in a Small Open Economy Model

Transcription

1 Financial i and Lb Labor Market tfiti Frictions in a Small Open Economy Model Lawrence J. Christiano Northwestern University Mathias Trabandt Sveriges Riksbank Karl Walentin Sveriges Riksbank

2 Questions: Are Financial Frictions Important as a Source of Shocks and/or Propagation in Aggregate Data?

3 Model Structure Base: closed economy model of CEE. Add: Financial Frictions as in BGG, CMR. Add: Labor Market Frictions as in MP, Gertler Trigari, CIMR. Add: Open Economy as in Adolfson, Laséen, Lindé and Villani (2005)

4 Small Open Economy L K

5 Small Open Economy C t 1 c c 1 d Ct c 1 c c 1 c C t m c 1 c c c 1. Dom homog good Sticky prices competition

6 Need Additional Price Frictions in Export Sector Exports potentially defeat hump shape p response of output to a monetary shock. Recall: habit in consumption, investment adjustment costs limit rise in demand after monetary policy shock, and so limit rise in output in closed economy. In open economy, extra source of demand: exports. Expansionary MP shock depreciates exchange rate, S, stimulates foreign demand. To stop this, we suppose that exports have sticky prices, set in foreign currency units ( pricing to market )

7 Export Sector Specialized importers Foreign homogeneous goods Domestic homogeneous goods Imported goods retailers Specialized importer Specialized importer Foreigners Foreign Export Retailers

8 Export Sector Domestic homogeneous goods Imported goods retailers Specialized exporter Specialized exporter Specialized exporter Foreign Export Retailers Foreigners

9 The whole economy.all at once!

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11 A Note on Swedish Data Pre 1992: exchange rate targeting. Post 1995: inflation targeting: Ramsey optimizing i i monetary policy committee loss function. Taylor rule. Important structural break that can in principle be modeled. We only work with post 95 data and characterize policy as Taylor rule.

12 19 Shocks in the Model z, unit-root neutral and invest. specific technology, stationary neutral and invest. specific technology c consumption preference shock, financial frictions shocks risk premium shock R monetary policy shock g government consumption shock i markup shocks (i d,x,mc,mx,mi bargaining power of workers y f, f, Rf foreign shocks

13 Data and Estimation Estimation on quarterly Swedish data from 1995Q1 2008Q1 (stay away from 1992 break) Real quantities in per capita terms. Data in demeaned dquarterly first dff differences, except inflation and interest rates. 19 data series R t, t, t c,, t i,, t,r t,spread t Δ ln W t /P t,δlnc t,δlni t,δlnq t,δlnh t,δlny t,δlnx t Δ lnmm Δ Y t,δlny t,δlngδ G t,δlnnδ N t,δlnunemprateδ U t.

14 Parameter Value Description 0.4 Capital share in production Discount factor i 0.43 Import share in investment goods c 0.25 Import share in consumption goods x 0.35 Import share in export goods g 0.3 Government consumption share of GDP k 0.25 Capital tax rate w 0.35 Payroll tax rate c 0.25 Consumption tax rate y 0.30 Labor income tax rate b 0.0 Bond tax rate z Steady state growth rate of neutral technology Steady state growth rate of investment technology Steady state gross inflation target x 1.05 Export price markup j 1.2 Price markups, j d,mc, mi,mx t, x f t, t 1 Working capital shares w 0 Wage indexation to real growth trend

15 F Steady state bankruptcy rate 0.55 Fraction of value of assets destroyed in bankruptcy W e /y Transfers to entreprenuers L Steady state fraction of employment N 4 Number of agency cohorts/length of wage contracts Survival rate of a match 0.5 Unemployment share in matching technology m Level parameter in matching function Parameter Parameter description Moment Moment value Value at post. mean Depreciation rate of capital p i i/y Real exchange rate p x x/y/ Entrepreneurial survival rate n/ p k k A L Scaling of disutility of work

16 Prior distr. Prior mean Prior s.d. Post. mean Post. s.d. d beta x beta mc beta mi beta mx beta indx beta L gamm b beta S norm a gamm R beta r norm r Δ norm r y norm r Δy gamm i gamm f gamm c gamm x gamm s beta rec. share gamm bshare beta

17 Prior distr. Prior mean Prior s.d. Post. mean Post. s.d. d beta x beta mc beta mi beta mx beta indx beta L gamm b beta Priors pretty tight, data contain some information about all but one price stickiness parameter. S norm a gamm R beta r norm r Δ norm r y norm r Δy gamm i gamm Tightness of prior could hide evidence that the model is wrong. However, we will leave itup to goodness of fit of fit measures (i.e., RMSEs) to tell us if the model f is so gamm much worse 1.50 than alternatives that it should be abandoned. c gamm x gamm s beta rec. share gamm bshare beta

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19 Exchange appreciates, exports drop

20 Shocks/Variabes Pid Pic Pii R dy dw dc di dq dh dg dexp dimp dn spread dunemp Unit-root invest. tech Unit-root neutr. tech Stat. neutr. tech Stat. invest. tech Consumption pref Risk premium Monetary policy Gov. consumption Domestic markup Export markup Cons. import mkup Invest. import mkup Export import mkup Entrepreneur risk Entrepreneur survival Bargaining power Foreign output Foreign inflation Foreign nom.int. rate

21 Shocks/Variabes Pid Pic Pii R dy dw dc di dq dh dg dexp dimp dn spread dunemp Unit-root invest. tech Unit-root neutr. tech Stat. neutr. tech Stat. invest. tech Consumption pref Risk premium Financial friction shocks important for: Monetary policy 0.9output 1.4 growth Gov. consumption Investment Spread, risky versus risk free debt Net worth growth Domestic markup Export markup Cons. import mkup Invest. import mkup Export import mkup Entrepreneur risk Entrepreneur survival Bargaining power Foreign output Foreign inflation Foreign nom.int. rate

22 Conclusion Described small open economy model Financial frictions important for shocks and propagation.