Stochastic General Equilibrium Model Research Articles

La modélisation en équilibre général dynamique et stochastique des cycles économiques en Afrique Sub-saharienne : une revue de la littérature

Cet article propose une revue de la litterature sur les modeles d'equilibre general dynamique et stochastique appliques aux pays d'Afrique Sub-saharienne. Cette litterature a pour double objectif (i) d'identifier les facteurs specifiques a ces economies susceptibles d'expliquer leur tres forte instabilite et (ii) d'evaluer les politiques monetaires et fiscales adequates face a ces facteurs. Nous presentons les avancees de cette litterature a l'aune de ces deux objectifs et en soulignons les limites.

The inflationary effects of stochastic resource revenues in resource-rich economies with less well-developed financial markets

This article develops a simple Dynamic Stochastic General Equilibrium (DSGE) model to illustrate how economies that face restrictions in their ability to alter both government spending and taxation in the short run and cannot borrow easily (perhaps because of incomplete internal capital markets) can find external fluctuations in resource revenues producing unexpected variations in their internal money supply and ultimately in their inflation rate. The main channels for these effects run through the government budget and through the country's balance of payments position. The model is calibrated to illustrate the case of Iran.

MACROECONOMIC VOLATILITY UNDER HIGH ACCUMULATION OF GOVERNMENT DEBT: LESSONS FROM JAPAN

This paper applies Bayesian estimation to an open-economy Dynamic Stochastic General Equilibrium (DSGE) model of Japan, to assess the effects of expanding government debt on interest rates, real exchange rate dynamics, and real sector performance. We find that the emergence of even a small risk premium on government debt will trigger considerable instability in the real and nominal variables. We show that a switch to an exchange-rate rule for monetary policy would considerably moderate the instability induced by a rising risk premium.

Welfare effect of interest rate shocks and policy implications

This article studies the welfare effect of exogenous country spread shocks and policy implications. First, country spread shocks are welfare-improving, a finding holding for three widely used preference representations over a wide range of structural parameter values, both in a two-period model with fixed endowments and in a workhorse Dynamic Stochastic General Equilibrium (DSGE) model of a small open economy. Second, it is always optimal to have procyclical policy unless (i) financial frictions are strong, (ii) policy responds to country spread gaps, and (iii) the subjective discount factor is endogenous.

The Impact of Government Spending on Private Spending in a Two-Sector Economy

Based on evidence that the dynamics of private spending on durables seem to differ from that of nondurables and services, this article disaggregates the impact of an exogenous government shock into its effect on each type of consumption good. Different calibrations of a dynamic stochastic general equilibrium (DSGE) model suggest that increases in government spending crowd out private spending on durable goods, while they serve to expand nondurable and services spending. Vector autoregression (VAR) estimates across these sectors yield qualitatively similar results. The estimated responses are driven by a negative correlation between durable spending and two measures of government spending that has not greatly varied over time—whereas the correlation between nondurable spending and government consumption has remained consistently positive throughout the sample. Estimates are consistent with a Great Moderation in three components of consumption, whereas moderations in the volatility of government spending took place earlier than the 1980s. The Great Recession of 2008–2009 saw an increase in volatility of consumption spending with no similar increases in the uncertainty of government spending.

Exogenous Shocks and Exchange Rate Regimes

AbstractUsing a dynamic stochastic general equilibrium (DSGE) model with nominal price rigidity and imperfect competition, we examine the impact of terms‐of‐trade and foreign interest rate shocks on some key macroeconomic variables for a small open economy under different exchange rate regimes. Numerical solutions from the model are found consistent with empirical panel VAR results of 33 Asian economies for the period of 1980–2009. From both the theoretical model and empirical evidence, we find that (i) output responses to terms‐of‐trade and foreign interest rate shocks are smoother in floats, (ii) price responses to terms‐of‐trade shocks are smoother in floats than in pegs, while its responses to foreign interest shocks are more volatile in floats than in pegs, and (iii) the effects of terms‐of‐trade and foreign interest shocks are more prolonged under floats.

Oil and Small Open Macroeconomy: A case of Korea

The world oil price has risen significantly since the late 1990s and reached a record high in 2008. The recent oil price hike raises concerns regarding the possible negative effects of the rising oil price on the economy as in the 1970s. We investigate the effects of the oil price hike on the Korean economy using a Bayesian dynamic stochastic general equilibrium (DGSE) model. We explicitly model the small open economy nature of the Korean economy and its oil usage and estimate the constructed model within a unified Bayesian framework. We also examine possible changes in the effects of world oil shocks on the Korean economy using counterfactual simulations. We find the adverse effects of world oil shocks as well as their importance in Korean business cycles have diminished due to reductions in the relative usage of crude oil in the economy, while world oil shocks themselves have changed relatively little over time.

Capital Utilization and the Amplification Mechanism

Different modeling techniques have been proposed in the literature to solve the issue of amplification in response to shocks in Dynamic Stochastic General Equilibrium (DSGE) models. This paper analyzes the impact of variable capital utilization on the amplification mechanism of productivity shocks. It builds a DSGE model which includes a link between capital utilization and shiftworking, consistently with the empirical literature. This paper shows that capital utilization cannot be the main mechanism which amplifies the effects of the shocks hitting the economy.

Drifting Inflation Targets and Stagflation

This paper revisits the phenomenon of stagflation. Using a standard New Keynesian dynamic, stochastic general equilibrium model, we show that stagflation from monetary policy alone is a very common occurrence when the economy is subject to both deviations from the policy rule and a drifting inflation target. Once the inflation target is fixed, the incidence of stagflation in the baseline model is essentially eliminated. In contrast with several other recent papers that have focused on the connection between monetary policy and stagflation, we show that while high uncertainty about monetary policy actions can be conducive to the occurrence of stagflation, imperfect information more generally is not a requisite channel to generate stagflation.

Fiscal and monetary policy interaction in the period of Europe's sovereign-debt crisis: an open economy DSGE model linking Euro area and China

European debt crisis might produce important influence on China via trades and capital flows since European Union is the largest trading partner of China. Especially, it has attracted more and more attention about the fiscal and monetary policy interactions between the Euro area and China in the period of Europe’s sovereign-debt crisis. In this paper, an open dynamic stochastic general equilibrium (DSGE) model for China and European Union economy is developed to research this issue. The sufficient important shocks are considered in this model for policy simulation. It can be used to analyse the impact of different shocks to the output, the policy interactions between European Union and China and the transmission path of one specific shock. The empirical results showed some contributions of the surplus of China’s foreign trade, the crowd out effect of one country’s government expense and the international effect of exchange rate fluctuations.

A Biased Expectation Equilibrium in Indeterminate DSGE Models

The aim of this article is to introduce a solution method for an indeterminate dynamic stochastic general equilibrium (DSGE) model. The method uses the concept of a biased expectation equilibrium, which is defined in this paper and means that expectations of certain variable are mechanically biased against those that would be rational. Our method should be particularly useful in terms of empirical estimation using DSGE models, because it will allow researchers to estimate how much agents’ expectations are biased in the case where a model has indeterminacy.

Policy analysis : tool applied to colombian needs: patacon model description

En este articulo describimos los fundamentos microeconomicos de un modelo de equilibrio general dinamico y estocastico llamado “herramienta para el analisis de la politica aplicada a las necesidades de Colombia” (Patacon, por su sigla en ingles); una herramienta predictiva que se utiliza como guia para el diseno de las politicas economicas de Colombia. En documentos complementarios describimos aspectos adicionales de este modelo, incluyendo el calculo de los parametros que afectan las funciones de dinamica y de impulso-respuesta.

Exports Versus Multinational Production Under Nominal Uncertainty

This paper examines how nominal uncertainty affects the choice firms face to serve a foreign market through exports or to produce abroad as a multinational. I develop a two-country, stochastic general equilibrium model in which firms make production and pricing decisions in advance, and I consider its implications on this relative choice. For foreign firms, both exports and multinational production are priced in the destination currency, and this uncertainty has no effect on the relative decision. In the data, U.S. firms set nearly all of their export prices in dollars. Therefore, home firms price exports in their own currency in the model. Home exporters gain an advantage over home multinationals: during a foreign contraction, the foreign exchange rate appreciates, causing exported goods from the home country to be relatively cheaper. This pricing advantage affects exporters non-linearly through demand, which translates to convex profits. As foreign volatility rises, the model implies that the home country should serve the foreign country relatively more through exports. I take this implication to bilateral U.S. data, using inflation volatility as a proxy for nominal volatility. Using sectoral data on sales by majority-owned foreign affiliates matched with U.S. exports, I find that higher inflation volatility is associated with a significantly lower ratio of multinational production to total foreign sales.

Bayesian Estimation of a Dynamic Asset Pricing Model with Long-Run Risk

In this paper, I build a Dynamic Stochastic General Equilibrium (DSGE) model and estimate it using Bayesian Markov Chain Monte Carlo (MCMC) methods. I use the results in order to examine how asset prices and macroeconomic quantities respond to the di erent shocks in the economy. Fluctuations in the endogenous variables of my model are driven by the two exogenous processes; an investment-speci c technology (IST) shock, and a total factor productivity (TFP) shock. I also consider that each of these exogenous processes is governed by two components, a short-run i.i.d. component and a long-run component. As a result macro aggregates as well as asset prices are subjected to expectations about future economic growth not only for short horizons but also for the very long run. I first empirically verify the presence of the long-run component in the investment-speci c technology process and then show that the long-run components of the stochastic processes are indeed small but persistent and they also play important roles in explaining the movements of asset prices. Furthermore my estimated model is able to predict the lead of equity returns over output growth and investment growth as observed in U.S. data.

Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity

We study the cyclical implications of credit market imperfections in a quantitative dynamic, stochastic general equilibrium model wherein firms face persistent shocks to aggregate and individual productivity. In our model economy, optimal capital reallocation is distorted by two frictions: collateralized borrowing and partial investment irreversibility. We find that a negative shock to borrowing conditions can, on its own, generate a large and persistent recession through disruptions to the distribution of capital. This recession, and the subsequent recovery, is distinguished both quantitatively and qualitatively from that driven by an exogenous shock to total factor productivity.

Global Rebalancing: The Macroeconomic Impact on the United Kingdom

This paper considers the implications for the United States, the United Kingdom and the rest of the world (ROW) of shocks that may contribute to a further reduction in global current account imbalances using a dynamic stochastic general equilibrium (DSGE) model. We consider a shock that increases domestic demand in the ROW; a shock that reduces domestic demand in the United States; and a supply shock that raises US productivity relative to other countries. The impact on UK output and inflation depends on the nature of the shock that drives global rebalancing. An increase in domestic demand in the ROW would raise UK exports and output, but would also contribute to increased inflationary pressure in the United Kingdom. Further weakness in US domestic demand is likely to weigh on UK output and inflation. Productivity gains in the United States relative to other countries would worsen the United Kingdom’s current account position, pushing down on output, but would lead to reduced inflationary pressure in the United Kingdom.

Credit Constraints, Learning and Aggregate Consumption Volatility

This paper documents three empirical facts. First, the volatility of consumption growth relative to income growth rose from 1947-1960 and then fell dramatically by 50 percent from the 1960s to the 1990s. Second, the correlation between consumption growth and personal income growth fell by about 50 percent over the same time period. Finally, the absolute deviation of consumption growth from its mean exhibits one break in U.S. data, and the mean of the absolute deviations has fallen by about 30 percent. First, I find that a standard dynamic, stochastic general equilibrium model is unable to explain these facts. Then, I examine the ability of two hypotheses: a fall in credit constraints and changing beliefs about the permanence of income shocks to account for these facts. I find evidence for both explanations and the beliefs explanation is more consistent with the data. Importantly, I find that estimated changes in beliefs about the permanence of income shocks have significant explanatory power for consumption changes.

Econometric and stochastic general equilibrium models for evaluation of economic policies

Comparative analysis of economic structure and forecasts generated from simultaneous equation, VAR and autoregressive models based on quarterly series from 1966:1 to 2007:3 of UK to those from the stochastic general equilibrium models has provided insights into objective and subjective evaluation of macro economic impacts of public policies. Econometric estimates are used in formulation of stochastic dynamic general equilibrium models to generate time series of macro variables from stochastic general equilibrium models. Calibrating to ratios, variances, covariance and correlations econometric analyses and general equilibrium models are integrated and shown to be complementary not competitive techniques.

Reform and Backlash to Reform: Effects of Ageing and Retirement Policy

Using a stochastic general equilibrium model with overlapping generations, this paper studies (i) the effects on both extensive and intensive labour supply responses to changes in fertility rates, and (ii) the potential of a retirement reform to mitigate the effects of fertility changes on labour supply. In order to neutralize the effects on effective labour supply of a fertility decline, a retirement reform, designed to increase labour supply at the extensive margin, is found to simultaneously reduce labour supply at the intensive margin. This backlash to retirement reform requires the statutory retirement age to increase more than proportionally to fertility changes in order to compensate for endogenous responses of the intensity of labour supply. The robustness of this result is checked against alternative model specifications and calibrations relevant to an economic region such as Europe.

Taxation, investment and asset pricing

This paper studies the impact of dividend and corporate income taxes on investment and asset returns in a stochastic general equilibrium model. Under the “new” view of dividend taxation (e.g. Poterba and Summers, 1985), proportional dividend taxes do not distort investment decisions, and thus have no impact on asset returns. By contrast, we find that corporate income taxes introduce additional tax-related risk factors into the economy by distorting investment decisions. We uncover a mechanism through which corporate taxes amplify the responses of consumption and investment to technology shocks, and consequently lead to a lower risk-free interest rate and a higher equity premium. This amplification mechanism is the strongest when there exists a strong preference for consumption smoothing and high costs of adjusting the capital stock.