General Equilibrium Effects Research Articles

Trade Elasticities in General Equilibrium: Demand, Supply, and Aggregation

Abstract We develop a general equilibrium model of international trade that incorporates imperfect factor mobility, product entry, and external returns to scale into a unified framework. The effects from these microeconomic channels can be summarized by two composite elasticities that govern supply and aggregation. We structurally derive export supply and import demand curves, develop a heteroskedastic estimator, and estimate supply, aggregation, and demand elasticities across international product markets. Employing our estimated model, we evaluate the impact of recent US protectionist policies and highlight the importance of our estimates and general equilibrium effects for tariff passthrough rates and cross-industry employment reallocations.

Welfare and economic implications of universal child benefits

Universal child benefits are an important component of the social protection systems in many developed economies, particularly in Europe. When evaluating their impact, most studies tend to focus primarily on the empirical evidence and short-term effects. However, given their large-scale implementation, such programs can have sizable general equilibrium effects. The aim of this paper is to study the long-run implications of universal child benefits within a theoretical framework that can capture the complexities of household decisions regarding consumption, labor participation, and the timing of children. To this end, I develop an overlapping generations model with idiosyncratic earnings risk, infertility shocks, and endogenous temporal fertility. According to the model simulations, universal child benefits lead to a reduction in the spacing between children and, on average, lower maternal age at childbirth for all births. This, in turn, alleviates some of the negative aggregate effects typically associated with redistributive policies, but has a detrimental impact on the average quality of children. Finally, universal child benefits increase ex-ante welfare by 0.42% of lifetime adult consumption, significantly outperforming broad-based transfer policies not tied to the number of children.

Estimating Who Benefits from Productivity Growth: Local and Distant Effects of City Productivity Growth on Wages, Rents, and Inequality

Abstract We first estimate the direct effects on local workers’ earnings and housing costs from increases in local labor demand caused by gains in city-level manufacturing productivity. We find that local workers benefit from productivity growth, even after subtracting increases in housing costs. These gains are larger for local less educated workers, such that productivity growth reduces local inequality. We then propose and implement a new transparent method of estimating indirect effects of local productivity growth on earnings and housing costs of workers in other cities. We find that these general equilibrium effects are economically important and disproportionately benefit college-educated workers.

Migration and the environment: A look across perspectives

The decisions related to migration – where to live, when to move, and where to move – have a long history in economics. Different fields, within economics and outside economics, have developed different empirical methods to study migration and its consequences. However, these literatures rarely cite each other and there is little crossover between them. The purpose of this paper is twofold. First, to provide a simple theoretical framework for understanding general equilibrium effects in migration models that can help researchers think through the specific contexts in which these will be a problem for reduced form estimation. Second, to examine the different literatures in economics that have addressed the question of the effects of environmental amenities on migration with an eye to the differences across them and the way they can complement each other.

Microcredit: equilibrium effects

Abstract Changes to access to credit can potentially cause changes to the returns to various factors—general equilibrium (GE) effects. This paper considers changes in wages, prices of goods and services, interest rates, and in the returns to forming or maintaining social ties. Such GE effects can lead to positive and/or negative indirect effects on economic agents, including those who are not directly affected by a given credit policy. Thus such effects matter for the average level and distribution of impacts resulting from credit access. In addition, GE effects have implications for research design, in that those who are indirectly affected via GE channels are generally not a valid counterfactual for those who are directly affected.

General Equilibrium Effects of the Minimum Wage

General Equilibrium Effects of the Minimum Wage

Thermal stress and financial distress: Extreme temperatures and firms’ loan defaults in Mexico

The frequency and intensity of extreme temperature events are likely to increase with climate change. Using a detailed dataset containing information on the universe of loans extended by commercial banks to private firms in Mexico, we examine the relationship between extreme temperatures and credit performance. We find that unusually hot days increase delinquency rates, primarily affecting the agricultural sector, but also non-agricultural industries that rely heavily on local demand. Our results are consistent with general equilibrium effects originated in agriculture that expand to other sectors in agricultural regions. Additionally, following a temperature shock, affected firms face increased challenges in accessing credit, pay higher interest rates, and provide more collateral, indicating a tightening of credit during financial distress.

General Equilibrium Effects of the Adoption of a Dual-Class Share Structure by an Innovative Firm in Korea

ABSTRACT This study examines the general equilibrium effects of the adoption of a dual-class share structure by an innovative firm in Korea. In contrast to previous studies, which are performed from a microeconomic perspective and focus on empirical analyses, this study is performed from a macroeconomic perspective and uses a theoretical approach based on a dynamic general equilibrium model. The calibrated results obtained using data from Korea show that the adoption of a dual-class share structure by an innovative firm increases real gross domestic product, total real consumption, social welfare, and total innovation ability by 0.63%, 1.23%, 1.23%, and 2.22%, respectively, but decreases the probability of failure to defend management rights by 6.44%. In contrast, the adoption of a dual-class share structure by a non-innovative firm has a much weaker effect because a non-innovative firm does not invest in innovation.

Capital Regulation and Shadow Finance: A Quantitative Analysis

Abstract This article studies the effects of higher bank capital requirements. Using new firm-lender matched credit data from South Korea, we document that Basel III coincided with a 25% decline in credit from regulated banks, and an increase of similar magnitude from non-bank (shadow) lenders. We use our data to estimate the effect of capital requirements on bank credit, and the spillover effect of the reform on non-bank lending. We then build a general equilibrium model with heterogeneous banks and firms that replicates these micro estimates. We find that Basel III can account for most of the observed decrease in regulated bank lending and about three quarters of the increase in shadow lending. The latter is driven exclusively by general equilibrium effects of the reform.

Impact of agricultural input subsidy policy on market participation and income distribution in Africa: A bottom-up/top-down approach

Previous literature on the effects of agricultural input subsidy programs on smallholder market participation has only focused on partial equilibrium analysis, while ignoring important general equilibrium effects. Therefore, this study fills this gap by highlighting the critical role of targeting in the implementation of the agricultural input policy in the Malawian context. Specifically, we establish a bi-directional link between a farm household model and a general equilibrium model in order to explore the spillover effects of the input policy on market orientation and income distribution. Based on the findings, the partial equilibrium analysis underestimates the effect of the input policy and neglects important heterogeneities between farmers. More importantly, we find that extending the program to farmers who are excluded from the cereal and/or labor markets can lead to higher market participation, economic growth, and a reduction in poverty. Our findings suggest better targeting to increase the impact of agricultural input policy on market participation.

The general equilibrium effects of localised technological progress: A Classical approach

We study the general equilibrium effects of localised technical progress à la Atkinson–Stiglitz in economies in which capital is a vector of reproducible and heterogeneous goods. We show that there is no obvious relation between ex-ante profitable innovations and the functional distribution of income that actually emerges in equilibrium. Unlike in the standard macroeconomic approach to technical progress, localised innovations may lead to indeterminacy in equilibrium factor prices, and individually rational choices of technique do not necessarily lead to optimal outcomes. Innovations may even cause the disappearance of all equilibria.

Electricity and Firm Productivity: A General-Equilibrium Approach

Many policymakers view power outages as a major constraint on firm productivity in developing countries. Yet empirical studies find modest short-run effects of outages on firm performance. This paper builds a dynamic macroeconomic model to study the long-run general-equilibrium effects of power outages on productivity. Outages lower productivity in the model by creating idle resources, depressing the scale of incumbent firms and reducing entry of new firms. Consistent with the empirical literature, the model predicts small short-run effects of eliminating outages. However, the long-run general-equilibrium effects are much larger, supporting the view that eliminating outages is an important development objective. (JEL D22, D24, G32, L94, O13, O14)

Quantifying the partial and general equilibrium effects of sanctions on Russia

AbstractThis paper evaluates the effects of sanctions on Russia between 2014 and 2019 and the resulting countersanctions. We estimate their impact on trade in a gravity framework, allowing for treatment heterogeneity among pairs and sectors, and use the estimated elasticities in a general equilibrium analysis. We find that the sanctions decreased trade with Russia in key sectors, translating to a loss in real income in Russia by 0.3%. Full decoupling of the EU and its allies from Russia would increase this effect to over 4%. Our results emphasize the role of deep sanctions as a foreign policy instrument and international cooperation.

Macroeconomic consequences of alternative reforms to the health insurance system in the United States

AbstractThis paper presents a dynamic general equilibrium model designed to examine the macroeconomic effects and welfare implications of alternative reforms to the US health insurance system. Specifically, it scrutinizes the extent to which health care reform can mitigate inefficiencies stemming from market imperfections in the health insurance industry. The model considers a stochastic overlapping generations framework, incorporating heterogeneous agents who are subject to uncertain health shocks. These individuals make optimal decisions regarding labor supply, health insurance, and medical services. Given that the optimal levels of medical consumption and hours worked are endogenous, this setting encapsulates general equilibrium effects. The model is calibrated to US data, and numerical simulations suggest that suitable adjustments to the present health insurance system can broaden coverage and enhance welfare. This improvement is achieved by reducing adverse selection, improving overall health status, and lessening tax distortions on labor supply.

The nature, detection, and avoidance of harmful discrimination in criminal justice

AbstractWe provide a selective survey of the literature on discrimination by criminal justice agents, and argue for a taxonomy of harms that differs from conventional approaches. Discrimination can be self‐defeating if it reduces welfare among targets of discrimination while serving no legitimate purpose for the discriminating party. Even if a legitimate purpose is served, discrimination can be deliberative or demeaning, resulting in welfare losses that need to be accounted for. Deliberative and demeaning discrimination can also be self‐defeating through general equilibrium effects on witness cooperation, clearance rates, and preemptive and retaliatory violence. We consider how harmful discrimination can be detected and avoided, as well as changes in our understanding of discrimination resulting from the proliferation of predictive algorithms.

The governance of regional innovation policy and its economic implications

This paper provides insights on the potential macroeconomic impact of the governance of the European innovation policy called Smart Specialisation. We use original empirical data on the implementation of the policy, which is funded through a dedicated financial envelope of the 2014–2020 EU cohesion policy, in a spatial macroeconomic modelling framework capable of gauging the general equilibrium effects of varying degrees of governance quality. Our contribution aims at narrowing the gap between the abstraction of ex-ante impact assessment exercises based on macroeconomic simulations and the reality of how policy interventions may take place. By using data for all Italian NUTS 2 regions, we find that the measured quality of Smart Specialisation governance could increase the pure investment-related impact of the policy by up to 40 percent. At the same time, we estimate that further potential GDP gains—in the order of an additional 40–50 percent over what was achieved with the observed levels of governance—would not materialise because of the comparatively low quality of governance in some regions.

La traslación del aumento de los costes de producción a los precios de venta de las empresas no financieras en 2022

Rationale The surge in energy and other commodity prices in 2021 H2 and a significant part of 2022 has led to firms’ costs increasing considerably. This article analyses how this rise in costs has been passed through to selling prices and what impact it has had on firms’ output, wages, employment and unit labour costs. Takeaways •On average, firms passed through a significant proportion of production cost increases to selling prices in 2022, albeit with a high degree of heterogeneity across sectors. •In sectors that have historically seen more rigid pricing (proxied by lower price volatility), pass-through of rising costs to selling prices has been slower. •Rising input prices directly cause selling prices and unit labour costs to grow. The latter is a consequence of the negative effect on labour productivity, owing to the adverse impact on output and the lack of an impact on personnel costs. •In any case, these direct effects, which are stronger in the sectors most exposed to this shock, do not account for the indirect (general equilibrium) effects that influence all sectors.

Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design

Many central banks are considering issuing a central bank digital currency (CBDC). How will the CBDC affect the macroeconomy? Will its design matter? To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking, and welfare. Our model captures the competition between different means of payments and incorporates a novel general equilibrium feedback effect from transactions to deposits creation. The general equilibrium effects of a CBDC are decomposed into three channels: payment efficiency, price effects, and bank funding costs. We show that a cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. Interestingly, a cash-like CBDC can also crowd in banking, even in the absence of bank market power. In a calibrated model, at the maximum, a cash-like CBDC can increase bank intermediation by 10.2% and welfare by 0.059%, and it can capture up to 23.3% of the payment market. We also discuss some lessons for designing a CBDC. This paper was accepted by Will Cong, Special Section of Management Science: Blockchains and Crypto Economics. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.02763 .

Tax progressivity and the Pareto tail of income distributions

In a continuous-time version of the Bewley–Huggett–Aiyagari model, this paper shows theoretically and numerically that the fatness of the Pareto upper tail of the income distribution depends on tax progressivity only through the general equilibrium effect on the interest rate. With confiscatory taxes (marginal income tax rate approaching 100% at the top), the Pareto exponent is independent of tax progressivity.

Climate, wind energy, and CO[formula omitted] emissions from energy production in Denmark

The dynamic relation between CO2 emissions and wind energy in Denmark is analyzed using a fractional cointegration approach, extended to accommodate covariates. The impact of climate and forces of demand on the potential of wind power production for emissions abatement is investigated. Emissions decline as temperature increases. Wind power production increases with precipitation and North Atlantic oscillations. Aggregate output matters for emissions in a manner consistent with an environmental Kuznets curve (EKC). Accounting for a seasonal trend, our main estimate of marginal CO2 emissions avoided (MEA) per MWh of wind energy produced is 0.16 tonnes, based on impulse responses. This estimate of the abatement potential of wind power is lower than values reported in the literature, but statistically significant, and robust to including climate and EKC variables. MEA is reduced by about one third by treating electricity prices as endogenous, and by one quarter by including emissions from combustion of biomass. However, formal exogeneity tests indicate that the main MEA estimate is not inflated due to left-out general equilibrium effects. Without covariates, estimated MEA is 0.07, and insignificant.