|
on Dynamic General Equilibrium |
| By: | Pham, Ngoc-Sang |
| Abstract: | We prove that a two-cycle equilibrium in a general equilibrium model with infinitely-lived agents also constitutes an equilibrium in an overlapping generations (OLG) model. Conversely, an equilibrium in an OLG model that satisfies additional conditions is part of an equilibrium in a general equilibrium model with infinitely-lived agents. Applying this result, we demonstrate that equilibrium indeterminacy and rational asset price bubbles may arise in both types of models. |
| Keywords: | infinite-horizon, general equilibrium, overlapping generations, asset price bubble, equilibrium indeterminacy. |
| JEL: | C6 D5 E4 |
| Date: | 2024–11–11 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122659 |
| By: | Isabel Gödl-Hanisch; Ron Mau; Jonathan Rawls |
| Abstract: | We study monetary policy in a New Keynesian model with a variable credit spread and scope for central bank asset purchases to matter. A novel financial and labor market interaction generates an endogenous cost-push channel in the Phillips curve and a credit wedge in the IS curve. These channels arise due to a liquidity premium to long-term debt present in our model. The “divine coincidence” holds with the nominal short rate and central bank balance sheet available as policy tools—dual-instrument policy. Targeting the liquidity premium using balance sheet policy provides a determinate equilibrium with a fixed policy rate, as does inflation-targeting balance sheet policy. While the liquidity premium in our model depends on unobservable components, the slope of the yield curve serves as a proxy for the liquidity premium when thinking about implementable monetary policy strategies that respond to observable variables alone. We quantify the welfare costs to various monetary policy strategies relative to the analytically derived optimal dual-instrument policy. |
| Keywords: | unconventional monetary policy; optimal monetary policy; New Keynesian model; policy rate; Interest rate |
| JEL: | E43 E52 E58 |
| Date: | 2024–11–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99106 |
| By: | Marina Azzimonti-Renzo; Nirvana Mitra |
| Abstract: | We examine how the post-pandemic trajectory of risk-free rates—from historically low levels in 2020 to a steep rise in 2022—affects sovereign debt management and default risk in emerging markets (EMs). Using a dynamic political economy model, we show that weak institutional environments with political incentives to engage in corruption spending lead to over-borrowing and increased default risk, especially during low-rate periods. As rates rise, EMs face high risks of default or the need for austerity programs, depending on the severity of productivity shocks. While International Financial Institution (IFI) lending provides short-term relief, it can fuel moral hazard and corruption. Making IFI loans contingent on anti-corruption efforts reduces default risk. However, even full monitoring cannot eliminate the incentives for fiscal mismanagement, as governments may still over-borrow during favorable periods without addressing sustainability. We also find that Quantitative Performance Criteria (QPC), such as a debt-ceiling rule, are less effective as they leave room for corruption that creates default risk and can generate welfare losses relative to a scenario without IFI debt. |
| Keywords: | Sovereign Debt Crises; Institutions; Corruption; Sovereign Default; IFI loans; Emerging Markets |
| JEL: | D72 E43 F34 E62 F41 |
| Date: | 2024–10–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99074 |
| By: | Hanno Foerster (Boston College); Tim Obermeier (University of Leicester); Bastian Schulz (Aarhus University) |
| 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 |
| JEL: | D1 J12 C78 D83 J31 |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1082 |
| By: | Jesús Fernández-Villaverde (UNIVERSITY OF PENNSYLVANIA, NBER, CEPR); Galo Nuño (BANCO DE ESPAÑA, CEPR, CEMFI); Jesse Perla (UNIVERSITY OF BRITISH COLUMBIA) |
| Abstract: | We argue that deep learning provides a promising approach to addressing the curse of dimensionality in quantitative economics. We begin by exploring the unique challenges involved in solving dynamic equilibrium models, particularly the feedback loop between individual agents’ decisions and the aggregate consistency conditions required to achieve equilibrium. We then 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 review of the applications of neural networks in quantitative economics and provide arguments for cautious optimism. |
| Keywords: | deep learning, quantitative economics |
| JEL: | C61 C63 E27 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2444 |
| By: | Christoph Gortz; 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; shocks transmission |
| JEL: | E20 E30 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:99119 |
| By: | Masaya Yasuoka (School of Economics, Kwansei Gakuin University); Ryoji Hasegawa (Fukuyama City University) |
| Abstract: | During the spread of COVID-19, behavioral restrictions were implemented as policy measures. These included avoiding non-essential outings, refraining from dining out, and reducing tourism, all of which suppressed economic activity. As a result, industries such as food services and tourism suffered severe blows, leading to a significant decline in GDP (Gross Domestic Product) in 2020. However, the government's proactive fiscal policies, particularly employment measures, such as the Employment Adjustment Subsidy, are believed to have mitigated the rise in unemployment rates. To what extent did the Employment Adjustment Subsidy help suppress the increase in unemployment? While prior studies have evaluated its effects, this paper employs a DSGE (Dynamic Stochastic General Equilibrium) model based on microeconomic foundations, deriving parameters for simulations through calibration using real-world data. It calculates the increase in unemployment resulting from GDP declines caused by consumption shocks under behavioral restrictions in the absence of the subsidy, comparing it to actual data to determine the subsidy's effectiveness in curbing unemployment. The analysis revealed that the subsidy's effect in suppressing unemployment was about half of what the government's evaluations suggested. Additionally, using input-output analysis, it was demonstrated that the Employment Adjustment Subsidy also contributed to mitigating GDP declines. |
| Keywords: | DSGE Model, Employment Adjustment Subsidy, The Spread of COVID-19 |
| JEL: | E24 H20 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:282 |