OGRE Model
with Zsuzsa Munkácsi
Working Paper 1: In this paper we present the structure of OGRE, a dynamic general equilibrium model with overlapping generations, unemployment and a shadow economy. Based on a parametrized version of the model, we examine the impacts of aging and calculate multipliers of public pension and other fiscal policies. Also, we contrast macroeconomic reactions with pay-as-you-go and fully funded pension plans. Lastly, we highlight the role of unemployment and that of the underground sector in the framework.
Working Paper 2: Southern Europe is currently experiencing a double-whammy: high levels of government debt coupled with a rapidly aging population. Thus, the consolidation of (pension) budgets seems inevitable. In this paper we examine the short- and long-run macroeconomic effects of public old-age pension reforms and other fiscal policies under conditions of population aging. To do so, we calibrate OGRE, a New Keynesian model with overlapping generations, unemployment and an underground sector to match annual data on Portugal and Spain. Our main finding is that a retirement-age increase is the least harmful policy with respect to long-run output. However, we raise some doubts about the feasibility of implementing this policy.
JEL codes: E24, E26, F41, H55, J11, J46
Working Paper 1: Structure of OGRE, Working Paper 2: Application of OGRE and the latest presentation
Presented: SPR Seminar of the International Monetary Fund, Washington DC, Jan 2017 | European Central Bank, Frankfurt am Main, Sept 2016 | Council for Budget Responsibility, Bratislava, Sept 2016 | 2016 York Fiscal Policy Symposium, York, July 2016 | Bank of Latvia (ESCB) Public Finance Workshop, Riga, June 2016 | 14th International Conference on Pensions, Insurance and Savings, Paris, May 2016 | National Bank of Slovakia, Bratislava, May 2016 (invited) | Deutsche Bundesbank, Frankfurt am Main, Apr 2016 | 2016 Annual Conference of the Scottish Economic Society, Perth, Apr 2016 | 2016 Annual Conference of the European Public Choice Society, Freiburg, Mar-Apr 2016 | 2016 Annual Conference of the Royal Economic Society, Brighton, Mar 2016 | Bank of Lithuania, Vilnius, Mar 2016 | 2015 Conference of the Hungarian Society of Economists, Budapest, Dec 2015 | 4th International Workshop on the Socio-Economics of Ageing, Lisbon, Oct 2015 | Bank of Lithuania, Vilnius, Oct 2015
Convergence Stories of Post-Socialist Central-Eastern European Countries
with István Kónya
This paper views the growth and convergence process of five Central-Eastern Eu- ropean economies - the Czech Republic, Hungary, Poland, Slovenia and Slovakia - through the lens of an open economy, stochastic neoclassical growth model. We esti- mate for these countries a version of the model augmented by simple financial frictions. Our main question is whether shocks to the growth rate of productivity (“trend”), or shocks to the external interest premium are more important to understand the volatil- ity of GDP growth and its components. We find that while GDP growth fluctuations can be traced back to productivity shocks, the composition of GDP - and consumption in particular - was driven particularly by premium shocks. Investment-specific and labor-market shocks are also important. Our panel estimation allows us to separate global and local components for productivity-trend and interest-premium shocks. The results indicate that the global trend component is well approximated by the growth rate of the advanced European Union economies, and we also find tentative evidence that recent investment behavior is largely driven to a large extent by European Union funds. When looking at the global component of the implicit interest rate recovered from the estimation, we find that it tracks the observed real interest rate in the EU 15 countries until 2008, but sharply diverges thereafter. This final finding is consistent with the hypothesis that various capital market wedges and non-price restrictions to lending became important during and after the global financial crisis.
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JEL: E13, O11, O41, O47
Presented: National Bank of Poland, Warsaw, Mar 2018 | 32nd Annual Congress of the European Economic Association and 70th European Meeting of the Econometric Society, Lisbon, Aug 2017 | 2nd World Congress of Comparative Economics, StPetersburg, Jun 2017 | PhD-Student Workshop, Conference of the Hungarian Society of Economists, Pécs, May 2017 | Seminar, Institute of Economics, Hungarian Academy of Science, Budapest, Apr 2017 | 54th Annual Meeting, Hungarian Economic Association, Kecskemét, Sept 2016 | National Bank of Poland, Warsaw, Sept 2016
More Gray, More Volatile?
Aging and (OptimaL) Monetary Policy
with Zsuzsa Munkácsi
The empirical and theoretical evidence on the impact of population aging on inflation is mixed, and there is no evidence regarding the volatility of inflation. Using advanced economies’ data and a DSGE-OLG model - a multi-period general equilibrium framework with overlapping generations - we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper shows how aging affects the short-term cyclical behavior of the economy and the transmission channels of monetary policy. We also examine the interplay between aging and optimal central bank policies. As aging redistributes wealth among generations, generations behave differently, and the labor force becomes more scarce. Our model suggests that aging makes monetary policy less effective, and aggregate demand less elastic to changes in the interest rate. Moreover, in grayer societies, central banks should react more strongly to nominal variables to compensate for higher inflation volatility.
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JEL: E13, E31, E32, E58, O11, O42,
Presented: 33rd Annual Congress of the European Economic Association and 71st European Meeting of the Econometric Society, August 2018 (upcoming) | Central European University, Budapest, Jan 2018 | 2017 Conference of the Hungarian Society of Economists, Budapest, Dec 2017 | Central European University, Budapest, Sept 2017 | Bank of Lithuania, Vilnius, Aug 2017 | Bank of Lithuania, Vilnius, July 2017
Secular Stagnation and the Role of Expectations
This paper reconsiders the secular stagnation hypothesis through the lens of bounded ratio- nality. The consequences of population aging on medium- and long-term equilibria are at the core of current macroeconomic discourse. According to the secular stagnation hypothesis, in aging societies, the GDP growth decelerates and the natural rate of interest decreases when households accumulate more savings for a longer lifespan. However, the negative relationship between the old-age dependency ratio and the real interest rate can be rejected or weakly explained by his- torical data from OECD countries. This paper presents a multi-period, Gertler-type OLG model that incorporates bounded rationality and empirically shows that a declining real interest rate is valid only for those countries where the agents’ behavior is consistent with the rational expectation equilibrium, or where the agents have a relatively long planning horizon.
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JEL: E13, E40, E43, E59, E71, O11
Presented: Central European University seminar (December 2018) | 2017 Conference of the Hungarian Society of Economists (December 2018)