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on Dynamic General Equilibrium |
| By: | Chris Naubert |
| Abstract: | I develop a methodology for Bayesian estimation of globally solved, non-linear macroeconomic models. A novel feature of my method is the use of a mixture density network to approximate the distribution of initial states. I use the methodology to estimate a medium-scale, two-agent New Keynesian model with irreversible investment and a zero lower bound on nominal interest rates. Using simulated data, I show that the method is able to recover the “true” parameters when using the mixture density network approximation of the initial state distribution. This contrasts with the case when the initial states are set to their steady-state values. |
| Keywords: | Business Fluctuations and Cycles; Economic Models |
| JEL: | C61 C63 E37 E47 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-3 |
| By: | Alejandro Gurrola Luna (HSBC Mexico); Stephen McKnight (El Colegio de Mexico) |
| Abstract: | We analyze how bounded rationality affects the equilibrium determinacy properties of forecast-based interest-rate rules in a behavioural New Keynesian model with limited asset market participation (LAMP). We show that the key policy prescriptions of rational expectation models do not carry over to behavioural frameworks with myopic agents. In high participation economies, the Taylor principle is more likely to induce indeterminacy when bounded rationality is introduced following the cognitive discounting approach of Gabaix (2020). Indeterminacy arises from a discounting channel and the problem is exacerbated under flexible prices and nominal illusion. In contrast, cognitive discounting plays a stabilizing role in LAMP economies, where passive policy is no longer required to prevent indeterminacy, and determinacy can potentially be restored under the Taylor principle. We investigate how our results depend on the timing of the interest-rate rule, alternative forms of bounded rationality, and the presence of a cost-channel of monetary policy. |
| Keywords: | Bounded rationality, Cognitive discounting, Equilibrium determinacy, Limited asset markets participation, Taylor principle, Monetary policy |
| JEL: | E31 E32 E44 E52 E71 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:emx:ceedoc:2025-02 |
| By: | Cristiano Cantore; Edoardo Leonardi |
| Abstract: | How does the monetary and fiscal policy mix alter households' saving incentives? To answer these questions, we build a heterogenous agents New Keynesian model where three different types of agents can save in assets with different liquidity profiles to insure against idiosyncratic risk. Policy mixes affect saving incentives differently according to their effect on the liquidity premium -- the return difference between less liquid assets and public debt. We derive an intuitive analytical expression linking the liquidity premium with consumption differentials amongst different types of agents. This underscores the presence of a transmission mechanism through which the interaction of monetary and fiscal policy shapes economic stability via its effect on the portfolio choice of private agents. We call it the 'self-insurance demand channel', which moves the liquidity premium in the opposite direction to the standard 'policy-driven supply channel'. Our analysis thus reveals the presence of two competing forces driving the liquidity premium. We show that the relative strength of the two is tightly linked to the policy mix in place and the type of business cycle shock hitting the economy. This implies that to stabilize the economy, monetary policy should consider the impact of the 'self-insurance' on the liquidity premium. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.17458 |
| By: | Ngoc-Sang Pham; Alexis Akira Toda |
| Abstract: | We revisit the classic paper of Tirole "Asset Bubbles and Overlapping Generations" (1985, Econometrica), which shows that the emergence of asset bubbles solves the capital over-accumulation problem. While Tirole's main insight holds with pure bubbles (assets without dividends), we argue that his original analysis with a dividend-paying asset contains some issues. We provide a fairly complete analysis of Tirole's model with general dividends such as equilibrium existence, uniqueness, and long-run behavior under weaker but explicit assumptions and complement with examples based on closed-form solutions. Some of the claims in Tirole (1985) require qualifications including (i) after the introduction of an asset with negligible dividends, the economy may collapse towards zero capital stock ("resource curse") and (ii) the necessity of bubbles is less clear-cut. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.16560 |
| By: | Aliaksandr Zaretski |
| Abstract: | I characterize optimal government policy in a sticky-price economy with different types of consumers and endogenous financial constraints in the banking and entrepreneurial sectors. The competitive equilibrium allocation is constrained inefficient due to a pecuniary externality implicit in the collateral constraint and other externalities arising from consumer type heterogeneity. These externalities can be corrected with appropriate fiscal instruments. Independently of the availability of such instruments, optimal monetary policy aims to achieve price stability in the long run and approximate price stability in the short run, as in the conventional New Keynesian environment. Compared to the competitive equilibrium, the constrained efficient allocation significantly improves between-agent risk sharing, approaching the unconstrained Pareto optimum and leading to sizable welfare gains. Such an allocation has lower leverage in the banking and entrepreneurial sectors and is less prone to the boom-bust financial crises and zero-lower-bound episodes observed occasionally in the decentralized economy. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.16575 |
| By: | Marco Carli (DEF, University of Rome "Tor Vergata") |
| Abstract: | Agents may be unsure about the productive potential of green technology and of the non-polluting sector due to imprecise information or misguiding news. I study the impact of this deep uncertainty in the context of the transition to a low-carbon economy in a dynamic stochastic general equilibrium model with polluting and green sectors and agents who, due to their ambiguity aversion, take decisions under pessimistic expectations about the future productivity of the latter sector. In the short term, losses of confidence can shift the balance of the economy in favor of investment in the polluting sector and lead to an increase in emissions. Coupling environmental tax and green subsidy can partially counteract this imbalance when the long-run forecast of agents ends up realizing, while also avoiding delays in the green transition. A dynamic version of the policy mix is also able to mitigate the short-term effects of drops in confidence. |
| Keywords: | Business Cycle, Ambiguity, E-DSGE |
| JEL: | Q55 E32 |
| Date: | 2025–02–05 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:591 |
| By: | Axelle Ferriere (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, 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); Gaston Navarro (Federal Reserve Board) |
| Abstract: | Historically, large changes in U.S. government spending induced fiscal efforts that were not all alike, with some using more progressive taxes than others. We develop a heterogeneous-agent New Keynesian model to analyse how the distribution of taxes across households shapes spending multipliers. The model yields empirically realistic distributions in marginal propensities to consume and labour elasticities, which result in lower responsiveness to tax changes for higher-income earners. In turn, multipliers are larger when spending is financed with higher tax progressivity—that is, when the tax burden falls more heavily on higher-income earners. This result is historically material. We estimate that, on average, tax rates increased more for top-income than for bottom-income earners after a spending shock. Thus, the typical U.S. spending shock was financed with higher tax progressivity. We further exploit the historical variation in the financing of spending to estimate progressivity-dependent multipliers, which we find consistent with the model. |
| Keywords: | Fiscal stimulus, Government spending, Transfers, Heterogeneous agents |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:hal-04849051 |
| By: | Vedanta Dhamija; Ricardo Nunes; Roshni Tara |
| Abstract: | Housing is a closely monitored and prominent sector for households. We find that households tend to overweight house price expectations when forming inflation expectations with a coefficient of 25–45 percent, significantly above the weight of house prices in the inflation index. We first use two datasets, a multitude of controls, and an instrumental variable approach to address endogeneity. We then use a second strategy based on household heterogeneity. As expected, we find a significant effect of cognitive abilities and whether households moved house recently. We model this household behavior in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and show that overweighted sectors are disproportionately more important for monetary policy. |
| Date: | 2025–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1069 |
| By: | Iacopo Morchio; Christian Moser |
| Abstract: | Using linked employer-employee data from Brazil, we document a large gender pay gap due to women working at lower-paying employers. To interpret this fact, we develop an equilibrium search model with endogenous firm pay, amenities, and hiring. We provide a constructive proof of identification of all model parameters. The estimated model suggests that amenities are important for both men and women and that compensating differentials explain half of the gender pay gap. Equal-treatment policies partly close gender gaps but are not output- or welfare-improving. |
| Keywords: | wage inequality, amenities, equilibrium search model, linked employer-employee data, compensating differentials, taste-based discrimination, monopsony power |
| JEL: | E24 J16 J31 J32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11617 |
| By: | David L. Fuller; Guillaume Vandenbroucke |
| Abstract: | We present a novel theory of intergenerational persistence in college attainment that does not rely on credit constraints, parental transfers and investments, or persistence in innate ability. The gist of our theory is heterogeneity in time preferences, which are endogenous since parents can teach patience to their children before the children make their college decisions. We show, analytically, that the most patient parents are simultaneously more likely to have a college degree and to educate their children to be patient. Persistence follows. We also show that persistence occurs if and only if there is persistence in patience. So, our model rationalizes the view that long-run family factors matter for educational attainment. We embed our theory in a general equilibrium model which we calibrate to U.S. data. The model matches both college persistence and cross sectional inequality moments. We implement a policy experiment in which a college subsidy is financed via a proportional tax on labor income. The policy distorts intertemporal trade-offs and, hence, affects people differently depending on their patience. We find that the policy raises overall college attainment (individuals earn a BA) and its persistence. Specifically, it raises the likelihood of attaining a BA for individuals whose parents have a BA and it lowers that likelihood for individuals whose parents do not have a BA. This result differs from that of the existing literature where college subsidies alleviate borrowing constraints and tend to reduce intergenerational persistence. |
| Keywords: | endogenous preferences; intergenerational persistence; inequality; college choice |
| JEL: | E6 I2 J62 |
| Date: | 2025–02–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:99496 |
| By: | Juin-Jen Chang (Academia Sinica,); Jang-Ting Guo (Department of Economics, University of California Riverside); Wei-Neng Wang (National Taichung University of Science and Technology) |
| Abstract: | This paper examines the theoretical and quantitative interrelations between progressive taxation and after-tax income inequality within a one-sector endogenous growth model. In a simplified two-type version of the macroeconomy, we analytically show that higher fiscal progression leads to less unequal long-run gross/net income distributions, provided the general-equilibrium elasticity of aggregate labor supply surpasses a specific negative threshold. In addition, numerical simulations find that our calibrated economy under useless or useful government spending, together with (i) agents' intertemporal elasticity of consumption substitution taking on the highest empirically-plausible value and (ii) a lower-than-unitary elasticity of capital-labor substitution in production, is able to generate qualitatively as well as quantitatively realistic long-run disposable-income inequality effects of changing the tax progressivity vis-Ã -vis recent panel estimation results. |
| Keywords: | Progressive Taxation; Income Inequality; Endogenous Growth. |
| JEL: | D31 E13 H30 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ucr:wpaper:202503 |
| By: | Alessandra Fogli; Veronica Guerrieri; Mark Ponder; Marta Prato |
| Abstract: | Since the 1980s, the US has experienced not only a steady increase in income inequality, but also a contemporaneous rise in residential segregation by income. What is the relationship between inequality and residential segregation? How does it affect intergenerational mobility? We first document a positive correlation between inequality and segregation, both over time and across metro areas. We then develop a general equilibrium model where parents choose the neighborhood where they raise their children and invest in their children’s education. In the model, segregation and inequality amplify each other because of a local spillover that affects the return to education. We calibrate the model to a representative US metro in 1980 and use the micro estimates of neighborhood exposure effects in Chetty and Hendren (2018b) to discipline the strength of the local spillover. We first use the calibrated version of the model to explore the economy’s response to an unexpected skill premium shock. We find that segregation dynamics played a significant role in amplifying the increase in inequality and in dampening intergenerational mobility. We then use the model to explore the effects of policies designed to move poor families to better neighborhoods, like the Moving To Opportunity (MTO) program. We show that scaling up MTO policies induces general equilibrium effects that limit their efficacy. |
| Date: | 2025–01–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedmoi:99487 |
| By: | Julia Le Blanc; Jiri Slacalek; Matthew N. White |
| Abstract: | Homeownership rates and holdings of housing wealth differ immensely across countries. We specify and estimate a life cycle model with risky labor income and house prices in which households face a discrete–continuous choice between renting and owning a house, whose sale is subject to transaction costs. The model allows us to quantify three groups of explanatory factors for long-run, structural differences in the extensive and intensive margins of housing: the homeownership rate and the value of housing wealth of homeowners. First, in line with survey evidence, we allow for differences in expectations of house prices. Second, countries differ in the institutional set-up of the housing market: maximum loan–value ratio and costs of renting, maintaining, and selling a house. Third, we allow for differences in household preferences: the dispersion in discount factors, the share of housing expenditure, and the bequest motive. We estimate the model using micro data from five large economies and provide a decomposition to interpret what drives the cross-country differences in housing wealth. We find that all three groups of factors matter, although preferences less so. Differences in homeownership rates are strongly affected by (i) house price beliefs and (ii) the rental wedge, the difference between rents and maintenance costs, which reflects the quality of the rental market. Differences in the value of housing wealth are substantially driven by housing maintenance costs. |
| Keywords: | housing, homeownership, house price expectations, housing market institutions, cross-country comparisons |
| JEL: | D15 D31 D84 E21 G11 G51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11621 |
| By: | Joaquín Saldain |
| Abstract: | I study the welfare consequences of regulations on high-cost consumer credit in the United States. I estimate a heterogeneous-agents model with uninsurable idiosyncratic risk, risk-based pricing of loans, and preference heterogeneity including households with self-control issues. I find that one-third of high-cost borrowers suffer from self-control issues. Noncontingent regulatory borrowing limits have distributional consequences within households with self-control issues. High-income households benefit from restrictions on borrowing because they face loose price schedules from lenders that allow them to overborrow. Low-income households face tight individually targeted loan price schedules that limit households’ borrowing capacity so that borrowing restrictions cannot improve welfare over them. |
| Keywords: | Credit and Credit Aggregates; Financial markets; Interest rates |
| JEL: | E71 E2 G51 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-6 |
| By: | Barbara Annicchiarico (Department of Law, Roma Tre University); Cédric Crofils (LEDa, Paris-Dauphine and PSL Research Universities) |
| Abstract: | Using data from a selection of Latin American countries affected by El Ni˜no-Southern Oscillation climate phenomena, we observe that extreme weather events can be highly disruptive for an economy, particularly in the agricultural sector, while also giving rise to inflationary pressures. Motivated by these findings, this paper examines the optimal stabilization policies for a climate-vulnerable economy with two segmented sectors: agriculture (producing food) and manufacturing. In response to climate disasters affecting agriculture, it is found to be optimal to increase fiscal transfers to farmers while maintaining core inflation at its target level. Deviating from the optimal policy mix results in smaller welfare losses as long as core inflation remains stabilized. |
| Keywords: | Climate change; Physical risk; Dual Economy; Optimal Monetary and Fiscal Policy; E-DSGE modeling |
| JEL: | E32 E52 Q54 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2504 |
| By: | Giammario Impullitti; Pontus Rendahl |
| Abstract: | In recent decades, the United States has experienced a notable rise in markups, a slowdown in productivity growth, and an increase in wealth inequality. We present a framework that unifies these trends into a common driving force. In particular, increased barriers to entry raises markups and boost corporate profits. Rising profits elevates firm valuations, fuels the demand for capital, and drives up asset returns. At the same time, the reduction in competition stifles overall economic growth. Wealth inequality is shaped by the return gap, r - g, which represents the difference between asset returns and the economy’s growth rate. The rise in capital demand together with a reduction in growth leads to a widening of the return gap, which amplifies inequality by affecting the saving patterns of households in different ways across the wealth distribution, deepening the divide between the rich and the poor. These trends result in substantial welfare losses for the majority of households, while only the top 1%, and especially the top 0.1%, experience gains. |
| Keywords: | Market Power, Growth, Heterogeneous Agents, Wealth Distribution. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:not:notcfc:2025/01 |
| By: | Charles Bellemare; Ibrahima Sory Aissatou Diallo; Marion Goussé |
| Abstract: | In this paper we develop and estimate a job search model with matching and bargaining in the presence of employer taste-based discrimination. The model is estimated using a longitudinal panel data from Canada’s Survey of Labour and Income Dynamics (SLID). Estimates suggest that employer discrimination and individual labour costs explain the majority of labour market disparities between persons living with and without disabilities. We use our model to estimate several counterfactuals. We find that implementing a hiring wage subsidy policy could increase the employment rate of persons with disabilities by 7 percentage points. Eliminating discrimination, on the other hand, would have an even greater impact, raising the employment rate by 14 percentage points for men, and 19 percentage points for women. Combining both measures — removing discrimination and introducing a hiring wage subsidy — would lead to an employment rate increase of 20 percentage points for men, and 24 percentage points for women. This combined approach would significantly reduce the existing employment rate gap between persons with and without disabilities. In particular, the employment rate gap is predicted to fall to 33 percentage points for men (relative to 53 percentage points in the data) and to 13 percentage points for women (relative to 39 percentage points in the data). Dans cet article, nous développons et estimons un modèle de recherche d'emploi avec appariement et négociation en présence d'une discrimination fondée sur les préférences de l'employeur. Le modèle est estimé à l'aide d'un panel de données longitudinales provenant de l'Enquête sur la dynamique du travail et du revenu (EDTR) du Canada. Les estimations suggèrent que la discrimination de l'employeur et les coûts individuels du travail expliquent la majorité des disparités sur le marché du travail entre les personnes handicapées et non handicapées. Nous utilisons notre modèle pour estimer plusieurs scénarios contrefactuels. Nous constatons que la mise en œuvre d'une politique de subvention salariale à l'embauche pourrait augmenter le taux d'emploi des personnes handicapées de 7 points de pourcentage. L'élimination de la discrimination, quant à elle, aurait un impact encore plus important, augmentant le taux d'emploi de 14 points de pourcentage pour les hommes et de 19 points de pourcentage pour les femmes. La combinaison des deux mesures - élimination de la discrimination et introduction d'une subvention salariale à l'embauche - entraînerait une augmentation du taux d'emploi de 20 points de pourcentage pour les hommes et de 24 points de pourcentage pour les femmes. Cette approche combinée réduirait de manière significative l'écart de taux d'emploi existant entre les personnes handicapées et non handicapées. En particulier, l'écart de taux d'emploi devrait tomber à 33 points de pourcentage pour les hommes (par rapport à 53 points de pourcentage dans les données) et à 13 points de pourcentage pour les femmes (par rapport à 39 points de pourcentage dans les données). |
| Keywords: | Disability, discrimination, Job search models, Wage subsidies, Handicap, discrimination, Modèles de recherche d'emploi, Subventions salariales |
| Date: | 2025–02–05 |
| URL: | https://d.repec.org/n?u=RePEc:cir:cirwor:2025s-04 |
| By: | Edouard Challe (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); Mykhailo Matvieiev (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: | Episodes of low natural interest rates, even transitory, pose a challenge to monetary policy, by possibly causing the effective lower bound (ELB) on the policy rate to bind. Those episodes are more likely to occur not only when the natural rate is low on average but also when fluctuations around its average level are large. We study the responsiveness of the natural interest rate to structural aggregate shocks affecting the aggregate supply of and demand for savings. Using a quantitative overlapping-generations model, we trace back this responsiveness to the slopes of aggregate savings supply and demand curves and argue that both curves have likely flattened over the past four decades in the US This implies a greater sensitivity of the natural interest rate to structural shocks affecting the supply of and demand for aggregate savings – making it more likely, all else equal, that it fall into negative territory. |
| Keywords: | Natural interest rate, Intertemporal income effects, Overlapping-generations |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:pseptp:hal-04645669 |