Post on 07-Feb-2017
MELEZE, a DSGE model for France within the Euro
Area
and what can be done with it
Benoît Campagne & Aurélien Poissonnier(aurelien.poissonnier@ec.europa.eu)
Insee-École Polytechnique-Crest
27th September 2016
Campagne & Poissonnier (Insee) Mélèze Sept.27 1 / 25
Motivation
DSGEs are widely used by governments, central banks and internationalinstitutions to assess the impact of �scal and structural reforms:
Quest III (EC), NAWM or EAGLE (ECB), GEM (IMF), SIGMA(FED)...
Insee wanted to develop its own expertise as a complement for themacroeconometric model Mésange.⇒ MELEZE : Modèle économique linéarizé d'équilibre en zone euro, i.e.linearised economic model of equilirium in the euro area
Full model description
Fiscal analysis (La�er curves, short term and long term �scalmultipliers)
Structural reforms
Campagne & Poissonnier (Insee) Mélèze Sept.27 2 / 25
Plan
1 Presentation of the modelGeneral featuresGovernmentFinancial marketsSteady state restrictions
2 Structural reforms: a plead for sensitivity analysesChannels of transmission of structural reformsQuantitative simulationsA closer look at utility
Campagne & Poissonnier (Insee) Mélèze Sept.27 3 / 25
Plan
1 Presentation of the modelGeneral featuresGovernmentFinancial marketsSteady state restrictions
2 Structural reforms: a plead for sensitivity analyses
Campagne & Poissonnier (Insee) Mélèze Sept.27 4 / 25
General features
New Keynesian model à la Christiano, Eichenbaum and Evans (2005)or Smets and Wouters (2003)
In�nitely lived households
Firms in monopolistic competition
Workers in monopolistic competition
Sticky wages and prices (Calvo)
Two countries in a monetary union
Trade of consumption and investment goods
No non tradables
Workers and installed capital are not mobile
Union wide market for private and public debt
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Only one equation
Households' utility: non-separable (King et al., 2002), withconsumption multiplicative habits (Abel, 1990 or Gali, 1994)
Ut(τ) = 11−σc
[Ct(τ)
(Ct−1
N
)−hc]1−σc [1− κ(1− σc)lt(τ)1+σl
]σcAlternative speci�cations:
with no consumption habits
with labour habits
with non Ricardian agents à la Campbell and Mankiw
Campagne & Poissonnier (Insee) Mélèze Sept.27 6 / 25
Government spending: budget rule or optimisation
behaviour ?
Standard practice in DSGE models = budget rules and tax rulesTheoretical benchmark = Ramsey problemRamsey = untractable + not realisticFève and Sahuc (2013) = G in utility function better �t than nonRicardian households
We propose a government maximizing utility derived from
public consumption but under incomplete information
Campagne & Poissonnier (Insee) Mélèze Sept.27 7 / 25
A big di�erence...We compare our proposal with Corsetti Meier Muller (2010) budgetrules
Figure: IRFs to a one percent productivity shock (autocorrelated)Campagne & Poissonnier (Insee) Mélèze Sept.27 8 / 25
Financial markets
Open economy = debt dynamic and unit root problemSchmitt-Grohe and Uribe (2003) gather modelling tricks
We model a simpli�ed (perfect) �nancial market
Financial intermediaries, out of EMU (London and Geneva), in perfectcompetition, collect a debt-asset elastic fee on their services.Ensures that each debt has a SS value and converges towards it.
Campagne & Poissonnier (Insee) Mélèze Sept.27 9 / 25
A debt elastic spread is akin to FISIM
|Borrowing 0
|Savings
Asset
-R
Interest rate
Centralbanker
Financialintermedi-ary
ψ′
ψ
•
•
Figure: Debt elastic spreads are similar to FISIM
The debtor or creditor position at SS depends on the discount factor.Campagne & Poissonnier (Insee) Mélèze Sept.27 10 / 25
A residual unit root pb
Summing all budget constraints in the models =∑φAssett+1 = (1 + rt)
∑φAssett (1)
creates a unit root in linearised modelBut if �nancial market is Walrassian,∑φAsset0 =
∑φAssetSS =
∑φAssett = 0
Can use all budget constraints but one +∑φAssett = 0 to close the
model
Campagne & Poissonnier (Insee) Mélèze Sept.27 11 / 25
Full SS in level
Can compute real variables' SS in levelthen possible to compute output or utility elasticity to mark-ups
SS implies many restriction on parameters ⇒ can we include them inthe estimation ?
Campagne & Poissonnier (Insee) Mélèze Sept.27 12 / 25
Plan
1 Presentation of the model
2 Structural reforms: a plead for sensitivity analysesChannels of transmission of structural reformsQuantitative simulationsA closer look at utility
Campagne & Poissonnier (Insee) Mélèze Sept.27 13 / 25
Our main results
Smets and Wouters' model in line with Blanchard and Giavazzi (2003)
Consumption-leisure arbitrage plays a key role in the transmission ofstructural reforms to the economy
⇒ Frisch elasticity (+ risk aversion and habits) are quantitatively crucial
Welfare analysis shows households might loose upon reform
Need for sensitivity analysis
More fundamental rethink of labour market modelling and the di�erencesbetween short term and long term elasticities.
Campagne & Poissonnier (Insee) Mélèze Sept.27 14 / 25
Channels of transmission of structural reforms...in Smets and Wouters' model
K
¯RWrk
L
Capital market Labour market
DD
Capital demand curve
θ−1θ αζ1−α
(KL
)α−1
= rk
Capital supply curve
rk = 1+rΠ− 1 + δ
Labour demand curve
θ−1θ (1− α)ζ1−α
(KL
)α= RW
Labour supply curve
RW = θwθw−1 (1 + σl)cf(l)
Campagne & Poissonnier (Insee) Mélèze Sept.27 15 / 25
Channels of transmission of structural reforms...in Smets and Wouters' model
K
¯RWrk
L
Capital market Labour market
D
S
D
Capital demand curve
θ−1θ αζ1−α
(KL
)α−1
= rk
Capital supply curve
rk = 1+rΠ− 1 + δ
Labour demand curve
θ−1θ (1− α)ζ1−α
(KL
)α= RW
Labour supply curve
RW = θwθw−1 (1 + σl)cf(l)
Campagne & Poissonnier (Insee) Mélèze Sept.27 15 / 25
Channels of transmission of structural reforms...in Smets and Wouters' model
K
¯RWrk
L
Capital market Labour market
D
S
S
D
Capital demand curve
θ−1θ αζ1−α
(KL
)α−1
= rk
Capital supply curve
rk = 1+rΠ− 1 + δ
Labour demand curve
θ−1θ (1− α)ζ1−α
(KL
)α= RW
Labour supply curve
RW = θwθw−1 (1 + σl)cf(l)
Campagne & Poissonnier (Insee) Mélèze Sept.27 15 / 25
Channels of transmission of structural reformsProduct market deregulation : ↑ substitutability between goods
dividends ↓ and factors' remuneration ↑ (D1 to D')
increased demand for factors translates into ↑ marginal productivity andfurther ↑ demand (D' to D2)
positive wealth e�ect, consumption ↑ and labour supply ↓ (S1 to S2)
K
¯RWrk
L
Capital market Labour market
D1
D'
D2
S2S1
S1
D1
D'D2
At steady state
capital ↑,labour ↑,production ↑
consumption↑, real wages ↑
Campagne & Poissonnier (Insee) Mélèze Sept.27 16 / 25
Channels of transmission of structural reformsLabour market deregulation : ↑ substitutability between workers
lower market power of workers implies an increased labour supply for asame wage (S1 to S')
increased labour supply translates into ↑ marginal productivity of capitaland then labour (D1 to D2)
consumption-leisure arbitrage adjusts (S' to S2 - wealth e�ect) but
unchanged real wages in the long-run
At steady state
capital ↑, labour↑, production ↑ inthe sameproportions
consumption ↑,real wagesstagnates
K
¯RWrk
L
Capital market Labour market
D1
D2
S1S2
S'S1
D1
D2
Campagne & Poissonnier (Insee) Mélèze Sept.27 17 / 25
Quantitative simulations
Figure: Production Figure: Real wage Figure: Total utility
Steady state variations upon reforms in p.p.
Best practices = standard exercise of convergence towards the threebest EU performers (UK, SW, DK)
Campagne & Poissonnier (Insee) Mélèze Sept.27 18 / 25
Output gains=utility losses
Figure: Goods market deregulationFigure: Labour marketderegulation
Decomposition of changes in disutility following pro-competitive reforms against theoutput increase induced by the reform. We represent the disutility of households. Aincrease in the disutility is therefore detrimental to the households.The x-axis indexes structural reforms (θ or θw) by their impact on output.
Campagne & Poissonnier (Insee) Mélèze Sept.27 19 / 25
Utility approach
Solid black lines correspond to utilities without reforms, i.e. initial steady state. Coloured solid linesrepresent the intertemporal utility once the reform is implemented. The di�erence between this line and
the �nal steady state is the transition cost to the reform.
Figure: Utility in the transition following a decrease in the price or wagemarkup
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Utility approach bis
Figure: Utility in the transition following a decrease in the price or wagemark-up without consumption habits (hc = 0)
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Results
Long term output gains but transitory costs
Output enhancing but ambiguous sign for utility
Importance of the households' utility and habits calibration
Additive or multiplicative habits identical in short run butequivalent to change in Frisch and elasticity of substitution in longrun
Campagne & Poissonnier (Insee) Mélèze Sept.27 22 / 25
Channels of transmission of structural reformsWhat should we expect?
Blanchard and Giavazzi (2003)
I monopolistic competition, entry costs and wage Nash bargainingI production = employment
Reform short-run transition long-run
↓ bargaining power of workerspro�ts ↑, and real
wages ↓
more �rms enter,labour and real
wages ↑
labour ↑ and realwages stagnate
↑ substitutability between goodsreal wages and
labour ↑pro�ts ↓ so �rms
exitneutral
↓ entry costsneutral as �xednumber of �rms
�rms start enteringreal wages and
labour ↑
Campagne & Poissonnier (Insee) Mélèze Sept.27 24 / 25
Long term elasticities of output and utility
Elasticities when performing :
a product market deregulationdYY
=(
α1−α + 1
(1+σl)(1−hl)(1+B) (1 + iycy ))
dθθ
θ−1 > 0
dUU
= (1− σc)(1− hc)[(
α1−α −
iycy
)+
1− θw−1θw
θ−1θ
(1−α)(1−hl)(1−hc)cy
(1+σl)(1−hl)(1+B) (1 + iycy )
]dθθ
θ−1
a labour market deregulationdYY
= 1(1+σl)(1−hl)(1+B)
dθwθw
θw−1 > 0
dUU
= (1− σc)(1− hc)1− θw−1
θw
θ−1θ
(1−α)(1−hl)(1−hc)cy
(1+σl)(1−hl)(1+B)
dθwθw
θw−1
Campagne & Poissonnier (Insee) Mélèze Sept.27 25 / 25