nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒12‒18
seventeen papers chosen by
  1. Monetary Rules, Financial Stability and Welfare in a non-Ricardian Framework By Adame Espinosa Francisco
  2. The New York Fed DSGE Model Perspective on the Lagged Effect of Monetary Policy By Richard K. Crump; Marco Del Negro; Keshav Dogra; Pranay Gundam; Donggyu Lee; Ramya Nallamotu; Brian Pacula
  3. The Impacts of Family Policies on Labor Supply, Fertility, and Social Welfare By Yuki Uemura
  4. Optimal Taxation in the Life Cycle with Human Capital Investment Abstract : This paper studies optimal taxes in a lifecycle model with unverifiable human capital investment inseparable from regular consumption. The planner faces asymmetric information regarding agents’ exogenous abilities and endogenous human capital. Agents deviate in two ways: misreporting ability and mis-investing in human capital. We characterize the distortions in a model with i.i.d. shocks and full human capital depreciation. Distortions are characterized by capital wedges that are positive over the life cycle, labor wedges that are negative early and positive later in the life cycle, and net human capital wedges that are positive in the life cycle. These wedges serve as mechanisms to eliminate the distortion to consumption due to inseparability from education expenditure. Calibrate to U.S. data, we show numerically that these results apply in a richer model with persistent shocks and non-full human capital depreciation. Simulation suggests that average capital wedges are positive in all working periods, with progressive capital wedges in contemporary skills, average labor wedges are negative in early and positive in later periods, with hump-shape in skills and nonzero at the top and the bottom of the skill distribution, a nd net human capital wedges are positive and regressive in skills, indicating that human capital subsidies are in favor of the high skilled. By Been-Lon Chen; Fei-Chi Liang
  5. Land-Price Dynamics and Macroeconomic Fluctuations with General Household Preferences Abstract : Through the collateral channel for entrepreneurs, a positive housing demand shock in Liu et al. (2013) increases land prices and business investment, but consumption decreases on impact and there is thus a comovement problem. This paper improves Liu et al. (2013) by adding general household preferences with broader intratemporal and intertemporal substitutions Bayesian estimation of our structural model based on aggregate U.S. data suggests that the intratemporal substitution is larger than unity and the intertemporal substitution is smaller than unity. Our impulse responses show that a positive housing demand shock increases land prices, business investment, and consumption, which resolves the comovement problem. Moreover, the strength of the collateral channel linking land prices and business investment in our Bayesian DSGE model is larger than that in Liu et al. (2013). Housing demand shocks explain 39−43% of the variance of output and 41−47% of the variance of investment in our model, but the same shocks explain only 17−31% of the variance of output and 30−41% of the variance of investment in Liu et al. (2013). Variance decomposition reveals that housing demand shocks account for a larger share of the fluctuations in land prices, investment, employment, and output than other shocks. Using the marginal data density as the measure of fit for models, we find that our model can better explain the same U.S. aggregate data. By Been-Lon Chen; Zheng-Ze Lai; Shian-Yu Liao
  6. Pandemic-Era Inflation Drivers and Global Spillovers By Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim
  7. Optimal taxation and the Domar-Musgrave effect By Brendan K. Beare; Alexis Akira Toda
  8. Matching Through Search Channels By Carillo-Tudela, Carlos; Kaas, Leo; Lochner, Benjamin
  9. Hicks in HANK: Fiscal Responses to an Energy Shock By Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich
  10. Optimal Monetary Policy with and without Debt By Chafwehé, Boris; Oikonomou, Rigas; Priftis, Romanos; Vogel, Lukas
  11. Fertility choices, Demographics and Automation By Derick Almeida; Tiago Miguel Guterres Neves Sequeira
  12. Why Do Couples and Singles Save during Retirement? Household Heterogeneity and its Aggregate Implications By De Nardi, M.; French, E.; Bailey Jones, J.; McGee, R.
  13. Limited Energy Supply, Sunspots, and Monetary Policy By Gornemann, Nils; Hildebrand, Sebastian; Kuester, Keith
  14. Capital humain et recherche d'emploi: un mariage heureux - Human Capital and Search Models: A Happy Match By Magnac, Thierry
  15. Duration Dependence in Finding a Job: Applications, Interviews, and Job Offers By Zuchuat, Jeremy; Lalive, Rafael; Osikominu, Aderonke; Pesaresi, Lorenzo; Zweimüller, Josef
  16. College Attrition and the Dynamics of Information Revelation By Arcidiacono, Peter; Aucejo, Esteban; Maurel, Arnaud; Ransom, Tyler
  17. The Political Economy of Domestic and External Sovereign Debt By Hermann, Tim; Scholl, Almuth
  1. By: Adame Espinosa Francisco
    Abstract: This work is based on a new Keynesian theoretical model for an advanced economy, which incorporates overlapping generations to analyze a channel through which fluctuations in household financial wealth influence aggregate demand. The optimal monetary policy, corresponding to that of a central planner maximizing households' welfare, aims to mitigate financial fluctuations while simultaneously reducing variability in inflation and the output gap. The model is calibrated for the United States and reproduces the effect of variations in the price of financial assets on aggregate demand. The results show, first, that in the presence of productivity, financial, and demand shocks, optimal monetary policy significantly improves aggregate welfare by stabilizing financial fluctuations that impact households' wealth. Secondly, in the face of productivity and financial shocks, an augmented monetary rule responding explicitly to fluctuations in the price of financial assets, in addition to inflation and output gaps, can reproduce the welfare achieved under optimal monetary policy. However, this is not the case for demand shocks.
    Keywords: Monetary Policy;Monetary Rules;Overlapping Generations
    JEL: E21 E44 E52 E58
    Date: 2023–11
    URL: http://d.repec.org/n?u=RePEc:bdm:wpaper:2023-14&r=dge
  2. By: Richard K. Crump; Marco Del Negro; Keshav Dogra; Pranay Gundam; Donggyu Lee; Ramya Nallamotu; Brian Pacula
    Abstract: This post uses the New York Fed DSGE model to ask the question: What would have happened to interest rates, output, and inflation had the Federal Reserve been following an average inflation targeting (AIT)-type reaction function since 2021:Q2, when inflation began to rise—as opposed to keeping the federal funds rate at the zero lower bound (ZLB) until March 2022, and then raising it aggressively thereafter? We show that actual policy was more accommodative in 2021 than implied by the AIT reaction function and then more contractionary in 2022 and beyond. On net, the lagged effect of monetary policy on the level of GDP, when measured relative to the counterfactual, has been positive throughout the forecast horizon, due to the initial boost associated with keeping the fed funds rate near zero in 2021.
    Keywords: Dynamic Stochastic General Equilibrium (DSGE) models; DSGE; lagged effects; forecasting; monetary policy; New York Fed
    JEL: E52
    Date: 2023–11–21
    URL: http://d.repec.org/n?u=RePEc:fip:fednls:97347&r=dge
  3. By: Yuki Uemura (Graduate School of Economics, Kyoto University)
    Abstract: We quantitatively examine the impacts of family policies on labor supply, fertility, and social welfare in a heterogeneous agent overlapping-generations (OLG) economy. We extend a standard incomplete-market OLG model with married and single households by incorporating parental decisions on the number of children, child care, education spending, and time allocation between market work, parental care, and leisure. We use this extended model to examine the possible impacts of four major family policies: child subsidies, child care subsidies, education subsidies, and income tax deductions for dependent children. The results of all four policies suggest a tradeoff between fertility rates and female labor supply, although the individual effects of each policy on households and the macroeconomy differ significantly. Child care subsidies raise female labor supply but lower fertility rates. By contrast, child subsidies, education subsidies, and income tax deductions reduce female labor supply but raise fertility rates. Child care subsidies improve overall welfare the most among the four policies. This is because increased labor supply and a decrease in the number of children raise the consumption level in the long run, while lowering policy costs.
    Keywords: Family policies, child care, fertility, household decisions
    JEL: D10 E62 H31 J13
    Date: 2023–11
    URL: http://d.repec.org/n?u=RePEc:kyo:wpaper:1100&r=dge
  4. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Fei-Chi Liang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Keywords: Optimal capital and labor taxes, Human capital accumulation
    JEL: E62 H21 J24
    Date: 2023–10
    URL: http://d.repec.org/n?u=RePEc:sin:wpaper:23-a006&r=dge
  5. Land-Price Dynamics and Macroeconomic Fluctuations with General Household Preferences Abstract : Through the collateral channel for entrepreneurs, a positive housing demand shock in Liu et al. (2013) increases land prices and business investment, but consumption decreases on impact and there is thus a comovement problem. This paper improves Liu et al. (2013) by adding general household preferences with broader intratemporal and intertemporal substitutions Bayesian estimation of our structural model based on aggregate U.S. data suggests that the intratemporal substitution is larger than unity and the intertemporal substitution is smaller than unity. Our impulse responses show that a positive housing demand shock increases land prices, business investment, and consumption, which resolves the comovement problem. Moreover, the strength of the collateral channel linking land prices and business investment in our Bayesian DSGE model is larger than that in Liu et al. (2013). Housing demand shocks explain 39−43% of the variance of output and 41−47% of the variance of investment in our model, but the same shocks explain only 17−31% of the variance of output and 30−41% of the variance of investment in Liu et al. (2013). Variance decomposition reveals that housing demand shocks account for a larger share of the fluctuations in land prices, investment, employment, and output than other shocks. Using the marginal data density as the measure of fit for models, we find that our model can better explain the same U.S. aggregate data.
    By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Zheng-Ze Lai (National Chengchi University); Shian-Yu Liao (Fu Jen Catholic University)
    Keywords: land prices, housing demand shocks, CES preferences, collateral constraints
    JEL: E3 E5
    Date: 2023–07
    URL: http://d.repec.org/n?u=RePEc:sin:wpaper:23-a005&r=dge
  6. By: Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim
    Abstract: We estimate a multi-country, multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–23 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/EUR exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020-21. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021-22. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the U.S. relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation.
    Keywords: inflation; international spillovers; global production network
    JEL: E2 E3 E6 F1 F4
    Date: 2023–11–01
    URL: http://d.repec.org/n?u=RePEc:fip:fednsr:97350&r=dge
  7. By: Brendan K. Beare; Alexis Akira Toda
    Abstract: This article concerns the optimal choice of flat taxes on labor and capital income, and on consumption, in a tractable economic model. Agents manage a portfolio of bonds and physical capital while subject to idiosyncratic investment risk and random mortality. We identify the tax rates which maximize welfare in stationary equilibrium while preserving tax revenue, finding that a very large increase in welfare can be achieved by only taxing capital income and consumption. The optimal rate of capital income taxation is zero if the natural borrowing constraint is strictly binding on entrepreneurs, but may otherwise be positive and potentially large. The Domar-Musgrave effect, whereby capital income taxation with full offset provisions encourages risky investment through loss sharing, explains cases where it is optimal to tax capital income. In further analysis we study the dynamic response to the substitution of consumption taxation for labor income taxation. We find that consumption immediately drops before rising rapidly to the new stationary equilibrium, which is higher on average than initial consumption for workers but lower for entrepreneurs.
    Date: 2023–11
    URL: http://d.repec.org/n?u=RePEc:arx:papers:2311.05822&r=dge
  8. By: Carillo-Tudela, Carlos (University of Essex); Kaas, Leo (Universität Frankfurt am Main); Lochner, Benjamin (Institute for Employment Research (IAB), Nuremberg, Germany ; FAU)
    Abstract: "Firms and workers predominately match via job postings, networks of personal contacts or the public employment agency, all of which help to ameliorate labor market frictions. In this paper we investigate the extent to which these search channels have differential effects on labor market outcomes. Using novel linked survey-administrative data we document that (i) low-wage firms and low-wage workers are more likely to match via networks or the public agency, while high-wage firms and high-wage workers succeed more often via job postings; (ii) job postings help firms the most in poaching and attracting high-wage workers and help workers the most in climbing the job ladder. To evaluate the implications of these findings for employment, wages and labor market sorting, we structurally estimate an equilibrium job ladder model featuring two-sided heterogeneity, multiple search channels and endogenous recruitment effort. The estimation reveals that networks are the most cost-effective channel, allowing firms to hire quickly, yet attracting workers of lower average ability. Job postings are the most costly channel, facilitate hiring workers of higher ability, and matter most for worker-firm sorting. Although the public employment agency provides the lowest hiring probability, its removal has sizeable consequences, with aggregate employment declining by at least 1.4 percent and rising bottom wage inequality." (Author's abstract, IAB-Doku) ((en))
    Keywords: IAB-Open-Access-Publikation ; Integrierte Erwerbsbiografien ; IAB-Stellenerhebung ; IAB-Haushaltspanel
    JEL: E24 J23 J31 J63 J64
    Date: 2023–11–16
    URL: http://d.repec.org/n?u=RePEc:iab:iabdpa:202310&r=dge
  9. By: Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich
    Abstract: The distributional and disruptive effects of energy supply shocks are potentially large. We study the effectiveness of alternative fiscal responses in a two-country HANK model that we calibrate to the euro area. Energy subsidies can stabilize the domestic economy, but are fiscally costly and generate adverse spillovers to the rest of the monetary union: What the subsidizing country gains, the other countries lose. Transfers based on historical energy consumption in the form of a Hicks/Slutsky compensation are less effective domestically as subsidies but do not harm economic activity abroad. In addition, transfers increase welfare at Home while subsidies reduce welfare.
    Keywords: Energy crisis, Subsidies, Transfers, HANK2, monetary union, spillovers, heterogeneity, inequality, households
    JEL: D31 E64 F45 Q41
    Date: 2023–11
    URL: http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_474&r=dge
  10. By: Chafwehé, Boris; Oikonomou, Rigas; Priftis, Romanos; Vogel, Lukas
    JEL: E31 E52 E58 E62 C11
    Date: 2023
    URL: http://d.repec.org/n?u=RePEc:zbw:vfsc23:277596&r=dge
  11. By: Derick Almeida (University of Coimbra, Faculty of Economics); Tiago Miguel Guterres Neves Sequeira (University of Coimbra, Centre for Business and Economics and Faculty of Economics)
    Abstract: In this paper we study a theoretical link between the effects of increased automation on labor markets, and the fertility decisions of a representative household that is replaced by robots in the production of tasks. We develop a framework in which children provide utility and impose an opportunity cost to the household due to lost labor income. We show that fertility rate changes are the result of an optimal response to wage variations after the economy is hit by a shock that increases the design quality of robots used in production. Using this model, we characterize an initial equilibrium and simulate the effect of a 10% increase in robot productivity on important endogenous variables, including wages, and find that, in the absence of fixed costs to raising children, the fertility rate increases by approximately 3.4%.
    Keywords: Automation, Robots, Tasks, Fertility
    JEL: I24 J13 J22 J24 J31 O15 O33
    Date: 2023–06
    URL: http://d.repec.org/n?u=RePEc:gmf:papers:2023-05&r=dge
  12. By: De Nardi, M.; French, E.; Bailey Jones, J.; McGee, R.
    Abstract: We estimate a model of savings for retired couples and singles who face longevity and medical expense risks, and in which couples can leave bequests both when the first and last spouse dies. We show that saving motives vary by marital status, permanent income, and age. We find that most households save more for medical expenses than for bequests, but that richer households and couples, who hold most of the wealth, save more for bequests. As a result, bequest motives are a key determinant of aggregate retirement wealth.
    Date: 2023–11–28
    URL: http://d.repec.org/n?u=RePEc:cam:camdae:2377&r=dge
  13. By: Gornemann, Nils; Hildebrand, Sebastian; Kuester, Keith
    JEL: E31 E32 E52 F41 Q43
    Date: 2023
    URL: http://d.repec.org/n?u=RePEc:zbw:vfsc23:277614&r=dge
  14. By: Magnac, Thierry
    Abstract: We review a tractable model of human capital investments that can accommodate lots of heterogeneity and we investigate its compatibility with some job search and equilibrium wage models that have been proposed in the literature. We show that the log wage equation derived from the combination of these set-ups is additively separable in the process of human capital investments and the dynamic effects of the job ladder under a few conditions among which strict liquidity constraints and exogeneity of search are prominent. This is the case in particular with the popular model proposed by Bagger, Fontaine, Postel-Vinay and Robin [2014] in which the predicted wage equation can be generalized to accommodate richer heterogeneous effects due to endogenous human capital accumulation.
    Keywords: Human capital; job search; wage inequalities; applied econometrics
    JEL: D31 I24 J24 J31 J64
    Date: 2023–11–23
    URL: http://d.repec.org/n?u=RePEc:tse:wpaper:128739&r=dge
  15. By: Zuchuat, Jeremy (University of Lausanne); Lalive, Rafael (University of Lausanne); Osikominu, Aderonke (University of Hohenheim); Pesaresi, Lorenzo (University of Zurich); Zweimüller, Josef (University of Zurich)
    Abstract: The job finding rate declines with the duration of unemployment. While this is a well established fact, the reasons are still disputed. We use monthly search diaries from Swiss public employment offices to shed new light on this issue. Search diaries record all applications sent by job seekers, including the outcome of each application – whether the employer followed up with a job interview and a job offer. Based on more than 600, 000 applications sent by 15, 000 job seekers, we find that job applications and job interviews decrease, but job offers (after an interview) increase with duration. A model with statistical discrimination by firms and learning from search outcomes by workers replicates these empirical duration patterns closely. The structurally estimated model predicts that 55 percent of the decline in the job finding rate is due to "true" duration dependence, while the remaining 45 percent is due to dynamic selection of the unemployment pool. We also discuss further drivers of the observed duration patterns, such as human capital depreciation, stock-flow matching, depletion of one's personal network, and changes in application targeting or quality.
    Keywords: job search, job finding, duration dependence, dynamic selection, search effort, job application, callback, job interview, job offer
    JEL: J24 J64
    Date: 2023–11
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp16602&r=dge
  16. By: Arcidiacono, Peter (Duke University); Aucejo, Esteban (London School of Economics); Maurel, Arnaud (Duke University); Ransom, Tyler (University of Oklahoma)
    Abstract: We examine how informational frictions impact schooling and work outcomes. To do so, we estimate a dynamic structural model where individuals face uncertainty about their academic ability and productivity, which respectively determine their schooling utility and wages. Our framework accounts for heterogeneity in college types and majors, as well as occupational search frictions and work hours. Individuals learn from grades and wages in a correlated manner, and may change their choices as a result. Removing informational frictions would increase the college graduation rate by 4.4 percentage points, which would increase further by 2 percentage points in the absence of search frictions. Providing students with full information about their abilities would also result in large increases in the college and white-collar wage premia, while reducing the college graduation gap by family income.
    Keywords: college dropout, dynamic discrete choice, learning, human capital
    JEL: C35 D83 J24
    Date: 2023–11
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp16585&r=dge
  17. By: Hermann, Tim; Scholl, Almuth
    JEL: F34 H63 E62 F41 D72
    Date: 2023
    URL: http://d.repec.org/n?u=RePEc:zbw:vfsc23:277632&r=dge
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