nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒11‒28
twenty-one papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Differentiable State-Space Models and Hamiltonian Monte Carlo Estimation By David Childers; Jesús Fernández-Villaverde; Jesse Perla; Christopher Rackauckas; Peifan Wu
  2. An Estimated DSGE Model of the Euro Area with Expectations about the Timing and Nature of Liftoff from the Lower Bound By Haderer, Michaela
  3. Climate Policies, Macroprudential Regulation, and the Welfare Cost of Business Cycles By Barbara Annicchiarico; Marco Carli; Francesca Diluiso
  4. Monetary Policy and Exchange Rate Dynamics in a Behavioural Open Economy Model By Marcin Kolasa; Sahil Ravgotra; Pawel Zabczyk
  5. Government Expenditures in a Small Open Economy Model : The Role of Credit Constraint By Wu, Zhe
  6. Running Primary Deficits Forever in a Dynamically Efficient Economy: Feasibility and Optimality By Andrew B. Abel; Stavros Panageas
  7. Optimal Unemployment Insurance in a THANK Model By Stéphane Auray; Aurélien Eyquem
  8. Do Multisectoral New Keynesian Models Match Sectoral Data? By Philippe Andrade; Viacheslav Sheremirov
  9. Capital Flows in an Aging World By Zsófia L. Bárány; Nicolas Coeurdacier; Stéphane Guibaud
  10. Decomposing the drivers of Global R* By Cesa-Bianchi, Ambrogio; Harrison, Richard; Sajedi, Rana
  11. Consumption and income inequality across generations By Giovanni Gallipoli; Hamish Low; Aruni Mitra
  12. Optimal GDP-indexed Bonds By Yasin Kürsat Önder
  13. MARKUPS, TAXES, AND RISING INEQUALITY By Stéphane Auray; Aurélien Eyquem; Bertrand Garbinti; Jonathan Goupille-Lebret
  14. Fiscal Stimulus Under Average Inflation Targeting By Zheng Liu; Jianjun Miao; Dongling Su
  15. A tail of labour supply and a tale of monetary policy By Cantore, Cristiano; Ferroni, Filippo; Mumtaz, Hroon; Theophilopoulou, Angeliki
  16. Unconventional Monetary Policy and Inequality By Salvatore Nisticò; Marialaura Seccareccia
  17. Preference for Redistribution during Structural Change with Labor Mobility Frictions By Makarski, Krzysztof; Tyrowicz, Joanna
  18. Exploration of the Parameter Space in Macroeconomic Models By Karl Naumann-Woleske; Max Sina Knicker; Michael Benzaquen; Jean-Philippe Bouchaud
  19. Search and Multiple Jobholding By Ãtienne Lalé
  20. Welfare Assessments with Heterogeneous Individuals By Eduardo Dávila; Andreas Schaab
  21. Boomerang College Kids: Unemployment, Job Mismatch and Coresidence By Stefania Albanesi; Rania Gihleb; Ning Zhang

  1. By: David Childers; Jesús Fernández-Villaverde; Jesse Perla; Christopher Rackauckas; Peifan Wu
    Abstract: We propose a methodology to take dynamic stochastic general equilibrium (DSGE) models to the data based on the combination of differentiable state-space models and the Hamiltonian Monte Carlo (HMC) sampler. First, we introduce a method for implicit automatic differentiation of perturbation solutions of DSGE models with respect to the model's parameters. We can use the resulting output for various tasks requiring gradients, such as building an HMC sampler, to estimate first- and second-order approximations of DSGE models. The availability of derivatives also enables a general filter-free method to estimate nonlinear, non-Gaussian DSGE models by sampling the joint likelihood of parameters and latent states. We show that the gradient-based joint likelihood sampling approach is superior in efficiency and robustness to standard Metropolis-Hastings samplers by estimating a canonical real business cycle model, a real small open economy model, and a medium-scale New Keynesian DSGE model.
    JEL: C01 C10 C11 E0
    Date: 2022–10
  2. By: Haderer, Michaela
    Abstract: I investigate the implications of the zero lower bound (ZLB) in a structural New-Keynesian model for the euro area. The medium-scale DSGE model accommodates forward guidance by treating the expected durations of the ZLB constraint as free parameters in estimation. Incorporating professional forecasters’ expectations about the future path of the policy rate provides well-identified estimates of the durations. These estimates indicate that unconventional monetary policy becomes increasingly important from 2018 on. Furthermore, when monetary policy is expected to be passive in its response to inflation after liftoff, forward guidance has weaker effects with deflationary pressures on the economy. Finally, including data from the Covid-19 pandemic in estimation leads to stable estimates and allows an assessment of monetary policy during that period.
    Keywords: monetary policy; zero lower bound; forward guidance; liftoff; Covid-19
    Date: 2022–11
  3. By: Barbara Annicchiarico (CEIS & DEF, University of Rome "Tor Vergata"); Marco Carli (DEF, University of Rome "Tor Vergata"); Francesca Diluiso (Mercator Research Institute on Global Commons and Climate Change)
    Abstract: We study the performance of alternative climate policies in a dynamic stochastic general equilibrium model that includes an environmental externality and agency problems associated with financial intermediation. Heterogeneous polluting producers finance their capital acquisition by combining their resources with loans from banks, are subject to environmental regulation, are hit by idiosyncratic shocks, and can default. The welfare analysis suggests that a cap-and-trade system will entail substantially lower costs of the business cycle than a carbon tax if financial frictions are stringent, firm leverage is high, and agents are sufficiently risk-averse. Simple macroprudential policy rules can go a long way in reining in business cycle fluctuations, aligning the performance of price and quantity pollution policies, and reducing the uncertainty inherent to the chosen climate policy tool.
    Keywords: Business Cycle; Cap-and-Trade; Carbon Tax; E-DSGE
    JEL: Q58 E32 E44
    Date: 2022–10–31
  4. By: Marcin Kolasa (International Monetary Fund); Sahil Ravgotra (University of Surrey); Pawel Zabczyk (International Monetary Fund)
    Abstract: We develop and estimate an extension of the open economy New Keynesian model in which agents are boundedly rational _a la Gabaix (2020). Our setup successfully mitigates many puzzling aspects of the relationship between exchange rates and interest rates, and remains consistent with recent empirical evidence showing that UIP puzzles vanish when actual - as opposed to rational - exchange rate expectations are used. We find that accounting for myopia dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the “FG puzzle" is decreasing in openness. We also show that bounded rationality makes positive monetary spillovers more likely, increases the persistence of the real exchange rate and net foreign assets, and exacerbates the small open economy unit root problem. Finally, the model provides arguments against using the exchange rate as a nominal anchor.
    JEL: F41 E70 E52 E58 G40
    Date: 2022–11
  5. By: Wu, Zhe (Monash University)
    Abstract: We investigate the role of international credit market constraint in a dynamic stochastic general equilibrium model in determining the effect of government spending policies on macroeconomic variables such as consumption and the real exchange rate in a small open economy. The numerical results show that increasing government expenditure under certain economic shocks can increase the value of the real exchange rate and reduce the chance of the small open economy reaching the borrowing limit. Hence, the dynamics of consumption and the real exchange rate can be significantly affected by government spending policies under international credit market constraints.
    Keywords: Credit Constraint ; Real Exchange Rate ; Government Spending JEL Classification: F41
    Date: 2022
  6. By: Andrew B. Abel; Stavros Panageas
    Abstract: Government debt can be rolled over forever without primary surpluses in some stochastic economies, including some economies that are dynamically efficient. In an overlapping-generations model with constant growth rate, g, of labor-augmenting productivity, and with shocks to the durability of capital, we show that along a balanced growth path, the maximum sustainable ratio of bonds to capital is attained when the riskfree interest rate, r[sub]f, equals g. Furthermore, this maximal ratio maximizes utility per capita along a balanced growth path and ensures that the economy is dynamically efficient.
    JEL: E0 E6 H60
    Date: 2022–10
  7. By: Stéphane Auray (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Aurélien Eyquem (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, Université de Lyon)
    Abstract: A Tractable HANK (THANK) model with three agents, incomplete markets, unemployment and sticky prices and wages, is used to analyze the dynamics, welfare and distributional effects of Ramsey-optimal unemployment insurance (UI) policies. First, the optimal transition from a steady state that replicates several empirical regularities of the European labor market to the Ramsey steady state is analyzed. In the long run, the vacancy creation motive dominates, as the replacement rate falls, lowering the unemployment rate. In the short run however, the insurance motive dominates until unemployment falls enough to generate larger welfare gains from a lower unemployment rate. Over the business cycle around the Ramseyoptimal steady state, we nd that the optimal changes in the replacement rate depend (i) on the nature of the shock and (ii) on the presence of price and wage rigidities. After productivity shocks, the vacancy creation motive dominates. After separation shocks, the planner has almost no traction over vacancy creations. Only the insurance and aggregate demand stabilization motives remain, and both point to a counter-cyclical UI policy.
    Keywords: Unemployment,Borrowing constraints,Incomplete markets,Unemployment Insurance
    Date: 2022–04–05
  8. By: Philippe Andrade; Viacheslav Sheremirov
    Abstract: We document empirical regularities of disaggregated inflation and consumption and study whether multisectoral New Keynesian models can explain them. We focus on higher moments of the inflation and consumption growth distributions as well as on the contemporaneous comovement of these two variables. We find that the sectoral distributions of inflation and consumption growth are asymmetric, with inflation skewed negatively and consumption growth positively. Both distributions are highly leptokurtic. In the full sample, from the mid-1980s through 2021, sectoral inflation and consumption growth overall correlate negatively, indicating the prevalence of supply shocks over demand shocks. The negative correlation is robust across historical episodes during this period, except during the COVID-19 pandemic, when inflation and consumption growth comoved positively. While the baseline model can match some of these facts for a specific shock process, in its baseline setup the model struggles to match them simultaneously.
    Keywords: disaggregated inflation; multisectoral models; idiosyncratic shocks
    JEL: E12 E31 E32 E52
    Date: 2022–09–01
  9. By: Zsófia L. Bárány (CEU - Central European University [Budapest, Hongrie], CEPR - Center for Economic Policy Research - CEPR); Nicolas Coeurdacier (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Stéphane Guibaud (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We investigate the importance of worldwide demographic evolutions in shaping capital flows across countries. Our lifecycle model incorporates crosscountry differences in fertility and longevity as well as differences in countries' ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers uphill capital flows from emerging to advanced economies, while country-specific demographic evolutions reallocate capital towards countries aging more slowly. Our quantitative multi-country overlapping generations model explains a large fraction of long-term capital flows across advanced and emerging countries.
    Keywords: Aging,Household Saving,International Capital Flows
    Date: 2022
  10. By: Cesa-Bianchi, Ambrogio (Bank of England); Harrison, Richard (Bank of England); Sajedi, Rana (Bank of England)
    Abstract: We use a structural overlapping-generations model to quantify the effects of five exogenous forces that drive the global trend equilibrium real interest rate, Global R*. We use data for 31 countries to extract the global trend components of the five drivers and to derive an empirical estimate of Global R*, which we use to calibrate the model. We design a recursive simulation method in which beliefs about the future path of the drivers are updated gradually. In our simulation, Global R* rises from the mid-1950s to the mid-1970s, declining steadily thereafter. The decline is driven predominantly by slowing productivity growth and increasing longevity.
    Keywords: Equilibrium interest rates; structural change; demographics
    JEL: E22 E43 J11
    Date: 2022–07–12
  11. By: Giovanni Gallipoli; Hamish Low; Aruni Mitra
    Abstract: We characterize the joint evolution of cross-sectional inequality in earnings, other sources of income and consumption across generations in the U.S. To account for cross-sectional dispersion, we estimate a model of intergenerational persistence and separately identify the influences of parental factors and of idiosyncratic life-cycle components. We find evidence of family persistence in earnings, consumption and saving behaviours, and marital sorting patterns. However, the quantitative contribution of idiosyncratic heterogeneity to cross-sectional inequality is significantly larger than parental effects. Our estimates imply that intergenerational persistence is not high enough to induce further large increases in inequality over time and across generations.
    Date: 2022–10–04
  12. By: Yasin Kürsat Önder (-)
    Abstract: I investigate the introduction of GDP-indexed bonds as an additional source of government borrowing in a quantitative default model. The idea of linking debt payments to developments in GDP resurfaced with the 1980s debt crisis and peaked with the COVID-19 outbreak. I show that the gains from this idea depend on the underlying indexation method and are highest if payments are symmetrically tied to developments in GDP. Optimized indexed debt can eradicate default risk, halve consumption volatility, and increase asset prices while raising the government’s debt balances. These changes occur because an optimally chosen indexation method does a better job at completing the markets.
    Keywords: GDP-indexed bonds, sovereign default, risk sharing, state-contingent assets
    JEL: G11 G23 F34
    Date: 2022–11
  13. By: Stéphane Auray (ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], CREST-THEMA - CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique - THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Aurélien Eyquem (UNIL - Université de Lausanne = University of Lausanne); Bertrand Garbinti (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, ENSAE - Ecole Nationale de la Statistique et de l'Analyse Economique - Ecole Nationale de la Statistique et de l'Analyse Economique); Jonathan Goupille-Lebret (CNRS - Centre National de la Recherche Scientifique, GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique, ENS Lyon, Université de Lyon)
    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.
    Date: 2022–10–27
  14. By: Zheng Liu; Jianjun Miao; Dongling Su
    Abstract: The stimulus effects of expansionary fiscal policy under average inflation targeting (AIT) depends on both monetary and fiscal policy regimes. AIT features an inflation makeup under the monetary regime, but not under the fiscal regime. In normal times, AIT amplifies the short-run fiscal multipliers under both regimes while mitigating the cumulative multiplies due to intertemporal substitution. In a zero-lower-bound (ZLB) period, AIT reduces fiscal multipliers under a monetary regime by shortening the duration of the ZLB through expected inflation makeup. Under the fiscal regime, AIT has a nonlinear effect on fiscal multipliers because of the absence of inflation makeup and the presence of a nominal wealth effect.
    Keywords: average inflation targeting; fiscal multipliers; monetary policy rules; fiscal policy; DSGE models
    JEL: E13 E32 E44 E52 G12
    Date: 2022–11–09
  15. By: Cantore, Cristiano (Bank of England); Ferroni, Filippo (Chicago Fed); Mumtaz, Hroon (Queen Mary, University of London); Theophilopoulou, Angeliki (Brunel University London)
    Abstract: We study the interaction between monetary policy and labour supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong income effect on labour supply in the left tail of the income distribution, following a monetary policy shock in the US and the UK. That is, while aggregate hours and labour earnings decline, employed individuals at the bottom of the income distribution increase their hours worked in response to an interest rate hike. Moreover, their response is stronger in magnitude relative to other income groups. We rationalize this using a two-agent New-Keynesian (TANK) model where our empirical findings can be replicated with a lower intertemporal elasticity of substitution for the Hand-to-Mouth households. This setup has important implications for the impact of inequality on the transmission of monetary policy. We unveil a novel dampening effect on aggregate demand generated by the Hand-to-Mouth substitution of leisure for consumption following a negative income shock. Therefore we show that the impact of inequality on the transmission mechanism of monetary policy is highly dependent on the different layers of heterogeneity on the household side and the different combinations of nominal and real frictions. More inequality does not necessarily generate a stronger response of aggregate demand after a monetary policy shock.
    Keywords: Monetary policy; household survey; FAVARs; TANK; hand to mouth
    JEL: C10 E32 E52
    Date: 2022–07–21
  16. By: Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome); Marialaura Seccareccia (Department of Economics and Finance, LUISS Guido Carli)
    Abstract: Cyclical inequality and idiosyncratic risk imply additional channels that amplify the transmission of persistent balance-sheet policies, through their effects on private sector's expectations and consumption risk. Through these channels, unconventional monetary policy improves the central bank's ability to anchor expectations and rule out endogenous instability. Moreover, they allow the central bank to optimally complement interest-rate policy in particular in response to financial shocks that expose the economy to the effective-lower-bound on the policy rate, and can promote a swifter exit from the liquidity trap.
    Keywords: Cyclical inequality; idiosyncratic risk; optimal monetary policy; HANK; THANK, ELB.
    JEL: E21 E32 E44 E58
    Date: 2022–11
  17. By: Makarski, Krzysztof (Warsaw School of Economics); Tyrowicz, Joanna (University of Warsaw)
    Abstract: Thorough structural change occurs periodically across world economies. In a parsimonious overlapping generation setup with political economy, we present a novel result: structural change not only exacerbates the rise in inequality but also strengthens the preference for redistribution. Labor mobility frictions are instrumental in this mechanism.
    Keywords: structural change, labor mobility frictions, redistribution
    JEL: H10 Z1
    Date: 2022–09
  18. By: Karl Naumann-Woleske (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique); Max Sina Knicker (TUM - Technische Universität München = Technical University of Munich); Michael Benzaquen (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique); Jean-Philippe Bouchaud (Académie des Sciences - Institut de France)
    Abstract: Agent-Based Models (ABM) are computational scenario-generators, which can be used to predict the possible future outcomes of the complex system they represent. To better understand the robustness of these predictions, it is necessary to understand the full scope of the possible phenomena the model can generate. Most often, due to high-dimensional parameter spaces, this is a computationally expensive task. Inspired by ideas coming from systems biology, we show that for multiple macroeconomic models, including an agent-based model and several Dynamic Stochastic General Equilibrium (DSGE) models, there are only a few stiff parameter combinations that have strong effects, while the other sloppy directions are irrelevant. This suggests an algorithm that efficiently explores the space of parameters by primarily moving along the stiff directions. We apply our algorithm to a medium-sized agent-based model, and show that it recovers all possible dynamics of the unemployment rate. The application of this method to Agent-based Models may lead to a more thorough and robust understanding of their features, and provide enhanced parameter sensitivity analyses. Several promising paths for future research are discussed.
    Date: 2022
  19. By: Ãtienne Lalé
    Abstract: This paper develops an equilibrium model of the labor market with hours worked, offand on-the-job search, and single as well as multiple jobholders. The model quantitatively accounts for the incidence of and worker flows in and out of multiple jobholding. Central to the model’s mechanism is that holding a second job ties the worker to her primary employer, at the benefits of having a stronger outside option to bargain with the outside employer. The model is also informative of how multiple jobholding shapes the outcomes that are typically the focus of search models. Multiple jobholding has opposing effects on job-to-job transitions that mostly offset each other. At the same time, since the option of having second jobs makes the main job survive longer, it reduces job separations and increases the employment rate. These findings have material implications for the calibration of standard models which ignore multiple jobholding. Cet article développe un modèle d'équilibre du marché du travail avec des heures travaillées, une recherche d'emploi depuis le chômage et également en emploi, et des titulaires d'emplois uniques ou multiples. Le modèle rend compte quantitativement de l'incidence du cumul d'emplois et des flux de travailleurs qui y entrent et en sortent. Le mécanisme au cœur de ce modèle est que le fait d'occuper un second emploi lie le travailleur à son employeur principal, avec l'avantage de disposer d'une meilleure position de négociation pour interagir avec l'employeur extérieur. Le modèle renseigne également sur la manière dont le cumul d'emplois façonne les résultats qui sont généralement au centre des modèles de recherche. Le cumul d'emplois a deux effets, positifs et négatifs, sur les transitions emploi-à-emploi, et ces effets tendent à se neutraliser. Dans le même temps, la possibilité d'avoir un deuxième emploi permet à l'emploi principal de survivre plus longtemps, si bien que le cumul d'emplois réduit les transitions vers le chômage et augmente le taux d'emploi. Ces résultats ont des implications importantes pour la calibration des modèles standards qui ignorent le cumul d'emplois.
    Keywords: Multiple jobholding,employment,hours worked,job search, Emploi multiple,emploi,heures travaillées,recherche d'emploi
    JEL: E24 J21 J62
    Date: 2022–11–15
  20. By: Eduardo Dávila; Andreas Schaab
    Abstract: This paper develops a new approach to make welfare assessments based on the notion of Dynamic Stochastic weights (DS-weights for short). For a large class of dynamic stochastic economies with heterogeneous individuals, we introduce an aggregate additive decomposition that satisfies desirable properties and that allows us to exactly decompose welfare assessments into four components: i) aggregate efficiency, ii) risk-sharing, iii) intertemporal-sharing, and iv) redistribution. We leverage DS-weights to i) revisit how welfarist (e.g., utilitarian) planners make interpersonal welfare comparisons and ii) formalize new welfare criteria that are exclusively based on one or several of the components that we identify.
    JEL: D60 E61
    Date: 2022–10
  21. By: Stefania Albanesi (University of Pittsburgh); Rania Gihleb (University of Pittsburgh, IZA); Ning Zhang (University of Oxford)
    Abstract: Labor market outcomes for young college graduates have deteriorated substantially in the last twenty five years, and more of them are residing with their parents. The unemployment rate at 23-27 years old for the 1996 college graduation cohort was 9%, whereas it rose to 12% for the 2013 graduation cohort. While only 25% of the 1996 cohort lived with their parents, 31% for the 2013 cohort chose this option. Our hypothesis is that the declining availability of ‘matched jobs’ that require a college degree is a key factor behind these developments. Using a structurally estimated model of child-parent decisions, in which coresidence improves college graduates’ quality of job matches, we find that lower matched job arrival rates explain two thirds of the rise in unemployment and coresidence between the 2013 and 1996 graduation cohorts. Rising wage dispersion is also important for the increase in unemployment, while declining parental income, rising student loan balances and higher rental costs only play a marginal role.
    Keywords: labor market outcomes, college attainment, educational attainment, household behavior
    JEL: I23 D13 E24

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