Keynesian DSGE Model Research Articles

Who benefits from using property taxes to finance a labor tax wedge reduction?

We use a New Keynesian DSGE model with a rental housing market to evaluate how financing a labor tax wedge reduction through higher property taxation affects the real economy and welfare. We find that a labor tax wedge reduction generates favorable macroeconomic effects and improves international competitiveness, independent of the financing instrument used. Even though it negatively affects the housing market, property acquisition taxation outperforms all other instruments as the financing instrument in terms of welfare. This finding is the result of allowing households to decide whether to buy or to rent housing services and of the fact that, in this situation, they shift from purchasing to renting more housing services. Abandoning tax credit on mortgage interest payments effectively harms borrowers.

Great Recession and Macroeconomic Theory: A Useless Crisis?

ABSTRACTThe global financial crisis of 2007–08 and the subsequent Great Recession have pushed many economists to acknowledge a fundamental limit in the theoretical models elaborated after the monetarist counter-revolution: these models disregard the financial system. The years following the Great Recession have thus been marked by the development of what can be called the ‘Financial Frictions Approach’, a theoretical approach based on the addition of the financial system to the New Keynesian DSGE model. The results of this line of research are beginning to appear also in macroeconomics textbooks. Significant examples are the publication of the seventh edition of Blanchard’s textbook, and the publication of the third edition of the textbook co-authored by Blanchard, Amighini and Giavazzi. The objective of this work is twofold: (i) to show that the new model presented by Blanchard, Amighini and Giavazzi, which reflects the results of the ‘Financial Frictions Approach’, does not allow to elaborate a coherent explanation of the Great Recession and (ii) to present the pillars of an alternative theoretical model based on the lessons of Keynes, Schumpeter and Minsky.

DSGE모형을 통한 뉴케인지안 필립스곡선의 추정과 인플레이션 동학

본 연구는 인플레이션 동학을 설명하는데 주요한 분석도구로 활용되는 필립스곡선을 검증하였다. 이를 위해 경기변동 분석에 활발하게 이용되고 있는 뉴케인지안 DSGE모형을 설정하였다. 명목경직성을 반영하기 위하여 가격과 임금의 결정에서 Calvo 방식을 적용할 뿐만 아니라 가격과 임금의 과거치에 일정부분 연동하는 방식을 함께 고려하였다. 또한 선호충격, 통화정책충격, 지출충격, 투자조정비용 충격 등의 수요측면의 외생충격과 기술충격, 가격마크업충격, 임금마크업충격 등의 공급측면의 외생충격을 고려하였다. 따라서 명목적 경직성과 다양한 외생충격을 고려함으로써 이들 요인들이 인플레이션 동학에 미치는 영향을 파악할 수 있었다.BR 이렇게 구축된 모형에서 대하여 베이지안 추정법을 통하여 추정하였다. 추정된 매개변수를 통하여 도출된 혼합형 필립스곡선은 다음과 같은 성격을 가지고 있다. 먼저, 과거 인플레이션보다는 기대 인플레이션이 현재 인플레이션에 미치는 영향의 정도가 더 크다. 즉, 미래지향적 요소가 과거지향적 요소에 비해 인플레이션에 더 큰 영향을 미친다. 그리고 실질한계비용에 대한 인플레이션의 반응을 나타내는 필립스곡선의 기울기는 매우 완만한 것으로 추정되었다. 이러한 추정결과는 필립스곡선의 기울기가 과거에 비해 더 완만해졌다는 기존 연구결과들과 부합한다.BR 그리고 인플레이션 변동성에 대한 분산분해 추정결과에 따르면, 비용상승충격으로 해석되는 가격마크업충격이 인플레이션 변동성을 설명하는데 압도적인 기여도를 보여주었고, 통화정책충격과 기술충격이 일정부분 인플레이션의 변동성을 설명하는 것으로 나타났다.BR 한편, 가격마크업충격에 대한 인플레이션 충격반응함수의 가격경직성에 따른 변화를 모의실험한 결과, 기업들이 과거 인플레이션 연동비율을 높일수록 인플레이션의 반응 폭은 확대되었지만 그 영향이 어느 정도 단기에 그친 반면, 기업들이 자신의 제품가격을 조정할 수 있는 기회가 낮아질수록 인플레이션의 반응이 더 증폭되었을 뿐만 아니라 그 영향이 지속되는 것으로 나타났다.

Commitment or Discretion? An Empirical Investigation of Monetary Policy Preferences in China

Despite the fact that China has become the second largest economy in the world, its monetary policy is yet to be understood by the outside observers. In this paper we estimate the policy preferences of China's central bank by confronting a small-scale microfounded New Keynesian DSGE model in which monetary policy is described by commitment or discretion with the Chinese macroeconomic data over the period from 1992Q2 to 2017Q4. Bayesian model comparison reveals that the data favours discretionary monetary policy. Estimates of the loss function weights under both cases show that the leading policy goal is price stability, followed by output stability and then interest rate smoothing. Finally, through counterfactual analyses we assess how macroeconomic outcomes might improve had the Chinese central bank been able to commit.

Labor Mobility in a Monetary Union

We study macroeconomic dynamics and optimal monetary policy in an economy with cyclical labor flows across two distinct regions sharing trade links and a common monetary framework. In our New Keynesian DSGE model with search and matching frictions, migration flows are driven by fluctuations in the relative labor market performance across the monetary union. The optimizing monetary policymaker shows greater flexibility in inflation targeting when labor is mobile by leaning somewhat against deviations of migration flows from efficient benchmarks. But strict inflation targeting remains close to optimal. For a given monetary policy, labor mobility facilitates macroeconomic adjustments by reducing efficiency gaps in regional labor markets. Internal migration therefore reduces the welfare costs of following simple suboptimal monetary policy rules in a monetary union.

Exchange Rate Pass-Through in Brazil: А Markov Switching DSGE Estimation for the Inflation Targeting Period

This paper investigates the nonlinearity of exchange rate pass-through in the Brazilian economy during the inflation targeting period (2000–2018) using a Markov-switching new Keynesian DSGE model. We find evidence of two distinct regimes for exchange rate pass-through and for the volatility of shocks to inflation. Under the so-called ‘normal’ regime, the long-run pass-through to consumer prices inflation is estimated as almost zero, only 0.00057 of a percentage point given a 1% exchange rate shock. In comprasion, the expected pass-through to inflation under a ‘crisis’ regime is 0.1035 of a percentage point, for the same exchange rate shock. These results allow us to identify four distinct cycles for exchange rate pass-through during the inflation targeting period in Brazil, and suggest that higher central bank credibility and anchored inflation expectations may be related to lower levels of pass-through.

Business cycle implications of capacity constraints under demand shocks

When capacity constraints limit the production of heterogeneous firms, demand shocks can endogenously generate a number of important business cycle regularities: recessions are deeper than booms, economic volatility is countercyclical, the aggregate Solow residual is procyclical and the fiscal multiplier is countercyclical. The model's main mechanism is that the share of firms at their production limit is strongly procyclical. A baseline calibration of a basic New Keynesian DSGE model with capacity constraints delivers more than 25% of the empirically observed asymmetry in output, 18% of the additional cross-sectional dispersion in recessions and around 25% of the additional aggregate volatility, and more than 50% of the fluctuations in the Solow residual. The model implies fluctuations in the fiscal multiplier of around 0.12 between expansions and recessions.

Identifying the sources of model misspecification

Conventional macroeconomic models fail to predict to the Great Recession. Is it because they are misspecified? We propose an empirical method for detecting and identifying misspecification in structural economic models. Our approach formalizes the common practice of adding “shocks” in the model, and identifies potential misspecification via forecast error variance decomposition and marginal likelihood analyses. The simulation results based on a small-scale DSGE model demonstrate that our method can correctly identify the source of misspecification. Our empirical results show that state-of-the-art medium-scale New Keynesian DSGE models remain misspecified, pointing to asset and labor markets as the sources of the misspecification.

The Aggregate Implications of Regional Business Cycles

Making inferences about aggregate business cycles from regional variation alone is difficult because of economic channels and shocks that differ between regional and aggregate economies. However, we argue that regional business cycles contain valuable information that can help discipline models of aggregate fluctuations. We begin by documenting a strong relationship across U.S. states between local employment and wage growth during the Great Recession. This relationship is much weaker in U.S. aggregates. Then, we present a methodology that combines such regional and aggregate data in order to estimate a medium‐scale New Keynesian DSGE model. We find that aggregate demand shocks were important drivers of aggregate employment during the Great Recession, but the wage stickiness necessary for them to account for the slow employment recovery and the modest fall in aggregate wages is inconsistent with the flexibility of wages we observe across U.S. states. Finally, we show that our methodology yields different conclusions about the causes of aggregate employment and wage dynamics between 2007 and 2014 than either estimating our model with aggregate data alone or performing back‐of‐the‐envelope calculations that directly extrapolate from well‐identified regional elasticities.

Who Benefits from Using Property Taxes to Finance a Labor Tax Wedge Reduction?

We use a New Keynesian DSGE model with a rental housing market to evaluate how financing a labor tax wedge reduction through higher property taxation affects the real economy and welfare. We find that a labor tax wedge reduction generates favorable macroeconomic effects and improves international competitiveness, independent of the financing instrument used. Even though it negatively affects the housing market, property acquisition taxation outperforms all other instruments as the financing instrument in terms of welfare. This finding is the result of allowing households to decide whether to buy or to rent housing services and of the fact that, in this situation, they shift from purchasing to renting more housing services. Abandoning tax credit on mortgage interest payments effectively harms borrowers.

A New Keynesian DSGE Model with a Focus on the Housing Sector for Iran’s Economy

در این مقاله با هدف شناسایی تاثیر شوک‌های مخارج دولت، پولی، مالی، نفتی و تکنولوژی بر قیمت و تولید در اقتصاد ایران با تاکید بر بخش مسکن یک مدل تعادل عمومی پویای تصادفی نیوکینزی طراحی شده است. در این مدل، اقتصاد متشکل از یک خانوار نماینده، یک بنگاه تولیدکننده کالاهای نهایی در بخش مسکن و یک بنگاه تولیدکننده کالاهای نهایی در بخش غیر مسکن، زنجیره‌ای از تولیدکنندگان کالاهای واسطه‌ای در دو بخش مسکن و غیر مسکن و کارگزار دولت- مقام پولی است که ترکیبی از دولت و بانک مرکزی می‌باشد. اقتصاد کشور مورد بررسی، ایران، بسته فرض شده است. نتایج نشان می‌دهد که تکانه فناوری در بخش غیر مسکن باعث افزایش تولید و سرمایه‌گذاری و کاهش نرخ تورم در این بخش و افزایش مخارج مصرفی خانوارها شده و در بخش مسکن تولید و سرمایه‌گذاری را افزایش می‌دهد و با توجه به ارتباط پیشین بخش مسکن با بخش غیر مسکن، تولید در بخش غیر مسکن را نیز افزایش می‌دهد. افزایش نرخ رشد حجم پول به عنوان یک سیاست پولی باعث افزایش نرخ تورم و تولید در هر دو بخش می‌شود. همچنین با توجه به کشش بالاتر عرضه در بخش تولید کالاها و خدمات غیر مسکن، اثر شوک پولی بر تولید بخش غیر مسکن بیشتر از بخش مسکن است. بروز یک تکانه در مخارج دولت باعث افزایش تولید و نرخ تورم در بخش غیر مسکن و مسکن می‌شود؛ با ذکر این نکته که تاثیر این شوک بر سطح عمومی قیمت‌ها در هر دو بخش طولانی‌تر از اثر آن بر تولید است.

THE NEW KEYNESIAN WAGE PHILLIPS CURVE: CALVO VS. ROTEMBERG

We systematically evaluate how to translate a Calvo wage duration into an implied Rotemberg wage adjustment cost parameter in medium-scale New Keynesian DSGE models by making use of the well-known equivalence of the two setups at first order. We consider a wide range of felicity functions and show that the assumed household insurance scheme and the presence of labor taxation greatly matter for this mapping, giving rise to differences of up to one order of magnitude. Our results account for the inclusion of wage indexing, habit formation in consumption, and the presence of fixed costs in production. We also investigate the conditional and unconditional welfare implications of the wage-setting schemes under efficient and distorted steady states.

뉴-케인지안 동태확률 일반균형 모형을 통해 본 최근 경기순환에 대한 해석

본 연구는 우리경제가 최근 경험한 제9순환의 수축기(2008년 1월 ~ 2009년 2월)와 제10순환의 수축기(2011년 8월 ~ 2013년 3월)에 실물경제에 미친 외생충격의 영향을 실증분석하였다.BR 이를 위하여 뉴-케인지안 동태확률 일반균형 모형(New Keynesian DSGE Model)을 설정하고, 1991년 이후 분기별 자료를 이용하여 베이지안 방법(Bayesian Method)으로 모형을 추정하였다. 추정모형에 대한 분산분해(Variance Decomposition), 가상적 모의실험(Counterfactual Simulation) 및 역사적 분해(Historical Decomposition)를 통해 발견한 사실은 다음과 같다.BR 추정모형은 기술충격, 비용상승충격, 선호충격 및 통화정책충격의 네 가지 외생충격을 고려하였는바, 두 번의 경기순환에서 경기수축의 주요 요인은 기술충격이며, 제9순환기의 경기수축은 수요측면의 충격인 선호충격의 부정적인 영향도 상당히 작용했다는 사실을 확인하였다. 이에 반해 비용상승충격은 오히려 부정적 영향이 거의 없었다. 이는 최근 우리경제에 인플레이션 압력이 큰 문제가 되지 않고 있는 상황을 보여준 것이라고 해석된다. 그리고 통화정책충격은 경기에 대해 긍정적, 또는 부정적 효과가 혼재한 것으로 나타났다.

Economic Fluctuations in the U.S. and Euro Area: Quantifying the Contribution of Technical Change

This article aims at quantifying the contribution of technical change to cyclical fluctuations in the U.S. and euro area. We distinguish technical progress in labor‐augmenting and capital‐augmenting change. To this end, we derive and estimate a New Keynesian DSGE model embodying a constant elasticity of substitution (CES) production function for both areas. Our main findings are: (i) capital‐augmenting progress is the main source of technical change volatility; (ii) labor‐augmenting shocks give a negligible contribution to the variance of output; (iii) technical change (of both types) explains more economic fluctuations in the U.S. than in the euro area; and (iv) historical decomposition of GDP growth over our sample period (1980–2008) shows that capital‐augmenting progress is one of the key drivers of the business cycle.

LEARNING AND THE SIZE OF THE GOVERNMENT SPENDING MULTIPLIER

This paper examines the government spending multiplier when economic agents combine adaptive learning and knowledge about future fiscal policy to form their expectations. The analysis shows that the effects of a government spending shock substantially change when the rational expectations hypothesis is replaced by this learning mechanism. In contrast to the dynamics under rational expectations, a government spending shock in a small-scale new Keynesian DSGE model with learning crowdsinprivate consumption and is associated with a positive comovement between real wages and hours worked. In the baseline calibration, the output multiplier under learning is above one and about twice as large as under rational expectations.

ETLA macro model for forecasting and policy simulations

This paper presents a review of a quarterly macroeconomic model built for forecasting and policy simulation purposes at the Research Institute of the Finnish Economy (ETLA). The ETLA model can be labelled as a structural econometric macro model (also known as “SEM” or “policy model” in the recent literature). The ETLA model constitutes of 81 endogenous and 70 exogenous variables and hence at this stage, it is relatively small in size. The model encompasses Keynesian features in the short run, albeit particular attention is paid to its long-term equilibrium properties which are defined from supply side. Owing to these characteristics, its adjustment to external/policy shocks resembles the behavior of New Keynesian DSGE models with sticky prices and wages. The agents of the model are partly forward-looking.

The Optimal Inflation Target and the Natural Rate of Interest

We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.

Bank Market Power and the Risk Channel of Monetary Policy

This paper investigates the risk channel of monetary policy through banks' lending standards. We modify the classic costly state verification (CSV) problem by introducing a risk-neutral monopolistic bank, which maximizes profits subject to borrower participation. While the bank can diversify idiosyncratic default risk, it bears the aggregate risk. We show that, in partial equilibrium, the bank prefers a higher leverage ratio of borrowers, when the profitability of lending increases, e.g. after a monetary expansion. This risk channel persists when we embed our contract in a standard New Keynesian DSGE model. Using a factor-augmented vector autoregression (FAVAR) approach, we find that the model-implied impulse responses to a monetary policy shock replicate their empirical counterparts.

Level-k DSGE and Monetary Policy

This paper develops a new framework of level-k DSGE for monetary policy analysis. Incomplete markets are introduced to guarantee the eductive stability of the equilibrium. k=1.334 is estimated using growth and inflation forecasts from the Michigan Survey of Consumers, capturing the missing indirect channels and the weakened direct channels in households’ forecast rules, as well as the wedge between forecasts and realizations. The model produces inflation inertia under Taylor Rule. In pre-Volcker era, more active GDP targeting generates more output mean reversion both in forecasts and in realizations. In Great Recession, the model can explain the missing drop of both inflation and inflation expectations, as well as the stagnant recovery expectations that leads to slow recovery. The model also implies both dampening and accumulation effects of forward guidance. When k goes to infinity, the level-k DSGE reduces to a basic three equation New Keynesian DSGE model as in Gali (2015).

Labor Tax Reductions in Europe: The Role of Property Taxation

We use a New Keynesian DSGE model with search frictions on the housing market to evaluate how financing a labor tax reduction by higher property taxation affects the real economy and welfare. Search on the housing market enables us to explicitly model stocks and flows, which is necessary to differentiate between recurrent property taxes (levied on stocks) and property transaction taxes (levied to flows). We find that using recurrent property taxation as financing instrument outperforms other instruments although all policy measures increase aggregate economy-wide welfare. Our simulations suggest that using property transaction taxation as financing instrument is the least favorable measure.