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on Dynamic General Equilibrium |
| By: | Minamo MIKOSHIBA |
| Abstract: | This study assesses the welfare implications of Japan’s public long-term care insurance (LTCI) system, focusing on the significance of a universal insurance system with in-kind benefits, in a rich overlapping generations model characterized by two-sided altruism. The welfare effects of the LTCI reform are influenced by caregiver labor productivity and generosity of the means-tested welfare program. When caregiver productivity is low, universal LTCI offering cash benefits can improve welfare more effectively than a system with in-kind benefits, despite the positive impact of the in-kind policy on caregiver labor supply. Cash benefits can maintain positive welfare effects while simultaneously reducing government spending on LTCI. Eliminating universal LTCI transfers the burden of care to families and increases reliance on welfare programs, partially offsetting reductions in government expenditure. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25030 |
| By: | Masashige Hamano; Philip Schnattinger; Kongphop Wongkaew |
| Abstract: | We develop a New Keynesian model to analyze how shifts in consumer preferences toward online retailers affect pricing dynamics and inflation. Our framework incorporates goods market search frictions between retailers and producers, with distinct search efficiencies for online and brick-and-mortar retailers. Since search incurs costs, retailers pass these costs on to consumers, creating a wedge between consumer and producer prices. Our analysis identifies two key channels through which these frictions influence inflation: the composition channel, driven by the reallocation of purchases between retailer types with different search efficiencies, and the arbitrage channel, reflecting changes in market tightness due to shifting demand. Bayesian estimation shows that increased consumer preference for online retail lowers CPI inflation by increasing the share of goods purchased through search-efficient retailers while reducing market tightness in brick-and-mortar retail, thereby narrowing the price wedge. |
| Keywords: | Search and matching friction; CPI inflation; Firm dynamics |
| JEL: | E31 E52 J64 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:pui:dpaper:230 |
| By: | Philippe Andrade; Erwan Gautier; Eric Mengus; Emanuel Moench |
| Abstract: | We study beliefs about fiscal dominance using a survey of German households. We first design and conduct a randomized controlled trial to identify how fiscal news impacts individuals’ debt-to-GDP and inflation expectations. We document that the link between debt and inflation crucially depends on individuals’ views about the fiscal space. News leading individuals to expect a higher debt-to-GDP ratio makes them more likely to revise their inflation expectations upward. These average effects are driven by individuals who think that fiscal resources are stretched. By contrast, individuals who think there is fiscal space do not associate debt with inflation. We then introduce a New Keynesian model in which agents have heterogeneous beliefs about the fiscal space. We show that such a heterogeneity of beliefs implies a policy tradeoff for the central bank: Agents who expect fiscal dominance in the future exert upward pressure on inflation, which the central bank should partially tolerate due to the real costs of completely stabilizing prices. |
| Keywords: | inflation expectations; fiscal and monetary policy; heterogeneous beliefs; randomized controlled trial; survey data |
| JEL: | E31 E52 H60 D84 |
| Date: | 2025–03–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:99721 |
| By: | Diaf, Sami; Zakane, Ahmed |
| Abstract: | Gauging the impact of oil price variations on small, oil-exporting countries has been heavily investigated under the umbrella of monetary policy interventions, using a standard general equilibrium framework. For some countries, the monetary policy coordinates with fiscal policy to deliver a better response to external oil shocks in an attempt to make the economic activity resilient to external backlash. This paper investigates the policy mix effectiveness in a small open economy, namely Algeria, and its ability to mitigate a negative oil price shock, using a DSGE model that maps several frictions found in single-commodity economies as for a managed exchange rate regime, the existence of a foreign exchange market accessible to households and a sovereign wealth fund. Simulations show countercyclical fiscal measures (increase in government spending) coupled with monetary interventions have no expansionary effects on output, but still necessary to maintain a resilient economic activity especially for the non-oil sector. Under the sticky prices assumption, households tend to lower their investment and consumptions levels, in addition of using their foreign currency savings as buffer. This results in alleviating potential pressures on the supply side and preventing possible inflation spikes. Findings confirm the effectiveness of a monetary policy based on targeting export products, to better handle the negative terms of trade shock via a slight exchange rate depreciation. However, the fiscal dominance in the policy-mix leads to the accumulation of public debt, which might require fiscal consolidation during protracted periods of declining oil prices. |
| Keywords: | monetary policy; fiscal policy; exchange rate; oil prices; external shock |
| JEL: | E31 E52 E63 F31 F41 H54 H63 Q35 Q38 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:083 |
| By: | Armangue-Jubert, Tristany (Universitat Autònoma de Barcelona and Barcelona School of Economics); Pietrobon, Davide (Department of Economics, Lund University); Ruggieri, Alessandro (CUNEF Universidad) |
| Abstract: | We argue that capital misallocation arises endogenously due to incomplete consumption insurance. We model risk-averse entrepreneurs with heterogeneous productivity who face idiosyncratic output shocks and choose how much capital to rent before uncertainty unfolds. We show that incomplete markets operate as correlated distortions, leading to a reallocation of capital from more to less productive firms relative to the complete markets benchmark. Using Portuguese administrative data, we document that capital misallocation is greater in locations and industries with higher output shock volatility, consistent with our framework. Leveraging the structure of the model, we show that completing insurance markets increases aggregate productivity and income by 64% and 97%, respectively. |
| Keywords: | Insurance; volatility; misallocation; distortions; efficiency. |
| JEL: | D61 E22 L23 L26 |
| Date: | 2025–02–26 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:lunewp:2025_002 |
| By: | Guido Ascari; Andrea Colciago; Timo Haber; Stefan Wöhrmüller |
| Abstract: | The EU aims for 42.5% green energy consumption by 2030. What are the effects of the European green transition on inequality? We answer this question using a heterogeneous-agent model with non-homothetic preferences for energy and non-energy goods, calibrated to European data. We study the impact of an increase in carbon taxes designed to meet the EU target under different revenue-recycling strategies. Redistributing tax revenues via uniform transfers reduces consumption inequality, shifts the welfare burden to high-income households, but leads to significant output losses. Subsidizing green energy producers boosts energy production, reduces output losses, and requires a smaller carbon tax to meet the EU target. However, it increases consumption and income inequality, with the highest welfare costs borne by low-income and asset-poor households. Our findings highlight key trade-offs between equity and efficiency in green transition policies. |
| Keywords: | Green Transition; Inequality; Carbon Pricing |
| JEL: | Q43 Q52 E6 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:830 |
| By: | Stefano Maria Corbellini |
| Abstract: | This paper analyzes the monetary policy trade-off between defending purchasing power of consumers and keeping moderate debt cost for borrowers, in the framework of a heterogeneous agent New Keynesian open economy hit by a foreign energy price shock. Raising the interest rate indeed combats the loss in purchasing power due to the energy shock through a real exchange rate appreciation: however, this comes at the expense of higher interest payments for debtors. The trade-off can be resolved by adopting a milder interest rate policy during the crisis in exchange for a prolonged contraction beyond the energy shock time span. This interest rate smoothing approach allows to still experience a real appreciation today, while spreading the impact on debt costs more evenly over time. This policy counterfactual is analyzed in a quantitative model of the UK economy under the 2022-2023 energy price hike, where the loss of consumers’ purchasing power and the vulnerability of mortgage costs to higher policy rates have been elements of paramount empirical relevance. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2502 |
| By: | Mbara, Gilbert |
| Abstract: | We investigate the notable decline in wealth and income inequality in Kenya over the 10-year period between 2005 and 2015. Using a calibrated continuous time heterogeneous agent model, we attribute up to 92% of the variation in top wealth inequality to a persistent but slow increase in the return to capital, a low risk free rate, and rising effective income tax rates. Our study suggests that a macroeconomic environment characterized by low risk-free interest rates anchored by low debt-to fiscal revenue ratios are key to reducing both wealth and income inequality. |
| Date: | 2024–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:aer:wpaper:aeeab0f8-4a1f-430c-90d1-58a06c9a0b2f |
| By: | Keuschnigg, Christian; Stalenis, Giedrius Kazimieras |
| Abstract: | We study a small open economy that must implement an emissions reduction plan and eventually phase out fossil fuel. R&D leads to the design of energy saving new machines. Endogenous scrapping eliminates old inefficient machines. We identify two distortions that delay the adoption and diffusion of energy saving technology: scrapping of old equipment and investment in new machines are both too low. The optimal policy to manage the energy transition thus combines a carbon tax with a profit tax to speed up exit, and an investment subsidy to speed up investment in new equipment. The optimal policy increases capital turnover, the diffusion of energy saving technology, and thereby mitigates the costs of the energy transition. Compared to a policy that exclusively relies on carbon taxes, the optimal policy could reduce the GDP loss of moving to net zero from 7.8 to 6.1% of GDP. |
| Keywords: | Energy saving innovation, vintage capital, emissions reduction |
| JEL: | D21 D62 H23 O33 Q41 Q43 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:usg:econwp:2025:03 |
| By: | Fabio Blasutto; Egor Kozlov |
| Abstract: | Cohabiting and married couples in the US exhibit dramatically different outcomes, including higher dissolution and women’s employment rates among cohabitants. These differences may reflect selection effects or behavioral responses to the distinct contract rules governing marriage and cohabitation, which shape the rights and costs of dissolving a partnership. To disentangle these mechanisms, we develop a structural life-cycle model of endogenous partnership formation and dissolution and estimate it using two new facts, obtained by exploiting the staggered introduction of unilateral divorce across the US states. First, the reform increases the likelihood of singles choosing cohabitation over marriage, suggesting that changes in the marital contract have eroded the commitment-based gains from marriage. Second, cohabitations formed post-reform last longer, indicating a shift in selection patterns. Our model suggests that contract rules account for up to 30% of the differences in the rate of dissolution, women’s employment, and risk sharing between cohabitation and marriage, implying that selection drives most of these disparities. Lastly, we analyze the effect of eliminating joint taxation, and find that the increase in women’s employment following the reform is partly explained by couples deciding to cohabit rather than to marry. |
| Keywords: | Cohabitation, Consumption insurance, Divorce, Limited Commitment, Marriage, Structural Estimation |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:eca:wpaper:2013/388775 |