Macroeconomic Model Research Articles

Exchange rate dynamics and consumption of traded goods

A Constant Elasticity of Substitution (CES) aggregator of domestic and foreign goods is assumed in virtually any model of international macroeconomics with multiple traded goods. If baskets of traded goods are allocated optimally across countries, the CES aggregator links trade flows to exchange rate dynamics implying a condition for optimal allocation of individual traded goods across countries. The condition holds irrespectively of assumptions about preferences or endowment processes. This paper analyzes optimal allocation of traded goods empirically for 9 OECD countries and finds that it is mostly rejected by data. The finding casts doubts on the ability of international macroeconomic models to jointly explain dynamics of consumption and exchange rates.

Economic and labour market impacts of migration in Austria: an agent-based modelling approach

This study examines the potential economic and labour market impacts of a hypothetical but plausible migration scenario of 250,000 new migrants inspired by Austria’s experience in 2015. Using the agent-based macroeconomic model developed by Poledna et al. (Eur Econ Rev, 151:104306, 2023. 10.1016/j.euroecorev.2022.104306, the study explores the detailed labour market outcomes for different groups in Austria’s population and the macroeconomic effects of the migration scenario. The analysis suggests that Austria’s economy and labour market have the potential to be resilient to the simulated migration influx. The results indicate a positive impact on GDP due to increased aggregate consumption and investment. The labour market experiences an increase in the unemployment rates of natives and previous migrants. In some industries, the increase in the unemployment rates is more significant, potentially indicating competition among different groups of migrants. This research provides insights for policymakers and stakeholders in Austria and other countries that may face the challenge of managing large-scale migration in the near future.

The Interaction between Credit Constraints and Uncertainty Shocks

AbstractThis paper proposes a novel link between credit markets and uncertainty shocks. We introduce a role for credit uncertainty via collateral constraints in an otherwise standard real business cycle (RBC) model and show that an increase in credit uncertainty triggers a precautionary response that interacts with the collateral constraint to generate a simultaneous decline in output, consumption, investment, real wages, and hours; a feature that previous work on uncertainty shocks without credit constraints is unable to produce in a flexible‐price environment. We also empirically test the theoretical predictions and show that an unforeseen increase in credit uncertainty generates a simultaneous decline in a broad measure of real activity in recessions.

Global natural rates in the long run: Postwar macro trends and the market-implied [formula omitted] in 10 advanced economies

Benchmark finance and macroeconomic models appear to deliver conflicting estimates of the natural rate and bond risk premia. This natural rate puzzle applies not only in the U.S. but across many advanced economies. We use a unified no-arbitrage macro-finance model with two trend factors to estimate the natural rate r∗ for 10 advanced economies. We cover a longer and wider sample than previous studies and draw on new sources to construct yield curves and excess returns. The two-trend model improves the explanatory power of yield regressions and return forecasts. Most variation in yields is due to the macro trends r∗ and π∗, and not bond risk premia, which are flatter than previous estimates. Our r∗ estimates covary with growth and demographic variables in a manner consistent with theory and previous findings.

Teaching behavioral macroeconomics—Examples and applications

The author of this article provides an example of how one might incorporate behavioral economics into teaching macroeconomics or labor economics at an undergraduate level. The focus is on two macroeconomic concepts—wage determination and the Phillips curve—and shows that the implications and conclusions of both models differ from their textbook versions, once behavioral aspects are taken into account. In order to do that, the author first presents the standard macroeconomic model in both cases, then stresses situations where homo economicus, i.e., the rationality assumption, does not hold, and finally introduces behavioral economics concepts that explain noted differences. The explanations are intertwined with small classroom experiments that can be part of the lecture and used to make the lecture more interesting and comprehensible.

Samuelson's last macroeconomic model: Secular stagnation and endogenous cyclical growth

On the occasion of the centennial of his mentor Alvin Hansen, Paul Samuelson published in 1988 a modified version of his seminal 1939 multiplier-accelerator model to address aspects of Hansen's secular stagnation hypothesis. The “Keynes-Hansen-Samuelson” model (or KHS, as he called it) was built to analyse the effects of population growth on the economy's trajectory. Several changes were then made. Instead of difference equations and a tight accelerator, as in his 1939 model, Samuelson deployed differential equations and a flexible accelerator to produce a nonlinear limit cycle. Despite Samuelson's strong claims for the analytical contributions of his 1988 paper, it has – in contrast with the 1939 model – received only scant attention by macroeconomists and historians of economics alike. Samuelson's 1988 paper was his last published macroeconomic model, based on his long-established tradition of non-optimising macro-dynamics. Our paper provides a close reading of that article and some analytical results that shed new light on the formal aspects of Samuelson's 1988 model. We also discuss how it historically links up with business cycle models advanced by John Hicks, Nicholas Kaldor, Roy Harrod and Richard Goodwin and examine how far Samuelson's use of the term secular stagnation differs from Larry Summers's recent reconstruction of it.

Asset bubbles and wealth inequality

AbstractWe examine the causal link between asset bubbles and wealth inequality in a two‐agent macroeconomic model. Bubbles influence wealth inequality through two channels: altering the debt–asset ratio and fuelling speculation. When bubbles grow, they can temporarily decrease wealth inequality if asset prices rise faster than debt. However, when they burst, wealth inequality increases as the debt–asset ratio rises. Steady‐state wealth inequality is unaffected by bubbles if household types share symmetric speculative timing. Although macroprudential policy, communication, and leaning against the wind can reduce negative bubble effects on aggregate utility, they have a limited effect on wealth inequality.

Business cycles in a cocoa and gold economy: Commodity price shocks do not always matter

This paper seeks to characterize the response of Ghana’s business cycle to cocoa and gold commodity price shocks using a time-varying parameter structural vector autoregressive (TVP-SVAR) model. We then provide some plausible explanations underlying the estimated effect of these price shocks on Ghana’s business cycle. In the yearly model, a significant positive effect of a cocoa price shock on Ghana’s business cycle is observed using data from 1960 to 2018. However, no significant effect of a gold price shock on Ghana’s business cycle was found. In the quarterly model, we found no significant effect of both cocoa and gold price shocks on Ghana’s quarterly business cycle under Ghana’s inflation-targeting monetary policy regime. The study concludes that the expected strong influence of cocoa and gold commodity price shocks on Ghana’s yearly and quarterly business cycles is not consistently supported by empirical data for all periods and time frequencies. We then suggest plausible explanations for the unexpectedly weak estimated effects of the two commodity price shocks on Ghana’s business cycle, particularly after the mid-1980s, including the role of a foreign-dominated gold sector, the influence of cocoa forward contracts, and the impact of cocoa smuggling. These findings call into question the incorporation of cocoa and gold commodity sectors into a business cycle model for Ghana’s economy for all business cycle episodes and time frequencies, contrary to conventional wisdom. Gold and cocoa windfalls/shortfalls in the short run are almost non-existent, which has important implications for Ghanaian policymakers and model builders.

Wage – price dynamics and financial market in a disequilibrium macro model: A Keynes – Kaldor – Minsky modeling of recession and inflation using VECM

This paper studies wage-price dynamics in the context of a disequilibrium macro model where there are two Phillips curves (PC's), a wage PC and price PC. We adapt this framework but introduce a Kaldorian delay effect in wage dynamics whereby output and sales predate wage dynamics. Along Keynesian lines aggregate demand drives output, but output is also impacted from the supply side, through Minsky - Kindleberger financial conditions, enhancing inflation through bottlenecks and supply constraints. Worsening financial conditions, resulting from central banks raising interest rates to counteract inflation, may actually accelerate the inflation rate through affecting the supply side. This occurs when there are financially generated bottlenecks and external non-stationary variables, such as fossil energy and food costs, acting as exogenous drivers of the inflation rate. These features are first studied in a disequilibrium intertemporal dynamic macroeconomic model but then empirically explored in a mixed Vector Error Correction Model (VECM) with a mix of stationary and non-stationary variables. Nonlinearities in the dynamics and regime switching are shown to be essential in disequilibrium macrodynamics, here first studied analytically and then econometrically, exploring the transitory and persistent effects of shocks.

Inter-industry trade and business cycle dynamics

Abstract Motivated by the increased importance of trade between industrialized and less-developed countries, we build a two-sector dynamic stochastic general equilibrium model featuring inter-industry trade as well as intra-industry trade to analyze the business cycle dynamics of industrialized countries. We find that import-competing sectors are more sensitive to domestic productivity shocks than exporting sectors, due to their stronger reliance on domestic demand. This generates pressure to adjust relative prices and to reallocate factors of production. It also propagates the international spillover effects of productivity shocks leading to stronger business cycle comovement across countries, relative to a traditional business cycle model that does not feature inter-industry trade.

Building a baseline to better integrate air passenger and air freight transport into a global Computable General Equilibrium (CGE) model

The Covid-19 pandemic has had opposite effects on demand for air passenger and air cargo transport and on the way these two sectors interact with other sectors of the economy. However, macroeconomic models generally represent aviation as a single sector, limiting the ability to assess those interactions. In this study, we split the air transport sector into two sectors (passenger and freight) in GTAP’s Multiregional Input–Output table. We assess the sectors’ response to a carbon tax by performing a sensitivity analysis. Our results highlight the environmental benefits from the Covid-19 pandemic will only be transitory unless policies and consumer demand rein in traffic growth in the aviation industry. Particular attention should be paid on leisure travel, due to its large share in the aviation industry and the potential steep rise in demand (87%) in the EU27 projected between 2015 and 2030.

Is labour force participation independent of unemployment? A panel analysis for high-income countries

PurposeWe test the pertinence of the unemployment invariance hypothesis (UIH) for a set of Organisation for Economic Co-operation and Development countries.Design/methodology/approachWe empirically investigate the nexus between unemployment and labour force participation employing structural vector autoregressive methods for panel data.FindingsWe find that shocks in unemployment produce long-lasting, negative effects on participation, testifying to a discouraged worker effect.Originality/valueOur results do not support the validity of the UIH in high-income economies. This has relevant implications for policy making and macroeconomic models.

Heteroskedastic proxy vector autoregressions: An identification-robust test for time-varying impulse responses in the presence of multiple proxies

We propose a test for time-varying impulse responses in heteroskedastic structural vector autoregressions that can be used when the shocks are identified by external proxy variables as a group but not necessarily individually. The test is robust to the identification scheme for identifying the shocks individually and can be used even if the shocks are not identified individually. The asymptotic analysis is supported by small sample simulations which show good properties of the test. An investigation of the impact of productivity shocks in a small macroeconomic model for the U.S. illustrates the importance of the issue for empirical work.

The Political Economy of Exchange Rates and Export-Led Industrialization in South Korea*

ABSTRACT South Korea’s economic trajectory has been one of the most successful stories of post-war catch-up industrialization. The Korean developmental state has used various tools, including the exchange rate, to become an export powerhouse in the twenty-first century. However, the export-led growth strategy has had a distributive conflict with Korea’s working class. Based on post-Keynesian and structuralist economics, this paper assesses the political economy of exchange rate depreciation and export-led industrialization in South Korea. I show that exports as a share of GDP have constantly risen to become the most important growth engine in the Korean economy. This long-term trend, however, has coincided with a decline in the labor income share in South Korea. I formulate the structuralist macroeconomic model to explain dynamics of real wages, real exchange rates, exports, and output. I finally use a vector autoregression (VAR) analysis to show that exchange rate depreciations during modern South Korea (1989Q1–2023Q1) are inflationary and contractionary in the short run. Currency depreciations have ambiguous effects on exports, but they clearly reduce output gaps. On the other hand, an increase in nominal wages is expansionary or varies positively with output gaps.

To change or not to change. The evolution of forecasting models at the Bank of England

ABSTRACT Why do policymakers and economists within a policymaking institution choose to throw away a model and to develop an alternative one? Why do they choose to stick to an existing model? This article contributes to the literature on the history and philosophy of modelling by answering these questions. It delves into the dynamics of persistence, change, and building practices of macroeconomic modelling, using the case of forecasting models at the Bank of England (1974–2014). Based on archives and interviews, we document the multiple factors at play in model building and model change. We identify three sets of factors: the agency of modellers, institutional factors, and the material factor. Our investigation shows the diversity of explanations behind the decision to change a model: each time, model replacement resulted from a different combination of the three types of factors.

Revisiting Event-Study Designs: Robust and Efficient Estimation

Abstract We develop a framework for difference-in-differences designs with staggered treatment adoption and heterogeneous causal effects. We show that conventional regression-based estimators fail to provide unbiased estimates of relevant estimands absent strong restrictions on treatment-effect homogeneity. We then derive the efficient estimator addressing this challenge, which takes an intuitive “imputation” form when treatment-effect heterogeneity is unrestricted. We characterize the asymptotic behaviour of the estimator, propose tools for inference, and develop tests for identifying assumptions. Our method applies with time-varying controls, in triple-difference designs, and with certain non-binary treatments. We show the practical relevance of our results in a simulation study and an application. Studying the consumption response to tax rebates in the U.S., we find that the notional marginal propensity to consume is between 8 and 11% in the first quarter—about half as large as benchmark estimates used to calibrate macroeconomic models—and predominantly occurs in the first month after the rebate.

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 novel macroeconomic modelling assessment of food loss and waste in the EU: An application to the sustainable development goal of halving household food waste

As part of a package of measures to alleviate pressures on our planetary boundaries, the European Union farm-to-fork strategy adopts target 12.3 of the sustainable development goals, with the aim of halving food waste by 2030. A quantification of medium-term changes in food loss and waste (FLW) by both food supply chain stage and member state, as well as the cradle-to-grave market impacts from proposed reductions, requires a suitably tailored simulation model. A systems wide approach (MAGNET) with a novel characterisation of FLW behaviour is employed and linked to recent detailed Eurostat FLW estimates. In addition to business-as-usual baseline estimates of FLW to 2030, a scenario assesses the sustainability and circularity impacts from halving food waste via waste behaviour taxes. From 2020 to 2030, baseline EU average per capita FLW grows less than anticipated due to changing household consumption patterns in the newer EU member states. Similarly, by 2030 the share of food losses in total FLW appears to grow. Compared with the baseline in 2030, halving household food waste reduces EU FLW by 17.5 million tonnes. Despite the introduction of targeted food waste behaviour taxes, the average relative EU food price still falls by 2 %. In addition, lower levels of EU emissions- and land leakage are reported, whilst the reduction in bio-waste streams for fertiliser does not incur higher fossil fertiliser uptake due to falling EU crop production. Concluding, the rising projected share of food losses in the baseline signals a need for reinforced stakeholder communication and coordination strategies which are receiving less attention than consumer behaviour, hindering efficient responses to mitigate FLW. Finally, to increase the social acceptance of waste behaviour taxes and mitigate anticipated losses to EU farmers, a policy of channelling tax proceeds to supporting incomes and employment retraining schemes should be publicly visible.

The roles of price points and menu costs in price rigidity

Macroeconomic models often generate nominal price rigidity via menu costs. In scanner databases, (1) price points, embodied in nine-ending prices, account for two-thirds of prices; (2) at the conclusion of sales, post-sale prices return to their pre-sale levels more than three-fourths of the time; and (3) such memory around sales is stronger if the pre-sale price was a price point. Extending a canonical menu cost model to allow for price points, I estimate an incentive to set nine-ending prices two orders of magnitude larger than the menu costs. The choice of a mechanism for price rigidity matters for aggregate dynamics.

A comprehensive modeling framework for coupled electricity and carbon markets

AbstractThe carbon market plays a critical role in promoting the transition toward renewable energy sources and reducing greenhouse gas emissions in the electricity generation and transmission. Extant research has overlooked the dynamic bilateral causality that exists between electricity and carbon markets. Moreover, these studies have frequently treated the macroeconomic effect as exogenous. To bridge this research gap, this paper presents a holistic modeling framework that comprehensively captures the intertwined nature of electricity and carbon markets and their concomitant interactions with the overarching economy. The suggested modeling framework is an integration of three principal modules, namely, a carbon market, an electricity market, and economic system. This synergistic blend provides an exhaustive understanding of the entire market operation cycle. It offers detailed clearance rules, and most importantly, it adopts a macroeconomic systematic modeling approach for evaluating the impact emanating from the interconnected electricity and carbon markets. To illustrate the practicality and effectiveness of the proposed approach, a case study anchored on empirical data sourced from the electricity and carbon markets in China is conducted. The empirical findings underscore the fact that incorporating a green certificate market into the modeling framework can precipitate a reduction in greenhouse gas emissions. Additionally, the results indicate that expanding the scale of the green certificate market from 1.9% in 2021 to 33% by 2023 will increase the generation of green electricity by 10%.