January 2013 calls for papers

January 30, 2013

Here are a few relevant calls for papers that came in this month.

Of course, as a reminder, the submission deadline for the Society for Economic Dynamics is coming soon (February 15, 2013).

European Search and Matching Network Annual Conference, Mainz (Germany), May 15-17, 2013 (deadline very soon!).

Society for Computational Economics Annual Meeting, Vancouver (Canada), July 10-12, 2013.

Doctoral Workshop on Dynamic Macroeconomics, Konstanz (Germany), May 24-25, 2013

European (PhD) Workshop in Macroeconomics, London (UK), June 20-21, 2013


News and Financial Intermediation in Aggregate and Sectoral Fluctuations

January 25, 2013

By Christoph Görtz and John Tsoukalas


We estimate a two-sector DSGE model with financial intermediaries – a-la Gertler and Karadi (2011) and Gertler and Kiyotaki (2010) – and quantify the importance of news shocks in accounting for aggregate and sectoral fluctuations. Our results indicate a significant role of financial market news as a predictive force behind fluctuations. Specifically, news about the value of assets held by financial intermediaries, reflected one to two years in advance in corporate bond markets, generate countercyclical corporate bonds spreads, affect the supply of credit, and are estimated to be a significant source of aggregate fluctuations, accounting for approximately 31% of output, 22% of investment and 31% of hours worked variation in cyclical frequencies. Importantly, asset value news shocks generate both aggregate and sectoral co-movement with a standard preference specification. Financial intermediation is key for importance and propagation of asset value news shocks.

Another paper that tries to introduces news shocks into some form of a standard model. The interesting aspect here is the quantification. Yet, I have the feeling that what is called news here may incorporate a lot more. For example, when there is herd behavior that drives assets prices one way or another, that is likely picked up as a news shock. Is that right? Or are news shocks capturing something that the econometrician does not observe, but market participants do, and it may even be a realized fundamental. Maybe I am just confused by a long day (see the RePEc blog tomorrow why).

Assortative matching through signals

January 19, 2013

By Friedrich Poeschel


In a model of sequential search with transferable utility, we allow heterogeneous agents to strategically choose a costless signal of their type. Search frictions are included as discounting and explicit search costs. Through signals, if only they are truthful, agents can avoid the inefficiencies of random search. Then the situation effectively approaches a setting without search frictions. We identify the condition under which signals are truthful and a unique separating equilibrium with perfect sorting arises despite frictions. We find that supermodularity of the match production function is a necessary and sufficient condition. This is a weaker condition than is needed for sorting in models without signals, which may explain why sorting is much more widespread in reality than existing models would suggest. Supermodularity functions here as both a sorting condition and a single-crossing property. The unique separating equilibrium in our model achieves nearly unconstrained efficiency despite frictions: agents successfully conclude their search after a single meeting, a stable matching results, and overall match output is maximised.

A search model with signaling where costless and truthful signals can avoid the search frictions. What if signals cost? Woult then some signals not be truthful? Would this have implications for some of the puzzles the labor search literature is pursuing? While the result of this paper seems quite trivial, its extensions look much more promising.

Real expectations: replacing rational expectations with survey expectations in dynamic macro models

January 16, 2013

By Jeff Fuhrer


This paper examines the implications of changing the expectations assumption that is embedded in nearly all current macroeconomic models. The paper substitutes measured or “real” expectations for rational expectations in an array of standard macroeconomic relationships, as well as in a DSGE model. The author finds that the use of survey measures of expectations — for near-term inflation, long-term inflation, unemployment, and short-term interest rates — improves performance along a variety of dimensions. Survey expectations exhibit strong correlations to key macroeconomic variables. Those correlations may be given a structural interpretation in a DSGE context. Including survey expectations helps to identify key slope parameters in standard relationships, and eliminates the need for having lagged dependent variables in structural models that is often motivated by indexation for prices and habit formation for consumption. Including survey expectations also obviates the need for autocorrelated structural shocks in the key equations. In a head-to-head empirical test, the weight placed on the DSGE model’s rational expectations is essentially zero and the weight on survey expectations is one. The paper also discusses the modeling complications that arise once the rational expectations assumption is abandoned, and proposes methods for endogenizing survey expectations in a general equilibrium macro model.

Another recent paper that deviates from rational expectations with interesting results, here by taking actual survey expectations. The cost is that one cannot pinpoint expectations within the model, and inferring policy implications unconditionally on expectations becomes iffy. We would then need a model to determine the econometrician’s expectations of the agents’ expectations. Should they be rational?

A model of borrower reputation as intangible collateral

January 15, 2013

By Kalin Nikolov


In this paper, we build a Kiyotaki-Moore style collateral amplification framework which generates large endogenous fluctuations in the leverage available to investing firms. We assume that defaulting borrowers lose not only their tangible collateral but also their future debt market access. The possibility of such market exclusion can lead to the emergence of intangible collateral in equilibrium alongside the tangible collateral which is usually studied in the literature. Fluctuations in the value of intangible collateral are isomorphic to fluctuations in the downpayments they need to make in their purchases of productive assets. This modification of the Kiyotaki-Moore model substantially increases its amplification of exogenous shocks.

What this paper is getting at is that “goodwill,” “credibility,” or “reputation” are forms of valuable intangible capital that are quickly lost, and hence provide an interesting amplication mechanism for economic fluctuations. As far as I can see it, though, it misses an important asymmetry as modeled in this paper: this intangible asset is quickly lost but it takes a long time to reestablish it. That would be coherent with the asymmetries of output fluctuations.

PS: Due to the very large number of papers disseminated through NEP-DGE this week, I have selected more than one paper. One was presented yesterday, and a third one will appear here tomorrow.

House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

January 14, 2013

By Paolo Gelain, Kevin Lansing and Caterina Mendicino


Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation.

Do we absolutely need to stick to fully-rational expectations? If there is evidence of “irrational exuberance,” I think we are allowed to deviate from rational expectation as long as this is done in a disciplined way. Here the authors choose a moving average expectation, reflecting a limited memory window of some market participants. While the results are promising, one needs now to get convinced that this expectation formation is empirically plausible.