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on Dynamic General Equilibrium |
| By: | Darapheak Tin; Chung Tran |
| Abstract: | Should government transfers to families with children be means-tested? We revisit this question from the unique Australian policy context, where all child-related transfers are strictly means-tested. Using household survey data, we first demonstrate that means testing effectively directs child benefits to low-income Australian families with children, comprising up to 40% of their gross total income during the childbearing period. Notably, this coincides with the distinct M-shaped labor supply pattern of Australian mothers over the life cycle. Combining these empirical facts with a dynamic general equilibrium overlapping generations model of single and married households with children, we quantify the aggregate and distributional impacts of child-related transfers. Our simulation results demonstrate the significant adverse effects of means testing on work incentives and human capital development among mothers. A structural reform that replaces the status quo means-tested system with a universal system improves female labor supply, output, and overall welfare while also garnering majority support. However, the universal system increases tax burden by 4 percentage points and negatively impacts single mothers-the intended beneficiaries-by reducing their net lifetime income and welfare. In our model, inclusion of means testing is essential for controlling fiscal costs and mitigating the adverse effects of higher taxes. Preserving the existing means-tested system and opting for incremental reforms could potentially result in modest improvements in output and welfare while ensuring a more equitable distribution of welfare gains. Hence, our findings highlight the complex trade-offs between efficiency and equity in designing child benefit programs. |
| Keywords: | Child Benefits; Means Testing; Female Labor Supply; Efficiency; Equity; Dynamic General Equilibrium |
| JEL: | E62 H24 H31 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:acb:cbeeco:2024-701 |
| By: | Dengler, Thomas; Gehrke, Britta; Zessner-Spitzenberg, Leopold |
| Abstract: | During the Covid-19 crisis, most OECD countries used short-time work (subsidized reductions in working hours) to preserve employment. This paper documents that short-time work affects the behavior of firms (supply) and households (demand). First, using household survey data from Germany, we show that the consumption risk of short-time work is lower than that of unemployment. Second, we construct a New Keynesian model with heterogeneous workers and firms, incomplete asset markets, and labor market frictions. Short-time work weakens workers' precautionary savings motive and lowers labor costs. This reduces the level and volatility of both the separation and unemployment rate at the cost of tying workers to less productive firms. Quantitatively, the positive employment effects dominate the productivity losses. |
| Keywords: | Short-time work, fiscal policy, incomplete asset markets, unemployment risk, matching frictions |
| JEL: | E21 E24 E32 E52 E62 J63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:tuweco:306866 |
| By: | Aliaksandr Zaretski (University of Surrey) |
| Abstract: | I characterize optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to a pecuniary externality implicit in the collateral constraint and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run and approximate price stability in the short run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy. |
| JEL: | E32 E44 E52 E63 G28 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0624 |
| By: | Gustafsson, Johan (Department of Economics, Umeå University); Lanot, Gauthier (Department of Economics, Umeå University) |
| Abstract: | We analyze the impact of improved automation on the size and distribution of pension benefits, and on the optimal size of public pension systems. To this end, we build an overlapping generations model with heterogeneous agents. Automation is either conceptualized in a capital-skill complementarity (CSC) or task-based (TB) fashion. We find that any productivity gains of automation realized as increased returns to savings disproportionately benefit high-skilled workers who are less dependent on illiquid public pensions. A redistributive pension system can reduce public pension inequality but increase inequality in private retirement savings. The optimal size of the pension system is larger in the TB specification where displacement effects of automation are accounted for. We do not find that automation-driven growth warrants any change to the optimal size of the public pension system. |
| Keywords: | Automation; General Equilibrium; Overlapping Generations; Public Pensions |
| JEL: | H55 J22 J26 |
| Date: | 2024–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:umnees:1030 |
| By: | Daeha Cho (Hanyang University); Eunseong Ma (Yonsei University) |
| Abstract: | This study quantitatively assesses both the aggregate and disaggregate effects of inflation-indexed loan contracts using a heterogeneous agentNewKeynesian (HANK) model with an occasionally binding zero lower bound (ZLB). Substituting real for nominal government bonds reduces the volatility of output and inflation and decreases the frequency of ZLB events. Real loans sever the link between real interest rates and inflation, preventing a rise in real interest rates at the ZLB. Accordingly, ZLB events become less costly, weakening precautionary savings against aggregate risk. This leads to higher average nominal rates and a reduced frequency of ZLB occurrences, further reducing aggregate volatility. Although inflation indexation improves aggregate welfare, at the disaggregate level, the wealthy lose while the poor gain. Inflation indexation outperforms suggested policies aimed at providing more room for monetary policy, such as increasing the inflation target and implementing an asymmetric Taylor rule. |
| Keywords: | Zero lower bound, HANK model, Inflation indexation, Welfare |
| JEL: | D31 E31 E32 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2024rwp-233 |
| By: | Daniel R. Carroll; Andre Luduvice; Eric Young |
| Abstract: | The policy predictions of standard heterogeneous agent macroeconomic models are often at odds with observed policies. We use the 2021 General Social Survey to investigate the drivers of individuals' preferences over taxes and redistribution. We find that these preferences are more strongly associated with political identity than with economic status. We discuss the implications for quantitative macroeconomic models with endogenous policy determination. |
| Keywords: | political economy; redistribution; heterogeneous agents; voting |
| JEL: | E62 D72 H20 |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99166 |
| By: | Oliver de Groot (University of Liverpool and CEPR); C. Bora Durdu (Federal Reserve Board); Enrique G. Mendoza (University of Pennsylvania and NBER) |
| Abstract: | We compare global (fixed-point iteration) and local (first-order, higher-order, risky-steady-state, and quasi-linear) solutions of open-economy incomplete-markets models. Cyclical moments of a workhorse endowment model are broadly in line with the data and similar across solutions calibrated to the same data targets, but impulse responses and spectral densities differ. Alternative local solutions yield nearly identical results. Calibrating them requires nontrivial interest-rate elasticities that make net foreign assets (NFA) “sticky, ” causing them to differ sharply from global solutions in experiments altering precautionary savings (e.g., increasing income volatility, adding capital controls). Analytic and numerical results show that our findings are due to the near-unit-root nature of NFA under incomplete markets and imprecise solutions of their autocorrelation. These findings extend to a Sudden Stops model with an occasionally binding collateral constraint. In addition, quasi-linear methods yield smaller financial premia and macroeconomic responses when the constraint binds. |
| Keywords: | Solution methods; Sudden stops; Precautionary savings; Occasionally binding constraints |
| JEL: | D82 E44 F41 |
| Date: | 2024–11–23 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-037 |
| By: | Issam Samiri |
| Abstract: | I propose a general equilibrium model with endogenous defaults among producers and a Value-at-Risk rule designed to stabilise insolvency risk in the banking sector. Bank equity fluctuates with aggregate default rates, affecting banks' lending capacity. The Value-at-Risk constraint induces procyclical leverage, amplifying the impact of bank equity fluctuations on credit supply. This mechanism generates countercyclical risk premia in lending rates, thus intensifying economic shocks. Analytical exploration identifies three channels driving the dynamics of bank leverage and credit spreads: (a) the credit demand channel, (b) the bank equity channel, and (c) a risk channel that captures the interaction between default expectations and the Value-at-Risk constraint. The model is calibrated to quantitatively replicate fluctuations in banks' balance sheets, credit spreads, and real business cycle variables. |
| Keywords: | RBC, Value-at-Risk, bank leverage, Credit Spreads, Financial Frictions |
| JEL: | E13 E32 E44 G21 G32 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:562 |
| By: | Viktors Ajevskis (Latvijas Banka) |
| Abstract: | This paper investigates how different parametrisation of the monetary policy reaction function and different mechanisms of expectations formation shape the macroeconomic outcomes in the Smets-Wouters type DSGE model. The initial macroeconomic conditions of the simulations correspond to the high inflation environment of early 2022. The simulation results show that under the hybrid expectations the terminal monetary policy rate is significantly higher than under the rational expectations for all Taylor rule parametrisations. Under the hybrid expectations, the inflation rate is much more persistent than under the rational expectations; three years is not enough to reach the inflation target of two per cent even for quite hawkish calibration of the Taylor rule. In the modelled economy, a relatively fast inflation stabilization for the hawkish Taylor rule has its own price in form of the cumulative output loss when compared with the dovish Taylor rule. Simulations are also performed for the case where the central bank misspecifies expectations formation mechanism in the DSGE model and follows an interest rate path implied by a false model. The results show that the hawkish reaction is preferable for both rightly and wrongly specified models. |
| Keywords: | DSGE, Monetary policy, Expectations, High inflation, Loss function |
| JEL: | C62 C63 D9 D58 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202407 |
| By: | Issam Samiri; Yunus Aksoy; Arup Daripa |
| 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 model. In standard models, monopoly profits are accounted for as a lump-sum payment 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 structures such as shareholderoperated or worker-operated firms that eliminate the leakage can generate within-firm incentives that effectively reduce the monopoly distortion in equilibrium. When all firms operate similarly, an additional general equilibrium effect arises through the internalization of an aggregate demand externality. We characterize steady-state welfare across structures, and show how zero-leakage institutions lead to aggregate improvements towards the steady-state Golden Rule benchmark. Overall, our paper takes the first step towards an analysis of the macroeconomics of institutions without incentive leakage. |
| Keywords: | Monopolistic competition, incentive leakage, ownership structure, internal competition, aggregate demand externality, steady-state welfare, Golden Rule, patience gap, monopoly gap |
| JEL: | E10 E22 E24 E25 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nsr:niesrd:563 |
| By: | Drygalla, Andrej; Heinisch, Katja; Schult, Christoph |
| Abstract: | In a multi-sector and multi-region framework, this paper employs a dynamic general equilibrium model to analyze climate-resilient economic development (DGE-CRED) in Vietnam. We calibrate sector and region-specific damage functions and quantify climate variable impacts on productivity and capital formation for various shared socioeconomic pathways (SSPs 119, 245, and 585). Our results based on simulations and cost-benefit analyses reveal a projected 5 percent reduction in annual GDP by 2050 in the SSP 245 scenario. Adaptation measures for the dyke system are crucial to mitigate the consumption gap, but they alone cannot sufficiently address it. Climate-induced damages to agriculture and labor productivity are the primary drivers of consumption reductions, underscoring the need for focused adaptation measures in the agricultural sector and strategies to reduce labor intensity as vital policy considerations for Vietnam's response to climate change. |
| Keywords: | adaptation, climate change, cost-benefit analysis, dynamic general equilibrium models |
| JEL: | E17 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhtrp:306350 |
| By: | Volha Audzei; Sergey Slobodyan |
| Abstract: | This paper studies convergence properties, including local and global strong E-stability, of the rational expectations equilibrium under non-smooth learning dynamics. In a simple New Keynesian model, we consider two types of informational constraints operating jointly - adaptive learning and sparse rationality. For different initial beliefs, we study if the convergence to the minimum state variable rational expectations equilibrium (MSV REE) occurs over time for positive costs of attention. We find that for any initial beliefs the agents’ forecasting rule converges either to the MSV REE equilibrium, or, for large attention costs, to a rule that disregards all variables but the constant. Stricter monetary policy slightly favors the constant only rule. Mis-specified forecasting rule that uses variable not present in the MSV REE does not survive this learning algorithm. Theory of non-smooth differential equations is applied to study the dynamics of our learning algorithm. |
| Keywords: | Bounded rationality, Expectations, Learning, Monetary policy |
| JEL: | D84 E31 E37 E52 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:cer:papers:wp792 |
| By: | Ingrid Kubin (Vienna University of Economics and Business); Thomas O. Zoerner (Oesterreichische Nationalbank) |
| Abstract: | We augment an overlapping generations endogenous credit cycle model with an environmental sector and study the interplay between fiscal and financial environmental regulation, which ultimately affects environmental quality, macroeconomic stability, and income distribution. We define environmental quality as the amount of pollution emitted, which can be regulated either by financial constraints on polluting projects (environmental haircuts) or by tax-financed investment in abatement and improvement technologies. We find that environmental haircuts and environmental taxes each affect emissions and income distribution in unique ways, with interaction effects that reveal trade-offs between economic stability, income, and environmental outcomes. Compared to scenarios in which only financial regulations are implemented, the introduction of a supplementary environmental tax on emissions maintains similar environmental standards, but leads to higher total income and capital per worker. However, this shift in income distribution favors green investors, while the older generation, which relies more on capital income, may experience an overall decrease in net income. |
| Keywords: | Green transition, environmental regulation, economic stability, income distribution, nonlinear model |
| JEL: | C61 C62 E32 Q52 Q58 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp373 |
| By: | Juergen Jung; Chung Tran |
| Abstract: | This paper documents empirical evidence on the long-lasting effects of poor health on stock market participation, asset portfolio composition, and the wealth gap over the lifecycle in the U.S. To quantify the significance of this health-wealth portfolio channel, we formulate a structural lifecycle model that incorporates elastic labor supply, asset portfolio choice, and household heterogeneity in health status, health expenditure, health insurance, and earnings ability. Through counterfactual simulations, we demonstrate that the health-wealth portfolio channel plays a significant role in explaining variations in wealth gaps across groups and over the lifecycle. Finally, our findings highlight the importance of the health insurance system in mitigating wealth inequality in the US. |
| Keywords: | Health and income risks, Health insurance, Heterogeneity, Lifecycle savings, Risky and safe assets, Asset portfolio, Inequality. |
| JEL: | G41 G51 G52 E21 H21 I13 I14 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:acb:cbeeco:2024-702 |
| By: | Vincenzo Quadrini (Univ. of Southern California, CEPRand NBER); Enrique G. Mendoza (University of Pennsylvania and NBER) |
| Abstract: | Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We show these results with a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies. |
| Date: | 2024–11–23 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-038 |
| By: | Patrick Gruning (Latvijas Banka); Zeynep Kantur (Baskent University) |
| Abstract: | This paper introduces financial intermediaries, who engage in lending to firms for investments and buying public bonds issued by the government, and unconventional monetary policy in the form of quantitative easing or tightening into a rich New- Keynesian multi-sector E-DSGE model with production and investment networks. Due to the strong input-output linkages between sectors, almost all policies are found to be not effective in facilitating a green transition. The policies considered are sector-specific bank regulation policies, unconventional monetary policies, various carbon tax revenue recycling schemes, public green capital investment, and sector- specific investment tax/subsidy policies. Only if carbon tax revenues are used to build public green capital, thereby boosting productivity of the green sectors, the trade-off between achieving positive economic growth and reducing carbon emissions is fully resolved. |
| Keywords: | Production network, Investment network, Climate change, Financial intermediation, Financial stability, Stranded assets, Monetary policy |
| JEL: | E22 E32 E52 G21 L14 Q50 |
| Date: | 2024–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202406 |
| By: | Athanasios Geromichalos; Lucas Herrenbrueck; Changhyun Lee; Sukjoon Lee (Department of Economics, University of California Davis) |
| Abstract: | We build on recent developments in the theory of money and liquidity to provide a qualitative and quantitative explanation for the well-known TIPS illiquidity vis-`a-vis noninflation- protected Treasuries. Our model does not assume exogenous differences between the markets where the two assets are traded or the investors who hold them; instead, an asset’s liquidity is endogenous and depends on the trading and market entry decisions of investors. The model offers a powerful amplification mechanism that operates upon only one difference between TIPS and Treasuries: the far greater supply of the latter. We also quantify how much the Treasury leaves on the table by issuing securities that are not as highly valued by the market as nominal Treasuries. However, the model does not necessarily imply that the Treasury should phase out TIPS, as some have suggested, only that it should seek to reduce segmentation and ensure that TIPS trade alongside nominal Treasuries in consolidated secondary markets. |
| Keywords: | Monetary-search models, OTC markets, Endogenous liquidity, Treasury securities, Treasury Inflation-Protected Securities (TIPS) |
| JEL: | E31 E43 E52 G12 |
| Date: | 2024–12–02 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:364 |
| By: | Sara Biadetti (Università di Roma “Tor Vergata”, Italy); Lorenzo Carbonari (DEF and CEIS, Università di Roma “Tor Vergata”, Italy); Filippo Maurici (Department of Political Sciences, Università Roma Tre, Italy) |
| Abstract: | This paper explores the effect of forward-looking ambiguity (Knightian uncertainty) on labor share distribution within a macro-development model involving entrepreneurs who are heterogeneous in productivity and wealth, and homogeneous saving workers. Ambiguity-averse agents base their decisions on worst-case labor share forecasts. As workers' expectations dominate, an endogenous hedging distribution emerges. The presence of ambiguity affects stability and induces cyclical fluctuations in labor supply, wages, and production, thereby amplifying short-term economic cycles. Capital over-accumulation arises as workers save more to hedge against uncertainty. Over time, persistent ambiguity leads to capital misallocation, reducing entrepreneurial assets while boosting aggregate capital. |
| Keywords: | ambiguity, Knightian uncertainty, heterogeneity, labor share, development |
| JEL: | E22 D81 D84 G14 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:24-18 |
| By: | William M. Doerner (Federal Housing Finance Agency); Michael J. Seiler (Federal Housing Finance Agency); Vivian Wong (Federal Housing Finance Agency) |
| Abstract: | This paper examines how banks adapt to tightening regulations, evolving macroeconomic conditions, and changes in household demand. Unlike most analyses of banking regulation, we develop a general equilibrium model in which banks both borrow from and lend to households, allowing us to assess the impact of regulations in conjunction with other macroeconomic factors. The model features an often overlooked interplay between household portfolio choices and bank financial decisions, emphasizing the contribution of household preferences to the precipitous climb in cash ratios that accompanied reductions in bank leverage following the 2008 global financial crisis. Through counterfactual analysis, we find that in the absence of heightened household demand for deposits, decline in bank leverage would have been twice as steep, and the proportion of mortgage loans within total assets would have contracted by more than twice the actual post-crisis change. Our empirical analysis confirms the increase in household demand for deposits and explores how this expansion interacts with banks' capital buffers. The empirical results support our comparative static implications that banks with larger capital buffers accumulate less cash and more mortgages as a share of total assets than banks with smaller capital buffers in response to growing deposits. The mechanisms discussed in this study are pertinent for policymakers, particularly as central banks worldwide consider further interest rate reductions and U.S. regulators finalize the implementation of Basel III requirements. |
| Keywords: | banks, deposits, monetary policy, mortgages |
| JEL: | C58 D14 D53 E44 E58 G21 G28 G51 R21 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:hfa:wpaper:24-08 |
| By: | Sara Biadetti (Università di Roma “Tor Vergata”, Italy); Lorenzo Carbonari (DEF and CEIS, Università di Roma “Tor Vergata”, Italy); Filippo Maurici (Department of Political Sciences, Università Roma Tre, Italy) |
| Abstract: | This paper explores forward-looking ambiguity (Knightian uncertainty) in a model with homogeneous workers and credit-constrained heterogeneous entrepreneurs. Agents are ambiguity-averse, using a worst-case criterion to form expectations about future productivity. We compare our economy with one that lacks uncertainty and find that ambiguity: (i) lowers the productivity threshold for market entry, (ii) reduces the equilibrium interest rate, and (iii) shifts expenditures from entrepreneurs to workers. These results stem from persistent expectation-realization mismatches. While ambiguity does not affect stability, it alters the convergence rate to the steady state and helps explain key macroeconomic comovements. |
| Keywords: | ambiguity, collateral constraints, heterogeneous agents, transition dynamics |
| JEL: | E22 D81 D84 G14 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:rim:rimwps:24-20 |