Keynesian Dynamic Stochastic General Equilibrium Research Articles

Comparative Anslysis of Carbon Emission Reduction Policies in China’s Manufacturing and Transportation Sectors

This study evaluates China’s environmental policies, specifically the increase of carbon emission tax rates and the reduction of carbon emission intensity, by developing a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model that incorporates energy consumption and carbon emissions. The production sector is segmented into manufacturing, non-manufacturing, and transportation, with transportation services acting as inputs for both manufacturing and non-manufacturing firms. We construct four cases within two scenarios, each characterized by distinct targets and policies. After calibrating and estimating the relevant parameters, we compare carbon reduction outcomes and economic fluctuations across the two scenarios. Our findings indicate that when targeting the same carbon emission tax rate increase or carbon emission intensity ratio reduction, policies that increase the carbon emission tax rate or reduce carbon emission intensity implemented in the manufacturing sector achieve greater carbon emission reductions compared to the same polices implemented in the transportation sector. Meanwhile, compared to the latter case, output experienced a greater decline, and inflation exhibited a more substantial increase in the former case. However, when the quantities of carbon emission reductions are approximately the same in the first quarter, policies that increase the carbon emission tax rate or reduce carbon emission intensity enacted in the transportation sector demonstrate superior performance relative to the same polices implemented in the manufacturing sector. This leads to smaller final output reductions and milder inflation increases. In summary, for equivalent levels of carbon emission reductions, policies implemented in the transportation sector yield more favorable economic outcomes than those applied in the manufacturing sector.

Asymmetric distance and business cycles (ΑDBC): A new understanding of distance in international trade models through the example of Iran's trade corridors

We introduce a new concept of distance, and the way this could affect gravity-based trade modeling. Our motivation is twofold: a) global uncertainty in trade relations allows us to treat distance as an asymmetric shock in economic modeling; b) economies of scale in seaborne trade make geographical distance less relevant in trade models, substituted by economic distance, as this can be proxied by ocean freight rates. This, for instance, allows China to import iron ore from Brazil, at three times the distance compared to Australia. We enhance the New Keynesian Dynamic Stochastic General Equilibrium Model (DSGE) by incorporating a distance shock parameter into the transaction costs function. We test this on Iran's participation in the Shanghai Cooperation Organization as well as in the International North-South Transport Corridor. We conclude that longer physical distances do not necessarily have a negative impact on trade.

Regulatory Effects of the Combinations of Aggregate and Structural Monetary Policy Instruments: an application of New Keynesian DSGE model to China

This paper selects Chinese macroeconomic data from the first quarter of 2009 to the first quarter of 2020 and employs a New Keynesian dynamic stochastic general equilibrium model that incorporates the financial accelerator mechanism, price stickiness, and invisible government guarantees. The regulatory effects of different combinations of monetary policy instruments are compared from five perspectives: the shock effect of monetary policy, the magnitude of economic volatility of non-monetary policy shocks, the Central Bank loss function, the gap in the distribution of household income, and the heterogeneous firm external financing premium. Our findings indicate that the regulatory effects of the aggregate price-based and structural quantity-based monetary policy instrument combination are optimal, a conclusion that is further supported by the robustness test. It is therefore recommended that the Central Bank consider the potential benefits of a combined approach to aggregate and structural monetary policy instruments, with a view to enhancing credit availability for the real economy. This paper represents a significant contribution to the field, as it is the first to explicitly propose four distinct monetary policy instrument combinations, thereby overcoming the limitations of previous studies that have focused on a single instrument or a narrow range of instruments. The paper also contributes to the theoretical understanding of monetary policy instruments.

Nonseparability of credit card services within Divisia monetary aggregates

Abstract We use the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) framework and Vector Autoregressive (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.

Monetary and fiscal policies in Brazil and the behavioral approach

PurposeThis study aims to elucidate the dynamics of monetary and fiscal policy interactions in Brazil, focusing on the impacts of positive shocks in government consumption and interest rates. By comparing rational and behavioral agent responses, it clarifies how these frameworks influence gross domestic product (GDP), inflation, private and government consumption and nominal interest rates.Design/methodology/approachThe study employs a new Keynesian dynamic stochastic general equilibrium (DSGE) model with Bayesian estimation from 2000Q1 to 2022Q4, capturing rational and behavioral behaviors with adjustments for Brazilian economic idiosyncrasies. Impulse response functions (IRF) assess the dynamic effects of policy shocks, providing a comparative analysis of the two frameworks.FindingsBehavioral agents show greater initial sensitivity to policy shocks, causing more pronounced fluctuations in GDP, inflation and private consumption compared to rational agents. Over time, the behavioral approach leads to a more robust recovery, while the rational approach results in a quicker return to equilibrium but less pronounced long-term recovery. The study also finds fiscal policy can partially offset the negative impacts of monetary tightening, with a more delayed effect in the behavioral model.Originality/valueThis paper provides insights into the interplay between monetary and fiscal policies under different agent expectations, emphasizing the importance of incorporating behavioral elements into macroeconomic models to better capture policy dynamics in emerging markets.

Corporate debt, repayment and maturity structure, and monetary policy transmission

Abstract This article develops a stylized New Keynesian Dynamic Stochastic General Equilibrium model and explores the function of the repayment and maturity structure of corporate debt in the monetary policy transmission mechanism. The results demonstrate that following an unanticipated policy tightening, long-term floating-rate debt exacerbates the credit channel, causing a greater decline in investment and output due to the increased debt burden relative to long-term fixed rate debt. In response to the downward trajectory of the output, the central bank pursues a lower interest rate path, thereby inflation remains at a relatively elevated level. Thus, the monetary authority is less effective in stabilizing inflation in economies with long-term floating rates compared to those with fixed rates. Prolonging the maturity of floating-rate debt aggravates these effects and renders firms even more susceptible to adverse shocks.

Inefficient shocks and optimal monetary policy

Real disturbances that lead to trade-offs between inflation and output gap stabilization have not been studied much in the context of monetary policy settings in emerging markets and developing economies (EMDEs). We identify market price support present in the agriculture sectors of the EMDEs as inefficient shocks that lead to such trade-offs. Using a three-sector new Keynesian dynamic stochastic general equilibrium model, we show trade-offs between core-inflation and output gap stabilization under discretionary and commitment policies. This result departs from the popular viewpoint, stating that the strict core-inflation targeting is an optimal monetary policy for EMDEs susceptible to relative price changes.

Effect of Financial Frictions on Monetary Policy Conduct: A Comparative Analysis of DSGE Models with and without Financial Frictions

In this study, we explored the impact of bank leverage and financial frictions on the transmission of real and financial shocks. Two new Keynesian dynamic stochastic general equilibrium (DSGE) models, with and without financial frictions, were employed in the context of the Tunisian economy. In the analysis, we considered three types of shocks—productivity, monetary, and adverse bank capital shocks. The findings reveal that, in the model with financial frictions, the response of macroeconomic and financial variables to demand and supply shocks was more pronounced than in the baseline model, where frictions primarily exist at the borrower level. In this study, we underscored the significance of financial shocks, particularly negative bank capital shocks, in triggering substantial macroeconomic and financial fluctuations, especially when banks operate with higher leverage ratios. Additionally, the inclusion of financial frictions in the DSGE model enhanced its ability to capture the empirical features of real and financial shocks, providing valuable insights for effective monetary policymaking. The results provide foundational insights for Tunisian policymakers to assess the impact of financial frictions in the context of the Tunisian economy. This is significant for the Central Bank of Tunisia, which has not yet adopted a specific DSGE model. Therefore, through our analysis, we determined the amplificatory role of financial frictions in the dynamics of macroeconomic and financial variables in Tunisia and examined the main transmission channels of shock propagation.

From parameters to policies: sensitivity analysis and fiscal and monetary reactions

PurposeThis paper seeks to explore the sensitivity of these parameters and their impact on fiscal policy outcomes. We use the existing literature to establish possible ranges for each parameter, and we examine how changes within these ranges can alter the outcomes of fiscal policy. In this way, we aim to highlight the importance of these parameters in the formulation and evaluation of fiscal policy.Design/methodology/approachThe role of fiscal policy, its effects and multipliers continues to be a subject of intense debate in macroeconomics. Despite adopting a New Keynesian approach within a macroeconomic model, the reactions of macroeconomic variables to fiscal shocks can vary across different contexts and theoretical frameworks. This paper aims to investigate these diverse reactions by conducting a sensitivity analysis of parameters. Specifically, the study examines how key variables respond to fiscal shocks under different parameter settings. By analyzing the behavioral dynamics of these variables, this research contributes to the ongoing discussion on fiscal policy. The findings offer valuable insights to enrich the understanding of the complex relationship between fiscal shocks and macroeconomic outcomes, thus facilitating informed policy debates.FindingsThis paper aims to investigate key elements of New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models. The focus is on the calibration of parameters and their impact on macroeconomic variables, such as output and inflation. The study also examines how different parameter settings affect the response of monetary policy to fiscal measures. In conclusion, this study has relied on theoretical exploration and a comprehensive review of existing literature. The parameters and their relationships have been analyzed within a robust theoretical framework, offering valuable insights for further research on how these factors influence model forecasts and inform policy recommendations derived from New Keynesian DSGE models. Moving forward, it is recommended that future work includes empirical analyses to test the reliability and effectiveness of parameter calibrations in real-world conditions. This will contribute to enhancing the accuracy and relevance of DSGE models for economic policy decision-making.Originality/valueThis study is motivated by the aim to provide a deeper understanding of the roles macroeconomic model parameters play concerning responses to expansionary fiscal policies and the subsequent reactions of monetary authorities. Comprehensive reviews that encompass this breadth of relationships within a single text are rare in the literature, making this work a valuable contribution to stimulating discussions on macroeconomic policies.

A Critical Analysis of the Financial Frictions Approach in a Minskyan Perspective

The concept of financial frictions is at the core of the Financial Frictions Approach (FFA) which underlines that to explain the financial crisis of 2007–2008 it is sufficient to add the financial system to the New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model. Many economists have cited Hyman Minsky among those who “emphasized the importance of financial frictions.” The aim of this work is: 1) to show that Minsky cannot be considered the precursor of the FFA and that FFA does not allow for a solid explanation of financial crises; and 2) to present a sound explanation of the financial instability affecting capitalist economies based on two teachings characterizing Minsky’s work. The first consists in Minsky’s interpretation of John Maynard Keynes’s General Theory, which recovers the revolutionary elements of Keynes’s thought neglected by the Neoclassical Synthesis. The second teaching consists in underlining the need to integrate Keynes’s and Joseph Schumpeter’s theoretical frameworks.

External vulnerability and optimal monetary policy in Nigeria

In this study, we assess the external vulnerability of the Nigerian economy by documenting three alternatives (zero, partial and full) oil price pass-through to inflation within a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) framework. The results show that under a zero-oil price pass-through, the choice of inflation measure is immaterial, as macroeconomic responses to the shock are comparable under alternative Taylor rule specifications. The shock precipitates stagflation, transmitted via the income and exchange rate channels; and introduces an extra layer of vulnerability associated with higher external risk premium. Both core and oil inflation targeting monetary rules maximize welfare under a zero-oil price passthrough, while oil inflation targeting is shown to be welfare superior under partial or full oil price pass-through. Credibility consideration renders core inflation targeting the feasible optimal path for the central bank.

Monetary policy in practice: do central banks respond to movements in exchange rate and credit growth?

PurposeThis study examines the importance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand. To this end, the authors construct a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model. The model encompasses several essential characteristics, including incomplete financial markets, incomplete exchange rate pass-through, deviations from the law of one price and a banking sector. The authors consider generalized Taylor rules, in which policymakers adjust policy rates in response to output, inflation, credit growth and exchange rate fluctuations. The marginal likelihoods are then employed to investigate whether the central bank responds to fluctuations in the exchange rate and credit growth.Design/methodology/approach This study constructs a small open economy DSGE model and then estimates the model using Bayesian methods.Findings The authors demonstrate that the monetary authority does target exchange rates, whereas there is no evidence in favor of incorporating credit growth into the policy rules. These findings survive various robustness checks. Furthermore, the authors demonstrate that domestic shocks contribute significantly to domestic business cycles. Although the terms of trade shock plays a minor role in business cycles, it explains the most significant proportion of exchange rate fluctuations, followed by the country risk premium shock.Originality/value This study is the first attempt at exploring the relevance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand.

Research on the Impact of Industrial Digitalization on High-Quality Economic Development: Evidence from China

This paper presents a New Keynesian dynamic stochastic general equilibrium model with price stickiness, employing macro-quarterly data and Bayesian estimation for parameter estimation. The study dissects the impact of industrial digitalization into three key components: total factor productivity shock, investment marginal efficiency shock, and capital-to-labor substitution shock. The paper then analyzes the mechanism through which industrial digitalization influences the high-quality development of the economy using impulse response analysis and historical variance decomposition. The result shows that: In terms of economic growth, all three types of shocks resulting from industrial digitalization contribute to output expansion, with the investment marginal efficiency shock rapidly boosting output in the short term. However, the technology shock has the most noticeable long-term effect on output growth. In the labor market, the investment marginal efficiency shock positively impacts employment and wages. The effects of the technology shock and capital-to-labor substitution shock on employment and wages first show suppression before enhancement. In the commodity market, the three shocks exert more pronounced effects in the medium and long term, bolstering investment and consumption to varying degrees. In light of these findings, policy recommendations include promoting the development of digital infrastructure, implementing proactive employment policies, offering robust industrial support for the digitalization of traditional enterprises, and fostering a favorable market environment.

DSGE on the metaverse

This paper explores the economic dynamics of the metaverse by using on-chain data of token holdings from a blockchain game. We use the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to examine the token inflation of the metaverse economy. We extend the standard DSGE models with in-game cryptocurrency to capture the demand and supply of NFTs assets. We compare the responses to tokenomic shocks that drive the metaverse economy. This paper is the first to use on-chain token holding data and DSGE models to study the metaverse economy.

Identifying efficient policy mix under different targeting regimes: A tale of two crises

We examine the influence of demand shock, supply shock and the monetary policy shock on macroeconomic variables using the New Keynesian Dynamic Stochastic General Equilibrium framework. Our study tries to identify the efficient monetary policy mix as an antidote to the prevailing economic fragilities that originated due to the COVID-19 pandemic and geopolitical conflict in case of India and China. Under both simulated and Bayesian analysis, our findings revealed the inflationary effect of demand and supply shock with a target-oriented monetary policy under sticky prices as the efficient policy tool to counter these effects. The macroeconomic projections depicted the favourable influence of output due to active intervention of target-oriented monetary policy in both these economies.

Implications of collateral constraints for the term premium

ABSTRACT This study examines the impact of credit constraints on the term premium in a production economy. To do so, we incorporate the Kiyotaki-Moore collateral constraint and Epstein-Zin-Weil preferences into a medium-scale New Keynesian Dynamic Stochastic General Equilibrium (NK DSGE) model with nominal rigidity. Our findings are twofold. First, credit constraint, a key ingredient of the financial accelerator channel, has significant effects on the term premium. Second, the loan-to-value ratio has non-linear effects on the term premium.

The Effects of Monetary Policy on Macroeconomic Variables through Credit and Balance Sheet Channels: A Dynamic Stochastic General Equilibrium Approach

Economic policies aimed at managing economic variables in the short and long term have always been of special importance. These policies seek to reduce economic fluctuations in the short term and increase sustainable economic growth in the long term. One of these policies is monetary policy, which is mainly carried out by central banks worldwide. This paper uses the Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to examine the effects of monetary policy on the real variables of the Iranian economy through the credit channel and the balance sheet channel. The presented model analyzed information about macroeconomic variables in Iran for the period from 1990 to 2020. The obtained results show that with the implementation of restrictive monetary policy in the economy, all productive activities of enterprises decreased, and this led to a decrease in household income, which in turn reduced household savings in the form of bank deposits. Because the most important sources of financing for banks are deposits, the ability of banks to offer loans was reduced. On the other hand, a restrictive monetary shock was associated with a decline in the value of corporate securities. As a result, the amount of received loans by firms was reduced by the value of the assets. This reduced the demand of banks for bank loans, which intensified the effects of the initial shock, along with a reduction in the banks’ ability to provide lending services. Further, the results indicate the relative success of the model in simulating Iran’s macro economy.

Evaluation and indirect inference estimation of inattentive features in a New Keynesian framework

AbstractWe test the standard New Keynesian (NK) dynamic stochastic general equilibrium (DSGE) model with and without inattentiveness features, where inattentiveness is modeled either in the form of sticky information (SI) or imperfect information (IF) data revision. All models are estimated and tested by indirect inference. The estimated model with sticky information somewhat outperformed the estimated NK model with full‐information rational expectation (FIRE), though both passed the test easily, while the model with IF data revision was strongly rejected.

Inflation dynamics in South Africa: The role of public debt

Orientation: Inflation targeting requires prudent fiscal policy to achieve desired results.Motivation for the study: Since the 2007–2008 financial crisis, fiscal authorities in South Africa have implemented an aggressive fiscal stimulus that has resulted in an acceleration of public debt, accompanied by a sustained government deficit. At the same time, the economy has continued to struggle with achieving significant growth to assist the government with its ever-growing expenditure obligations.Research Purpose: This study set out to investigate the relationship between inflation dynamics and the stance of fiscal policy, with a focus on public debt, in South Africa.Method: This study employs a New Keynesian dynamic stochastic general equilibrium (NKDSGE) model with financial frictions calibrated on South African data.Main Findings: The results of this study showed that when fiscal authorities put a relatively small weight on the control of public debt, inflation significantly increases in response to economic shocks. As a result, the cost channel of monetary policy transmission dominates the demand channel even if the loan rate pass-through is complete.Practical/Managerial Implications: The results of this study highlight the importance of fiscal discipline and its potential adverse effects on monetary authorities’ ability to achieve price stability as set out in their monetary framework.Contribution/Value added: To the best of our knowledge, this is the first study to analyse inflation dynamics and public debt in South Africa using modular experiments in a structural model derived from micro-economic foundations of constrained decision-making.

CLIMATE POLICIES AND BUSINESS CYCLES: THE EFFECTS OF A DYNAMIC CAP

AbstractEmissions are directly linked to economic output and consequently subject to business cycle fluctuations. The present study analyses the interactions between climate policies and business cycles through the lens of a New Keynesian dynamic stochastic general equilibrium model. We compare a static cap-and-trade policy with a dynamically adjusting policy in terms of macroeconomic stabilisation, welfare and emissions price dynamics. The results of the quantitative evaluation suggest that a constant policy leads to lower aggregate volatility but is associated with larger welfare costs. In contrast, under the dynamic policy emissions prices and labour markets display less variations.