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Epidemics in the New Keynesian Model
Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt
Journal of Economic Dynamics and Control,
July
2022
Abstract
This paper documents the behavior of key macro aggregates in the wake of the Covid epidemic. We show that a unique feature of the Covid recession is that the peak-to-trough decline is roughly the same for consumption, investment, and output. In contrast to the 2008 recession, there was only a short-lived rise in financial stress that quickly subsided. Finally, there was mild deflation between the peak and the trough of the Covid recession. We argue that a New Keynesian model that explicitly incorporates epidemic dynamics captures these qualitative features of the Covid recession. A key feature of the model is that Covid acts like a negative shock to the demand for consumption and the supply of labor.
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The Impact of Active Aggregate Demand on Utilisation-adjusted TFP
Konstantin Gantert
IWH Discussion Papers,
Nr. 9,
2022
Abstract
Non-clearing goods markets are an important driver of capacity utilisation and total factor productivity (TFP). The trade-off between goods prices and household search effort is central to goods market matching and therefore drives TFP over the business cycle. In this paper, I develop a New-Keynesian DSGE model with capital utilisation, worker effort, and expand it with goods market search-and-matching (SaM) to model non-clearing goods markets. I conduct a horse-race between the different capacity utilisation channels using Bayesian estimation and capacity utilisation survey data. Models that include goods market SaM improve the data fit, while the capital utilisation and worker effort channels are rendered less important compared to the literature. It follows that TFP fluctuations increase for demand and goods market mismatch shocks, while they decrease for technology shocks. This pattern increases as goods market frictions increase and as prices become stickier. The paper shows the importance of non-clearing goods markets in explaining the difference between technology and TFP over the business cycle.
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Epidemics in the Neoclassical and New Keynesian Models
Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt
Abstract
We analyze the effects of an epidemic in three standard macroeconomic models. We find that the neoclassical model does not rationalize the positive comovement of consumption and investment observed in recessions associated with an epidemic. Introducing monopolistic competition into the neoclassical model remedies this shortcoming even when prices are completely flexible. Finally, sticky prices lead to a larger recession but do not fundamentally alter the predictions of the monopolistic competition model.
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Should We Use Linearized Models To Calculate Fiscal Multipliers?
Jesper Lindé, Mathias Trabandt
Journal of Applied Econometrics,
Nr. 7,
2018
Abstract
We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long‐lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearized models to calculate fiscal multipliers in long‐lived liquidity traps.
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Global Food Prices and Monetary Policy in an Emerging Market Economy: The Case of India
Oliver Holtemöller, Sushanta Mallick
Journal of Asian Economics,
2016
Abstract
This paper investigates a perception in the political debates as to what extent poor countries are affected by price movements in the global commodity markets. To test this perception, we use the case of India to establish in a standard SVAR model that global food prices influence aggregate prices and food prices in India. To further analyze these empirical results, we specify a small open economy New-Keynesian model including oil and food prices and estimate it using observed data over the period 1996Q2 to 2013Q2 by applying Bayesian estimation techniques. The results suggest that a big part of the variation in inflation in India is due to cost-push shocks and, mainly during the years 2008 and 2010, also to global food price shocks, after having controlled for exogenous rainfall shocks. We conclude that the inflationary supply shocks (cost-push, oil price, domestic food price and global food price shocks) are important contributors to inflation in India. Since the monetary authority responds to these supply shocks with a higher interest rate which tends to slow growth, this raises concerns about how such output losses can be prevented by reducing exposure to commodity price shocks.
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The Macroeconomic Risks of Undesirably Low Inflation
Jonas Arias, Christopher J. Erceg, Mathias Trabandt
European Economic Review,
2016
Abstract
This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects.
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Effects of Incorrect Specification on the Finite Sample Properties of Full and Limited Information Estimators in DSGE Models
Sebastian Giesen, Rolf Scheufele
Journal of Macroeconomics,
June
2016
Abstract
In this paper we analyze the small sample properties of full information and limited information estimators in a potentially misspecified DSGE model. Therefore, we conduct a simulation study based on a standard New Keynesian model including price and wage rigidities. We then study the effects of omitted variable problems on the structural parameter estimates of the model. We find that FIML performs superior when the model is correctly specified. In cases where some of the model characteristics are omitted, the performance of FIML is highly unreliable, whereas GMM estimates remain approximately unbiased and significance tests are mostly reliable.
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Unemployment and Business Cycles
Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt
Econometrica,
Nr. 4,
2016
Abstract
We develop and estimate a general equilibrium search and matching model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, we do not impose wage inertia. Instead we derive wage inertia from our specification of how firms and workers negotiate wages. Our model outperforms a variant of the standard New Keynesian Calvo sticky wage model. According to our estimated model, there is a critical interaction between the degree of price stickiness, monetary policy, and the duration of an increase in unemployment benefits.
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Global Food Prices and Business Cycle Dynamics in an Emerging Market Economy
Oliver Holtemöller, Sushanta Mallick
Abstract
This paper investigates a perception in the political debates as to what extent poor countries are affected by price movements in the global commodity markets. To test this perception, we use the case of India to establish in a standard SVAR model that global food prices influence aggregate prices and food prices in India. To further analyze these empirical results, we specify a small open economy New-Keynesian model including oil and food prices and estimate it using observed data over the period from 1996Q2 to 2013Q2 by applying Bayesian estimation techniques. The results suggest that big part of the variation in inflation in India is due to cost-push shocks and, mainly during the years 2008 and 2010, also to global food price shocks, after having controlled for exogenous rainfall shocks. We conclude that the inflationary supply shocks (cost-push, oil price, domestic food price and global food price shocks) are important contributors to inflation in India. Since the monetary authority responds to these supply shocks with a higher interest rate which tends to slow growth, this raises concerns about how such output losses can be prevented by reducing exposure to commodity price shocks and thereby achieve higher growth.
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