nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒11‒14
twenty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. How to Redistribute the Revenues from Climate Policy? A Dynamic Perspective with Heterogeneous Households By Eydam, Ulrich; Diluiso, Francesca
  2. Cost, Emission, and Macroeconomic Implications of Diesel Displacement in the Saudi Agricultural Sector: Options and Policy Insights By Hossa Almutairi; Marzio Galeotti; Baltasar Manzano; Axel Pierru
  3. Macroeconomic effects of growth-enhancing measures in the euro area By Alessandro Cantelmo; Alessandro Notarpietro; Massimiliano Pisani
  4. Credit Misallocation and Macro Dynamics with Oligopolistic Financial Intermediaries By Alessandro Villa
  5. Markups, Taxes, and Rising Inequality By Stéphane Auray; Aurélien Eyquem; Bertrand Garbinti; Jonathan Goupille-Lebret
  6. Education, Informality and the Pandemic: Explaining the Unequal Impacts of Covid-19 in the Mexican Labour Market By Garcia, Aida; Martin, Chris; Okolo, Magdalyn
  7. On Political and Economic Determinants of Redistribution: Economic Gains, Ideological Gains, or Institutions? By Gustavo de Souza
  8. The Economic Ripple Effects of COVID-19 By Buera,Francisco J.; Fattal Jaef,Roberto N.; Neumeyer,P. Andres; Hopenhayn,Hugo; Shin,Yongseok
  9. Cyclical Earnings, Career and Employment Transitions By Carrillo-Tudela, Carlos; Visschers, Ludo; Wiczer, David
  10. Sovereign Risk, Financial Fragility and Debt Maturity By Dallal Bendjellal
  11. Optimal Unemployment Insurance Requirements By Gustavo de Souza; Andre Luduvice
  12. Trade, Jobs, and Worker Welfare By Artuc,Erhan; Bastos,Paulo S. R.; Lee,Eunhee
  13. A Division of Laborers : Identity and Efficiency in India By Cassan,Guilhem; Keniston,Daniel; Kleineberg,Tatjana Karina
  14. Why Aging Induces Deflation and Secular Stagnation By R. Anton Braun; Daisuke Ikeda
  15. Pollution versus Inequality: Tradeoffs for Fiscal Policy By Camille Hainnaux; Thomas Seegmuller
  16. Credit-Supply Factors and Malawian Business Cycles By Kumwenda, Thomson; Mangani, Ronald; Mazalale, Jacob; Silumbu, Exley
  17. The Future of Global Economic Power By Seth G. Benzell; Laurence J. Kotlikoff; Maria Kazakova; Guillermo LaGarda; Kristina Nesterova; Victor Yifan Ye; Andrey Zubarev
  18. Structural Unemployment, Underemployment, and Secular Stagnation By Hashimoto, Ken-ichi; Ono, Yoshiyasu; Schlegl, Matthias
  19. Consumption Inequality in the Digital Age By Arvai, Kai; Mann, Katja
  20. Climate Change Mitigation: How Effective is Green Quantitative Easing? By Abiry, Raphael; Ludwig, Alexander; Ferdinandusse, Marien; Nerlich, Carolin
  21. Deindustrialization and Industry Polarization By Michael Sposi; Kei-Mu Yi; Jing Zhang

  1. By: Eydam, Ulrich; Diluiso, Francesca
    Abstract: In light of climate change mitigation efforts, revenues from climate policies are growing, with no consensus yet on how they should be used. Potential efficiency gains from reducing distortionary taxes and the distributional implications of different revenue recycling schemes are currently debated. To account for households heterogeneity and dynamic trade-offs, we study the macroeconomic and welfare performance of different revenue recycling schemes using an Environmental Two-Agent New-Keynesian model, calibrated on the German economy. We find that, in the long run, welfare gains are higher when revenues are used to reduce distortionary taxes on capital, but this comes at the cost of higher inequality: while all households prefer labor income tax reductions to lump-sum transfers, only financially unconstrained households are better off when reducing taxes on capital income. Interestingly, we find that over the transition period relevant to meet short-medium run climate targets, labor income tax cuts are the most efficient and equitable instrument.
    Keywords: double dividend,E-DSGE,environmental tax reform,non-Ricardian households,revenue recycling,redistribution
    JEL: E62 H23 H31 Q58
    Date: 2022
  2. By: Hossa Almutairi; Marzio Galeotti; Baltasar Manzano; Axel Pierru (King Abdullah Petroleum Studies and Research Center)
    Abstract: We assess the extent to which the implementation of Saudi Vision 2030 policies enhances the Saudi economy’s resilience to oil price and production shocks, and to the productivity of tradable and non-tradable goods. We extend Blazquez et al.’s (2021) dynamic stochastic general equilibrium model to capture the country’s economic diversification policies and build a resilience index based on impulse responses to shocks.
    Keywords: Applied general model, Discount rate, Discounting
    Date: 2022–09–23
  3. By: Alessandro Cantelmo (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the short- and long-term effects of different growth-enhancing policy measures implemented in the euro area by simulating a calibrated New Keynesian model featuring endogenous growth via the private sector's R&D accumulation. We find that higher public investment in infrastructures, pro-competition reforms in the product market, and subsidies to R&D have a positive effect on long-term growth and raise the natural rate of interest. In the short term, these measures can have mildly negative effects on inflation through their positive effect on aggregate supply.
    Keywords: endogenous growth, R&D spending, new keynesian model, monetary policy, euro area
    JEL: E30 E52 O30 O42
    Date: 2022–10
  4. By: Alessandro Villa
    Abstract: Bank market power shapes firm investment and financing dynamics and hence affects the transmission of macroeconomic shocks. Motivated by a secular increase in the concentration of the US banking industry, I study bank market power through the lens of a dynamic general equilibrium model with oligopolistic banks and heterogeneous firms. The lack of competition allows banks to price discriminate and charge firm-specific markups in excess of default premia. In turn, the cross-sectional dispersion of markups amplifies the impact of macroeconomic shocks. During a crisis, banks exploit their market power to extract higher markups, inducing a larger decline in real activity. When a “big” (i.e., non-atomistic) bank fails, the remaining banks use their increased market power to control the supply of credit, worsening and prolonging the recession. The results suggest that bank market power could be an important concern when formulating appropriate bail-out polices.
    Keywords: Dynamic Financial Oligopoly; Endogenous Financial Markups; Heterogeneous Firms; Firm Dynamics; Micro-Funded Financial Frictions; Price discrimination
    JEL: D43 E44 G12 G21 L11
    Date: 2022–09–08
  5. By: Stéphane Auray; Aurélien Eyquem; Bertrand Garbinti; Jonathan Goupille-Lebret
    Abstract: How to explain rising income and wealth inequality? We build an original heterogeneous-agent model with three key features: (i) an explicit link between firm’s market power and top income shares, (ii) a granular representation of the tax and transfer system, and (iii) three assets with endogenous portfolio decisions. Using France as an illustration, we look at how changes in markups, taxes, factor productivity, and asset prices affect inequality dynamics over the 1984-2018 period. Rising markups account for the bulk of rising income inequality. Wealth inequality dynamics result mostly from changes in saving rate inequality but only in response to the exogenous changes in taxation and markups. Our results point to the critical importance of endogenous saving decisions in response to exogenous shocks as a key driver of wealth inequality.
    Keywords: heterogeneous agents, taxes, market power, income inequality, wealth inequality
    JEL: D40 E20 H20 O40 O52
    Date: 2022
  6. By: Garcia, Aida; Martin, Chris; Okolo, Magdalyn
    Abstract: The impact of the Covid-19 in Mexico was especially severe for non-graduates and for workers in informal employment. We argue that this occurred despite the adverse shocks from the pandemic being similar for all workers, because non-graduates and informal workers are in a weaker position in the labour market. We support this argument by presenting novel evidence of shorter job tenures and higher rates of transition from employment to non-employment for these workers and by showing that simulation of a DSGE model with the same shocks for all workers matches the experience of Mexico during the pandemic well. To do this, we develop an innovative model that differentiates between graduates and non-graduates as well as between formal and informal workers; the key feature of our model is that the job surplus for non-graduates and informal workers is smaller, making these workers more vulnerable to adverse shocks. Our results are likely to be applicable to other emerging economies with large numbers of informal workers.
    Keywords: Covid-19; Mexico; Search Frictions; DSGE model
    JEL: E24 E26 J46
    Date: 2022
  7. By: Gustavo de Souza
    Abstract: I describe a structural method to quantify the contribution of different elements of social choice to the level of redistribution. Estimating a DSGE model with microdata on the support for redistribution, I find that if voters disregarded their ideological views on welfare policies, redistribution in the U.S. would increase 117%. Because ideology is a more important determinant of voting behavior than income, increasing voter turnout or capping campaign contributions would have a small effect on redistribution. Among the drivers of ideology, I find that racial animosity and distrust of the government contributes to an 80% and 44% smaller redistribution, respectively.
    Keywords: Redistribution; Prefereces for Redistribution; Dynamic Macro Models of Political-Economoy
    JEL: E69 H11 P16
    Date: 2022–10–05
  8. By: Buera,Francisco J.; Fattal Jaef,Roberto N.; Neumeyer,P. Andres; Hopenhayn,Hugo; Shin,Yongseok
    Abstract: What are the effects of a large temporary shock to the economy such as a temporary lockdown in response to a pandemic? Are the effects propagated and made persistent by firms’ deteriorating balance sheets and labor market frictions? This paper develops a model with financial market and labor market frictions to answer these questions. The model makes quantitative predictions about the effect on output, employment and firm dynamics from lockdowns of varying magnitude and duration. It finds that the effects are not persistent despite the deterioration of the financial soundness of non-essential firms and labor market frictions, if (i) laid-off workers can be recalled by their previous employers without having to go through the frictional labor market and (ii) the government provides employment subsidies to firms during lockdown. However, the effect are heterogeneous and young non-essential firms are disproportionately affected. In addition, if lockdowns lead to more permanent reallocation across industries, the recession becomes more protracted.
    Date: 2021–04–14
  9. By: Carrillo-Tudela, Carlos (University of Essex); Visschers, Ludo (University of Edinburgh); Wiczer, David (Stony Brook University)
    Abstract: This paper studies the cyclical behaviour of earnings risk and career changes. We document that the procyclical skewness of the earnings growth distribution arises mostly from the earnings changes of employer and occupation switchers. To uncover their relative importance in driving cyclical earnings changes and whether this arises from changes in the returns to mobility or mobility shocks, we propose a multi-sector business cycle model with on-the-job search and endogenous occupational mobility. Idiosyncratic occupational mobility is the main driver of cyclical earnings risk, mainly due to cyclical shifts in the returns to this mobility. This is the main reason why the sullying effects of recessions are long-lasting. These effects manifest themselves through a collapse of the job ladder and forgone lifetime earnings gains, especially for low-paid workers, and through large lifetime earnings losses among high-paid workers who experience forced occupational mobility and poor re-employment outcomes.
    Keywords: earnings, unemployment, business cycle, search, occupational mobility
    JEL: E24 E30 J62 J63 J64
    Date: 2022–09
  10. By: Dallal Bendjellal (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper studies the transmission of a sovereign debt crisis in which a shift in default risk generates a recession and gives rise to a doom loop between sovereign distress and bank fragility with important amplification effects. The model is used to investigate the macroeconomic and welfare effects of altering debt maturity during the crisis. Short-term maturities alleviate the bankers' losses on long-term bonds and moderate the recession at the cost of higher levels of debt in the future. In contrast, long-term maturities are more effective to reduce the households' welfare losses as they lower default risk and distortionary taxes.
    Keywords: Debt Crisis,Sovereign Default Risk,Financial Fragility,Maturity Dynamics
    Date: 2022–09
  11. By: Gustavo de Souza; Andre Luduvice
    Abstract: In the U.S., workers must satisfy two requirements to receive unemployment insurance (UI): a tenure requirement of a minimum work spell and a monetary requirement of a past minimum earnings. Using discontinuity of UI rules at state borders, we find that the monetary requirement decreases the number of employers and the share of part-time workers, while the tenure requirement has the opposite effect. In a quantitative model, the monetary requirement induce workers to search longer because low paying jobs are not covered by UI. Since it mitigates moral hazard, the optimal UI design has a high monetary requirement.
    Keywords: Unemployment Insurance; UI Eligibility; Optimal UI
    JEL: E24 E61 J65
    Date: 2022–04–01
  12. By: Artuc,Erhan; Bastos,Paulo S. R.; Lee,Eunhee
    Abstract: This paper examines the welfare effects of international trade on workers in a new dynamic general equilibrium discrete choice model of labor mobility, where the workers’ choice set of jobs is endogenous. The analysis exploits differential exposure of sectors and regions to destination-specific demand shocks to estimate the impacts of exports on wages, employment, and labor mobility, using employer-employee panel data for Brazil. It then employs the same empirical strategy to estimate structural parameters and the different components of changes in model-implied worker welfare. Counterfactual simulations show that the endogenous number of job options significantly magnifies the welfare effects of trade shocks.
    Keywords: Rural Labor Markets,International Trade and Trade Rules,Labor Markets,Trade and Multilateral Issues
    Date: 2021–04–13
  13. By: Cassan,Guilhem; Keniston,Daniel; Kleineberg,Tatjana Karina
    Abstract: Workers’ social identity affects their occupation, and therefore the structure and prosperityof the aggregate economy. The paper estimates a general equilibrium Roy model of this phenomenon in the Indian castesystem, where work and identity are particularly intertwined. New data on occupation, wages, and caste’straditional occupations and social status show that workersare over-represented in their traditional occupations and under-represented in socially higher or lower occupations.The authors consider counterfactuals removing castes’ hierarchical and occupational links. Despite more efficienthuman capital allocation, aggregate output gains are small—in some counterfactuals negative—due to weaker castenetworks and reduced learning across generations.
    Keywords: Labor Markets,Educational Sciences,Human Rights,Employment and Unemployment
    Date: 2021–02–16
  14. By: R. Anton Braun (Federal Reserve Bank of Atlanta (E-mail:; Daisuke Ikeda (Director, Financial System and Bank Examination Department, Bank of Japan (E-mail:
    Abstract: We provide a quantitative theory of deflation and secular stagnation. In our lifecycle framework an aging population puts persistent downward pressure on the price level, real interest rates, and output. A novel feature of our theory is that it also recognizes the reactions of government policy. The central bank responds to falling prices by reducing its policy nominal interest rate and the fiscal authority responds by allowing the public debt-GDP ratio to rise.
    Keywords: Aging, Deflation, Lifecycle, Monetary policy, Portfolio choice, Secular stagnation, Tobin effect
    JEL: E52 E62 G51 D15
    Date: 2022–10
  15. By: Camille Hainnaux (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this paper, we investigate the impact of redistribution and polluting commodity taxation on inequality and pollution in a dynamic setting. We build a two-sector Ramsey model with a green and a polluting good. Households are heterogeneous, which allows for income inequality, and have a level of subsistence consumption for the polluting commodity, modeled by non-homothetic preferences. Increasing the tax rate has a mixed effect depend on the level of subsistence consumption. A low level allows to tackle both the pollution and inequality issues. Under a high level of it, pollution increases: if inequality can be reduced through redistribution, taxation does not allow to solve for environmental degradation. Looking at the stability properties of the economy, we find that the level of subsistence consumption and the externality matter. A high subsistence level of polluting consumption leads to instability or indeterminacy of the steady-state, while the environmental externality plays a stabilizing role in the economy. This leaves room for taxation and redistribution: increasing the tax rate and redistributing more towards workers play a key role in the occurrence of indeterminacy and instability.
    Keywords: Externalities,Heterogeneous agents,Inequality,Pollution,Redistribution,Taxation
    Date: 2022–09
  16. By: Kumwenda, Thomson; Mangani, Ronald; Mazalale, Jacob; Silumbu, Exley
    Abstract: This study investigates the role of credit-supply factors in Malawian business cycles. A developing country banking sector is embedded into a Bayesian DGSE model using data for Malawi for the period 2004 to 2020. Financial intermediation in the model includes the issuance of loans to both households and firms, deposit mobilization, and actively financing of public debt to a cash-constrained central government treasury. Our study finds that banking sector shocks emanating from financing public debt plays a significant role in explaining variations in output in Malawi, both in the short and long run. Our study also finds that shocks from banking sector profits, intermediation role to household loans, entrepreneurs and firms do not have adverse effects on the fluctuation of output in Malawi which is contrary to the public sentiments. We also established that these shocks crowd-out private sector credit supply, and hence push interest rates up in the face of a liquidity-constrained treasury. These crowding outcomes are in the form of a trade-off of investment opportunities for banks. For every excess fund above the regulatory liquidity threshold, banks are more likely induced to invest only 20.96% in loans to households and 19.56% in loans to firms.
    Keywords: Public Debt; Collaterals; Banks; Interest Rates; Crowding-Out
    JEL: E30 E32 E43 E51 E52
    Date: 2022–10
  17. By: Seth G. Benzell; Laurence J. Kotlikoff; Maria Kazakova; Guillermo LaGarda; Kristina Nesterova; Victor Yifan Ye; Andrey Zubarev
    Abstract: Which region(s) will come to dominate the world economy? This paper develops the Global Gaidar Model (GGM), a 17-region, 2-skills, 100-period OLG model, to address this and other questions. The model is carefully calibrated to 2017 UN demographic and IMF fiscal data. Productivity growth and its interaction with demographic change are the main drivers of future economic power. Fiscal conditions and automation matter are secondary factors. Our baseline simulations, which forecast productivity growth using each region’s long-term record, predict China and India becoming the world’s top two economic hegemons. GGM also predicts an evolving global savings glut, major reductions in world interest rates, substantial increases in tax rates in China and other regions due to population aging, and permanent differences in regional living standards. Our findings are, however, highly sensitive to productivity growth. If productivity growth continues at each region’s very recent pace, India will account for one third of 2100 world output and China for over one fifth. The US output share will grow slightly. Under other scenarios, productivity growth in China and India dramatically slows; Sub Saharan Africa’s sky rockets, leaving China’s plus India’s 2100 output share at only 16 percent and Africa’s at an astounding 17 percent.
    JEL: E0 J0 O1
    Date: 2022–10
  18. By: Hashimoto, Ken-ichi; Ono, Yoshiyasu; Schlegl, Matthias
    JEL: E24 E31 E44 J20 J64
    Date: 2022
  19. By: Arvai, Kai; Mann, Katja
    JEL: E21 E22 J31 O33 O41
    Date: 2022
  20. By: Abiry, Raphael; Ludwig, Alexander; Ferdinandusse, Marien; Nerlich, Carolin
    JEL: E51 E62 Q54
    Date: 2022
  21. By: Michael Sposi; Kei-Mu Yi; Jing Zhang
    Abstract: We add to recent evidence on deindustrialization and document a new pattern: increasing industry polarization over time. We assess whether these new features of structural change can be explained by a dynamic open economy model with two primary driving forces, sector-biased productivity growth and sectoral trade integration. We calibrate the model to the same countries used to document our patterns. We find that sector-biased productivity growth is important for deindustrialization by reducing the relative price of manufacturing to services, and sectoral trade integration is important for industry polarization through increased specialization. The interaction of these two driving forces is also essential.
    Keywords: Structural Change; International Trade; Sector Biased Productivity Growth
    JEL: F11 F43 O41 O11
    Date: 2021–12–19

This nep-dge issue is ©2022 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.