Analysis of External Debt Sustainability in Mongolia: An Estimated DSGE Approach

In this study, we assess the effects of the structural shocks on the external debt sustainability in Mongolia, based on an estimated small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model with the traded, the non-traded, and the mining sectors. The impulse response results show that the traded sector’s productivity shock, the commodity price shock, the mining output shock, and the foreign interest-rate shock have a decreasing effect on external debt accumulation in Mongolia, whereas the non-traded sector’s productivity shock, the household preference shock, and the government spending shock have an increasing effect on the same. Furthermore, we assess Mongolia’s external debt sustainability under the COVID−19 pandemic shock. Under our assumed pandemic scenario, Mongolia’s external debt will increase by 30% from its steady state over the next 10–28 quarters. Our recommended solution in this study is to develop the traded sector, instead of the mining sector, to maintain sustainability of the external debt and to decrease vulnerability of the economy.

Firm Entry and Exit during Recessions

We analyze shocks to productivity, collateral constraint (credit shock), firm operation, and labor disutility in a model of firm dynamics with entry and exit. Shocks to firm operation and labor disutility capture COVID-19 lockdowns. Compared to the productivity shock, the credit and the lockdown shocks generate larger changes in firm entry and exit. The credit shock accounts for lower entry, higher exit, and concentration of exit among young firms during the Great Recession. The lockdown shocks predict a large fall in entry and rise in exit followed by a sharp rebound. In both recessions, changes in entry and exit account for 10-20 percent of the fall in output and hours. Finally, we discuss how the modeling of potential entrants matters for the quantitative results.

Economic fluctuations in a model with an overlapping structure of employment

This study presents a dynamic general equilibrium model with an explicit employment period and investigates economic fluctuations to a temporary productivity shock. Numerical experiments indicate oscillatory responses of new hiring and employment to the shock which are not observed in a standard flexible price model. The explicit employment period constructs an overlapping structure of employment which results in the oscillatory response. This study also examines the effects of change in employment period to economic fluctuations and shows that the variations in new hiring are higher when the employment period is long.

Common Trade Exposure and Business Cycle Comovement

A large empirical literature has shown that countries that trade more with each other have more correlated business cycles. We show that previous estimates of this relationship are biased upward because they ignore common trade exposure to other countries. When we account for common trade exposure to foreign business cycles, we find that (1) the effect of bilateral trade on business cycle comovement falls by roughly 25 percent and (2) common exposure is a significant driver of business cycle comovement. A standard international real business cycle model is qualitatively consistent with these facts but fails to reproduce their magnitudes. Past studies have used models that allow for productivity shock transmission through trade to strengthen the relationship between trade and comovement. We find that productivity shock transmission increases business cycle comovement largely because of a country-pair's common trade exposure to other countries rather than because of bilateral trade. When we allow for stronger transmission between small open economies than other country-pairs, comovement increases both from bilateral trade and common exposure, similar to the data.

Common Trade Exposure and Business Cycle Comovement

A large empirical literature has shown that countries that trade more with each other have more correlated business cycles. We show that previous estimates of this relationship are biased upward because they ignore common trade exposure to other countries. When we account for common trade exposure to foreign business cycles, we find that (1) the effect of bilateral trade on business cycle comovement falls by roughly 25 percent and (2) common exposure is a significant driver of business cycle comovement. A standard international real business cycle model is qualitatively consistent with these facts but fails to reproduce their magnitudes. Past studies have used models that allow for productivity shock transmission through trade to strengthen the relationship between trade and comovement. We find that productivity shock transmission increases business cycle comovement largely because of a country-pair's common trade exposure to other countries rather than because of bilateral trade. When we allow for stronger transmission between small open economies than other country-pairs, comovement increases both from bilateral trade and common exposure, similar to the data.

Rethinking Production under Uncertainty

Conventional models of production under uncertainty specify that output is produced in fixed proportions across states of nature. I investigate a representation of technology that allows firms to transform output from one state to another. I allow the firm to choose the distribution of its random productivity from a convex set of such distributions described by a limit on a moment of productivity scaled by a natural productivity shock. The model produces a simple discount factor that is linked to productivity and that can be used to price a wide variety of assets, without regard to preferences. (JEL G12) Received November 26, 2019; editorial decision May 23, 2020 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Endogenous democracy: causal evidence from the potato productivity shock in the old world

Despite a high cross-country correlation between development and democracy, it is difficult to gauge the impact of economic development on the probability that autocracies will transition to democracy because of endogeneity, especially due to reverse causation and omitted variable bias. Hence, whether development causes democracy remains a contested issue. We exploit exogeneity in the regional variation of potato cultivation along with the timing of the introduction of potatoes to the Old World (i.e., a potato productivity shock) to identify a causal effect of urbanization, a proxy for economic development, on democratization. Our results, which hold under sensitivity analyses that question the validity of the exclusion restriction, present new evidence of the existence of a causal effect of economic development on democracy.

Three essays on bayesian analysis of nonlinear DSGE models

The 2008 financial crisis has highlighted the importance of nonlinear features of our economy including risks, uncertainty shocks, rare disasters, structural changes, zero-lower bound, and occasionally binding constraints. Macroeconomists have tried to build nonlinear models to analyze these interesting features and take the models to the data. Dynamic Stochastic General Equilibrium (DSGE) model that essentially takes into account dynamic optimal decision making of households, firms, and government is one of the useful tools to deal with these issues. In the model, there are various random shocks causing the macroeconomic variables such as GDP, consumption, and investment to fluctuate over time. Above all things, the nonlinear approximation of the model allows us to capture the impact of risk on decision making. The focus of this dissertation is to provide a novel Bayesian estimation procedure for the estimation of nonlinear DSGE model and apply the proposed methodologies to analyze some nonlinear issues related to DSGE models. ... In the third chapter, I investigate a real business cycle (RBC) model for a small open economy by estimating the model solved up to second order. The higher order approximation more closely approximates the original model than the linear approximation. In this study, I evaluate the likelihood of the nonlinear model using the Gaussian mixture a lter (GMF) and employ the GMF within the MCMC algorithm. From the estimation results of the quadratic approximation, I obtain the following implications for a small open economy: First, the quadratic RBC model with financial frictions does a good job at identifying the parameters of the nonstationary productivity shock process. Second, the observed data favor the quadratic benchmark RBC and financial-friction models over the linear models. Third, the quadratic RBC model with financial frictions does a better job at capturing serial correlations of the observed data than the linear model with financial frictions. Fourth, contrary to the linear model with financial frictions, a nonstationary productivity shock in the quadratic model plays an important role in explaining Argentine economic fluctuations.

Modelling productivity shocks and economic growth using the Bayesian dynamic stochastic general equilibrium approach

Purpose Most existing studies on the impact of tourism on economic growth adopt an econometric approach that is insufficient to confirm that tourism actually leads to economic growth. Moreover, it cannot explain the causalities of different variables. Taking Mauritius as an example, this study aims to use the dynamic stochastic general equilibrium approach to investigate the contribution of tourism to economic growth when there is a productivity shock in the tourism sector. Design/methodology/approach A two-sector, small, open economy is modelled under the dynamic stochastic general equilibrium framework. The model is estimated using the Bayesian method based on real tourism and macroeconomic data from Mauritius for the period from 1999 to 2014. The impulse response functions are used to simulate the contribution of tourism to economic growth when there is a productivity shock in the tourism sector. Findings The simulation results show that the Mauritian gross domestic product (GDP) would increase by 0.09 per cent if the productivity of tourism is improved by 1 per cent, indicating that tourism could lead to economic growth. Considering the average annual growth rate of the Mauritian GDP, the contribution of tourism to its economic growth is significant. Furthermore, the effects of tourism on economic growth are moderated by price elasticities in international tourism demand. Originality/value This is the first study that estimates the dynamic stochastic general equilibrium model using the Bayesian method in tourism economic field. By correcting the prior information with real tourism and macroeconomic data, the estimation and simulation results are more robust compared with the calibration method, which has been used frequently in tourism studies.