Stochastic Equilibrium Model Research Articles

Twenty Years of Time Series Econometrics in Ten Pictures

This review tells the story of the past 20 years of time series econometrics through ten pictures. These pictures illustrate six broad areas of progress in time series econometrics: estimation of dynamic causal effects; estimation of dynamic structural models with optimizing agents (specifically, dynamic stochastic equilibrium models); methods for exploiting information in “big data” that are specialized to economic time series; improved methods for forecasting and for monitoring the economy; tools for modeling time variation in economic relationships; and improved methods for statistical inference. Taken together, the pictures show how 20 years of research have improved our ability to undertake our professional responsibilities. These pictures also remind us of the close connection between econometric theory and the empirical problems that motivate the theory, and of how the best econometric theory tends to arise from practical empirical problems.

Investment with incomplete markets for risk: The need for long-term contracts

Barring subsidies, investment in the power generation sector has come to an almost complete halt in the restructured European power sector. Market and regulatory failures such as the well known missing money (see Joskow, (2006)) but also normal market features such as risk, possibly also affected by market failures like market incompleteness are mentioned as common causes for the situation. This paper discusses incomplete risk trading and its impact on investment. The analysis applies computable stochastic equilibrium models on a simple market model of the Energy Only type. The paper first compares the cases of complete and fully incomplete markets (full risk trading and no risk trading). It continues by testing the impact of different risk trading contracts on both welfare and investment. We successively consider Contracts for Difference, Reliability Options with and without physical back up that we add to our Energy Only market model. We test the impact of market liquidity on the results. Finally, we compare these methods to a Forward Capacity Market that we also add to the energy only model. We complete the paper by interpretation of these results in terms of hurdle rate implied by these risk-trading situations.

Implications of Near-Autarky for North Korean Economy

This paper introduces a notion of near-autarky to describe the following features of North Korean economy: economic sanctions, more than 40 percents of trade dependency, chronic trade deficits, and monopolistic trade with China. The model in this paper is a dynamic stochastic general equilibrium(DSGE) model modified to incorporate the above features. The result show that North Korea have no incentive to deviate from the current situation. And also the fact that North Korea's biggest trade partner is China weakens the effectiveness of economic sanctions against North Korea.

The “Backus-Smith” puzzle, non-tradable output, and international business cycles

Purpose This paper aims to examine the effects of adding non-tradable sector and trade in intermediate goods sector and their impact on the “Backus-Smith” (BS) puzzle and the features of the non-tradable output. Conventional international real business cycle models show that the real exchange rate and the terms of trade are positively correlated to the relative consumption movement between the home and foreign economies when there is a total factor productivity shock, whereas the correlation in the data is negative. The author develops a two-country, dynamic, stochastic and general equilibrium (DSGE) model with staggered price setting in the non-tradable sector and international trade in intermediate goods sector because of product differentiation in a high-asset market frictions situation. Design/methodology/approach In this paper, DGSE simulation and calibration are performed using Matlab with Dynare. Findings When the world economy has positive country-specific productivity shock, the benchmark model with non-tradable sector and intermediate goods sector successfully solves the BS puzzle and is able to match several features of the data. The dynamic responses to productivity shock show that integrating product differentiation is necessary to generate a more volatile and counter-cyclical non-tradable output. Originality/value The paper investigates the effects of incorporating non-tradable sector and trade in interemediate goods sector to standard two-country DSGE model through simulation and calibration.

OPTIMAL DECISION MAKING FOR ONLINE AND OFFLINE RETAILERS UNDER BOPS MODE

As a new business form, the buy-online and pick-up-in-store (BOPS) mode allows consumers to pay for goods online and pick them up in a physical store. In this paper, an equilibrium model is constructed to formulate an optimal decision-making problem for online and offline retailers under the BOPS mode, where the online retailer determines the retail price of the goods and the consignment quantity in a physical store, while the offline retailer chooses the revenue share of profit by a consignment contract. Different to the existing models, the cost of overstocking and loss of understocking are incorporated into the profit function of the online retailer due to the randomness of demand. For the objective function of the offline retailer, the cross-sale quantity generated by the BOPS mode is taken into account. Then the game between the online and offline retailers is expressed as a stochastic Nash equilibrium model. Based on the analytic properties of the model, necessary conditions for the equilibrium solution are obtained. A case study and sensitivity analysis are employed to reveal the managerial implications of the model, which can provide a number of valuable suggestions on optimizing the strategies for the online and offline retailers under the BOPS mode.

Como o Banco Central tem reagido aos choques (bolhas) nos preços das habitações brasileiras? Uma análise por meio por meio do Modelo Dinâmico Estocástico de Equilíbrio Geral (DSGE)

Resumo: Este artigo tem o propósito de analisar os efeitos do choque (bolha) nos preços dos imóveis sobre as variáveis macroeconômicas brasileiras (PIB, inflação e taxa de juro). Foram utilizados dois procedimentos metodológicos: inicialmente, serão obtidos os parâmetros estruturais do modelo Dinâmico Estocástico de Equilíbrio Geral (DSGE), por meio do Método Generalizado dos Momentos (GMM). Esses resultados dessa etapa serão utilizados na simulação dos efeitos dos choques nos preços das habitações na economia artificial. Posteriormente, será utilizado o modelo de Vetores Autorregressivos (VAR), no qual os choques serão identificados por meio de restrições de sinais, baseadas nas respostas obtidas pela calibração do modelo teórico. Os resultados mostraram queos efeitos da bolha no mercado habitacional brasileiro afetou positivamente os movimentos subsequentes no produto e na inflação; no entanto, o efeito desse choque se deu de forma transitória sobre essas variáveis, trazendo efeitos persistentes apenas sobre a taxa de juros.

Integrated traffic-transit stochastic equilibrium model with park-and-ride facilities

We propose an Integrated Stochastic Equilibrium model that considers both private automobile traffic and transit networks to incorporate the interactions between these two modes in terms of travel time and generalized costs. In addition, in the general version of the model, travelers are allowed to switch from personal vehicles to mass transit at specific locations in a park-and-ride scheme. The assignment for traffic equilibrium is based on the Markovian Traffic Equilibrium model of Baillon and Cominetti (2008), whereas the equilibrium of the transit network is represented by the Stochastic Transit Equilibrium model of Cortés et al. (2013). Stochastic travel decisions are made at the node level, thereby avoiding the enumeration of routes or strategies and incorporating various perception and uncertainty issues. We propose a Method-of-Successive-Averages algorithm to calculate an Integrated Stochastic Equilibrium and conduct numerical experiments to highlight the effect of stochasticity on equilibrium flows and travel times. Our experiments show that higher stochasticity implies greater dispersion of equilibrium flows and longer expected travel times. Results on a real network with mode combination and park and ride facilities provide insights regarding the use of park and ride in terms of number and location, potential modal share of the combined mode option under different circumstances, and travel time impact due to the implementation of such park and ride facilities in a real setting.

The Impact of Noise Traders on Macrodynamics

This study constructs a closed economy dynamic stochastic general equilibrium (DSGE) model with noise traders to study the processes of change which occur throughout stock market and macroeconomy. The study finds that the noise-trader shocks on expected share return directly affect the stock market through their excess demand for shares and indirectly affect the macroeconomy through the changes in behaviors of households and good producers. The positive noise-trader shocks increases share price which implies that share return decreases. Then, the informed traders prefer selling their shares because of over-price share. The noise traders get loss after share price declines. However, they still buy shares at lower price level since they believe an average buying strategy is the best way. For changes in behaviors, the noise traders work more but consume less since they prefer holding more shares while the informed traders behave opposite because they get higher income. Last, an increase in aggregate employment requires the higher investment in order to product more goods.

Effect of providing traffic information estimated by a stochastic network equilibrium model with stochastic demand

To estimate travel times through road networks, in this study, we assume a stochastic demand and formulate a stochastic network equilibrium model whose travel times, flows, and demands are stochastic. This model enables us to examine network reliability under stochastic circumstances and to evaluate the effect of providing traffic information on travel times. For traffic information, we focus on travel time information and propose methods to evaluate the effect of providing that information. To examine the feasibility and validity of the proposed model and methods, we apply them to a simple network and the real road network of Kanazawa, Japan. The results indicate that providing ambulance drivers in Kanazawa with travel time information leads to an average reduction in travel time of approximately three minutes.

Bayesian estimation of a new Keynesian policy model for a small open economy

The estimation of dynamic stochastic general equilibrium (DSGE) models has gained momentum during the last decade. In this paper, we estimate a small scale new Keynesian model for an emerging economy, Tunisia. We study the transmission channels of monetary policy on the fluctuations of domestic output and inflation over the short and long run in open and closed economy settings. We find that domestic shocks have higher impact on monetary policy calibration and the dynamic of the internal demand. The inclusion of the working capital channel for a country like Tunisia exhibiting high level of indebtedness of local firms helps better describe the behaviour of macroeconomic variables in response to shocks emanating from the policy side. We show that the policy reaction parameters of the Central Bank confirm our hypothesis that the latter has been following closely the Taylor rule. This finding explains the recent inflation trend in the country.

The Contingent Tariff of the Special Safeguard Mechanism: What Happens When Markets are Imperfectly Competitive?

AbstractContingent tariffs for agri‐food commodities have been proposed as a Special Safeguard Mechanism (SSM) in the Doha Round negotiations by the G33 group of countries as an instrument to control downward spikes in their border prices and/or surges of imports. The objective is to safeguard the livelihood security of farm households in poor countries. To date, most analysis of such tariffs uses stochastic partial equilibrium models with perfect competition. Yet in many markets for such commodities, imperfectly competitive market intermediaries play an important role in determining producers' prices, as do state trading enterprises (STEs). A stochastic partial equilibrium model of a typical importing country situation is specified in which there are either imperfectly competitive domestic intermediaries with a contingent tariff or an STE. The role of these intermediaries in influencing price behaviour and livelihood security in the presence of contingent tariffs alters the conclusion based on models of perfect competition. Using Monte‐Carlo simulation, it is shown that the efficacy of a contingent tariff is substantially reduced as the number of firms declines because increasingly they absorb the tariff, and the procurement price and producer surplus do not increase to the extent that they do under perfect competition.

Interest Rates and the Market for New Light Vehicles

We study the impact of interest rates changes on both the demand for and supply of new light vehicles in an environment where consumers and manufacturers face their own interest rates. An increase in the consumers' interest rate raises their cost of financing and thus lowers the demand for new vehicles. An increase in the manufacturers' interest rate raises their cost of holding inventories. Both channels have equilibrium effects that are amplified and propagated over time through inventories, which serve as a way to both smooth production and facilitate greater sales at a given price. Through the estimation of a dynamic stochastic market equilibrium model, we find evidence of both channels at work and of the important role played by inventories. A temporary 100 basis-point increase in both interest rates causes vehicle production to fall 12 percent and sales to fall 3.25 percent at an annual rate in the short run.

Solving the Dynamic Stochastic General Equilibrium Model with Stochastic Volatility: An Application in China

A first-order approximation technique is not suited to handle issues such as welfare comparison, time-varying variance. Following Schmitt-Grohe and Uribe [1], in this paper, we derive a second-order approximation to estimate the dynamic stochastic equilibrium model with stochastic volatility, to capture the different impacts of the level shocks and the volatility shocks. Furthermore, the paper presents an application of standard quantitative New Keynesian business cycle model, and the results shows the negative effects of stochastic volatility shocks. Furthermore, the paper presents an application of standard quantitative New Keynesian business cycle model, and the empirical results find that the level shocks have positive effects on consumption, investment and output, while the volatility shocks have negative effects on consumption, investment and output.

An Assessment of Alternatives for the Dutch First Pension Pillar System

The ageing of the Dutch population, resulting in an increase in the number of retirees relative to the working population, has induced a debate about the sustainability of the Dutch first pillar pension scheme (AOW). This study explores possible alternatives for the AOW. A stochastic partial equilibrium model is used to study intragenerational insurance against longevity and productivity risk. The model shows the welfare, labour-market and saving effects of a shift from a Beveridge towards a Bismarck system in which pension rights depend on labour-market history. The main conclusion is that a shift of first pillar pensions from a Beveridge towards a Bismarck system is not necessarily welfare improving from an ex-ante insurance perspective, i.e. before the veil of ignorance is lifted. Moreover, a means test of the first pillar against wealth income, which implies a lower AOW when an individual has wealth income and a lower pension premium for everyone, does not improve welfare in the setting of the model considered in this study.

Optimal Carbon Abatement in a Stochastic Equilibrium Model with Climate Change

This paper studies a dynamic stochastic general equilibrium model involving climate change. Our model allows for damages on output resulting from global warming. We compare two approaches (level and growth rate impact) and provide results for both. Our calibration captures several effects of climate change and feedback effects on the temperature dynamics. In particular, we are able to match estimates of future temperature distributions provided in the fifth assessment report of the IPCC (2014). We solve for the optimal abatement policy and find that this policy is considerably state-dependent. We also study the effect of risk aversion and elasticity of intertemporal substitution. It turns out that risk aversion matters more if climate change has a level impact on output, whereas the elasticity of intertemporal substitution has a significant effect for both specifications. Similar results hold for the social cost of carbon.

Learning and Monetary Policy Shifts

This paper estimates a dynamic stochastic equilibrium model in which agents use a Bayesian rule to learn about the state of monetary policy. Monetary policy follows a nominal interest rate rule that is subject to regime shifts. The following results are obtained. First, the author’s policy regime estimates are consistent with the popular view that policy was marked by a shift to a high-inflation regime in the early 1970s, which ended with Volcker’s stabilization policy at the beginning of the 1980s. Second, while Bayesian posterior odds favor the “full-information” version of the model in which agents know the policy regime, the fall of inflation and interest rates in the disinflation episode in the early 1980s is better captured by the delayed response of the “learning” specification. Third, the author examines the magnitude of the expectations-formation effect of monetary policy interventions in the “learning” specification by comparing impulse responses to a version of the model in which agents ignore the information contained in current and past monetary policy shocks about the likelihood of a regime shift.

Optimal Carbon Abatement in a Stochastic Equilibrium Model with Climate Change

This paper studies a dynamic stochastic general equilibrium model involving climate change. Our frame- work allows for feedback effects on the temperature dynamics. We are able to match estimates of future temperature distributions provided in the fifth assessment report of the IPCC (2014). We compare two approaches to capture damaging effects of temperature on output (level vs. growth rate impact) and combine them with two degrees of severity of this damage (Nordhaus vs. Weitzman calibration). It turns out that the choice of the damage function is crucial to answer the question of how much the distinction between level and growth rate impact matters. The social cost of carbon is similar for frameworks with level or growth rate impact if the potential damages of global warming are moderate. On the other hand, they are more than twice as large for a growth rate impact if damages are presumably severe. We also study the effect of varying risk aversion and elasticity of intertemporal substitution on our results. If damages are moderate for high temperatures, risk aversion only matters when climate change has a level impact on output, but the effects are relatively small. By contrast, the elasticity of intertemporal substitution has a significant effect for both level and growth rate impact. If damages are potentially severe for high temperatures, then the results also become sensitive to risk aversion for both damage specifications.

Multiclass and multicriteria stochastic traffic network equilibrium model based on ATIS

Multiclass and multicriteria stochastic traffic network equilibrium model based on ATIS

Why Do Emerging Economies Accumulate Debt and Reserves?

Reserve accumulation has the benefit of decreasing external vulnerability but it comes with a high cost. Emerging economies have been accumulating reserves without reducing their levels of debt. This behavior is puzzling because these economies could also decrease their vulnerability by decreasing their debt. In this paper I construct a stochastic dynamic equilibrium model of a small open economy with non contingent debt and reserve assets. Reserves have the benefit of smoothing consumption when the country is in autarky, after defaulting. Once we assume the asymmetric default costs of Arellano (2008), the results show that the optimal policy is to accumulate positive levels of debt and reserves in equilibrium. These economies accumulate reserves without decreasing debt because it decreases the cost of autarky after they default. For governments to accumulate reserves and debt simultaneously they need to be patient enough to save but still have positive probability of default, the asymmetric default costs generate that.

Human Capital as an Asset Class Implications from a General Equilibrium Model

This paper derives the value and risk of aggregate human capital in a stochastic equilibrium model with Duffie-Epstein preferences. A three-factor asset-pricing model is derived, where the factors are the market, the capital share, and investment in human capital. When the model is calibrated to match the historical ratio of wages to consumption in the United States, the weight of human capital in aggregate wealth is estimated to be about 93%, well above most previous estimates, and human capital's riskiness is lower than that of the market portfolio.