Fiscal Policy with Credit Constrained Households

Transcription

1 Fsal oly wh ed onsaned ouseholds by Wene Roege and an n ' Veld Euoean ommsson DG EFN - Eonom and Fnanal Affas Bussels Ths daf: une 9 Absa: The uen fnanal ss s haaesed by an nease n ed onsans and sks of deflaon. Ths suaon has evved he dsusson abou he ole of fsal oly. Ths ae exloes he effes of ed onsans on he effeveness of fsal oly n a DSGE model wh housng nvesmen and ed onsaned households. We show ha he esene of ed onsaned households ases he magnal oensy o onsume ou of uen ne nome bu onsumon eans a song nees ae effe. Ths makes fsal oly a moe oweful ool fo sho un sablsaon eseally n he ase of deflaonay shoks whh lkely edues he nees ae esonse of he enal Bank o fsal measues. EL lassfaon: E; E6; F4; 3; 63 eywods: Fsal oly Fsal ulle Govenmen Defs ed onsan DSGE modellng We hank Salvado Baos and sván Szekely and semna aans a he nenaonal oneay Fund he Bank of anada and he Euoean enal Bank fo helful ommens and suggesons. The vews exessed n hs ae ae hose of he auhos and should no be abued o he Euoean ommsson. Emal: wene.oege@e.euoa.eu; an.nveld@e.euoa.eu

2 . noduon Wh he fnanal ss seadng o he eal eonomy hee has been a evval of nees n dseonay fsal oly. As aggegae demand has lummeed he sole elane on he oeaon of auoma sablses has been alled no queson. n ode o suo effos aken by enal banks o sablse he busness yle hee have been wdesead alls fo fsal oly measues o even a sha delne n ouu. The Euoean ounl aoved n Deembe 8 a Euoean Eonom Reovey lan onssng of suual efoms and fsal measues amounng o aound EUR bn o suo demand and avod a sha eesson. n esonse o he ss many Euoean ounes have announed measues asng ubl exendue and/o edung axes. n addon he nomng U.S. admnsaon has announed lans fo a lage fsal smulus amounng o moe han $8 bn.. Ths evval of fsal oly has enewed he debae abou he effeveness of sho em fsal sablsaon. A deade ago hee was wdesead ageemen ha was bes o "le fsal oly have s man ouneylal ma hough he auoma sablzes" and ha " dseonay fsal oly o be saved exlly fo longe em ssues equng less fequen hanges" Taylo 9. was agued ha ouneylal dseonay fsal oly was "nehe desable no olally feasble" Ehenbaum 997 and "delbeae ouneylal dseonay oly has no onbued o eonom sably and may have aually been desablzng n he as" Feldsen. These essms vews on he effeveness of fsal oly mgh have been usfed by sef faos. Fs he las deades have been haaesed by a domnane of suly shoks. Blnde and Rudd 8 ovde emal evdene on he moane of suly faos fo exlanng he sagflaon eod fom he begnnng of he 97s o he md-98s wh wo eessons n and 98 heavly nfluened by song neases n ol es. The sudden nease n ol es assoaed wh he fs aq wa n 99 also onbued o he eesson n he ealy 99s. When he eonomy s h by suly shoks hee s lle ave dseonay fsal oly an do. A seond fao ha usfed he sesm on fsal oly was he ad fnanal lbealsaon. As moe households aqued aess o fnanal makes and wee able o smooh he onsumon fsal oly beame less oweful. The esen suaon s dffeen wh a lage negave demand shok and an nease n ed onsans. Ths has led many eonomss o eonsde a ossble ole fo dseonay fsal oly o omlemen he oeaon of auoma sablses. The onen ha wh nees aes a an all me low hee emans lle soe fo onvenonal moneay oly measues has enfoed hs evval of nees n fsal oly. s geneally ageed ha fo fsal oly o be effeve measues have o be desgned o be mely ageed and emoay. Bu s geneally feaed ha hs ss ould be longe lasng han aveage as eessons. Renha and Rogoff 8 doumen he afemah of sevee fnanal ses and ague ha hese ae oaed affas wh ouu fallng an aveage ove 9 een ove a duaon of oughly wo yeas. Gven he exeed duaon of he ss he ofen-ased sm agans dseonay fsal oly.e. ha aves oo lae seems less elevan a he uen unue. The lan ovdes a ommon famewok fo he effos made by embe Saes and by he Euoean Unon wh a vew o ensung onsseny and maxmsng effeveness. See e.g. Feldsen 9 Auebah 9 and Slmbego e al. 8.

3 Ths ae examnes he effeveness of fsal oly n a moden dynam sohas geneal equlbum DGSE model n whh ed onsans lay an moan ole. The man ansmsson hannels of he fnanal ss no he eal eonomy ae hough o be hough hghe sk ema and ed aonng fo households and fms. By dsaggegang households no ed onsaned and a non-onsaned gou along he lnes suggesed by he een leaue on he fnanal aeleao mehansm 3 we an examne he moane of ghe ed onsans on he effeveness of dseonay fsal oly. The esene of ed onsaned households ases he magnal oensy o onsume ou of uen ne nome and makes fsal oly a moe oweful ool fo sho un sablsaon. A model wh ed onsans also dslays a osve o-movemen of onsumon o govenmen sendng shoks even when allowng fo labou adusmen oss n onas o Gal e al 7. A seond eason why fsal oly an be moe oweful now s ha wh deflaonay shoks lke he uen fnanal ss moneay oly an be moe aommodave owads he fsal smulus and allow eal nees aes o fall. ed onsaned onsumes ea even moe songly o a fall n eal nees aes. The es of he ae s suued as follows. The nex seon sas wh a bef ovevew of he emal leaue on he effeveness of fsal oly. Ths s followed by a evew of ed onsans n he een downun. n seon 4 we desbe he model wh a seal emhass on he household seo. n hs seon we also exloe how ed onsaned households esond o hanges n uen nome and nees aes. The followng seon esens he smulaon esuls and dsusses he effe he noduon of ed onsaned households has on he effeveness of emoay ax and exendue measues wh and whou an aommodave moneay oly. We use a wo-egon veson of hs model onssng of he EU and he es of he wold o look a he effes of a fsal smulus n he EU alone as well as a global fsal smulus and also onsde slloves aoss he wo egons. The fnal seon onludes.. Ovevew of emal leaue The emal leaue on he effes of dseonay fsal oly shows esmaes of fsal mulles vay wdely. Aoahes based on mo sudes of as ax ebaes show oughly half o wo-hd of he nome effe s sen on hghe onsumon e.g. Boda and ake 8 bu hs onass shaly wh mao evdene ha shows no nease n onsumon followng he ay 8 US ax ebae Taylo 9. Naave sudes of he effes of ax hanges fnd vey lage effes lke a emanen e en of GD ax nease leadng o a 3 e en onaon n GD Rome and Rome 7. On he ohe hand naave sudes of esodes of exaodnay sendng have ended o fnd muh weake o negave effes on ouu Ramey and Shao 998. Esmaes fom VAR sudes also vay wdely. Blanhad and eo aled suual veo auoegesson SVAR mehodology o sudy he effes of fsal oly n he US. They fnd osve effes on ouu fo neases n sendng and negave effes fo neases n axes. n mos ases he mulles ae small ofen lose o one. Gal e al. 7 eo VAR esmaes fo he US usng daa bak o he 95s and eo a sendng mulle of.78 on ma and of.74 a he end of he seond yea. Usng sgn esons 3 See e.g. yoak and ooe 997 aovello 5 aovello and Ne 8 onaell 7 alza onaell and Saa 7.

4 on he mulse esonse funons ounfod and Uhlg 5 esmae he effes of a balaned budge and a def sendng shok. They fnd ha govenmen sendng shoks owd ou boh esdenal and non-esdenal nvesmen bu hey hadly hange onsumon he esonse of he lae s small and nsgnfan. Vaous auhos have exended he SVAR mehodology o nlude ohe ounes. eo 5 looks a fve OED ounes and fnds geneally weake effes when nludng nees aes n he VAR. The effes of govenmen sendng shoks and ax us on GD and s omonens have beome subsanally weake ove me: n he os-98 eod hese effes ae mosly negave n aula on vae nvesmen. Only fo he US s he onsumon esonse found osve and dd he GD mulle exeed one n he os-98 eod. De aso and Fenandez de os 6 fnd a osve elaonsh beween govenmen sendng and ouu n he sho em fo San bu a negave one n he medum and long em whle Godano e al. 7 fnd a osve and essen effes on ouu and onsumon fo aly. Afonso and Sousa 9 nvesgae he maoeonom effes of fsal oly usng a Bayesan Suual Veo Auoegesson aoah on quaely dae fo fou ounes and sess he moane of exlly modellng govenmen deb dynams n he model. They fnd govenmen sendng shoks have n geneal a small effe on GD ofen negave and lead o moan owdng-ou effes n aula on nvesmen. Esmaes fom DSGE models also dffe wdely wh ese o he effeveness of fsal oly. Whle hee seems o be ageemen ha hee s a owdng ou effe of govenmen sendng on vae nvesmen hee s lle onsensus on he effe of govenmen sendng on vae onsumon boh emally and n he DSGE leaue. A osve onsumon mulle s a eequse fo a lage exendue mulle. Ravn e al. 7 nodue a make suue no he model whh mles a song delne n he mak u n he ase of a govenmen sendng shok n ode o geneae a osve onsumon effe. onaell e al. 8 nodue a uly funon whh mles a songe omovemen beween hous woked and onsumon n ode o geneae he same effe. Gal e al. 7 geneae a osve effe on vae onsumon by nodung subsanal aal make mefeons n he fom of lqudy onsaned households. Rao e al. 9a esmae a fs yea mulle fo govenmen onsumon shoks of aound.6 wh an esmaed shae of lqudy onsaned households of abou 3% fo he euo aea smla fo govenmen nvesmen bu lowe fo ansfes. vae onsumon by lqudy-onsaned households ses n esonse o a govenmen sendng shok bu ha of non-onsaned households falls and aggegae onsumon delnes. oenen and Saub 5 also fnd fo a smla shae of non-radan households a sho-lved se n lqudy-onsaned onsumon bu fallng below s seady sae level afe a few quaes and a delne n aggegae onsumon. aeas ha one needs exeme shaes of lqudy onsaned households -. e. households who don' have aess o aal makes a all - n ode o geneae a leas a non negave esonse of vae onsumon. Ths seems o be a odds wh obseved esmaes of he shae of lqudy onsaned households. ed onsans onsue an aave alenave hyohess. Gven he uneany abou nome and wealh develomens of boowes banks yally mose ollaeal onsans. Ths ae heefoe exloes he onsequenes fo fsal oly of hs ed make fon. 3. Tghenng of ed onsans Sne he onse of he fnanal ss hee has been a sha nease n ed onsans. The ollase of house es n he US as well as n many Euoean ounes led o a sha 3

5 nease n defaulng loans. Banks esonded o hese ed losses by esng mogage lendng and edung ed suly. As a esul he subme mogage make n he US vually ollased. The feezng u of he nebank make n 8 aggavaed he suaon and ed suly ghened fuhe. Ths seon evews some evdene based on bank lendng suveys n he euo aea and he US ha show how ed onsans have ghened fo households n aula fo house uhases. The suveys ae addessed o seno loan offes of a eesenave samle of banks and ae ondued a egula nevals. Fgue llusaes how ed sandads ghened n he euo aea sne he begnnng of 8. shows he ne eenage of banks eong a ghenng of ed sandads fo loans o households fo house uhase as well as onsume ed and ohe loans 4. Even ough hs ne eenage lessened somewha n he fs quae of 9 hee was sll a fuhe oveall ghenng of ed sandads fom an aleady elevaed level. The man faos onbung o he onnued ne ghenng of ed wee exeaons egadng geneal eonom avy and housng make oses as well as os of funds and balane shee onsans fo banks. Fgue : Euo aea: ed sandads aled o he aoval of loans o households ne eenages of banks eong ghenng ed sandads an-3 ay-3 Se-3 an-4 ay-4 Se-4 an-5 ay-5 Se-5 an-6 ay-6 Se-6 an-7 ay-7 Se-7 an-8 ay-8 Se-8 an-9 - loans fo house uhases onsume ed and ohe loans Soue: EB Fo he US suvey daa fom he Seno Loan Offe Onon Suvey goes bak o he begnnng of he 99s and he evdene of ghenng of ed onsans s even songe Fgue. Sne 7 an neasng ne eenages of domes banks eoed havng ghened ed sandads on esdenal mogages. Even n he fs quae of 9 a lage faon of domes esondens omaed o he evous quae eoed havng ghened he lendng sandads on me and nonadonal esdenal mogages 5. As only wo banks eoed makng any subme mogage loans ha quae no esonse fo he subme aegoy was eoed n he suvey. The evdene fom hese suveys sugges a onsdeable ghenng of ed onsans fo households sne he begnnng of he ss. 4 The ne eenage s defned as he dffeene beween he sum of he eenages of banks esondng ghened onsdeably and ghened somewha and he sum of he eenages of banks esondng eased somewha and eased onsdeably. 5 A smla ghenng of lendng sandads was eoed fo evolvng home equy lnes of ed. 4

6 Fgue : US: ed sandads aled o he aoval of loans o households ne eenages of banks eong ghenng ed sandads Ne eenage of Domes Resondens Tghenng Sandads fo ogage Loans All me Nonadonal Subme Soue: FRB Seno Loan Offe Onon Suvey of Bank Lendng aes 4. The odel We onsde a wo egon wold eonomy whee we dsngush beween he Euoean Unon and he es of he wold. Thee ae hee oduon seos n eah egon namely a seo odung adables non adables and houses. We dsngush beween Radan households whh have full aess o fnanal makes ed onsaned households fang a ollaeal onsan on he boowng and lqudy onsaned households whh do no engage n fnanal makes. And hee s a moneay and fsal auhoy boh followng ules based sablsaon oles. Behavoual and ehnologal elaonshs an be sube o auooelaed shoks denoed by U whee k sands fo he ye of shok. The logahm of k U 6 wll geneally be auooelaed wh auooelaon oeffen k k ρ and nnovaon k ε. 4. Fms: Thee s a adable and a non adable seo and hee s a housng seo. 4.. odues of adables and non adables Fms oeang n he adable and non adable seo ae ndexed by T and NT esevely TNT. Eah fm odues a vaey of he domes good whh s an mefe subsue fo vaees odued by ohe fms. Beause of mefe subsuably fms ae monoolsally omeve n he goods make and fae a demand funon fo goods. Domes fms n he adable seo sell onsumon goods and seves o vae domes and foegn households and he domes and foegn govenmen and hey sell nvesmen and nemedae goods o ohe domes and foegn fms. The non adable seo sells onsumon goods and seves only o domes households and he domes govenmen and hey sell nvesmen and nemedae goods only o domes fms nludng he 6 Lowe ases denoe logahms.e. z logz. Lowe ases ae also used fo aos and aes. n aula we defne / as he elave e of good w... he GD deflao GD 5

7 esdenal onsuon seo. efeenes fo vaees of adables and non adables an dffe esulng n dffeen mak us fo he adable and non adable seo. Ouu s odued wh a ES oduon funon nesng a obb Douglas ehnology fo value added usng aal and oduon wokes L LO augmened wh ubl G aal and a ES funon fo domesally odued NTD moed NTF and non-adable nemedaes NTNT. whee O Y s n n. Y n n s n n. NT n n α α Y G G and ua L LO U α α n n wh L θ θ θ θ L d. 3 NT s / n T sdom NTD sdom NTF n n s / n T NTNT n n n n The em LO eesens ovehead labou. Toal emloymen of he fm L s self a ES aggegae of labou suled by ndvdual households. The aamee θ > deemnes he degee of subsuably among dffeen yes of labou. Fms also dede abou he degee of aay ulsaon UA. Thee s an eonomy wde ehnology shok U Y. The obeve of he fm s o maxmse ofs L UA 4 Y w L ad ad L ad ua. whee denoes he enal ae of aal. Fms also fae ehnologal and egulaoy onsans whh es he e seng emloymen and aay ulsaon desons. e seng gdes an be he esul of he nenal ogansaon of he fm o sef usome-fm elaonshs assoaed wh ean make suues. oss of adusng labou have a song ob sef omonen e.g. anng oss bu hghe emloymen adusmen oss may also ase n heavly egulaed labou makes wh seah fons. oss assoaed wh he ulsaon of aal an esul fom hghe manenane oss assoaed wh a moe nensve use of a ee of aal equmen. The followng onvex funonal foms ae hosen 6

8 5 ad ad ad L L UA w L u ua L L L ua ua ua ua The fm deemnes labou nu aal seves and es omally n eah eod gven he ehnologal and admnsave onsans as well as demand ondons. The fs ode ondons ae gven by: 6a L O > L η w u L w L L E w L L w 6b O > η O 6 > η ua ua ua ua ua 6d O > d / E η wh. Whee η s he Lagange mulle of he ehnologal onsan and s he eal nees ae. Fms equae he magnal odu of labou ne of magnal adusmen oss o wage oss. As an be seen fom he lef hand sde of equaon 6a he onvex a of he adusmen os funon enalses n os ems aeleaons and deeleaons of hanges n emloymen. Equaons 6b- only deemne he omal aal sok and aay ulsaon by equang he magnal value odu of aal o he enal e and he magnal odu of aal seves o he magnal os of neasng aay. Equaon 6d defnes he mak u fao as a funon of he elasy of subsuon and hanges n nflaon. The aveage mak u s equal o he nvese of he e elasy of demand. We follow he emal leaue and allow fo addonal bakwad lookng elemens by assumng ha a faon -sf of fms ndex e neases o nflaon n -. Fnally we also allow fo a mak u shok. Ths leads o he followng sefaon: d η / β sfe sf u 6d [ ] η sf 4.. Resdenal onsuon Land Fms h n he esdenal onsuon seo use new land sold by Radan n households and non adable goods o odue new houses usng a ES ehnology 7

9 L L 7 L Land L L n L sl sl Fms n he esdenal onsuon seo ae monoolsally omeve and fae e adusmen oss hus he mak u s gven by η / β sfe sf u sf [ ] New and exsng houses ae efe subsues. Thus households an make aal gans o suffe aal losses deendng on housee fluuaons 4. ouseholds: The household seo onsss of a onnuum of households [ ] l h. Thee ae s households whh ae lqudy onsaned and ndexed by l. These households do no ade on asse makes and onsume he dsosable nome eah eod. A faon s of all households ae Radan and ndexed by and s households ae ed onsaned and ndexed by. The eod uly funon s denal fo eah household ye and seaable n h h h onsumon lesue L and housng seves. We also allow fo hab essene n onsumon and lesue. Thus emoal uly fo onsumon s gven by h h h h h κ h U L log h ϑ L log ω All hee yes of households suly dffeenaed labou seves o unons whh maxmse a on uly funon fo eah ye of labou. s assumed ha yes of labou ae dsbued equally ove he hee household yes. Nomnal gdy n wage seng s nodued by assumng ha he household faes adusmen oss fo hangng wages. These adusmen oss ae bone by he household. 4.. Radan households Radan households have full aess o fnanal makes. They hold domes govenmen G bonds F B and bonds ssued by ohe domes and foegn households B B eal aals of he adable and non adable seo as well as he sok of land Land whh s sll avalable fo buldng new houses and ash balanes. The household eeves nome fom labou fnanal asses enal nome fom lendng aal o fms sellng land o he esdenal onsuon seo lus of nome fom fms owned by he household adables non adables esdenal onsuon. We assume ha all domes fms ae owned by Radan households. nome fom labou s axed a ae w enal nome a ae k and nvesos an eeve an nvesmen subsdy. n addon households ay lum-sum axes T LS. We assume ha nome fom fnanal wealh s sube o dffeen yes of sk. Domes bonds yeld sk-fee nomnal eun equal o. Domes and foegn bonds ae sube o sohas sk ema lnked o ne foegn ndebedness. uen sendng s alloaed o onsumon nvesmen n equmen and suues 8

10 9 as well as esdenal nvesmen L. An equy emum on eal asses ases beause of uneany abou he fuue value of eal asses. The Lagangan of hs maxmsaon oblem s gven by. Ε Ε Ε Ε Ε Ε L Land L L L LS Land L L k W W k k F F G F G L Land g Land T W W w L B e sk B B B e B B L U V ax β ξ λ δ β ϑ λ δ β ζ λ δ ξ β λ δ δ β λ β The nvesmen desons w... hysal aal and housng ae sube o onvex adusmen oss heefoe we make a dsnon beween eal nvesmen exendue and hysal nvesmen. nvesmen exendue of households nludng adusmen oss s gven by 3a u 3b u The budge onsan s wen n eal ems wh all es exessed elave o he GD deflao. nvesmen s a omose of domes and foegn goods. Fom he fs ode ondons we an deve he followng onsumon ule whee he ao of he magnal uly of onsumon n eod and s equaed o he eal nees ae adused fo he ae of me efeene 4 h h Ε β

11 Fom he abage ondon of nvesmen we an deve an nvesmen ule whh lnks aal fomaon o he shadow e of aal. 5 GD E u ξ Whee he shadow e of aal s gven as he esen dsouned value of he enal nome fom hysal aal 6 Ε GD δ δ ξ ξ Fom he FO fo housng nvesmen we an deve a housng nvesmen ule whh lnks nvesmen o he shadow e of housng aal 7 GD E u ζ. The shadow e of housng aal an be eesened as he esen dsouned value of he ao of he magnal uly of housng seves and onsumon 8 Ε h GD h δ ζ ω ζ Fo he e of land we one oban a quas oellng ule Ε L Land Land g The gowh ae of he e of land mus guaanee a ae of eun whh an be eaned by ohe asses. e. he gowh ae of land mus be equal o L g. 4.. ed onsaned households ed onsaned households dffe fom Radan households n wo eses. Fs hey have a hghe ae of me efeene β β < and hey fae a ollaeal onsan on he boowng. They boow B exlusvely fom domes Radan households. Radan households have he ossbly o efnane hemselves va he nenaonal aal make. The Lagangan of hs maxmsaon oblem s gven by

12 9 LS W W B T W W w L B B L U V ax χ β λ ψ δ β ζ λ β λ β Ε Ε Ε Ε Fom he fs ode ondons we an deve he followng deson ules fo onsumon h h ψ β Ε And housng nvesmen GD E u ζ ψ Whee agan he shadow e of housng aal s he esen dsouned value of he ao of he magnal uly of housng seves and onsumon Ε GD h δ ζ ψ χ ψ ω ζ The mao dffeene beween ed onsaned and Radan households s he esene of he Lagange mulle of he ollaeal onsan n boh he onsumon and he nvesmen ule of he fome. The em ψ as lke emum on he nees ae whh fluuaes osvely wh he ghness of he onsan Lqudy onsaned households Lqudy onsaned households do no omze bu smly onsume he ene labou nome a eah dae. Real onsumon of household k s hus deemned by ne wage nome lus ansfes mnus a lum-sum ax 3 l LS l l w l T TR W L s assumed ha lqudy onsaned households ossess he same uly funon as Radan households.

13 4..4 Wage seng A ade unon s maxmsng a on uly funon fo eah ye of labou whee s assumed ha yes of labou ae dsbued equally ove onsaned and unonsaned households wh he eseve oulaon weghs. The ade unon ses wages by maxmsng a weghed aveage of he uly funons of hese households. The wage ule s obaned by equang a weghed aveage of he magnal uly of lesue o a weghed aveage of he magnal uly of onsumon mes he eal wage adused fo a wage mak u 4 s U s l l L s U L s U L l l U s U s U W η W W whee η s he wage mak u fao wh wage mak us fluuang aound / θ whh s W he nvese of he elasy of subsuon beween dffeen vaees of labou seves. The ade unon ses he onsumon wage as a mak u ove he esevaon wage. The esevaon wage s he ao of he magnal uly of lesue o he magnal uly of onsumon. Ths s a naual measue of he esevaon wage. f hs ao s equal o he onsumon wage he household s ndffeen beween sulyng an addonal un of labou and sendng he addonal nome on onsumon and no neasng labou suly. Fluuaon n he wage mak u ases beause of wage adusmen oss and he fa ha a faon -sfw of wokes s ndexng he gowh ae of wages W o nflaon n he evous eod. 5 W η / θ W / θ β W sfw sfw sfw [ ] W ombnng 7 and 8 one an show ha he sem elasy of wage nflaon wh ese o he emloymen ae s gven by κ / W. e. s osvely elaed o he nvese of he labou suly elasy and nvesely elaed o wage adusmen oss Aggegaon The aggegae of any household sef vaable X h n e aa ems s gven by h l l X X dh s X s X s X sne households whn eah gou ae denal. ene aggegae onsumon s gven by 6a s s l s l and aggegae emloymen s gven by 6b L l l s L s L s L wh L L L. l

14 3 Sne lqudy onsaned households do no own fnanal asses we have l F l l B B.ed onsaned households only engage n deb onas wh Radan households heefoe we have 7 B s s B. 4.3 Tade and he uen aoun So fa we have only deemned aggegae onsumon nvesmen and govenmen uhases bu no he alloaon of exendue ove domes and foegn goods. n ode o falae aggegaon we assume ha households he govenmen and he ooae seo have denal efeenes aoss goods used fo vae onsumon ubl exendue and nvesmen. Le { } G G Z be demand of an ndvdual household nveso o he govenmen and hen he efeenes ae gven by he followng uly funon 8a f d Z u s Z u s Z whee he shae aamee s an be sube o andom shoks and d Z and f Z ae ndexes of demand aoss he onnuum of dffeenaed goods odued esevely n he domes eonomy and aboad gven by. 8b d d d d d n h d h d Z n Z f f f f f m h f h f Z m Z The elasy of subsuon beween bundles of domes and foegn goods d Z and f Z s. Thus aggegae mos ae gven by 9 G G n u s ρ ρ whee and s he uly based onsume e deflao and he lag suue aues delvey lags.. We assume smla demand behavou n he es of he wold heefoe exos an be eaed symmeally and ae gven by 3 F X F WX X F WX X W Y E E u s X X ρ ρ

15 whee X F and F Y ae he exo deflao an ndex of wold onsume es n foegn ueny and wold demand. es fo exos and mos ae se by domes and foegn exoes esevely. The exoes n boh egons buy goods fom he eseve domes odues and sell hem n foegn makes. They ansfom domes goods no exoables usng a lnea ehnology. Exoes a as monools omeos n exo makes and hage a mak-u ove domes es. Thus exo es ae gven by X 3 η X and mo es ae gven by 3 F η E ak-u fluuaons ase beause of e adusmen oss. Thee s also some bakwad ndexaon of es sne a faon of exoes -sfx and -sfm s ndexng hanges of es o as nflaon. The mak us fo mo and exo es s also sube o andom shoks η u k { X } / k β sf sf k k k k k k k k 34 [ ] Exos and mos ogehe wh nees ees/aymens deemne he evoluon of ne foegn asses denomnaed n domes ueny. F F F 35 E B E B X X 4.4 oly We assume ha moneay oly s aly ules based and aly dseonay. oly esonds o an ouu ga ndao of he busness yle. The ouu ga s no alulaed as he dffeene beween aual and effen ouu bu we y o use a measue ha losely aoxmaes he sandad ae of ouu ga alulaon as used fo fsal suvellane and moneay oly see Dens e al. 6. Ofen a oduon funon famewok s used whee he ouu ga s defned as devaon of aal and labou ulsaon fom he long un ends. Theefoe we defne he ouu ga as 36 YGA ua ua ss α L ss L α. ss whee L and ulsaon: ss ua ae movng aveage seady sae emloymen ae and aay 37 ua ss ρ ρ ua ss ua ua ua ss Lss ss Lss 38 L ρ L ρ L 4

16 whh we es o move slowly n esonse o aual values. oneay oly s modelled va he followng Taylo ule whh allows fo some smoohness of he nees ae esonse o he nflaon and ouu ga 39 τ NO lag τ NO y τ yga NO lag [ EQ yga u T τ NO NO T τ NO y yga ] T The enal bank has a onsan nflaon age and aduss nees aes wheneve aual onsume e nflaon devaes fom he age. The enal bank also esonds o he ouu ga. Thee s also some nea n nomnal nees ae seng. Thee s no ave fsal oly. On fsal oly we dsngush on he exendue sde govenmen onsumon govenmen nvesmen and ansfe aymens o households. Revenue onsss of axes on onsumon as well as aal and labou nome and lum-sum axes. Govenmen deb B evolves aodng o 4 B G G w B TR W L T. LS The labou nome ax ae s used fo onollng he deb o GD ao aodng o he followng ule 4 w B B T τ b τ Y DEF B Y whee T b s he govenmen deb age. 4.5 Sensvy of ed onsaned onsumon o hanges n nome and nees aes Boh emoay and emanen fsal exansons have only a neglgble effe on Radan onsumes sne hese esond o emanen nome whh s hadly affeed by emoay fsal measues and lkely o be zeo o even negave n he ase of emanen fsal aons. The queson ases how do ed onsaned households esond o fsal oly? Sne hey omse an neemoal uly funon he onsumon desons wll also be based on a one of emanen nome. Bu how does he fa ha hey have a hghe ae of me efeene and he fa ha uen hanges n fnanal wealh ae onsaned by he value of he housng sok affe he onsumon esonse o hanges n uen nome and he eal nees ae? n hs seon we omae he esonse of onsumon fo ed onsaned and Radan households by foussng on he maxmsaon oblem of ed onsaned households eq. 9 o unde he assumon of exogenous dsosable nome and eal nees aes and onas hs o ha of Radan households. 5

17 Fgue 3 shows he song o-movemen beween nome and onsumon fo emoay nome shoks. ed-onsaned households esond o he nease n uen nome by asng he onsumon almos ooonaely he magnal oensy o onsume s lose o.9. Radan households n onas do no ase he onsumon by muh as emanen nome s no affeed. As shown n Fgue 4 he esonse of onsumon o nees aes s vey song and exeeds he esonse of Radan onsumes o emoay hanges n eal nees aes. Ths s exlaned by a song nease of he Lagange mulle assoaed wh he ed onsan. n he ase of an nees ae nease nees aymens of heavly ndebed households nease songly whh ghens he ollaeal onsan. Fo ed onsaned households hanges n he eal nees ae exe an nome effe on onsumon. Gven he mng onvenon n ou model hanges n uen nees aes wll lead o hanges n nees aymens n he followng eod. The analyss n hs seon shows ha onenng hanges n uen nome ed onsaned households behave smla o lqudy onsaned households whle onenng hanges n eal nees aes hey ea even songe han Radan households. Fgue 3: Resonse of onsumon o hanges n uen nome absolue devaons Q 9Q 9Q3 9Q4 Q Q Q3 Q4 Y R Fgue 4: Resonse of onsumon o hanges n nees aes % devaons Q 9Q 9Q3 9Q4 Q Q Q3 Q4 - R R 6

18 5. odel albaon The model used n hs exese onsss of wo egons: he Euoean Unon and he es of he wold. The egons ae dffeenaed fom one anohe by he eonom sze and he model s albaed on blaeal ade flows. nooaes some of he man sylsed dffeenes beween he EU and he es of wold whee we base ou albaon on esmaes of he model on euo aea and US daa see Rao e al. 9. Table summases he man dffeenes beween he wo bloks. These ae fo he EU hghe ansfes and unemloymen benefs hghe wage axes hghe e gdes and labou adusmen oss and a lowe elasy of labou suly. n ems of nomnal and eal gdes ou esmaes eveal lea dffeenes whh ae lagely onssen wh o exeaons and ohe emal evdene. Ths s mos lea when omes o e adusmen gdes. Euoean fms kee es fxed fo moe quaes han US fms. Ou esmaes sugges ha he duaon of wage sells n he US s smla o hose n he EA. Thee ae howeve sgnfan dffeenes n he labou suly elasy. A sgnfanly hghe elasy n he US anslaes no a smalle esonse n US wages o hanges n emloymen 7. Anohe esmaon esul ha ondes well wh a o belefs on emloymen oeon ae hghe labou adusmen oss n he EU. Aodng o hese esmaes admnsave oss of neasng emloymen amoun o abou 3% of oal addonal wage oss n he EA and only % n he US. Thee s less evdene on dffeenes n aal adusmen oss. onenng fnanal make fons we assume 4 een of households o be lqudy-onsaned whh oesonds losely o ou esmaes. We have lle knowledge on he shae of ed-onsaned households and we assume n ou benhmak model half of he non-lqudy onsaned households o be ed-onsaned. We omae hs o an alenave model R whee he ed-onsaned gou s shfed o he non-onsaned Radan gou and he aos lqudy onsaned ed onsaned non onsaned ae Ths allows us o fous on he ma he noduon of ed-onsaned households makes n he esonse of he vae seo o he fsal exansons. The loan-o-value ao -χ s se a.75 fo boh egons albaed o f a mogage deb ao as shae of GD on he baselne of aound 5 een. The esmaed Taylo ules do no on o szeable dffeenes n moneay oly behavou and we se hese aamees denal. Anohe moan sylsed fa s he dffeene beween he EU and he US n he geneosy of he ansfe sysem. The shae of govenmen ansfes o households s hghe n he Euo aea han n he US. The man dffeene ae a moe geneous unemloymen benef sysem and a hghe emhass on AYG enson shemes n he EU. Aa fom he geneosy dffeene hee s also a dffeene n benef-and enson enlemens beause of a hghe unemloymen ae and a hghe old age deendeny ao n he EU omaed o he US. 7 Ths s onssen wh ou hlls uve esmaes whh also show a songe esonse of wage nflaon o unemloymen n he Euo aea omaed o he US. 7

19 Table : odel albaon EU US Nom. Rgdes: Avg. duaon beween e adusmens Quaes Avg. wage ona lengh Quaes Real Rgdes: Labou adusmen os % of oal add. wage oss L 3 Labou suly elasy /κ /5 /3 Sem-wage elasy w... emloymen ae κ / w.33. aal adusmen os nvesmen adusmen os onsumon: Shae of lqudy-onsaned onsumes s l.4.4 Shae of ed-onsaned onsumes s.3 R.3 R Shae of non-onsaned onsumes s.3.6 R.3.6 R Downaymen ae χ.5.5 ab essene h.7.7 oneay oly: NO Lagged nees ae τ lag onsume e nflaonτ NO.5.5 NO Ouu ga τ Y.5.5 Naonal aouns deomoson: onsumon nvesmen adedables.6.5 nvesmen non-adables.7.6 nvesmen esdenal.6.6 Govenmen onsumon.8.5 Govenmen nvesmen.4.4 Exos.8.5 mos.8.5 Tansfes o households.6.3 8

20 6. Fsal shoks 6. Govenmen onsumon shok To show he dffeene he noduon of ed onsans has made n he model we omae he model wh ed onsans wh he model ha exludes hs gou R. n hs seon we show emoay one yea global fsal shoks govenmen onsumon unoduve and labou axes aled o boh egons a he same me and sandadsed o e en of baselne GD 8. The fsal ule ha euns he deb o GD ao o baselne levels s uned off fo he fs yea o see he ma of he shok on budge balanes bu fom he seond yea onwads labou axes ae ased o eun he deb o GD ao o baselne. ene hese senaos ae budgeay neual n he medum un. The fs senao shown n Fgue 5 s a emoay nease n govenmen onsumon and he esuls shown ae fo he EU. Ths emoay mulse ases GD by e en n he model wh ed onsans model and.95 e en n he model whou R. The man dffeene beween he wo model vaans s he esonse of vae onsumon. Unde he sandad moneay oly assumon n he R model vae onsumon falls n esonse o he nease n ubl onsumon a well doumened feaue of many DSGE models 9. Ths seems a fs sgh n onfl wh he fndngs of Gal e al. 7 who show ha allowng fo a faon of lqudy onsaned onsumes exeedng 5 e en a model wh sky es an aoun fo a osve onsumon esonse o a govenmen sendng shok. Bu he esul deends ually on he assumed labou adusmen os aamee L. Gal e al. assume no nomnal wage gdes and no labou adusmen oss. oweve emal esmaes show hese aamees o be sgnfanly dffeen fom zeo. A sensvy analyss n Rao e al. 9 shows ha when hese aamees end o zeo as assumed n Gal e al 7 he onsumon esonse o a govenmen sendng shoks ends o beome osve n ou model oo. neesngly n he model wh edonsaned households hee s a osve o-movemen beween ubl and vae onsumon even wh non-zeo labou adusmen oss. Ths s omleely dven by he esonse of onsumon by ed onsaned households who a moe lke lqudyonsaned households n esonse o emoay govenmen onsumon shoks and ase he onsumon. Resdenal nvesmen falls due o he nease n eal nees aes. The effes of fsal oly shoks deend ually on he moneay oly assumons. Emal sudes ha hold nees aes onsan show lage mulles han sudes ha allow fo nees ae esonses by enal banks. n ode o show he sensvy of he esuls o he moneay oly assumon we omae he esuls o an alenave assumon of a fully aommodave moneay oly n whh nees aes ae ke unhanged n he fs yea when he smulus ous and esume o he nomal esonse n he yeas heeafe. The effes ae sgnfanly songe unde hs moe aommodave moneay oly Fgue 6. As n hs ase moneay oly does no ea o he nease n 8 A wde ange of fsal shoks s desbed n Roege and n ' Veld 9. Thee we also dsuss emanen shoks whh have muh smalle mulles whh when fnaned by neases n labou axes geneally beome negave n he long un. n hose ases households anae fuue neases n axes and edue he onsumon and save moe. 9 See e.g. oenen and Saub 7. The eonom neeaon of hs esul s smle. Neglgble wage and labou adusmen oss mly a songe osve sho un ma of an nease n govenmen onsumon on labou nome and heefoe a songe esonse of vae onsumon. 9

21 nflaon n he yea he fsal smulus ous hee s a sha fall n he eal nees ae and hs neases aggegae demand. The model wh ed onsans dslays an even songe nease n aggegae onsumon. ed onsaned onsumes ea songly wh a lage nease n onsumon lage han lqudy onsaned onsumes as hee s a small loosenng of he ollaeal onsan due o a smulaneous nease n he housng sok and beause hee s an addonal effe fom lowe eal nees aes see seon 3.5. Noe hough ha even n he R model whou ed-onsans hee s an nease n aggegae onsumon wh even a small nease n onsumon by Radan non-onsaned households. Anohe dffeene wh Fgue 5 s ha now hee s an nease n ooae and esdenal nvesmen due o he fall n eal nees aes. Ths effe s songe n he model wh ed onsans. 6. Labou ax eduon The GD effe of a emoay eduon n labou axes s oughly half ha of an nease n sendng wh a hghe nease n savngs see Fgue 7. Thee s howeve a sgnfan dffeene beween he wo alenave models. n he model whou ed onsaned households R GD ses by only.3 e en whle he nease s we as lage n he model wh ed onsans. Radan non-onsaned households hadly esond o he emoay eduon n axes as emanen nome s no muh affeed. n onas ed onsan households have a hghe magnal oensy o onsume ou of ansoy ax eduons and esond n a smla way as lqudy onsaned households by neasng he onsumon. As a esul he nease n aggegae onsumon s we as lage n he model wh ed onsans. ooae nvesmen s down by moe n he model wh ed onsans as eal nees aes se by moe. ousng nvesmen by Radan nononsaned households does no hange muh bu ed onsaned households an ase he housng nvesmen afe he ax eduon. The fall n eal wages s smalle n he model wh ed onsans due o hghe onsumon wealh effe. When he ax eduon s aomaned by a fall n eal nees aes moneay aommodaon - Fgue 8 he effes ae sgnfanly lage. The esonse of lqudy onsaned onsumes s denal bu ed onsaned onsumes ase he onsumon now by moe as he addonal effe fom lowe eal nees aes booss he dsosable nome. ooae and esdenal nvesmen ae hghe due o he fall n eal nees aes and hs effe s songe n he model wh ed onsans. Thee s also now an nease n eal wages n he model wh ed onsans due o hghe onsumon. 6.3 Sllove effes of emoay fsal shoks The fsal shoks dsussed n he evous seon wee global exansons n boh egons. To llusae he moane of he sllove effes Table below shows he dffeene beween global exansons n boh egons and fsal exansons n one egon alone n he model ha nludes ed onsaned households. The able shows he fs yea GD effes fo he same sandadsed emoay one yea fsal shoks n he fs olumn fo a shok n he EU n he seond olumn n es of he wold and n he hd olumn fo a global shok n boh egons ogehe as dsussed above. Govenmen sendng shoks have hghe fsal mulles han evenue shoks. Slloves of a fsal exanson n he EU o he es of he wold ae aound een whle he evesed slloves of a shok n he ohe egon o he EU ae somewha lage efleng he dffeene n sze and ade

22 oenness. ulles ae geneally smalle n he EU due o hghe nomnal and eal gdes and benef and ansfe geneosy. n ase of a moneay aommodaon he effes ae lage as he sha fall n he eal nees ae neases aggegae demand. The fsal smulus n one sngle egon s also aomaned by a deeaon of he exhange ae whh booss ade n he ouny onened bu edues he sllove effes o he ohe egon. Unde an aommodave moneay sane a oodnaed global fsal exanson has also lage effes wh he mulles angng fom.7 fo ax eduons o.5 fo sendng neases. Table Fs yea GD effes of emoay fsal shoks of % of GD EU RoW Global Govenmen onsumon EU GD RoW GD Govenmen onsumon wh moneay aommodaon EU GD RoW GD Labou ax EU GD RoW GD Labou ax wh moneay aommodaon EU GD RoW GD Noe: GD dffeene fom baselne n fs yea of smulaon fo es. EU ang alone RoW ang alone and global oodnaed exansons. All shoks ae edbly emoay fo one yea and of equal sze % of baselne GD. 7. onlusons The uen fnanal ss has enewed nees n dseonay fsal oly. Usng a DSGE model wh housng nvesmen and ed onsaned households hs ae has shown ha fsal oly an be moe effeve a he uen unue wh ghe ed onsans and deflaonay shoks ha make a moe aommodave moneay oly eaon o a fsal smulus moe lkely. We fnd ha emoay fsal oly shoks an have szeable effes lage fo sendng shoks han fo ax eduons. Seond he noduon of edonsaned households ases he mulle fo ax shoks almos doublng he ma when half he Radan households ae assumed o be n fa ed-onsaned. Ths suggess ha a he esen unue wh a ghenng of ed onsans as a esul of he fnanal ss fsal oly mgh be moe effeve han n he as. Thd he esonse of moneay oly o a fsal smulus maes gealy. f nomnal nees aes ae ke unhanged and eal nees aes fall he demand smulus s muh lage. onsumon of ed onsaned households hen neases by even moe and he model geneaes a osve omovemen beween govenmen sendng and onsumon. Fouh sllove effes of fsal shoks ae osve and effes of a on fsal smulus ae lage han when ang alone.

23 Refeenes Afonso A. Sousa R.. 9 The aoeonom Effes of Fsal oly EB Wokng ae 99 anuay 9. Auebah A. 9 "mlemenng he New Fsal oly Avsm" Annual eeng of he Amean Eonom Assoaon Sesson The Revval of Fsal oly anuay 9. h:// Blanhad O. eo R. "An emal haaezaon of he dynam effes of hanges n govenmen sendng and axes on ouu" Quaely ounal of Eonoms Blnde A. S. and. B. Rudd 8 The suly shok exlanaon of he gea sagflaon evsed. NBER Wokng ae No alza A. T. onaell and L. Saa 7 ogage makes ollaeal onsans and oneay oly : do nsuonal faos mae mmeo. oenen G. R. Saub 5 Does govenmen sendng owd n vae onsumon? Theoy and emal evdene fo he euo aea nenaonal Fnane De aso Fenandez F. enandez de os. 6 The eonom effes of exogenous fsal shoks n San: a SVAR aoah EB Wokng ae 647. Ehenbaum an Some Thoughs on aal Sablzaon oly The Amean Eonom Revew 87 : 36-3 Feldsen.. The Role fo Dseonay Fsal oly n a Low nees Rae Envonmen NBER Wokng ae No. W93 Feldsen. 9. Saemen fo he ouse Demoa Seeng and oly ommee" h:// Gal. Valles. and Loez-Saldo. D. 7 Undesandng he effes of govenmen sendng on onsumon ounal of he Euoean Eonom Assoaon Godano R. omglano S. Ne S and R. eo 7 The effes of fsal oly n aly: Evdene fom a VAR model Euoean ounal of olal Eonomy aovello. 5: "ouse es ollaeal onsans and moneay oly n he busness yle" Amean Eonom Revew aovello. and S. Ne 8 " ousng make slloves: evdene fom an esmaed DSGE modle" Bana d'ala Wokng aes 659 anuay 8. yoak N. and. ooe 997: "ed yles" ounal of olal Eonomy onaell T. 7 New eynesan models duable goods and ollaeal onsans ER dsusson ae 596. onaell T. and R. eo 8. "Fsal oly Wealh Effes and akus." NBER Wokng ae No

24 ounfod A. Uhlg. 5 "Wha ae he effes of fsal oly shoks?" umbold-unvesä zu Beln Wokng ae SFB 649. eo R. 5 "Esmang he effes of fsal oly n OED ounes" ER Dsusson ae 484. Ramey V. and. Shao 998. osly aal Realloaon and he Effe of Govenmen Sendng. anege-rohese onfeene Sees on ubl oly Rao W. Roege and. n Veld 9a QUEST : An Esmaed Oen-Eonomy DSGE odel of he Euo Aea wh Fsal and oneay oly Eonom odellng Ravn. S. Shm-Gohe and. Ube 6. "Dee abs." Revew of Eonom Sudes. Roege W. and. n Veld 9 Fsal oly wh ed onsaned households Euoean ommsson Euoean Eonomy Eonom ae no Rogoff. and. Renha 8. s he 7 US Sub-me Fnanal ss So Dffeen? Amean Eonoms Revew ay 8. Rogoff. and. Renha 8b. "The Afemah of he Fnanal ses" ae esened a Annual eeng of he Amean Eonom Assoaon. h:// Rome. and Rome D.. 7 "The maoeonom effes of ax hanges: esmaes based on a new measue of fsal shoks" NBER Wokng ae 364. Slmbego Anono Seve Symansky Olve Blanhad and alo oaell Fsal oly fo he ss F Saff oson Noe Deembe 9 8 SN/8/. h:// Taylo ohn B.. Reassessng Dseonay Fsal oly The ounal of Eonom eseves 4 3: -36. Taylo ohn B. 9. The Lak of an Emal Raonale fo a Revval of Dseonay Fsal oly" Annual eeng of he Amean Eonom Assoaon Sesson The Revval of Fsal oly anuay 9. h:// 3

25 Fgue 5 Temoay nease govenmen onsumon GD onsumon _GDR R_GDR _TOT R_TOT onsumon: lqudy-onsaned hh onsumon: Non-onsaned and ed onsaned hh _L R_L _NL R_NL _ ooae nvesmen ousng nvesmen: Non-onsaned and ed onsaned hh _TOT R_TOT _OUSENL R_OUSENL _OUSE Emloymen Real wages _L R_L _WR R_WR Real nees ae nflaon _R R_R _NF R_NF 4

26 Fgue 6 Temoay nease govenmen onsumon wh moneay aommodaon GD onsumon _GDR R_GDR _TOT R_TOT onsumon: lqudy-onsaned hh onsumon: Non-onsaned and ed onsaned hh _L R_L _NL R_NL _ ooae nvesmen ousng nvesmen: Non-onsaned and ed onsaned hh _TOT R_TOT _OUSENL R_OUSENL _OUSE Emloymen Real wages _L R_L _WR R_WR Real nees ae nflaon _R R_R _NF R_NF 5

27 Fgue 7 Temoay eduon labou axes GD onsumon _GDR R_GDR _TOT R_TOT onsumon: lqudy-onsaned hh onsumon: Non-onsaned and ed onsaned hh _L R_L _NL R_NL _ ooae nvesmen ousng nvesmen: Non-onsaned and ed onsaned hh _TOT R_TOT _OUSENL R_OUSENL _OUSE Emloymen Real wages _L R_L _WR R_WR Real nees ae nflaon _R R_R _NF R_NF 6

28 Fgue 8 Temoay eduon labou axes wh moneay aommodaon GD onsumon _GDR R_GDR _TOT R_TOT onsumon: lqudy-onsaned hh onsumon: Non-onsaned and ed onsaned hh _L R_L _NL R_NL _ ooae nvesmen ousng nvesmen: Non-onsaned and ed onsaned hh _TOT R_TOT _OUSENL R_OUSENL _OUSE Emloymen Real wages _L R_L _WR R_WR Real nees ae nflaon _R R_R _NF R_NF 7