Meleze DSGE model

MELEZE, a DSGE model for France within the Euro

Area

and what can be done with it

Benoît Campagne & Aurélien Poissonnier([email protected])

Insee-École Polytechnique-Crest

27th September 2016

Campagne & Poissonnier (Insee) Mélèze Sept.27 1 / 25

mailto:[email protected]

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


http://www.insee.fr/en/themes/document.asp?reg_id=0&ref_id=g201605




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


Plan

1 Presentation of the modelGeneral featuresGovernmentFinancial marketsSteady state restrictions

2 Structural reforms: a plead for sensitivity analyses


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


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


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


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.


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


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 ?


Plan

1 Presentation of the model

2 Structural reforms: a plead for sensitivity analysesChannels of transmission of structural reformsQuantitative simulationsA closer look at utility


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.


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)



K

¯RWrk

L


D

S

D


θ−1θ αζ1−α

(KL

)α−1

= rk


rk = 1+rΠ− 1 + δ

Labour demand curve

θ−1θ (1− α)ζ1−α

(KL

)α= RW

Labour supply curve




K

¯RWrk

L


D

S

S

D


θ−1θ αζ1−α

(KL

)α−1

= rk


rk = 1+rΠ− 1 + δ

Labour demand curve

θ−1θ (1− α)ζ1−α

(KL

)α= RW

Labour supply curve



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


D1

D'

D2

S2S1

S1

D1

D'D2

At steady state

capital ↑,labour ↑,production ↑

consumption↑, real wages ↑


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


D1

D2

S1S2

S'S1

D1

D2


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)


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.


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


Utility approach bis

Figure: Utility in the transition following a decrease in the price or wagemark-up without consumption habits (hc = 0)


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


Appendix


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 ↑


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


Economy & Finance

Meleze DSGE model