Essays in Heterogeneous Agent Monetary Economics

Essays in Heterogeneous Agent Monetary Economics
Author: Christian D. Bustamante Amaya
Publisher:
Total Pages: 119
Release: 2019
Genre: Macroeconomics
ISBN:

In these essays, I study the interplay of monetary policy with agent heterogeneity in economies with frictional markets. While accounting for the heterogeneity observed at the micro level, I investigate the implications of having persistent differences in firms and households' balance sheets and their consequences for business cycle fluctuations in monetary economies during both normal times and in times of economic distress. In the first chapter, “Debt Overhang, Monetary Policy, and Economic Recoveries After Large Recessions”, I explore why conventional monetary policy was so ineffective in mitigating the severity of the 2007 U.S. recession and unsuccessful thereafter in stimulating aggregate demand. Linking firm-level data with predictions from a model, I show that accounting for individual firms’ debt structures is crucial in explaining why business investment fell so dramatically through the recession and remained low for several years, despite the Federal Reserve repeatedly cutting its target interest rate until conventional policy tools were exhausted. Using a sample of publicly traded firms, I establish that firms with greater long-term debt exposure experienced larger contractions and slower recoveries in their investment expenditure. Next, I show that debt overhang episodes were unusually prevalent over the years following the onset of the recession, and particularly so among firms relying more heavily on long-maturing debt. To understand these microeconomic observations and their implications for aggregates, I develop a New Keynesian model where heterogeneous firms finance investment using defaultable nominal long-term debt and where the central bank faces an explicit zero lower bound constraint. There, the greater a firm’s leverage, the higher its likelihood of experiencing a debt overhang episode following a large aggregate shock. Moreover, the severity of debt overhang problems, and their consequences for the distribution and level of aggregate investment, compounds with (1) an increased real value of debt, i.e., debt deflation, and (2) the monetary authority’s inability to restore inflation once nominal interest rates reach the zero lower bound. Together, firms’ long maturity debt positions and the binding zero lower bound are critical in transmitting the consequences of a deep recession into a remarkably anemic recovery in aggregate investment.

Interaction and Market Structure

Interaction and Market Structure
Author: Domenico Delli Gatti
Publisher: Springer Science & Business Media
Total Pages: 302
Release: 2012-12-06
Genre: Business & Economics
ISBN: 3642570054

This book is a collection of essays which examine how the properties of aggregate variables are influenced by the actions and interactions of heterogenous individuals in different economic contexts. The common denominator of the essays is a critique of the representative agent hypothesis. If this hypothesis were correct, the behaviour of the aggregate variable would simply be the reproduction of individual optimising behaviour. In the methodology of the hard sciences, one of the achievements of the quantum revolution has been the rebuttal of the notion that aggregate behaviour can be explained on the basis of the behaviour of a single unit: the elementary particle does not even exist as a single entity but as a network, a system of interacting units. In this book, new tracks in economics which parallel the developments in physics mentioned above are explored. The essays, in fact are contributions to the analysis of the economy as a complex evolving system of interacting agents.

Essays in Heterogeneous Agent Macroeconomics

Essays in Heterogeneous Agent Macroeconomics
Author: Nobuhide Okahata
Publisher:
Total Pages: 0
Release: 2021
Genre: Macroeconomics
ISBN:

In these essays, I study the implications of macroeconomic policies under the environment with rich heterogeneities of economic agents. The analyses in these essays highlight that income and wealth inequality among agents could change the responses of macroeconomic policies and large aggregate shocks from those in the representative agent models. These results could modify our understanding of economic dynamics and the effect of macroeconomic policies. As an illustration, I focus on the monetary policy in a closed economy model and capital controls in an open economy model. I also develop a new nonlinear and global numerical solution method to analyze a class of heterogeneous-agent macroeconomic models. In the first chapter, ''An Alternative Solution Method for Continuous-Time Heterogeneous Agent Models with Aggregate Shocks'', I propose an alternative solution method for continuous-time heterogeneous agent models with aggregate shocks by extending the Backward Induction method developed initially for discrete-time models by Reiter (2010). The existing methods commonly used in the literature essentially rely on the local linearization and are only applicable to the problems where certainty equivalence with respect to aggregate shocks holds. On the other hand, the proposed method is nonlinear and global with respect to both idiosyncratic and aggregate shocks and thus suitable to investigate models where large aggregate shocks exist or nonlinearity matters. I apply this method to solve a Krusell and Smith (1998) economy and evaluate its performance along two dimensions: accuracy and computation speed. I find that the proposed method is accurate even with large aggregate shocks and high curvature without surrendering computation speed (the baseline economy is solved within a few seconds). This new method is also applied to a model with recursive utility and an Overlapping Generations (OLG) model, and it is able to solve both models quickly and accurately. In the second chapter, ''Consumption Inequality and Monetary Policy in a Heterogeneous-Agent New Keynesian Model'', I consider a continuous-time heterogenous-agent New Keynesian model with the wealth effect of the labor supply and study quantitative implications of additional insurance mechanisms available to the households. Our numerical experiment illustrates cross-sectional consumption inequality increases after a contractionary monetary policy shock which is consistent with the previous empirical result while it contradicts with predictions of the model without the wealth effect of the labor supply. Furthermore, consumption response to contractionary monetary policy shock is dampened, and a cross-sectional average of utilities decreases while the opposite is true in the model without wealth effect. These results suggest that propagation of monetary policy shock to the aggregate variables and welfare depends critically on additional insurance instruments available to agents. The third chapter, ''Capital Controls under Income Heterogeneity'', studies the welfare implication of capital controls under the small open economy model with the idiosyncratic income risks and the borrowing constraints. A calibrated model computes the change in welfare for different levels of capital controls. Compared to the recent studies, welfare gain of capital controls becomes small under agent income heterogeneity. For the economy with low borrowing capacity, capital controls become more effective compared to the baseline case.

Essays on Macroeconomic Policies in Heterogeneous Agent Models

Essays on Macroeconomic Policies in Heterogeneous Agent Models
Author: Alaïs Martin-Baillon
Publisher:
Total Pages: 256
Release: 2021
Genre:
ISBN:

It is now recognized that the heterogeneity of economic agents plays a crucial role in understanding the fluctuations of an economy. The different chapters of my thesis serve the same question: How does heterogeneity changes the way economic policies should be conducted? Today, heterogeneous-agent macroeconomics is developing in several directions, each shedding different light on the problems we face as economists. My thesis is at the confluence of the different facets of this field. The first chapter of my thesis, participates in the heterogeneous agent macroeconomics that derives analytical solutions in reduced-heterogeneity models. I study how governments should increase or decrease taxes on firms over the business cycle. I show that taking into account firms heterogeneity greatly changes tax policy recommendations. The second chapter of my thesis is part of quantitative heterogeneous agent macroeconomics. We study whether monetary policy should use its ability to redistribute wealth among heterogenous households to achieve its objectives. The third chapter of my thesis participates in field that uses micro data to understand macroeconomics and to design public policies. I estimate firms' propensities to invest to better understand how economic policies can vary firms' investment by varying their income.

Essays on Macroeconomics with Heterogeneous Agents

Essays on Macroeconomics with Heterogeneous Agents
Author: Kyooho Kwon
Publisher:
Total Pages: 84
Release: 2013
Genre: Labor supply
ISBN:

"Chapter 1 develops a heterogeneous-agent general equilibrium model that incorporates both intensive and extensive margins of labor supply. A nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins. We consider calibrated versions of this model that differ in the value of a key preference parameter for labor supply and the extent of heterogeneity. The model is able to capture the key features of the empirical hours worked distribution, including how individuals transit within this distribution. We then study how the various specifications influence labor supply responses to temporary shocks and permanent tax changes, with a particular focus on the intensive and extensive margin elasticities in response to these changes. We find important interactions between heterogeneity and the extent of curvature in preferences. Chapter 2 builds a model of family labor supply in which individuals choose between full-time work, part-time work, and nonemployment. The model is calibrated to replicate the movements of both male and female workers among these states. The willingness to substitute hours over time (the so-called intertemporal elasticity of labor supply) is critical for many economic analysis. A common strategy for uncovering the value of this willingness is to carry out structural estimation on micro panel data. One general issue in this estimation exercises using micro data is that misspecification of the constraints that individuals face is likely to influence inference about preference parameters. In the model economy, although the individual labor supply problem is a discrete choice problem, individuals are able to adjust hours along the intensive margin by moving between part-time and fulltime work. Intuitively, adjustment along the intensive margin potentially allows one to estimate the true value of the underlying curvature parameter describing the utility from leisure. We explore the extent to which standard labor supply methods can achieve this in our setting. Although these methods deliver precise estimates that are significantly different from zero, the estimates are effectively unrelated to the true underlying values. These methods also deliver elasticity estimates for women, even when the underlying preference parameters are the same for men and women. Chapter 3 investigates the optimal progressive tax code in an incomplete-market economy in which households are linked intergenerationally by altruism and earning ability. The model economy is calibrated to that of the US with the progressive tax code suggested by Gouviea and Strauss (1994). First, I compute the equilibrium with the optimal progressive tax code. Second, I investigate the extent to which the size of government welfare programs affects the optimal progressivity of the income tax code. I find that the optimal tax code for an economy populated with altruistic households is approximately equivalent to a proportional tax of 23.1% with a fixed deduction of approximately $17,000 in 1990 US dollars. For an economy populated with non-altruistic households, however, these numbers are 18.8% and $12,000 respectively. This result implies that inequality is more severe in an economy with intergenerational links so that the policy maker requires a more progressive tax system to provide insurance. Additionally, I find that when the size of the government welfare program is chosen carefully, the additional insurance benefits from the progressive income tax code disappear"--Pages iv-v.

Essays in Macroeconomics with Heterogeneous Agents

Essays in Macroeconomics with Heterogeneous Agents
Author: Pierre-Alexandre Noual
Publisher:
Total Pages: 87
Release: 2007
Genre: Labor supply
ISBN: 9780549302100

My dissertation investigates two models of macroeconomics with heterogeneous agents. The first chapter analyzes a setup where agents are ex ante identical, yet receive idiosyncratic income shocks which make them heterogeneous ex post. A private information friction gives rise to incomplete risk-sharing as a constrained-efficient allocation. The second chapter again considers ex post heterogeneous agents: they have identical preferences but face idiosyncratic shocks to their earning capacity. There the focus is not on risk-sharing, but on the aggregate consequences for labor supply.

Essays on Monetary Economies with Heterogeneous-agents

Essays on Monetary Economies with Heterogeneous-agents
Author: Hoonsik Yang
Publisher:
Total Pages:
Release: 2016
Genre:
ISBN:

This dissertation consists of three essays in monetary economics. Although the topic of each chapter differs, the approach is shared: I extend a random matching model of money by augmenting the set of money holdings, and compute socially desirable allocations in the spirit of mechanism design analysis. The augmentation is not just technically improving the model, but making the model rich enough to think about the economic problem that each chapter delves into. I document some interesting properties of the desirable allocations, and highlight the differences generated by the extension.Chapter 1. "A beneficial role of government bonds"I study a random matching model of money to show that the existence of bonds can be beneficial to a society, compared to having only money. In the model, anonymous agents randomly meet in pairs to produce and consume, hence money becomes essential. I compare two identical economies except the availability of bonds, in the sense that people can use any available assets as payments. Following the mechanism design approach, I define implementable allocations and the optimum. Under the notion of the implementability, social planner can devise trading mechanisms that induce people to hold both assets without exogenously given advantages of money as means of payment. I find that having both bondsand money in the economy can improve social welfare over having only money. This role of bonds is associated with a beneficial effect of inflation produced by lump-sum transfers, and it is achieved differently from the previously documented mechanism.Chapter 2. "Optimal intervention in a random-matching model of money" (joint with Wataru Nozawa)Wallace [2014] conjectures that there generically exists an inflation-financed transfer scheme that improves welfare over no intervention in pure-currency economies. We investigate this conjecture in the Shi-Trejos-Wright model with different upper bounds on money holdings. The choice of an upper bound affects the results as some potentially beneficial transfer schemes cannot be studied under small upper bounds. Numerical optima are computed for different degrees of discounting rate and risk aversion. As the upper bound on money holdings increases, optima are more likely to have positive money creation (and inflation),and this result is in line with the conjecture.Chapter 3. "Optimal inflation in a model of inside money: A further result" (joint with Wataru Nozawa)We extend the Deviatov and Wallace [2014] model of inside money in which they find some examples where inflation is beneficial. Their model is restrictive in that it cannot address policies that provide interests on cash (Friedman rule). With a higher upper bound on money holdings than what they use, such policies can be engineered without inflation and resulting allocations are potentially better than what they find, in which case positive inflation is not a property of good allocation. We investigate this possibility and confirm their results in a more generalized setting for some parameters. At optima for the examples, interest on cash is not provided and positive inflation arises in a similar manner to their work. Welfareat optimum increases monotonically with respect to discount factor and public monitoring capacity of a society, but other variables change in a more complex way.