Review of Economic Dynamics最新文献

We study the preferential treatment of green bonds in the central bank collateral framework as a climate policy instrument within a DSGE model with climate and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral, subject to haircuts determined by the central bank. A haircut reduction induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by a haircut gap of 20 percentage points, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal carbon taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features a preferential treatment of green bonds.

We introduce our GDSGE framework and a novel global solution method, called simultaneous transition and policy function iterations (STPFIs), for solving dynamic stochastic general equilibrium models. The framework encompasses many well-known incomplete markets models with highly nonlinear dynamics such as models of financial crises and models with rare disasters including the current COVID-19 pandemic. Using consistency equations, our method is most effective at solving models featuring endogenous state variables with implicit laws of motion such as wealth or consumption shares. Finally, we incorporate this method in an automated and publicly available toolbox that solves many important models in the aforementioned topics, and in many cases, more efficiently and/or accurately than their original algorithms.

To generate large responses of unemployment to productivity changes requires a high elasticity of the fundamental surplus with respect to productivity. When all deductions that enter the fundamental surplus are acyclical, and the fundamental surplus does not involve endogenous variables, then the elasticity of the fundamental surplus coincides with the inverse of the fundamental surplus fraction.

This paper demonstrates that accounting for firms' endogenous productivity growth over lifecycle plays an important role in understanding the link between financial and economic development. It incorporates firm productivity investment into a span-of-control model, and compares the effects of firm financing constraints arising in this model to the effects of the same constraints in the model in which firm productivity growth is assumed to be exogenous. It finds that, depending on the severity of firm financing constraints, endogenizing firm productivity growth increases the adverse effects of the constraints on steady state output by 1.5-3 times, both due to a large decrease in average productivity and due to a bigger equilibrium effect on capital used in production.

Inflation dynamics are investigated by estimating a generalized version of the New Keynesian Phillips curve (NKPC) of Galí and Gertler (1999) using Bayesian GMM. US macroeconomic data suggests that the generalized NKPC (GNKPC) performs best in terms of quasi-marginal likelihood among those considered both during and after the Great Inflation period. The estimated GNKPC indicates that when trend inflation fell after the Great Inflation period, the probability of price change decreased and the GNKPC flattened, which is in line with findings by previous studies.

Empirical evidence suggests that the degree of price stickiness is not uniform around the world. Heterogeneous price stickiness introduces a new propagation mechanism of global demand shocks that lead to a liquidity trap for all countries, which we call the open-economy paradox of flexibility. We show that the severity of the paradox increases with the degree of trade and capital market openness, when home and foreign goods are Edgeworth substitutes and when the more affected home country runs a trade deficit. This implies that highly open trade and financial linkages are not desirable in terms of world welfare. We show that the inefficiencies generated by heterogeneous price stickiness can be reduced through two types of international policy coordination: i) an arrangement in which the country with relatively sticky prices raises the interest rates or ii) a monetary union.

Regulated banks expand relative to shadow banks in recessions and when credit spreads are high, while regulated banks shrink relative to shadow banks in expansions and when credit spreads are low. Motivated by these facts, I build a quantitative general equilibrium model with endogenous risk taking to study how competitive interactions between regulated banks and shadow banks affect optimal dynamic capital requirements. Limited liability and deposit insurance can lead regulated banks to provide socially inefficient risky loans when the returns on safer loans decline. Competition for scarcer funding can further lower the net returns on safe loans, making it more attractive for regulated banks to exploit the shield of limited liability with risky loans. Higher capital requirements can reduce inefficient risk at the cost of lower liquidity provision and some migration of credit from regulated banks to shadow banks. Accounting for the interactions of regulated and shadow banks can change the magnitude and direction of the optimal response of capital requirements to shocks that drive the business cycle. Moreover, Basel-III style rules that differentiate between the type of bank loans are much better at mimicking the Ramsey optimal capital requirements than standard rules that aggregate loans. The performance of such dynamic rules can be further improved once they are combined with a small static capital buffer.

We analyze optimal capital and labor taxes in a model where (i) the government makes noncontingent announcements about future policies and (ii) state-contingent deviations from these announcements are costly. With Full Commitment, optimal announcements coincide with expected future taxes. Costly state contingency dampens the response of both current and future capital taxes to government spending shocks and labor taxes play a major role in accommodating fiscal shocks. These features allow our quantitative model to account for the volatility of taxes in US data. In the absence of Full Commitment, optimal announcements are instead strategically biased, because governments have an incentive to partially constrain their successors. The cost of deviating from past announcements generates an endogenous degree of fiscal commitment, determining the average level of capital taxes.

We investigate what principles should govern the evolution and maturity structure of the national debt when nominal government securities constitute an important form of exchange media. Even in the absence of government funding risk, we find a rationale for issuing nominal debt in different maturities, purposely mispricing long-term debt, and growing the nominal debt to support a strictly positive inflation target. The policy of discounting long-term debt and supporting a strictly positive inflation target provides superior risk-sharing arrangements for clienteles characterized by different degrees of patience. Pareto improvements are possible only if these policies are offered jointly.

We use over a decade of representative payroll data from Great Britain to study the nominal wage changes of employees who stayed in the same job for at least one year. We show that basic hourly pay drives the cyclicality of marginal labour costs, making this the most relevant measure of wages for macroeconomic models that incorporate wage rigidity. Basic hourly pay adjusts much less frequently than previously thought in Britain, particularly in small firms. We find that firms compress wage growth when inflation is low, which indicates that downward rigidity constrains firms' wage setting. We demonstrate that the empirical extent of downward nominal wage rigidity (DNWR) can theoretically cause considerable long-run output losses. Combined, our results all point to the importance of including DNWR in macroeconomic and monetary policy models.