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Deleverage and Financial Fragility
Marco Maffezzoli and Tommaso Monacelli

IGIER Working Paper #546 (latest version: 27/3/2015)
Severe economic downturns, characterized by deleverage, are typically preceeded by phenomena of debt overhang. This evidence suggests that large recessions may not be the result of large shocks, but, rather, of the interaction between typical shocks and the current state of the economy. We study the transmission of deleverage shocks in a stochastic economy with heterogeneous agents and occasionally binding collateral constraints, where debt evolves endogenously. Our key finding is that the impact effect of a deleverage shock on aggregate output is a non-linear, S -shaped, function of the accumulated level of debt. At low levels of debt, deleverage is almost neutral, whereas its negative impact is largely magnified when debt reaches a critical threshold, i.e., when financial fragility is sufficiently high. At this threshold, the constraint on borrowing becomes endogenously binding. However, when the level of debt is already high before the shock hits, the borrowers are constrained both ex-ante and ex-post. In this case, the effect on output of a deleverage shock is the highest, but, at the margin, roughly insensitive to the level of debt. This non-linearity is much more pronounced for deleverage shocks than for productivity shocks. Our results cast doubts on the accuracy of gauging the effects of financial disturbances in linearized, certainty-equivalence environments.

Last change 02/04/2015

Occasionally binding emission caps and real business cycles
Valentina Bosetti and Marco Maffezzoli

Working Paper IGIER #523 (latest version: 30/7/2014)


Recent applications to the modeling of emission permit markets by means of stochastic dynamic general equilibrium models look into the relative merits of different policy mechanisms under uncertainty. The approach taken in these studies is to assume the existence of an emission constraints that is always binding (i.e. the emission cap is always smaller than what actual emissions would be in the absence of climate policy). Although this might seem a reasonable assumption in the longer term, as policies will be increasingly stringent, in the short run there might be instances where this assumption is in sharp contrast with reality. A notable example would be the current status of the European Emission Trading Scheme. This paper explores the implications of adopting a technique that allows occasionally, rather than strictly, binding constraints. With this new setup the paper sets out to investigate the relative merits of different climate policy instruments under different macro-economic shocks.


Keywords: Dynamic Stochastic General Equilibrium model, emission trading, carbon tax, occasionally binding constraints.

JEL codes: Q58, Q54, E2.

Last change 01/08/2014

Taxing Carbon under Market Incompleteness
Valentina Bosetti and Marco Maffezzoli

Working Paper IGIER #513 (latest version: 30/7/2014)

 FEEM - Nota di lavoro 2013.072


This paper is the first attempt, to the best of our knowledge, to study the impact of a carbon tax by means of a heterogeneous agents model. The objectives of the paper are two: i) To assess how the results of a representative agent model compare to those coming from a model accounting for heterogeneity across agents when evaluating aggregate economic and environmental impacts of a carbon tax; ii) To assess the distributional implications of a carbon tax (and equivalent cap) and how they can be mitigated through different recycling schemes or allocations.


Keywords: Carbon tax, double dividend, heterogeneous agents model
JEL codes: Q58, Q54, E2

Last change 01/08/2014

The banking and distribution sectors in a small open economy DSGE Model
Szabolcs Deak, Lionel Fontagné, Marco Maffezzoli, and Massimiliano Marcellino

Working Paper IGIER 454


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.

Keywords: DSGE model, Small open economy, Banking, International trade, Luxembourg, Segmented labor market; Trade union
JEL Codes: E13; E32;

Last change 11/09/2013

Tax evasion under market incompleteness
Marco Maffezzoli

Working paper IGIER 378


Empirical evidence suggests that the distribution of income and its composition play an important role in explaining tax noncompliance. We address the issue from a macroeconomic point of view, building a dynamic general equilibrium Bewley-Huggett-Aiyagari model that endogenizes tax evasion and income heterogeneity. Our results show that the model can successfully replicate the salient qualitative and quantitative features of U.S. data. In particular, the model replicates the shape of the cross-sectional distribution of misreporting rates over true income levels. Furthermore, we show that a switch from progressive to proportional taxation has important quantitative effects on noncompliance rates and tax revenues.


Keywords: Tax Evasion, Income Heterogeneity, Incomplete markets.
JEL codes: E13, E26, H26

  • Tax evasion under market incompleteness (updated 5/9/2011) (397 Kb)
  • Last change 11/09/2013

    Tax Cuts in Open Economies
    Alejandro Cunat, Szabolcs Deak and Marco Maffezzoli

    IGIER Working Paper 322


    A reduction in income tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after an income 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 revenue in steady state.


    Keywords:  international trade, Heckscher-Ohlin, dynamic macroeconomics, taxation, revenue estimation, Laffer Curve
    JEL Classification: E13, E60, F11, F43, H20



  • Tax Cuts in Open Economies - updated (588 Kb)
  • Last change 11/09/2013

    Last updated November 25, 2008