Szabolcs Deák
PUBLICATIONS
LSM: A DSGE Model for Luxembourg, joint with L. Fontagné, M. Maffezzoli and M. Marcellino, Economic Modelling, 28, 6 (November), 2862-2872, 2011
Abstract Luxembourg is a small open economy with a set of particular features, including rather limited competition in the domestic goods market, strong union power, and a segmented labor market for resident and non-resident workers. In this paper we develop a medium scale DSGE model that captures these features, calibrate it to mimic the actual behavior of the key macroeconomic aggregates, and use it to conduct policy experiments aimed at relaxing some of the existing rigidities in the goods and labor market.
WORKING PAPERS
Tax Cuts in Open Economies, joint with A. Cuñat and M. Maffezzoli, 2018, invited for resubmission at the Review of Economic Dynamics
Abstract A reduction in capital tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after a tax cut is partly or, depending on parameter values, even completely offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implications of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate that international trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenues in steady state.
Learning, Imperfect Information and Endogenous Persistence, joint with P. Levine, J. Pearlman and B. Yang, 2018, invited for resubmission at the Journal of Economic Dynamics and Control. Online Appendix
Abstract We construct and estimate a New Keynesian (NK) behavioural model with bounded-rationality (BR) and heterogeneous agents. We radically depart from most existing models of this genre in our treatment of bounded rationality and informational assumptions. Instead of the traditional Euler learning approach, we assume that agents are anticipated utility learners given their beliefs of aggregate states. The model is inhabited by fully rational (RE) and BR agents where the latter use simple heuristic rules to forecast aggregate variables exogenous to their micro-environment. In the most general form of the model, RE and BR agents learn from their forecasting errors by observing and comparing them with each other making the composition of the two types endogenous. We conduct a Bayesian estimation with fixed proportions of RE and BR agents and a general heuristic forecasting rule. We find that a pure BR model fits the data better than the pure RE case with the standard perfect information (PI) assumption. But with imperfect information (II), consistent with the informational assumptions for the BR agents, we find that RE outperforms BR (easily) and RE-BR composites (slightly), but second moment comparisons suggest that the RE-BR composite can match data better. Our findings suggest that retaining RE with Kalman-filtering learning can outperform BR in matching persistence seen in the data.
Designing Robust Monetary Policy Using Prediction Pools, joint with A. Mirza, P. Levine and J. Pearlman
Abstract This paper develops a method for designing simple policy rules when all models are wrong yet every model can be useful. Specifically, we develop a methodology to design robust simple rules when the policy maker has at her disposal a finite set of models, none of which are believed to be the true data generating process. We form prediction pools by assigning weights to models on the basis of their forecasting accuracy and solve a policy design problem to select the optimized simple Taylor-type robust monetary policy rule across models weighted in accordance with their forecasting performance. We apply our method to design robust monetary policy across models with and without a financial sector. We find that the choice of weights matters and there are considerable differences between optimized rules when the prediction pool weights are used rather than the more common Bayesian model averaging.
The Fiscal Multiplier and the State of Public Finances, joint with A. Lenarčič
Abstract Can fiscal policy always stimulate output? We address this question empirically by estimating a regime-switching VAR using U.S. data where the size of the fiscal multiplier is conditional on the state of public finances. We make two contributions. First, we address the question what proxy we should use for the state of public finances to define the regimes of our model. We estimate several model specifications which differ in the conditioning variable and find that a model with the debt-to-GDP ratio as a conditioning variable fits the data better than other nonlinear specifications or the linear model. Second, we estimate fiscal multipliers conditional on the debt-to-GDP ratio. We find strong asymmetries in the response of output across regimes and a negative relationship between the fiscal multiplier and the debt-to-GDP ratio. This implies that deficit financed fiscal stimulus is characterized by diminishing returns since it increases the debt-to-GDP ratio and, consequently, leads to a decrease in the fiscal multiplier.
The Banking and Distribution Sectors in a Small Open Economy DSGE Model, joint with L. Fontagné, M. Maffezzoli and M. Marcellino, EUI Working Paper RSCAS 2012/53
Abstract The recent crisis has emphasized the role of financial-macroeconomic interactions, and international trade in goods and services, in the transmission of the shocks. Both phenomena, closely related to the higher degree of globalization, are very relevant for small open economies, and particularly so when a large share of the economy relies on financial and distribution services. Hence, in this paper we propose to incorporate the banking and distribution sectors into a medium scale DSGE model of a small open economy. As an illustration, the resulting model is then calibrated to match the specific characteristics of the Luxembourg economy, where the financial sector plays a key role. We believe that the results are also of more general interest for studying the reaction of small open economies to real and financial shocks.
LSM2: un modèle avec secteur bancaire pour le Luxembourg, joint with L. Fontagné, M. Maffezzoli and M. Marcellino, 2012
Labour and Product Market Reforms in a Very Small Open Economy, joint with L. Fontagné, M. Maffezzoli and M. Marcellino, 2011
Abstract The recent crisis has heavy consequences on workers in terms of higher unemployment and lower income and wealth. Firms are also negatively affected by the decrease in demand and increase in financial costs, which can influence their hiring and investment prospects. These effects are typically stronger in small open economies, whose business cycles are more pronounced than those of larger and closer countries. In this paper we assess the consequences of a variety of policies addressing these problems in a consistent macroeconomic framework, in the short run as well as in the long run. We rely on a DSGE model that incorporates the most recent advances in economic theory. These advances are combined with a careful modeling of the particular institutional features of Luxembourg, taken as an example. We conclude that a combination of policies aiming at favoring employment and competition would work best.
WORK IN PROGRESS
Fiscal policy and hidden labor market, joint with Á. Ábrahám
Optimal Monetary Mandate in a New Keynesian Framework, joint with P. Levine and T.S. Pham
Heterogeneous Agents, Menu Costs and Endogenous Wage Inertia, joint with T. Holden, P. Levine and A. Mele
Can Volatility be Welfare-Enhancing? joint with C. Cantore, V. Gabriel and P. Levine
An Empirical Assessment of a New Keynesian Behavioural Model based on Experimental and Macroeconomic Data, joint with T. Holden, C.H. Hommes and P. Levine