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on Dynamic General Equilibrium |
| By: | Pablo Garcia Sanchez; Luca Marchiori; Olivier Pierrard |
| Abstract: | We study the effects on capital accumulation from public health in an overlapping generations model. Investing in the health of young individuals raises longevity and lowers frailty, influencing capital accumulation through three main channels. First, since it is tax-financed, public health investment reduces disposable income and the capacity to save (cost channel). Second, it prolongs life expectancy, encouraging individuals to save for old age (longevity channel). Third, it reduces frailty and the need to save to finance long-term care (frailty channel). Longevity and frailty have ambiguous effects on taxation when the government subsidizes long-term care. We analytically derive the economic implications of these health channels and numerically illustrate our findings. Our main result is that although public investment in healthy aging is costly, it can stimulate capital accumulation even without directly affecting productivity. Classification-JEL: H51, I15, O41. |
| Keywords: | Overlapping generations, public health, health channels, capital accumulation. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp189 |
| By: | HARIT, ADITYA |
| Abstract: | This paper develops a dynamic general equilibrium (DGE) model to assess the impact of AI-driven automation on labor and capital allocation in an economy. The model considers the endogenous response of firms to task automation and labor substitution, showing how the increasing use of AI affects total output (GDP), wages, and capital returns. By introducing task complementarity and dynamic capital accumulation, the paper explores how automation impacts labor dynamics and capital accumulation. Key results show that while AI enhances productivity and GDP, it can also reduce wages and increase income inequality, with long-run effects that depend on the elasticity of substitution between labor and capital. |
| Keywords: | AI-driven Automation, Dynamic General Equilibrium, Labor Markets, Capital Accumulation, Income Distribution, Technological Change, Task Automation, Economic Inequality, Labor Demand, Capital Returns, Economic Policy, Neoclassical Growth Theory, Labor-Capital Dynamics. |
| JEL: | A10 A11 C0 C02 E1 E13 E6 E60 J3 J31 J4 J40 N3 P4 P48 |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122244 |
| By: | Juan Carlos Hatchondo; Leonardo Martinez; Yasin Kürsat Önder; Francisco Roch (-) |
| Abstract: | We study a sovereign default model in which the government issues CoCos (contingent convertible bonds) that stipulate a suspension of debt payments upon a sizeable increase of the global risk premium (and thus, of the government’s borrowing cost). We find that CoCos allow the government to smooth out the effects of risk-premium shocks on consumption, but they increase the default frequency. By suspending debt payments, CoCos imply higher debt levels and thus higher default probabilities after adverse shocks. We also study CoCos that in addition to the payment suspension, stipulate debt forgiveness after adverse shocks. In contrast with no-forgiveness CoCos, debt-forgiveness CoCos reduce debt levels after adverse shocks, thereby reducing default probabilities. Debt-forgiveness CoCos also yield larger welfare gains. |
| Keywords: | Sovereign default, CoCos, debt relief, reprofiling, debt forgiveness squares, efficiency, robustness |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1096 |
| By: | Thiago Revil T. Ferreira; Nils M. Gornemann; Julio L. Ortiz |
| Abstract: | Household savings rose above trend in many developed countries after the onset of COVID-19. Given its link to aggregate consumption, the presence of these "excess savings" has raised questions about their implications for the transmission of monetary policy. Using a panel of euro-area economies and high-frequency monetary policy shocks, we document that household excess savings dampen the effects of monetary policy on economic activity and inflation, especially during the pandemic period. To rationalize our empirical findings, we build a New Keynesian model in which households use savings to self-insure against counter-cyclical unemployment and consumption risk. |
| Keywords: | Monetary Policy; Excess Savings; Precautionary Savings; Consumption Risk; Unemployment |
| JEL: | E12 E21 E24 E31 E52 |
| Date: | 2024–10–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1397 |
| By: | Jacob Wright; Angela Zheng |
| Abstract: | Across all education levels, policymakers are using the re-sorting of students to diversify the socioeconomic composition of student bodies. We study how these integration policies interact, using a heterogeneous agent overlapping generations model featuring multiple periods of human capital development. Households sort into public schools through housing location, and into college via a competitive admissions process. Quality of schools and colleges are endogenous through peer effects. At the public school level, we simulate an integration policy that randomly shifts students across schools. For college, we consider an income-based affirmative action policy. Public school integration weakens the link between residential location and school quality, increasing intergenerational mobility by 2.5%. On the other hand, the college policy decreases intergenerational mobility by 0.7%: when the high-quality college reserves seats for low-income students, it makes college more competitive, which increases sorting at the public school level. In fact, an integration policy that combines public school re-sorting and college affirmative action leads to minimal changes in upwards mobility. |
| Keywords: | intergenerational mobility; sorting; human capital |
| JEL: | I2 R23 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:mcm:deptwp:2024-07 |
| By: | Domenico Ferraro (Arizona State University); Damián Pierri (ESCP Business School - Universidad Autónoma de Madrid) |
| Abstract: | We develop an equilibrium business cycle model of multi-plant firms with perfectly competitive product and labor markets. Plant-level production features a minimumlabor requirement, leading to occasionally binding capacity constraints at the firm level. The aggregate production function is kinked, displaying constant returns toscale when the economy is below capacity and decreasing returns when at capacity. We calibrate the model to U.S. data and show that the effects of distorting taxes are highly nonlinear and state-dependent, varying systematically with the state of the business cycle. The aggregate hours elasticity is higher in recessions and decreases with the size of the labor tax cut. Moreover, it differs from the structural preference parameter determining the individual-level labor supply elasticity. |
| Keywords: | Minimum labor requirement; Hours constraints; Capacity utilization; State dependence; Labor taxes; Aggregate hours elasticity |
| JEL: | E22 E23 E24 E32 E62 H24 H25 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:341 |
| By: | Pablo Garcia; Pascal Jacquinot; Crt Lenarcic; Kostas Mavromatis; Niki Papadopoulou; Edgar Silgado-Gómez |
| Abstract: | We analyze the economic impact of the green transition in the euro area by extending the Euro Area and Global Economy (EAGLE) model to include green and brown energy sectors. In this model, energy goods are consumed both as final goods by households and as inputs by intermediate goods firms. A carbon tax acts as a cost-push shock, creating stagflation ary effects, particularly when fiscal interventions are not primary-balance neutral. Without subsidies for green energy firms, the green transition is limited to a shift in household ex penditure towards green energy goods. However, when authorities provide subsidies to green energy firms, intermediate goods firms also increase their demand for green energy inputs, thereby strengthening the demand channel in the green energy market and driving its price upward. When carbon taxes are raised globally and governments redistribute carbon tax revenues to green energy firms, the recession in the euro area deepens, and inflationary pres sures increase, partly due to a weakening euro. Taxes on brown capital investment are also contractionary but lead to lower inflation. In this scenario, subsidies for investment in green energy capital can help mitigate the recession. However, overall, taxes on brown capital investment are less effective in driving the green transition compared to carbon taxes. Classification-JEL: C53, E32, E52, F45, H30, Q48 |
| Keywords: | DSGE Modelling, International Spillovers, Monetary Union, Euro Area, COVID-19 Climate Policy, Carbon Taxation, Monetary Policy, Fiscal Policy, Euro Area, DSGE modeling |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp190 |
| By: | Denderski, Piotr; Kaas, Leo; Schulz, Bastian; Siassi, Nawid |
| JEL: | E24 H24 J63 J64 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302388 |
| By: | Stiepelmann, Gero |
| JEL: | E24 E32 H21 J63 J64 J65 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302419 |
| By: | Minjie Deng and Chang Liu (Simon Fraser University) |
| Abstract: | This paper analyzes the impact of a balanced budget rule (BBR) on government financing costs and its implications for the government balance sheet. Exploiting the variation in BBR implementation across US states, we find that states with more stringent BBRs exhibit significantly lower bond spreads and credit default swap spreads, demonstrating the crucial role of default risk. A sovereign default model, which features long-term debt, endogenous investment and output, as well as a BBR, aligns with the empirical result. Our quantitative analysis suggests that implementing a BBR in Illinois could dramatically decrease the state bond spread, lower the debt, and improve welfare three years after the policy change. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:sfu:sfudps:dp24-04 |
| By: | Antonia Díaz (Instituto Complutense de Análisis Económico (ICAE), Universidad Complutense de Madrid (Spain).) |
| Abstract: | Wealthier, risk-averse buyers pay more to expedite up transactions in competitive search markets. This, coupled with forward-looking intermediaries who hold vacant homes overnight, implies that a credit expansion produces a boom in prices that slowly recedes over time. This boom is due to a combination of two effects. First, search and matching frictions imply that buyers are willing to pay a higher price to trade faster, not only to consume housing services. Second, the fact that intermediaries are forward-looking implies that trading probabilities today depend on the future evolution of prices. Since agents forecast that prices are higher than in the initial steady state, they turn to trading today. Our theory produces a boom in prices that slowly recedes and a gradual rise of homeownership rate. |
| Keywords: | Competitive search; Wealth effects; Housing prices; Credit constraints; Housing supply; Elasticity; Rental market; Transitional dynamics. |
| JEL: | D31 D83 E21 R21 R30 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ucm:doicae:2404 |
| By: | Knapp, Fabian |
| JEL: | D62 E32 E44 F32 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302415 |
| By: | Kitae Cho (Yonsei University); Eunseong Ma (Yonsei University) |
| Abstract: | This paper investigates the effects of hours constraints on optimal progressive tax structures. To this end, we present a heterogeneous-agent model with a nonlinear progressive tax system. As a form of hours constraints, we introduce a wage penalty for those working below 40 hours per week, generating a realistic distribution of work hours predominantly concentrated at 40 hours. Our findings indicate that optimal tax progressivity should be significantly higher than the current level. Poor households benefit from the reform, while the rich experience welfare losses, primarily due to productive households being unable to adjust their labor supply under hours constraints. The optimal tax reform reduces overall inequality, albeit at the cost of decreased economic activity. Uncovering the Pareto weights in the social welfare functions, under the current tax system, the weight assigned to the richest households is approximately twice the average. |
| Keywords: | hours constraints, optimal tax progressivity, labor supply elasticity, redistribution |
| JEL: | E21 H21 H23 J22 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2024rwp-231 |
| By: | Julien Albertini (Université Lumière Lyon 2, CNRS, Université Jean Monnet Saint-Etienne, emlyon business school, GATE, 69007, Lyon, France); Xavier Fairise (GAINS, Le Mans Université); Anthony Terriau (GAINS, Le Mans Université) |
| Abstract: | This paper explores the differentiated effects of corporate tax changes based on firm characteristics and evaluates the potential impact of a tax system modulated by both firm size and age. Using tax rate variations across U.S. states and comparing adjacent counties across state borders, we find that corporate taxes significantly reduce employment in small and young firms, while having no notable impact on large and older firms. We then develop a model to analyze firm dynamics throughout their life cycle under different tax regimes. Our simulations show that a corporate tax system adjusted by both firm size and age is more effective than one based solely on size (and even more so than a system with a single rate). This approach lightens the tax burden on highly productive young firms and shifts it toward less productive older firms, ultimately boosting employment and welfare without reducing the fiscal surplus. |
| JEL: | H25 H32 J21 J23 E61 E62 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gat:wpaper:2410 |
| By: | Niemann, Stefan; Prein, Timm |
| JEL: | E44 E62 F34 H63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302386 |
| By: | Busso, Matías; Fentanes, Oscar |
| Abstract: | What determines the aggregate and distributional effects of new transportation infrastructure? One key overlooked channel is the role that infrastructure policy plays in changing the incentives of firms to enter, exit, and grow--in turn generating endogenous changes in local productivity. In this paper, we document and quantify the importance of this channel by using detailed Mexican microdata and a spatial general-equilibrium model that incorporates firm dynamics. Leveraging random delays in the construction of highways, we empirically show that productivity grows in places with better transportation infrastructure. Firms play a critical role in driving these results: highways increase firms' size, entry rates, survival rates, and total factor productivity. Then, by calibrating our model on census data between 1998 and 2018, we find that new highways over this period increased welfare and income by half a percent, similar to its costs in terms of GDP. Moreover, we find substantial spatial reallocation of workers and production. Nearly half of these effects are explained by endogenous changes in local productivity, which is driven by firm dynamics. |
| Keywords: | Economic geography;firm dynamics;Infrastructure |
| JEL: | R12 D24 O18 O54 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13759 |
| By: | Bora Durdu; Sergio Villalvazo |
| Abstract: | This paper investigates the impact of loan-to-value (LtV) borrowing constraints in models with occasionally binding credit constraints. These constraints give rise to a Fisherian debt-deflation mechanism, where exogenous shocks can trigger cascading effects resulting in significant declines in consumption, asset prices, and borrowing reversals—characteristic of financial crises. However, recent literature challenges traditional view by suggesting that collateral constraints may not always exacerbate financial disturbances but could instead foster dynamics leading to multiple equilibria. Building on this discussion, the paper explores equilibrium asset pricing models with LtV collateral constraints, identifying critical thresholds that govern asset price dynamics, consumption patterns, and current account behaviors. Our analysis uncovers that when the LtV limit is close to zero, tighter constraints induce smaller drops in consumption during crises. Conversely, when the LtV limit is close to one, we observe that tighter constraints induce larger drops in consumption during crises. The nonlinear relationship between the LtV ratio and adverse effects on macroeconomic outcomes aligns with cross-country evidence regarding the relationship between the level of financial development and the severity of consumption declines during crises. |
| Keywords: | Financial crises; Loan-to-value constraints; Debt-deflation |
| JEL: | E31 E37 E52 F41 G01 |
| Date: | 2024–09–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-81 |