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on Dynamic General Equilibrium |
| By: | Felipe Alves; Giovanni L. Violante |
| Abstract: | The current monetary policy framework of the Fed intends to be more ’inclusive’ by running the economy hot for longer during expansions. The logic of this strategy rests on Okun’s (1973) hypothesis that sustaining a ‘high-pressure economy’ persistently improves labor market outcomes of low-wage workers. To evaluate this conjecture, we develop a Heterogeneous Agent New Keynesian framework with a three-state frictional model of the labor market where low-skilled workers are more exposed to the business cycle and recessions have a long-lasting effect on their labor force participation and earnings, in line with the evidence. Under a canonical Inflation Targeting rule, the ZLB generates a deflationary bias and severely amplifies the persistent scars of recessions at the bottom of the wage distribution. The Lower-for-Longer strategy is an effective antidote to the ZLB-driven hysteresis and leads to notable earnings gains for low-wage workers and a reduction to overall earnings inequality. If pursued aggressively, however, the policy reverts the inflation bias from negative to positive. Since policymakers might prioritize differently inflation relative to inclusion, we conclude by quantifying the inflation-inclusion trade-off implied by various monetary policy rules. |
| JEL: | E10 E30 E5 J63 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33488 |
| By: | di Giovanni, Julian; Garcia Santana, Manuel Jose; Jeenas, Priit; Moral Benito, Enrique; Pijoan-Mas, Josep |
| Abstract: | This paper provides a framework to study how different allocation systems of public procurement contracts affect firm dynamics and long-run macroeconomic outcomes. It builds a novel panel dataset for Spain that merges public procurement data, credit register loan data, and quasi-census firm-level data. The paper provides evidence consistent with the hypothesis that procurement contracts act as collateral for firms and help them grow out of their financial constraints. The paper then builds a model of firm dynamics with asset- and earnings-based borrowing constraints and a government that buys goods and services from private sector firms, and uses it to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. The findings show that policies which promote the participation of small firms have sizeable macroeconomic effects, but the net impact on aggregate output is ambiguous. While these policies help small firms grow and overcome financial constraints, which increases output in the long run, these policies also increase the cost of government purchases and reduce saving incentives for large firms, decreasing the effective provision of public goods and output in the private sector, respectively. The relative importance of these forces depends on how the policy is implemented and the type and strength of financial frictions. |
| Date: | 2023–07–24 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10522 |
| By: | Bilal Islah; Bar Light |
| Abstract: | Large dynamic economies with heterogeneous agents and aggregate shocks are central to many important applications, yet their equilibrium analysis remains computationally challenging. This is because the standard solution approach, rational expectations equilibria require agents to predict the evolution of the full cross-sectional distribution of state variables, leading to an extreme curse of dimensionality. In this paper, we introduce a novel equilibrium concept, N-Bounded Foresight Equilibrium (N-BFE), and establish its existence under mild conditions. In N-BFE, agents optimize over an infinite horizon but form expectations about key economic variables only for the next N periods. Beyond this horizon, they assume that economic variables remain constant and use a predetermined continuation value. This equilibrium notion reduces computational complexity and draws a direct parallel to lookahead policies in reinforcement learning, where agents make near-term calculations while relying on approximate valuations beyond a computationally feasible horizon. At the same time, it lowers cognitive demands on agents while better aligning with the behavioral literature by incorporating time inconsistency and limited attention, all while preserving desired forward-looking behavior and ensuring that agents still respond to policy changes. Importantly, in N-BFE equilibria, forecast errors arise endogenously. We measure the foresight errors for different foresight horizons and show that foresight significantly influences the variation in endogenous equilibrium variables, distinguishing our findings from traditional risk aversion or precautionary savings channels. This variation arises from a feedback mechanism between individual decision-making and equilibrium variables, where increased foresight induces greater non-stationarity in agents' decisions and, consequently, in economic variables. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.16536 |
| By: | Zahid, Hamza |
| Abstract: | This paper studies the effects of U.S. energy shocks on international economic activity and the world oil market. The analysis uses a set of factor-augmented vector autoregressions to identify and compare the impact of unanticipated changes in U.S. energy efficiency and U.S. oil supply over 1980Q1–2019Q4. The identification strategy relies on the fact that positive shocks in both cases decrease the real price of oil and increase global gross domestic product (GDP), while generating opposite implications for world oil production and consumption. On average, U.S. energy efficiency shocks have a larger impact on the real price of oil and global GDP than U.S. oil supply shocks. Historical decompositions suggest that in 2010–19, U.S. oil supply shocks increased GDP by 2 percent, while (negative) energy efficiency shocks decreased global GDP by 1.3 percent. The latter effect dominated during the second shale boom in 2017–19. Considerable heterogeneity exists in cross-country responses, with favorable implications for GDP in advanced and emerging market oil importers and adverse implications for oil exporters. The empirical findings are interpreted through the lens of a dynamic general equilibrium multi-country model that features a global oil market and where key parameters are estimated using indirect inference. |
| Date: | 2023–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10402 |