GIMF is a multicountry Dynamic Stochastic General Equilibrium (DSGE) model with
optimizing behavior by households and firms, and full intertemporal stock-flow accounting.
Frictions in the form of sticky prices and wages, real adjustment costs, liquidity-constrained
households, along with finite-planning horizons of households, imply an important role for
monetary and fiscal policy in economic stabilization.
The assumption of finite horizons separates GIMF from standard monetary DSGE models and allows it to have well-defined steady states where countries can be long-run debtors or creditors. This allows users to study the transition from one steady state to another where fiscal policy and private saving behavior play a critical role in both the dynamics and long- run comparative statics.2
The assumption of finite horizons separates GIMF from standard monetary DSGE models and allows it to have well-defined steady states where countries can be long-run debtors or creditors. This allows users to study the transition from one steady state to another where fiscal policy and private saving behavior play a critical role in both the dynamics and long- run comparative statics.2
The non-Ricardian features of the model provide non-neutrality in both spending-based and
revenue-based fiscal measures, which makes the model particularly suitable to analyze fiscal
policy questions. In particular, fiscal policy can stimulate the level of economic activity in
the short run, but sustained government deficits crowd out private investment and net foreign
assets in the long run.3 Sustained fiscal deficits in large economies can also lead to a higher
world real interest rate, which is endogenous.
Asset markets are incomplete in the model. Government debt is only held domestically, as nominal, non-contingent, one-period bonds denominated in domestic currency. The only assets traded internationally are nominal, non-contingent, one-period bonds denominated in U.S. dollars that can be issued by the U.S. government and by private agents in any region. Firms are owned domestically. Equity is not traded in domestic financial markets; instead, households receive lump-sum dividend payments.
Firms employ capital and labor to produce tradable and nontradable intermediate goods. There is a financial sector a la Bernanke, Gertler and Gilchrist (1999), that incorporates a procyclical financial accelerator, with the cost of external finance facing firms rising with their indebtedness.
Asset markets are incomplete in the model. Government debt is only held domestically, as nominal, non-contingent, one-period bonds denominated in domestic currency. The only assets traded internationally are nominal, non-contingent, one-period bonds denominated in U.S. dollars that can be issued by the U.S. government and by private agents in any region. Firms are owned domestically. Equity is not traded in domestic financial markets; instead, households receive lump-sum dividend payments.
Firms employ capital and labor to produce tradable and nontradable intermediate goods. There is a financial sector a la Bernanke, Gertler and Gilchrist (1999), that incorporates a procyclical financial accelerator, with the cost of external finance facing firms rising with their indebtedness.
GIMF is multi-region, encompassing the entire world economy, explicitly modeling all the
bilateral trade flows and their relative prices for each region, including exchange rates. The
version used in this paper is comprised of 5 regions: the United States, the euro area, Japan,
emerging Asia (including China), and, as a single entity, the remaining countries. The
international linkages in the model allow the analysis of policy spillovers at the regional and
global level.
A. Household Sector
There are two types of households, both of which consume goods and supply labor. First, there are overlapping-generation households (OLG) that optimize their borrowing and saving decisions over a 20-year planning horizon. Second, there are liquidity-constrained households (LIQ), who do not save and have no access to credit. Both types of households There are two types of households, both of which consume goods and supply labor. First, there are overlapping-generation households (OLG) that optimize their borrowing and saving decisions over a 20-year planning horizon. Second, there are liquidity-constrained households (LIQ), who do not save and have no access to credit. Both types of householdspay direct taxes on labor income, indirect taxes on consumption spending, and a lump-sum tax.
A. Household Sector
There are two types of households, both of which consume goods and supply labor. First, there are overlapping-generation households (OLG) that optimize their borrowing and saving decisions over a 20-year planning horizon. Second, there are liquidity-constrained households (LIQ), who do not save and have no access to credit. Both types of households There are two types of households, both of which consume goods and supply labor. First, there are overlapping-generation households (OLG) that optimize their borrowing and saving decisions over a 20-year planning horizon. Second, there are liquidity-constrained households (LIQ), who do not save and have no access to credit. Both types of householdspay direct taxes on labor income, indirect taxes on consumption spending, and a lump-sum tax.
OLG households save by acquiring domestic government bonds, international U.S. dollar
bonds, and through fixed-term deposits. They maximize their utility subject to their budget
constraint. Aggregate consumption for these households is a function of financial wealth and
the present discounted value of after-tax wage and investment income. The consumption of
LIQ households is equal to their current net income, so their marginal propensity to consume
out of current income is unity by construction.4 A high proportion of LIQ households in the
population would imply large fiscal multipliers from temporary changes to taxes and transfer
payments.
For OLG households with finite-planning horizons, a tax cut has a short-run positive effect on output. When the cuts are matched with a tax increase in the future, so as to leave government debt unchanged in the long run, the short-run impact remains positive, as the change will tilt the time profile of consumption toward the present. In effect, OLG households discount future tax liabilities at a higher rate than the market rate of interest........
For OLG households with finite-planning horizons, a tax cut has a short-run positive effect on output. When the cuts are matched with a tax increase in the future, so as to leave government debt unchanged in the long run, the short-run impact remains positive, as the change will tilt the time profile of consumption toward the present. In effect, OLG households discount future tax liabilities at a higher rate than the market rate of interest........
