phillips curve. This is the “misallocation channel of inequality†. The cyclicality of inequality crucially depends on how important capital is for production. Our findings have important implications for building models with household heterogeneity and for optimal monetary policy. |
| Keywords: | Household Heterogeneity, Inequality, Supply-Side Effects, Optimal Monetary Policy, Factor Misallocation. |
| JEL: | E52 E61 E32 D24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:mar:magkse:202503 |
| By: | Jonathan Benchimol (BoI - Bank of Israel); Caroline Bozou (UP1 - Université Paris 1 Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Keywords: | Banking concentration, Imperfect competition, Financial stability, Welfare analysis, DSGE model |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:emse-04624985 |