|
on Dynamic General Equilibrium |
|
Issue of 2024‒05‒27
twelve papers chosen by |
| By: | Diego Legal; Eric Young |
| Abstract: | We quantitatively evaluate the effects of UI on bankruptcy in an equilibrium model of labor market search and defaultable debt. First, we ask whether a standard unsecured credit model extended with labor market search and matching frictions can account for the negative correlation between UI caps and bankruptcy rates observed in the data. The model can account for this fact only if estimated with the employment rate among bankruptcy filers as a target. Not matching this employment rate underestimates the consumption smoothing benefits of UI cap increases, as the model assigns too much importance to unemployment shocks for driving default, and implies large welfare losses from increasing the cap rather than negligible gains. Second, with bankruptcy available, there are significant welfare gains from increasing the replacement rate above the calibrated value, but not in the absence of default. |
| Keywords: | consumer bankruptcy; unsecured credit; unemployment insurance |
| JEL: | J65 K35 E21 E24 J64 |
| Date: | 2024–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:98188&r=dge |
| By: | Yuki Uchida (Faculty of Economics, Seikei University); Tetsuo Ono (Graduate School of Economics, Osaka University) |
| Abstract: | Implications of increased life expectancy on parental fertility decisions and subsequent shifts in political influence between younger and older generations carry significant consequences for government policies concerning education and pension. This study introduces an overlapping generations growth model incorporating these effects, qualitatively indicating that increased life expectancy correlates with lower fertility rates, decreased education expenditure-GDP ratio, and increased pension benefit-GDP ratio. A model simulation evaluates the impact of the projected increase in life expectancy until 2100 on four country groups: synthetic rich OECD, synthetic rich OECD Europe, Japan, and the United States. The findings demonstrate similar trends as in the qualitative analysis, yet growth rates are projected to vary significantly across regions and countries due to differing life expectancy increases. |
| Keywords: | Fertility; Public Pension; Public Education; Probabilistic Voting; Overlapping Generations |
| JEL: | D70 E62 H52 H55 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:2407&r=dge |
| By: | Manuel Amador; Javier Bianchi |
| Abstract: | We examine banking regulation in a macroeconomic model of bank runs. We construct a general equilibrium model where banks may default because of fundamental or self-fulfilling runs. With only fundamental defaults, we show that the competitive equilibrium is constrained efficient. However, when banks are vulnerable to runs, banks’ leverage decisions are not ex-ante optimal: individual banks do not internalize that higher leverage makes other banks more vulnerable. The theory calls for introducing minimum capital requirements, even in the absence of bailouts. |
| JEL: | E32 E44 E58 G01 G21 G33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32341&r=dge |
| By: | William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Hyun Park (Department of Economics, Valparaiso University, Valparaiso, IN 46383, USA) |
| Abstract: | We use the New-Keynesian DSGE framework and VAR to investigate the usefulness and relevancy of monetary services, augmented to include credit card transaction services. We use the new credit-card-augmented Divisia monetary aggregates in the models to further the existing research on their usefulness and relevancy. In this research, we compare three different monetary aggregates within the New-Keynesian framework: (1) the aggregation theoretic "true" monetary aggregate, (2) the credit-card-augmented Divisia monetary aggregate, and (3) the simple sum monetary aggregate. We acquire the following primary results. (1) The credit-card-augmented Divisia monetary aggregate tracks the theoretical (true) monetary aggregate, while simple-sum does not. Although this result would be expected from the theory in classical economic models, the result is not an immediate implication of the theory in New-Keynesian models and therefore needs empirical confirmation. (2) Under the recursive VAR framework, the credit-card-augmented Divisia monetary aggregate serves as a preferable monetary policy indicator compared to the traditional federal funds rate. (3) On theoretical grounds, we find that the separability condition for existence of a monetary aggregator function could fail, if credit card deferred payment services were excluded from the monetary services block, unless all markets are perfect. |
| Keywords: | Credit-card-augmented Divisia monetary aggregates, New-Keynesian DSGE, credit card services, VAR. |
| JEL: | E12 E41 E51 E52 E58 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:202408&r=dge |
| By: | Duarte Maia |
| Abstract: | At the onset of the COVID-19 pandemic shock, several policy measures were adopted to mitigate the severe effects on economic and financial activities. In this paper we focus on the assessment of the economic and financial impacts of prudential policy measures, namely the flexibility measure – i.e. a temporary relaxation of the Pillar 2 Guidance and the combined buffer requirement – and the dividends pay-out restriction. As the economy recovers from the pandemic crisis and measures are being withdrawn, we are also interested in understanding the implications of distinct paths for the replenishment of capital buffers. For these purposes we use a dynamic general equilibrium model with banks, households and firms default, calibrated for the Portuguese economy. Our main conclusions are that the measures were effective in achieving their main policy objectives of maintaining the credit flow in the economy. Importantly, results also suggest that the joint use of the flexibility measure and the dividends pay-out restrictions reinforces the benefits that were achieved by using the flexibility measure only. We also show that the joint use of measures reduce the effort of the banking system to rebuild their capital buffers once the pandemic crisis vanishes. Lastly, transition periods for the replenishment of capital buffers should be carefully considered, since shorter transition periods may be more effective at reinforcing banks’ resilience, but longer transitions may be more adequate for ensuring that lending flows smoothly to the economy. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202314&r=dge |
| By: | Puch González, Luis Antonio; Ruiz, Jesús |
| Abstract: | This paper investigates the asymmetrical effects of supply chain disruptions on oil prices and inflation. To this purpose, we identify anticipated (news) shocks associated to the global supply chain. Then we estimate the effects of these shocks on oil prices and inflation in the US. We allow 'escalating' (restrictive) and 'deescalating' (expansionary) supply chain news shocks tohave differing effect sizes. Our empirical findings reveal that anticipated supply chain disruptions exert a substantial and statistically significant influence on both oil prices and inflation. We uncover a significant asymmetry in these effects: 'escalating news' shocks exhibit a markedly stronger and more persistent impact compared to 'deescalating news' shocks. Consequently, the oil price is less sensitive to an alleviation of supply chain strain than to an exacerbation. Our results can be rationalized by a small open economy model which is used to assess the validity of our empirical approach. Furthermore, we demonstrate that the mechanisms governing thetransmission of supply chain news shocks in the model align closely with observed empirical patterns. Failing to account for this asymmetry could lead to misjudgments regarding the repercussions of supply chain pressures. |
| Keywords: | News shocks; Inflation; Oil prices; Supply chain disruption; Expectations |
| JEL: | E2 E6 E32 E44 Q42 Q43 Q58 |
| Date: | 2024–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:43758&r=dge |
| By: | Oriana Bandiera; Ananya Kotia; Ilse Lindenlaub; Christian Moser; Andrea Prat |
| Abstract: | Are labor markets in higher-income countries more meritocratic, in the sense that worker-job matching is based on skills rather than idiosyncratic attributes unrelated to productivity? If so, why? And what are the aggregate consequences? Using internationally comparable data on worker skills and job skill requirements of over 120, 000 individuals across 28 countries, we document that workers' skills better match their jobs' skill requirements in higher-income countries. To quantify the role of worker-job matching in development accounting, we build an equilibrium matching model that allows for cross-country differences in three fundamentals: (i) the endowments of multidimensional worker skills and job skill requirements, which determine match feasibility; (ii) technology, which determines the returns to matching; and (iii) idiosyncratic matching frictions, which capture the role of nonproductive worker and job traits in the matching process. The estimated model delivers two key insights. First, improvements in worker-job matching due to reduced matching frictions account for only a small share of cross-country income differences. Second, however, improved worker-job matching is crucial for unlocking the gains from economic development generated by adopting frontier endowments and technology. |
| JEL: | C78 E24 J24 J31 O11 O12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32375&r=dge |
| By: | Tiago Pinheiro |
| Abstract: | We analyze the effects of the Portuguese COVID-19 sovereign loan guarantee scheme on financial stability using a DSGE model. Sovereign loan guarantees decrease the default rate of banks, increase credit, and speed up economic recovery. On the other hand, guarantees increase the leverage and default rate of firms. These effects are larger the lower the sensitivity of the capital of banks to capital requirements. Behind these results are the reduction in regulatory risk-weights and the transfer of loan losses from banks to the sovereign brought by sovereign loan guarantees. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202313&r=dge |
| By: | Francesco Lancia; Alessia Russo; Tim Worrall |
| Abstract: | How should successive generations insure each other when the young can default on previously promised transfers to the old? This paper studies intergenerational insurance that maximizes the expected discounted utility of all generations subject to participation constraints for each generation. If complete insurance is unattainable, the optimal intergenerational insurance is history-dependent even when the environment is stationary. The risk from a generational shock is spread into the future, with periodic resetting. Interpreting intergenerational insurance in terms of debt, the fiscal reaction function is nonlinear and the risk premium on debt is lower than the risk premium with complete insurance. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.10090&r=dge |
| By: | Karsten O. Chipeniuk (Economics Department, Reserve Bank of New Zealand); Eric M. Leeper (Department of Economics, University of Virginia); Todd B. Walker (Department of Economics, Indiana University) |
| Abstract: | We consider fiscal and monetary policy interactions in the continuous-time HANK framework. We find that heterogeneity fundamentally alters the way in which monetary policy shocks propagate in equilibrium. Fiscal shocks have inflationary consequences even when policy parameters are consistent with accommodating (passive) fiscal policy. By eliminating income effects through a complex transfers process, monetary policy can once again regain control of inflation. However, meaningful heterogeneity or heterogeneity in which a representative-agent approximation is poor, requires a complex set of transfers that do not resemble reality. With a realistic calibration for the distribution of wealth, fiscal policy will always impinge on inflation regardless of policy parameters. We thus conclude that monetary policy is fiscal policy according to HANK. |
| Keywords: | Heterogeneous Agents, Monetary and Fiscal Policy Interactions |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2024004&r=dge |
| By: | Guido Ascari; Jakob Grazzini; Dominico Massaro |
| Abstract: | The Covid-19 shock caused a dramatic spike in the number of retirees – a phenomenon dubbed the “Great Retirement†– and a prolonged con- traction in the labor force. This paper investigates the impact of the Great Retirement on the post-pandemic surge of inflation, via the labor market. First, retirement is generally countercyclical, and the peculiarity of the pan- demic shock was just in its size: the “Great Layoff†in March and April 2020 triggered the Great Retirement. Hence, a transitory labor demand shock generated a persistent labor supply shock. Second, counties more exposed to the Great Layoff exhibit a relatively higher increase in wages. Finally, an estimated model with endogenous labor market participation quantitatively assesses the overall contribution of the Great Retirement to inflation from 2020:Q1 up to 2023:Q2 to be roughly equal to 3.7 percentage (cumulative) points. |
| Keywords: | Great Retirement; Labor Force; Wages; Inflation |
| JEL: | E30 E24 J21 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:812&r=dge |
| By: | Alberto Bucci (ICEA & DEMM, University of Milan); Lorenzo Carbonari (DEF, University of Rome "Tor Vergata"); Giovanni Trovato (DEF, University of Rome "Tor Vergata"); Pedro Trivin (DEMM, University of Milan) |
| Abstract: | Building on Lucas (1988), we develop a model in which the impact of population dynamics on per capita GDP and human capital depends on the balance of intertemporal altruism effects towards future generations and class-size effects on an individual’s education investment. We show that there is a critical level of the class-size effect that determines whether a decline in population growth will lead to a decrease or an increase in a country’s long-run growth rate of real per capita income. We take the model to OECD data, using a semi-parametric technique. This allows us to classify countries into groups based on their long-term growth trajectories, revealing patterns not captured by previous studies on the topic. |
| Keywords: | Long-run economic growth; Depopulation; Class-size effects; Human capital investment. |
| JEL: | J11 O11 O41 |
| Date: | 2024–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:575&r=dge |