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on Dynamic General Equilibrium |
| By: | Wongkot Rujiwattanapong (Faculty of Political Science and Economics, Waseda University) |
| Abstract: | This paper studies the effects of shocks to the flow hazards into and out of unemployment on the aggregate household saving rate, and attempts to explain the spike in the US saving rate during the Great Recession with these shocks. The results are obtained from a Dynamic Stochastic General Equilibrium model under incomplete markets and borrowing constraints similar to Krusell and Smith (1998) using extended path algorithm, perturbation method and approximate aggregation. It is found that a negative job-finding shock and a positive job-separation shock simultaneously and separately contribute to an increase in the saving rate. Shocks to the job-finding probability create a more drastic and persistent impact on the saving rate than do shocks to the job-separation probability. The baseline model generates the saving rate that exhibits strikingly similar dynamics to the US saving rate; however, the magnitude of the model-generated responses is somewhat smaller than what can be observed in the US. Job-finding shocks alone explain almost all the dynamics of the saving rate during the Great Recession whilst both job-finding and job-separation shocks are important in explaining the saving dynamics during normal times. The same analysis under the complete market assumption yields results completely opposite to the US data. |
| Keywords: | Business cycles; job finding; job separation; private savings |
| JEL: | E21 E22 E23 E32 J62 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2418 |
| By: | Masashige Hamano (Waseda University); Philip Schnattinger (Bank of England); Kongphop Wongkaew (Waseda University) |
| Abstract: | We develop a New Keynesian DSGE model to examine how preference shifts between online and brick-and-mortar retail affect pricing dynamics and inflation. Central to our model are goods market search frictions, which govern the interaction between retailers and producers. We introduce distinct search efficiencies for online and brick-and-mortar retailers, capturing the evolving retail landscape. Our analysis reveals two key channels through which these frictions impact inflation: the composition channel, arising from differing search efficiencies, and the arbitrage channel, reflecting changes in market tightness. Both channels operate through the search friction mechanism, altering the wedge between consumer and producer prices. Bayesian estimation identifies that both channels reinforce each other, lowering CPI inflation. This research highlights the critical role of goods market search frictions in understanding modern inflation dynamics. |
| Keywords: | Search and matching friction; CPI inflation; Firm dynamics |
| JEL: | E31 E52 J64 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2420 |
| By: | Priftis, Romanos; Schoenle, Raphael |
| Abstract: | We construct a New-Keynesian E-DSGE model with energy disaggregation and financial intermediaries to show how energy-related fiscal and macroprudential policies interact in affecting the euro area macroeconomy and carbon emissions. When a shock to the price of fossil resources propagates through the energy and banking sector, it leads to a surge in inflation while lowering output and carbon emissions, absent policy interventions. By contrast, imposing energy production subsidies reduces both CPI and core inflation and increases aggregate output, while energy consumption subsidies only lower CPI inflation and reduce aggregate output. Carbon subsidies instead produce an intermediate effect. Given that both energy subsidies raise carbon emissions and delay the “green transition, ” accompanying them with parallel macroprudential policy that taxes dirty energy assets in bank portfolios promotes “green” investment while enabling energy subsidies to effectively mitigate the adverse effects of supply-type shocks, witnessed in recent years in the EA. JEL Classification: E52, E62, H23, Q43, Q58 |
| Keywords: | DSGE model, energy sector, energy subsidies, financial frictions, macroprudential policy |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253032 |
| By: | Wongkot Rujiwattanapong (Faculty of Political Science and Economics, Waseda University) |
| Abstract: | Standard search theory suggests that (1) job search intensity increases with the relative gain from searching, and that (2) job search intensity increases the job finding probability. Firstly, this paper presents new empirical findings that are at odds with these theoretical predictions when workers are categorised by their unemployment insurance (UI) history. Unemployed workers who either are currently receiving or used to receive UI search harder than those who never take up UI during their unemployment spells. Moreover, despite their higher search intensity, those with a UI history have a lower job finding probability. Subsequently, I incorporate unproductive and inefficient job search, consistent with these empirical findings, into an otherwise standard stochastic equilibrium search-and-matching model with endogenous search intensity. Three key results emerge from these job search imperfections: (1) Aggregate search intensity becomes acyclical leading to an underestimated matching efficiency; (2) the general equilibrium effects of UI extensions and the labour market fluctuations are dampened; and (3) unemployment and its duration are more persistent. |
| Keywords: | Business cycles; job search intensity; matching efficiency; unemployment insurance; unemployment dynamics |
| JEL: | E24 E32 J24 J64 J65 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2417 |
| By: | Hai Ha Pham (EM Normandie - École de Management de Normandie = EM Normandie Business School); Ngoc-Sang Pham (EM Normandie - École de Management de Normandie = EM Normandie Business School) |
| Abstract: | We introduce the notion of wariness, defined as a concern for the lowest lifetime utility, in overlapping generations models and explore its effects on economic growth. In an exogenous growth model, under standard assumptions, we prove that the capital stock converges to a steady state. We then explore conditions under which this steady state is increasing (or decreasing) in the wariness level. We also provide a necessary and sufficient condition for the dynamic efficiency of the intertemporal equilibrium. In endogenous growth models (à la Romer (1986) or à la Barro (1990)), we show that the growth rate of capital stock per capita in the economy with wariness is lower (higher, respectively) than that in the economy without wariness if and only if the capital return is high (low, respectively). |
| Keywords: | Wariness, Overlapping generations, Dynamic efficiency, Economic growth, Endogenous growth, Wariness Overlapping generations Dynamic efficiency Economic growth Endogenous growth |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04918980 |
| By: | Wongkot Rujiwattanapong (Faculty of Political Science and Economics, Waseda University) |
| Abstract: | This paper studies the welfare cost of business cycles under incomplete markets and heterogeneous labour skills for male and female workers. The main goals are to estimate welfare gains and/or losses of economic agents if they could live in an economy without aggregate uncertainty, and to analyse the magnitudes of gains and/or losses among subgroups of agents. These tasks can be realised by calibrating a stochastic general equilibrium model with aggregate productivity shocks, individual skill uncertainty and unemployment risks, and compare the results to a similar model only without aggregate fluctuations. It is found that when business cycles are removed the overall welfare could increase up to almost 6% which is 700 times larger than the famous result in Lucas (1987). However, from a disaggregated perspective, the results are contrary to conventional expectation that subgroups with lower income should gain more benefit from the removal of business cycles due to the more adverse labour market conditions which hinder the ability to smooth consumption particularly under liquidity constraints and aggregate uncertainty. Instead, females gain less benefit than males, low-skilled workers are less better off than high-skilled workers, and unemployed workers gain slightly less than employed workers. Wealth inequality is found to remain fairly unchanged when business cycles are present in the economy although there is a noticeable shift in wealth distribution. |
| Keywords: | Business cycles;wealth inequality; worker heterogeneity. |
| JEL: | E24 E32 J24 J64 J65 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2421 |
| By: | Francisco E. Ilabaca; Greta Meggiorini |
| Abstract: | An OFR working paper presents a new model to analyze the effects of trend inflation on macroeconomic stability in New Keynesian models. |
| Keywords: | determinacy, indeterminacy, bayesian-estimation, inflation-targeting, departures-from-rational-expectations |
| Date: | 2023–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:23-17 |
| By: | Bergeaud, Antonin; Cahuc, Pierre; Malgouyres, Clement; Signorelli, Sara; Zuber, Thomas |
| 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 x 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: | 2024–07–02 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126767 |
| By: | Seula Kim |
| Abstract: | This paper investigates how worker beliefs and job prospects impact the wages and growth of young firms, as well as the aggregate economy. Building a heterogeneous-firm directed search model where workers gradually learn about firm types, I find that learning generates endogenous wage differentials for young firms. High-performing young firms must pay higher wages than equally high-performing old firms, while low-performing young firms offer lower wages than equally low-performing old firms. Reduced uncertainty or labor market frictions lower the wage differentials, thereby enhancing young firm dynamics and aggregate productivity. The results are consistent with U.S. administrative employee-employer matched data. |
| Keywords: | wage differentials, firm dynamics, learning, search frictions, uncertainty |
| JEL: | E20 E24 J31 J41 J64 L25 L26 M13 M52 M55 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:25-09 |
| By: | Galego Mendes, Arthur; Miyamoto, Wataru; Nguyen, Thuy Lan; Pennings, Steven Michael; Feler, Leo |
| Abstract: | This paper provides new evidence on the macroeconomic impact of cash transfers in developing countries. Using a Bartik-style identification strategy, the paper documents that Brazil’s Bolsa Familia transfer program leads to a large and persistent increase in relative state-level GDP, formal employment, and informal employment. A state receiving 1% of GDP in extra transfers grows 2.2ppts faster in the first year, with R$100, 000 of extra transfers generating five formal-equivalent jobs, half of which are informal. Consistent with a demand-side mechanism, the effects are concentrated in non-tradable sectors. However, an open-economy New Keynesian model only partially captures the high multipliers estimated. |
| Date: | 2023–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10652 |
| By: | Burgold, Peter; Ernst, Anne; Hinterlang, Natascha; Jäger, Marius; Stähler, Nikolai |
| Abstract: | In this paper, we compare the economic and welfare implications of two carbon pricing policies, namely the European Cap and Trade (CaT) regime and the Chinese Tradeable Performance Standard (TPS). The former sets an economy-wide emissions target and forces firms to purchase sufficient certificates. The latter sets an emissions intensity and requires firms with a higher intensity to either abate or buy emissions allowances from firms with lower-than-target intensities. It can be shown that TPS is equivalent to CaT when carbon pricing revenues are redistributed to firms according to output. In a dynamic multi-sector general equilibrium TANK model, we show that TPS outperforms a CaT regime that redistributes carbon revenues to households in a lump-sum manner, both, in terms of output gains and welfare due to lower costs on the production side. However, CaT with labor tax reduction increases welfare most because it alleviates distortions on the production side and improves the income situation of all households. |
| Keywords: | Carbon Pricing, Cap and Trade, Tradable Performance Standard, Dynamic General Equilibrium Model, Sectoral Heterogeneity, Input-Output Matrix |
| JEL: | E32 E62 H23 H32 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:311837 |
| By: | Laszlo Tetenyi; Karol Mazur |
| Abstract: | Governments operate agricultural input subsidy programs worldwide. Using a general equilibrium heterogeneous agent model featuring transaction costs, we quantitatively evaluate the macroeconomic consequences of such policies. Focusing on Malawi’s Farm Input Subsidy Program, we find that while this large program decreases undernutrition, it reduces welfare by exacerbating misallocation and benefiting the wealthier urban population.We show that partial equilibrium analysis leads to contrary conclusions and that halving the subsidy rate or investingin infrastructure improves outcomes. Finally, we demonstrate that the microdata from Malawi and cross-country data from Sub-Saharan Africa are consistent with the predictions of our model. |
| JEL: | O11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202422 |
| By: | Aksoy, Yunus; Daripa, Arup; Samiri, Issam |
| Abstract: | Questions about market power have become salient in macroeconomics. We consider the role of institutional structures in addressing these within a dynamic general equilibrium framework. Standard models account for monopoly profits as a lump-sum transfer to the representative agent. We label this an "incentive leakage, " and show this to be a general characteristic of firm-optimal arrangements. We show that shareholder-operated or worker-operated firms that eliminate leakage can generate within-firm incentives that effectively reduce monopoly distortion in equilibrium. When all firms operate similarly, an additional general equilibrium effect arises through internalization of an aggregate demand externality. We characterize steady-state welfare across structures, and show how zero-leakage institutions lead to improvements towards the Golden Rule benchmark. Overall, our paper takes the first step towards an analysis of the macroeconomics of institutions without incentive leakage. JEL Classification: E10, E22, E24, E25 |
| Keywords: | aggregate demand externality, Golden Rule, incentive leakage, monopolistic competition, monopoly gap, patience gap |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253033 |
| By: | Brian Greaney; Andrii Parkhomenko; Stijn Van Nieuwerburgh |
| Abstract: | We develop a dynamic urban model combining features of quantitative spatial and macro-housing models. It includes multiple locations, forward-looking households, commuting, costly migration, uninsurable income risk, housing tenure choice, and housing frictions. The model operates in continuous time, with shocks and choices occurring at discrete intervals. This ``mixed time'' approach enables efficient computation of steady-state equilibria and transition dynamics, even with thousands of location pairs. Using a model of the San Francisco Bay Area, we show how forward-looking behavior, spatial frictions, and transition dynamics reshape estimated effects of spatially heterogeneous shocks and policies, traditionally studied with static models. |
| JEL: | C63 G11 J61 R10 R21 R23 R31 R52 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33512 |
| By: | Pedro Brinca; Joao Duarte; Ana Melissa Ferreira; Valter Nobrega |
| Abstract: | In this paper, we revisit the question of what the welfare costs of business cycles are with new insights. The seminal paper by Lucas (1987) found welfare costs to be negligible at around 1%, but subsequent literature focused on finding mechanisms that could rationalize larger welfare costs. Our study builds on recent research that incorporates incomplete markets, adjustment costs, and marginal propensities to consume to show that welfare costs can be substantial. Our calculations indicate that eliminating business cycle fluctuations would result in a 1.25% increase in welfare, as measured in consumption equivalents. Furthermore, using a 2-asset HANK model, we find a welfare cost of 2.6%. This result arises from considering portfolio adjustment costs, which generate a distribution of marginal propensities to consume along the income dimension that is empirically plausible and produces a share of (rich and poor) hand-to-mouth households that is consistent with recent findings. In periods of recession, these values rise to 11.1%. These results are particularly driven by effects from the price rigidity. |
| Keywords: | Welfare costs, Business cycles, Liquidity, Hand-to-mouth |
| JEL: | E32 E21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unl:unlfep:wp667 |