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on Dynamic General Equilibrium |
| By: | Zheng Gong |
| Abstract: | This paper decomposes a Heterogeneous-Agent New Keynesian (HANK) model’s responses to aggregate shocks into Representative-Agent (RANK) and redistribution effects. RANK effects are obtained by introducing counterfactual transfers neutralizing redistribution, ensuring homogeneous agent responses. Redistribution effects stem from the HANK model’s response to the derived redistribution shock, which breaks down into interest rate exposure, income exposure, and liquidity channels. Following a monetary policy shock, RANK effects explain 62% of the consumption response; the interest rate, income, and liquidity channels contribute 16%, 14%, and 8% respectively. The decomposition is also applied to literature to identify key redistribution channels driving model dynamics. |
| Keywords: | Heterogeneous households; Monetary Policy; Fiscal Policy; HANKmodel; Inequality; Business cycles. |
| JEL: | D31 E21 E43 E52 E62 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_624 |
| By: | Jonathan Payne (Princeton University); Adam Rebei (Stanford University); Yucheng Yang (University of Zurich; Swiss Finance Institute) |
| Abstract: | We develop a new method to globally solve and estimate search and matching models with aggregate shocks and heterogeneous agents. We characterize general equilibrium as a high-dimensional partial differential equation with the distribution as a state variable. We then use deep learning to solve the model and estimate economic parameters using the simulated method of moments. This allows us to study a wide class of search markets where the distribution affects agent decisions and compute variables (e.g. wages and prices) that were previously unattainable. In applications to labor search models, we show that distribution feedback plays an important role in amplification and that positive assortative matching weakens in prolonged expansions, disproportionately benefiting low-wage workers. |
| Keywords: | Search and Matching, Distribution Feedback, Two-sided Heterogeneity, Business Cycles, Sorting, Over-the-Counter Financial Markets, Deep learning |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2505 |
| By: | Leanne Nam |
| Abstract: | Unemployment leads to large and persistent income losses for workers. Higher unemployment in the labor market therefore has spillover effects on the housing market. This paper studies such spillover effects from both empirical and theoretical perspectives. Using data from the Current Population Survey (CPS), I show that a 1 percentage point increase in the unemployment rate leads to a 1.55% decline in housing prices. Theoretically, I develop an overlapping generations model with a housing market. The calibrated model replicates the empirically observed spillover effect for the U.S. economy. Higher income uncertainty is the main driver of the spillover effect, rather than actual income losses. The spillover effect transmits one-third of the welfare losses of workers due to higher unemployment in the labor market to older, retired households by reducing their housing wealth. Younger workers benefit in part by buying houses at depressed prices. The magnitude of the spillover effect is shaped by the demographic structure of the population and the specific age groups affected by unemployment shocks. I find that increasing the generosity of unemployment insurance stabilizes the housing market, although it only partially mitigates the spillover effect. |
| Keywords: | Unemployment, Housing demand, Portfolio choice, Overlapping generations |
| JEL: | G11 R21 E21 E24 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_636 |
| By: | Jiequn Han (Flatiron Institute); Yucheng Yang (University of Zurich; Swiss Finance Institute); Weinan E (Princeton University) |
| Abstract: | We propose an efficient, reliable, and interpretable global solution method, the Deep learning-based algorithm for Heterogeneous Agent Models (DeepHAM), for solving high dimensional heterogeneous agent models with aggregate shocks. The state distribution is approximately represented by a set of optimal generalized moments. Deep neural networks are used to approximate the value and policy functions, and the objective is optimized over directly simulated paths. In addition to being an accurate global solver, this method has three additional features. First, it is computationally efficient in solving complex heterogeneous agent models, and it does not suffer from the curse of dimensionality. Second, it provides a general and interpretable representation of the distribution over individual states, which is crucial in addressing the classical question of whether and how heterogeneity matters in macroeconomics. Third, it solves the constrained efficiency problem as easily as it solves the competitive equilibrium, which opens up new possibilities for normative studies. As a new application, we study constrained efficiency in heterogeneous agent models with aggregate shocks. We find that in the presence of aggregate risk, a utilitarian planner would raise aggregate capital for redistribution less than in absence of it because poor households do more precautionary savings and thus rely less on labor income. |
| Keywords: | Heterogeneous agent models, aggregate shocks, global solution, deep learning, generalized moments, constrained efficiency |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2506 |
| By: | Yucheng Yang (University of Zurich; Swiss Finance Institute) |
| Abstract: | Inflation has heterogeneous impacts on households, which then affects optimal monetary policy design. I study optimal monetary policy rules in a quantitative heterogeneous agent New Keynesian (HANK) model where inflation has redistributive effects on households through their different (1) consumption baskets, (2) nominal wealth positions, and (3) earnings elasticities to business cycles. I parameterize the model based on the empirical analysis of these channels using the most recent data. Unlike in representative agent models, a utilitarian central bank should adopt an asymmetric monetary policy rule that is accommodative towards inflation and aggressive towards deflation. Specifically, by accommodating stronger demand and higher inflation, the central bank benefits low-income and low-wealth households through nominal debt devaluation and higher earnings growth. |
| Keywords: | Redistributive Inflation, Optimal Monetary Policy, Heterogeneous Agent, Expenditure Channel, Revaluation Channel, Earnings Channel |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2507 |
| By: | Anastasiia Antonova (Aix Marseille Univ, CNRS, AMSE, Marseille, France); Mykhailo Matvieiev (Aix Marseille Univ, CNRS, AMSE, Marseille, France); Céline Poilly (Aix Marseille Univ, CNRS, AMSE, Marseille, France) |
| Abstract: | Endogenous uncertainty acts as an aggregate-demand amplification mechanism of supply shocks. Using U.S. data, we first stress that taking into account time-varying macroeconomic uncertainty leads to a significantly stronger recession and less inflationary pressures, in response to a TFP shock. In addition, we show empirically that households’ misperception increases during recessions. To rationalize these findings, we build a noisy-information New- Keynesian model where the precision of signals increases with economic activity. Pro-cyclical precision of information gives rise to an amplified precautionary saving behavior. A fullfledged model parametrized by using consumer-based forecast errors generates a demandlike recession of supply shock. |
| Keywords: | uncertainty, imperfect information, Keynesian supply shocks. |
| JEL: | D81 D83 E21 E32 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2427 |
| By: | Cai Chunbing; Jordan Roulleau-Pasdeloup; Zheng Zhongxi |
| Abstract: | We develop a perfect foresight method to solve models with an interest rate lower bound constraint that nests OccBin/DynareOBC and \cite{Eggertsson2010}'s as well as \cite{Mertens2014}'s pen and paper solutions as special cases. Our method generalizes the pen-and-paper solutions by allowing for endogenous persistence while maintaining tractability and interpretability. We prove that our method necessarily gives stable multipliers. We use it to solve a New Keynesian model with habit formation and government spending, which we match to expectations data from the Great Recession. We find an output multiplier of government spending close to 1 for the US and Japan. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.06473 |
| By: | Garcia Silva, Pablo; Gutierrez Schweitzer, Maria de los Angeles; Medina Guzman, Juan Pablo |
| Abstract: | We examine the macroeconomic effects of the energy transition, focusing on the impact of oil prices on GDP, productivity and inflation. We find that energy dependence on fossil fuels increases vulnerability to oil price shocks, negatively affecting Total Factor Productivity (TFP). Using the Solow decomposition and including energy as part of the capital stock, we find two key effects: The Price and Scale Effect, in which higher energy prices increase production costs and reduce TFP; and The Recomposition Effect, in which greater use of domestic renewables boosts TFP by reducing reliance on non-renewable imports. Our findings for Chile between 2001 and 2019 the TFP adjustment for energy factors provides a complementary and enriched view of productivity, especially in periods or contexts with high volatility in energy consumption or prices. Finally, using a New-Keynesian DSGE model calibrated for Chile, we examine the macroeconomic consequences of the energy transition. A counterfactual scenario shows that, without diversification of the energy matrix, the economic impact of higher oil prices would have been more severe, with larger GDP declines, higher inflation, tighter monetary policy, and a steeper fall in TFP, highlighting the benefits of Chile's shift to a more renewable energy matrix. |
| Keywords: | DSGE Model, Aggregate Production Function, Monetary Policy, Environment and Growth, Energy Shocks |
| JEL: | C54 E23 E52 O44 Q43 |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123225 |
| By: | Efi Adamopoulou; Anne Hannusch; Karen Kopecky; Tim Obermeier |
| Abstract: | Why do U.S. college-educated couples with children marry at higher rates than those without a college degree? We argue that investing in children is more valuable for college-educated couples, who are more likely to send their children to college. Marriage, which entails lower separation risk and more equal asset division if separation does occur, provides insurance to the lower-earning spouse, which facilitates child investment. Using an OLG model of marriage, cohabitation, wealth accumulation, and educational investments where college completion is risky, we find that insurance through marriage is particularly important when investing in children is costly and college costs are high. |
| Keywords: | cohabitation, marriage, child development, time and money investments, human capital accumulation, college costs |
| JEL: | D15 E24 J12 J22 J24 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_628 |
| By: | Julien Albertini (University Lumière Lyon 2, CNRS, Université Jean Monnet Saint-Etienne, emlyon business school, GATE, 69007, Lyon, France); Arthur Poirier (LEDa, Paris Dauphine University); Anthony Terriau (GAINS, Le Mans University) |
| Abstract: | Introduced in France in the 1990s to reduce the cost of low-skilled labor, payroll tax reductions on low wages were later expanded and extended to higher wages. This study evaluates the impact of the current payroll tax schedule on employment, fiscal surplus, and welfare. We develop a life-cycle matching model in which workers are heterogeneous in terms of age, education, human capital, family status, hours worked and idiosyncratic productivity, and where search effort, hiring and separations are endogenous. Accounting for interactions with the socio-fiscal system, we demonstrate that reducing payroll tax cuts for low wages would result in declines in both employment and fiscal surplus. Furthermore, we show that increasing the minimum wage would significantly reduce employment and fiscal surplus, with the magnitude of the effect depending on whether the payroll tax schedule and other socio-fiscal measures are indexed to the minimum wage. Lastly, we identify the optimal payroll tax schedule, revealing that employment, fiscal surplus, and welfare can all be improved by increasing payroll tax reductions for wages near the minimum wage while reducing them for wages exceeding twice the minimum wage. |
| Keywords: | Payroll Tax Reductions; Minimum Wage; Search and Matching; Life Cycle |
| JEL: | J23 J31 J32 J38 J64 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:gat:wpaper:2501 |
| By: | Simon Mongey; Michael E. Waugh |
| Abstract: | This paper studies household inequality and product market power in dynamic, general equilibrium. In our model, households’ price elasticities of demand endogenously vary with wealth. Heterogeneous firms set their price as oligopolistic competitors given the endogenous distribution of demand. A firm’s market power varies with the distribution of demand as households with different elasticities sort into high- and low-price varieties. Under standard preferences, larger firms’ products are more appealing, sell at higher prices, to more households, and a relatively richer customer base, face less elastic demand, and set higher markups. Quantitatively (a) our model rationalizes a wide set of recent empirical studies in the cross-section of households and firms, (b) we find household heterogeneity to be a dominant source of markup variation across firms, and (c) a one-time fiscal transfer of one percent of GDP to households leads to a 0.3 percentage point increase in the aggregate markup. |
| JEL: | E0 E27 E3 E60 L0 L10 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33399 |
| By: | Adhikari, Shisham |
| Abstract: | Successfully transitioning to a low-carbon economy by 2050 necessitates not only technological advancements but also the swift reallocation of the workforce. Existing policies, such as the Inflation Reduction Act (IRA), focus on firm subsidies while overlooking critical labor market coordination frictions. Workers face high entry costs and uncertainty about green job opportunities, while firms hesitate to invest without a reliable labor supply. This creates a coordination problem: workers are reluctant to enter the green sector without job guarantees, and firms delay expansion without sufficient workers. This paper extends the Diamond-Mortensen-Pissarides (DMP) model to incorporate these coordination frictions, calibrating it to U.S. labor market data. By evaluating subsidies targeted at firms, workers, and a combined strategy, the analysis shows that while individual subsidies can achieve the green employment target of 14% by 2030, a combined approach is far more efficient. It aligns incentives, reduces unemployment, and minimizes fiscal costs, highlighting the necessity of addressing coordination frictions to ensure a cost-effective and equitable green transition. |
| Keywords: | Green transition, Policy misalignment, Coordination friction, Unemployment, Fiscal efficiency, Search-match model |
| JEL: | E61 J2 J6 J64 |
| Date: | 2025–01–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123479 |
| By: | Christian Bittner (Deutsche Bundesbank & Goethe University Frankfurt); Rustam Jamilov (University of Oxford); Farzad Saidi (University of Bonn & CEPR) |
| Abstract: | We develop a quantitative macroeconomic framework with heterogeneous financial intermediaries and active liquidity management. In the model, banks manage uninsured, idiosyncratic deposit withdrawal risk through an iterative over-the-counter interbank market with endogenous intensive and extensive margins and equilibrium assortative matching based on balance sheet size. We validate our framework using administrative data from Germany encompassing the universe of bank-to-bank exposures. Our findings strongly support the presence of assortative matching in the data, thereby confirming the model's key mechanism. We show that assortative matching can inefficiently lead to reduced trading volumes and a broader region of inaction in the interbank market, a smaller and riskier banking sector, and a macroeconomy characterized by lower aggregate output. Using our empirically validated framework, we explore secular trends in interbank trading, the roles of liquidity and interest rate corridor policies, and the impact of deposit market power. |
| Keywords: | Heterogeneous banks, interbank markets, monetary policy, liquidity policy |
| JEL: | E44 E52 G20 G21 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:353 |
| By: | Casas, Pablo; Christou, Tryfonas; García Rodríguez, Abián; Lazarou, Nicholas Joseph; Salotti, Simone |
| Abstract: | We provide a macroeconomic evaluation of the impact of the 2014-2020 European Social Fund, the Youth Employment Initiative and the labour market interventions of the REACT-EU programme, using data updated to the end of 2023. We use the spatial dynamic general equilibrium model RHOMOLO, modified to include endogenous labour force participation, to analyse the impact of nearly €110 billion in total, showing how GDP, employment, wages and various measures of inequality respond to the policies. The results suggest that the European labour market policy has a substantial positive impact on the regional economies of the Union and on the labour force, with long-lasting positive effects on GDP and employment, and a reduction in regional disparities and macroeconomic educational mismatches. |
| Keywords: | European Social Fund, regional labour markets, general equilibrium modelling. |
| JEL: | C68 J20 J30 R13 |
| Date: | 2025–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123410 |
| By: | Thomas Breda (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Ecole Normale Supérieure - UMNG - Université Marien-Ngouabi [Université de Brazzaville] = Marien Ngouabi University [University of Brazzaville], PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Luke Haywood; Haomin Wang (Cardiff Business School - Cardiff University) |
| Abstract: | We quantify the unintended effects of a low-wage payroll tax reduction using an equilibrium search model featuring bargaining, worker and firm productivity heterogeneity, labor taxes, and a minimum wage. The decentralized economy is inefficient due to search externalities and labor market policies. We estimate the model using French data and find that a significant reduction in low-wage payroll taxes in 1995 leads to an overall improvement in economic efficiency by increasing employment and correcting existing policy distortions that disincentivize labor force participation. However, the tax reduction, by increasing labor force participation among low-productivity workers and vacancy postings by low-productivity firms, results in negative but minor spillover and reallocation effects due to congestion. We find that the optimal policy mix is a lower minimum wage and lower payroll taxes compared to the policies in place in the early 1990s. |
| Keywords: | Payroll tax, Minimum wage, Equilibrium job search, Worker and firm heterogeneity |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04873024 |
| By: | Rosella Levaggi; Francesco Menoncin; Andrea Modena |
| Abstract: | Tolerating tax evasion may increase debt less than an equivalent tax cut. In our model, utility-maximizing entrepreneurs earn income from risky production technologies and risk-free bonds. The government uses income taxes and bonds to finance its expenses. Entrepreneurs can evade taxes at the risk of being audited and fined. Aggregate tax evasion and debt-to-GDP are positively related in equilibrium. Nevertheless, reducing effective tax rates by tolerating evasion may generate a lower debt-to-GDP ratio (but also lower growth) than equivalent debt-financed nominal tax cuts. Policies are equivalent with log utility. |
| Keywords: | Dynamic tax evasion; general equilibrium; public debt. |
| JEL: | D5 E6 H2 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_623 |
| By: | Titan Alon; Natalie Cox; Minki Kim |
| Abstract: | In the presence of credit frictions, student debt may prevent graduates from realizing the full returns to a college education by distorting their occupation choice and subsequent early career investments in human capital. This paper quantifies the aggregate size of these labor market distortions by computing the effect of large-scale student debt forgiveness policies. The model’s predictions are disciplined by new empirical evidence showing that more student debt leads to higher initial earnings, but lower returns-to-experience. The quantitative results suggest that rising student debt is having a substantial adverse effect on aggregate labor productivity and the occupational composition of employment. |
| Keywords: | Student debt, occupation choice, wage profiles, credit constraints, misallocation of talent, college, higher education, labor productivity. |
| JEL: | E0 E2 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_635 |
| By: | Pham, Ngoc-Sang |
| Abstract: | In a market economy, the aggregate production level depends not only on the aggregate variables but also on the distribution of individual characteristics (e.g., productivity, credit limit, ...). We point out that, due to financial frictions, the equilibrium aggregate production may be non-monotonic in both individual productivity and credit limit. We provide conditions under which this phenomenon happens. By consequence, improving productivity or relaxing credit limit of firms may not necessarily be beneficial to economic development. |
| Keywords: | Productivity shock, financial shock, credit constraint, heterogeneity, productivity dispersion, distributional effects, efficiency, general equilibrium. |
| JEL: | C6 D5 E3 G1 O4 |
| Date: | 2025–01–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123394 |
| By: | Federico Lubello |
| Keywords: | Climate risk; macroprudential policy coordination; DSGE models |
| JEL: | E1 E2 O41 Q5 Q58 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp192 |