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on Dynamic General Equilibrium |
| By: | Masashige Hamano (Faculty of Political Science and Economics, Waseda University); Yuki Murakami (Graduate School of Economics, Waseda University) |
| Abstract: | We employ a small open economy model with debt-deflation, where agents form expectations regarding sudden stops—typically characterized by a combination of current account reversals and sharp output declines. To this end, we construct a rational expectations regime switching DSGE model with occasionally binding collateral constraints. In environments with frequent sudden stops, agents anticipate future occurrences more strongly. Heightened expectations of losing access to international financial markets prompt collateral-constrained households to increase precautionary savings. These additional savings help sustain consumption and support collateral prices during turbulent periods, counteracting capital flight. However, as sudden stops become more frequent, the welfare loss due to pecuniary externalities intensifies, necessitating stronger macroprudential capital control measures. We provide empirical evidence from emerging economies that aligns with our theoretical findings. |
| Keywords: | Small open economy, capital flows, regime switching |
| JEL: | F41 F44 E44 G01 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2422 |
| By: | Francisco E. Ilabaca; Greta Meggiorini |
| Abstract: | This paper evaluates the implications of introducing bounded rationality into a New Keynesian model with trend inflation. |
| Keywords: | determinacy, indeterminacy, bayesian-estimation, inflation-targeting, departures-from-rational-expectations |
| Date: | 2023–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:wpaper:23-09 |
| By: | David Andolfatto; Fernando M. Martin |
| Abstract: | We use an analytically tractable DSGE model to study the surge in the cost of living in the wake of the COVID-19 pandemic. A calibrated version of the model is used to assess the conduct of US monetary and fiscal policy over the 2020-2024 period. The model is also used to estimate the economic and welfare consequences of alternative monetary and fiscal policies. The calibrated model suggests that while the extraordinary fiscal transfers made in 2020-21 generally improved economic welfare, they were significantly larger than needed. These welfare gains came primarily in the form of insurance, not stimulus. For the observed fiscal policy, an optimal monetary policy would not have resulted in a significantly different inflation dynamic. Although monetary policy could have prevented the inflation surge with sufficient fiscal support, such a policy would have required a permanently higher real rate of interest and a permanent recession. Finally, our model suggests that while observed monetary policy muted the inflation dynamic, it did not significantly alter the total amount of inflation experienced. Finally, the COVID-19 inflation would have been mean-reverting even without an aggressive tightening of monetary policy. |
| Keywords: | monetary policy; fiscal policy; inflation; price level; COVID-19 |
| JEL: | E40 E52 E60 E63 E65 |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:99576 |
| By: | Lisa Martin; Mr. Christopher S Adam; Douglas Gollin |
| Abstract: | We develop a spatial dynamic general equilibrium model of a small open agricultural economy to study the impact of global food, fuel and fertilizer price shocks on consumption patterns of heterogeneous households located in different regions, under alternative fiscal responses, including direct price subsidies and household transfers. We show strong spatial heterogeneity in response to shocks, with associated implications for welfare. In particular, while urban households’ consumption baskets are more exposed to the direct effects of global food price shocks, remote rural households’ production and consumption are more exposed to supply-side dislocations associated with shocks to fuel and fertilizer prices. |
| Keywords: | Spatial General Equilibrium; Import Price Shocks; Household Heterogeneity; Food Security; Fiscal Policy |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/039 |
| By: | Nazim Tamkoc |
| Abstract: | This paper focuses on the role of development in informality through higher wages and expanded production possibilities. First, it uses informal, plant-level survey data across countries to document that on average, richer countries have smaller informal, unregistered plants in terms of employment. This negative relationship holds even after controlling for plant-level characteristics. Then, a dynamic general equilibrium model with incomplete tax enforcement is developed such that formal and informal plants coexist in equilibrium. The model allows for two groups of agents operating in the informal sector: those with lower abilities than workers, and those with abilities falling between workers and formal managers. In the model, when plants become more productive, some agents operating informally choose to be workers and some of them transition into formality due to higher wages and better production possibilities, which decreases the mean size of informal plants. The quantitative results indicate that around 30 percent of the increase in aggregate output due to higher productivity is associated with a roughly one-quarter decline in the mean size of informal plants. |
| Date: | 2024–10–23 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10956 |
| By: | Huber, Johannes; Meyer-Gohde, Alexander |
| Abstract: | The standard approach to solving linear DSGE models is to apply the QZ method. It is a one-shot algorithm that leaves the researcher with little alternative than to seek a different algorithm should the result be numerically unsatisfactory. We develop an iterative implementation of QZ that delivers the standard result as its first iteration and further refinements at each subsequent iteration. We demonstrate that our algorithm successful corrects for accuracy losses identified in particular cases of a macro finance model and does not erroneously attempt to refine sufficiently accurate solutions. |
| Keywords: | Numerical accuracy, DSGE, Solution methods |
| JEL: | C61 C63 E17 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:311846 |
| By: | Lin, Fan; Xie, Danyang |
| Abstract: | This paper develops a dynamic general equilibrium integrated assessment model (DGE-IAM) with endogenous technological changes to explore strategies for China to optimize social welfare, mitigate climate change, and transition to green development. We analyze three solutions and provide corresponding projections of their outcomes: market solution (no intervention), carbon tax solution (carbon taxes and rebates), and green technology solution (induced R\&D investment in green knowledge). While the temperature rise will reach $4.2^\circ C$ in market solution by the next century, it is reduced to $4.0^\circ C$ in the carbon tax solution with social welfare gains. In the green technology solution, economic growth pattern is almost intact with welfare gains while carbon emission approaches net-zero and climate change is curbed and even repairs consistently lower than $1^\circ C$ in centuries. Our results highlight the potential of R\&D investment in green knowledge, e.g., the modern new energy sector, as crucial for China's green transition in the long run with possibly welfare gains. We emphasize the need for immediate and intensive actions and offer valuable insights for policymakers addressing climate change and promoting a sustainable future for China. |
| Keywords: | Climate Change, Endogenous Technological Changes, Induced R\&D, China |
| JEL: | E27 O33 O44 Q54 |
| Date: | 2024–07–30 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123556 |
| By: | Chan, Jenny (Bank of England) |
| Abstract: | Sentiments, or beliefs about aggregate demand, can be self-fulfilling in models departing slightly from the complete information benchmark in the New Keynesian framework. Through its effect on aggregate variables, the policy stance determines the degree of complementarity in firms’ production (pricing) decisions and consequently, the precision of endogenous signals that firms receive. As a result, aggregate fluctuations can be driven by both fundamental and non-fundamental shocks. The distribution of non-fundamental shocks is endogenous to policy, introducing a novel trade-off between stabilising output and inflation. Both strong inflation targeting and nominal flexibilities increase the variance of non-fundamental shocks, which are shown to be suboptimal. Moreover, the Taylor principle is no longer sufficient to rule out indeterminacy. Instead, an interest rate rule that places sufficiently low weight on inflation eliminates non-fundamental volatility and thereby the output-inflation trade-off. |
| Keywords: | New Keynesian; sunspots; animal spirits; rational expectations; optimal monetary policy; indeterminacy |
| JEL: | E31 E32 E52 E63 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1106 |
| By: | Da Costa, Carlos; Maestri, Lucas; Santos, Cezar |
| Abstract: | When searching for employment, workers consider non-wage job characteristics, such as effort requirements or amenities. We study an environment where unemployed workers search for jobs of different quality in a labor market characterized by directed search. In equilibrium, firms are more likely to post vacancies for low-quality jobs, as these are more profitable. Hence, high-quality jobs are hard to come across. The non-observability of these employment contracts influences the optimal unemployment insurance (UI) program, leading to distortionary taxation. Calibrating the model to the U.S. economy, we find that non-observability of employment contracts results in faster declining UI benefits, steeper taxes upon re-employment, distortionary taxation, and a 10.5% costlier program than an observable contract scenario providing equal welfare. |
| JEL: | H21 J64 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13974 |
| By: | Yan Bai; Patrick J. Kehoe; Pierlauro Lopez; Fabrizio Perri |
| Abstract: | Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads’ fluctuations. Over the whole 1994-2024 period, however, Northern shocks account for less than 20% of these fluctuations. |
| JEL: | F34 F41 F44 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33441 |
| By: | Le blanc, Julia (European Commission - JRC); Slacalek, Jiri (European Central Bank); White, Matthew N. (Econ-ARK) |
| 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 discreteâcontinuous 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 loanâvalue 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) therental wedge, the difference between rents and maintenance costs, which reflects the qualityof 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: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:jrs:wpaper:202501 |
| By: | Frederik Almar; Benjamin Friedrich; Ana Reynoso; Bastian Schulz; Rune Vejlin |
| Abstract: | This paper studies how family and firm investments interact to explain gender gaps in career achievement. Using Danish administrative data, we first document novel evidence of this interaction through a “spousal effect” on firm-side career investments. This effect is accounted for by family labor supply choices that shape worker characteristics, which then influence firms’ training and promotion decisions. Our main theoretical contribution is to develop a quantitative life cycle model that captures these family-firm interactions through household formation, families’ joint career and fertility choices, and firms’ managerial training and promotion decisions. We then use the estimated model to show that the interaction between families and firms in the joint equilibrium of labor and marriage markets is important when evaluating firm-side and family-side policy interventions. We find that gender-equal parental leave and a managerial quota can both improve gender equality, but leave implies costly skill depreciation, whereas the quota raises aggregate welfare, in part through adjustments in marital sorting towards families that invest in women. |
| Keywords: | gender inequality, career investments, firm training, management promotions, marriage market matching |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11659 |