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on Dynamic General Equilibrium |
| By: | Vasileios Karaferis (School of Economics, University of Edinburgh) |
| Abstract: | This paper investigates whether redistributive fiscal policy can be reconciled with macroeconomic efficiency in a heterogeneous agent economy featuring labour market frictions and monetary policy trade-offs. The paper develops a Finitely-Lived Agent New Keynesian (FLANK) model with search-and-matching frictions and a novel participation margin, where households face a constant probability of permanent exclusion from both labour and financial markets. This structure generates persistent inter-generational and cross-sectional inequality and breaks the Ricardian equivalence through finite lifespans and realistic levels of government debt. The model is used to examine the transitional dynamics following a stylized fiscal expansion in the form of transfers to inactive households. The findings suggest that a dovish monetary stance—characterized by a more muted response to inflation—consistently improves labour market outcomes and mitigates inefficiencies, even when fiscal interventions fail to stimulate aggregate demand. These results imply that accommodative monetary policy can enhance the effectiveness of redistribution in heterogeneous-agent environments. |
| Keywords: | Heterogeneous Agents; Monetary Policy; Fiscal Policy; Inequality; Redistribution; Labour Market Frictions |
| JEL: | E21 E24 E52 E62 D63 D91 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:edn:esedps:319 |
| By: | Othman Bouabdallah; Pascal Jacquinot; Ante Šterc |
| Abstract: | We develop a Heterogeneous Agents New Keynesian model with a detailed outline (block) of financial intermediation and plausible marginal propensities to consume (MPC). Accounting for heterogeneous MPCs allows plausible predictions of the effectiveness of fiscal policy in the short and long term. Using our model, calibrated to the U.S. economy, we show that government spending has the largest short- and long-term effect on output when financed by debt, with gradual repayment through lump-sum transfers/taxes. We find a novel, non-linear, and non-monotonic relationship between the effectiveness of the fiscal stimulus, income tax progressivity, and the debt-to-GDP ratio, absent in representative or two-agent models. Lastly, the model suggests limited effectiveness of the fiscal stimulus and higher inflationary pressure for highly indebted economies. |
| JEL: | D31 E21 G11 H31 H63 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202508 |
| By: | Rubén Domínguez-Díaz (BANCO DE ESPAÑA); Donghai Zhang (NATIONAL UNIVERSITY OF SINGAPORE AND UNIVERSITY OF BONN) |
| Abstract: | We assess the macroeconomic effects of unemployment insurance (UI) extensions in the US through a novel identification scheme based on the design of the UI policy rule. Our approach exploits differences in the effects of demand shocks across US states with different responses in UI duration. Our results indicate that UI extensions have a significant stabilization role. We then show that a New Keynesian small-open-economy model with imperfect insurance against unemployment aligns with our empirical findings. Finally, we use the model to recover the implied UI multiplier, quantify the different transmission channels of UI extensions and uncover their union-wide effects. |
| Keywords: | unemployment insurance, UI extensions, heterogeneous agents |
| JEL: | E62 E24 E21 E30 J60 R12 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2521 |
| By: | Uluc Aysun (Department of Economics, College of Business Administration, University of Central Florida); Sewon Hur (Federal Reserve Bank of Dallas); Zeynep Yom (Department of Economics, Villanova School of Business, Villanova University) |
| Abstract: | We build and embed an endogenous growth mechanism into an otherwise standard New Keynesian DSGE model to investigate the transmission of monetary policy. Endogenous growth is determined by the R&D expenditures of monopolistically competitive firms and monetary policy, through its effects on these expenditures, can have supply-side effects in addition to its usual demand-side effects. After solving the model and estimating it with a Bayesian methodology, we find that R&D activity amplifies the responses to monetary policy shocks. An empirical investigation that uses firm-level COMPUSTAT data supports this result. Specifically, we find that monetary policy transmission operates more strongly through R&D intensive firms. |
| Keywords: | R&D, endogenous growth, DSGE, monetary policy, COMPUSTAT |
| JEL: | E24 E32 O30 O33 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:vil:papers:61 |
| By: | De Grauwe, Paul; Foresti, Pasquale |
| Abstract: | We study the role of agents’ limited cognitive capabilities, combined with fiscal and monetary policies, in the generation of a deflationary trap. In order to do so, we employ a heterogeneous expectations New Keynesian model in which the agents’ forecasts are based on simple heuristics. Thanks to a learning mechanism, the model is able to generate endogenous changes in agents’ beliefs that we prove to have a crucial role in the characterization of a deflationary trap. We show that the probability of hitting the zero lower bound on the interest rate, and potentially entering a deflationary trap, is not only affected by the inflation target set by the central bank. This probability is also influenced by the governments’ focus on public debt stabilization and by the agents’ memory and willingness to learn. We also show that the impact of these factors is very significant for inflation targets in the range 0–3%, while an inflation target of 4% isolates the system from the zero lower bound problem. |
| Keywords: | agents’ beliefs; deflationary trap; monetary–fiscal policy; zero lower bound |
| JEL: | E52 E61 F33 F36 |
| Date: | 2025–04–09 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:127946 |
| By: | Mr. Eugenio M Cerutti; Antonio I Garcia Pascual; Yosuke Kido; Longji Li; Mr. Giovanni Melina; Ms. Marina Mendes Tavares; Mr. Philippe Wingender |
| Abstract: | This paper examines the uneven global impact of AI, highlighting how its effects will be a function of (i) countries’ sectoral exposure to AI, (ii) their preparedness to integrate these technologies into their economies, and (iii) their access to essential data and technologies. We feed these three aspects into a multi-sector dynamic general equilibrium model of the global economy and show that AI will exacerbate cross-country income inequality, disproportionately benefiting advanced economies. Indeed, the estimated growth impact in advanced economies could be more than double that in low-income countries. While improvements in AI preparedness and access can mitigate these disparities, they are unlikely to fully offset them. Moreover, the AI-driven productivity gains could reduce the traditional role of exchange rate adjustments due to AI’s large impact in the non-tradable sector—a mechanism akin to an inverse Balassa-Samuelson effect. |
| Keywords: | Artificial Intelligence; Productivity; Multi-Region DSGE Model |
| Date: | 2025–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/076 |
| By: | Jesper Lindé; Marcin Kolasa; Stefan Laseen |
| Abstract: | This paper provides a comprehensive assessment of the macroeconomic and fiscal impact of unconventional monetary tools in small open economies. Using a DSGE model, we show that the exchange rate plays a critical role to amplify the favourable impact of unconventional monetary policy while it attenuates the effectiveness of conventional fiscal policy to jointly boost output and inflation. We then use the model as a laboratory to do a case study of the Swedish Riksbank asset purchases and negative policy rates 2015-2019. We find that the Riksbank unconventional policy measures provided meaningful macroeconomic stimulus to economic activity and inflation, with the dual benefit of reducing overall government debt by about 5 percent of GDP. If conventional fiscal policy had been used to provide a commensurate output boost, inflation would have risen notably less, and the fiscal cost would have amounted to a deterioration of the government debt position with nearly 8 percent of GDP. |
| Keywords: | Monetary Policy; Asset Purchases; Quantitative Easing; Negative Interest Rate Policy; Fiscal Policy |
| Date: | 2025–04–04 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/066 |
| By: | Kolasa, Marcin (International Monetary Fund); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Sveriges Riksbank and International Monetary Fund) |
| Abstract: | This paper provides a comprehensive assessment of the macroeconomic and fiscal impact of unconventional monetary tools in small open economies. Using a DSGE model, we show that the exchange rate plays a critical role to amplify the favourable impact of unconventional monetary policy while it attenuates the effectiveness of conventional fiscal policy to jointly boost output and inflation. We then use the model as a laboratory to do a case study of the Swedish Riksbank asset purchases and negative policy rates 2015-2019. We find that the Riksbank unconventional policy measures provided meaningful macroeconomic stimulus to economic activity and inflation, with the dual benefit of reducing overall government debt by about 5 percent of GDP. If conventional fiscal policy had been used to provide a commensurate output boost, inflation would have risen notably less, and the fiscal cost would have amounted to a deterioration of the government debt position with nearly 5 percent of GDP. |
| Keywords: | Monetary Policy; Asset Purchases; Quantitative Easing; Negative Interest Rate Policy; Fiscal Policy |
| JEL: | D44 E52 E58 E63 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0450 |
| By: | Hochmuth, Philipp (Oesterreichische Nationalbank); Krusell, Per (Stockholm University); Mitman, Kurt (Stockholm University) |
| Abstract: | The EU has embarked on an ambitious path toward climate neutrality. How difficult will this transition be for the population as a whole and different subsets of consumers? This paper investigates this question using a dynamic general equilibrium model that captures a key feature of energy consumption: the relative energy content in one's consumption basket falls significantly as a function of one's relative income. Thus, poorer consumers are expected to be hit harder by the higher energy prices that we anticipate over the next few decades. In the model, energy---a complementary input to capital and labor---can be produced either using fossil fuel or a "green'' technology. We represent the EU policy in terms of a tax on fossil fuel and show that the European Commission's Fit-for-55 package implies a 168% tax on the fossil-based technology. The output losses from this tax are substantial, and GDP is 9.3% lower in the new steady state. The burden falls primarily on the poor agent who is 50% more worse off than the rich agent. The output losses can be compensated for if the economy achieves a 1.49% annual increase in energy efficiency as outlined in the Fit-for-55 package. |
| Keywords: | inequality, green transition, Fit-for-55 |
| JEL: | E61 Q43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17861 |
| By: | Domenica Di Virgilio; Duarte Maia |
| Abstract: | In this paper, the authors introduce a dividend prudential target rule (DPT) à la Muñoz (2021) in a DSGE model, by Clerc et al. (2015), where banks can default, and extend the model by introducing bankers’ preference for dividend smoothing. Both versions of the model - the original by Clerc et al. (2015) and the extension to banker dividend smoothing – shed light on the same transmission channels of the DPT. However, the results are quantitatively more pronounced in the extended version. The results show the beneficial impact of the DPT on bank resilience and in mitigating the credit downturn and supporting the economic recovery in response to shocks, originating either from the financial system or from the real economy. Moreover, the paper shows the existence of complementarities between the DPT and the countercyclical capital buffer (CCyB) in smoothing the credit cycle and in improving the social welfare. Compared to the original version of the model, in presence of the more realistic assumption of bankers’ preference for dividend smoothing the benefits of the synergy between the CCyB and the DPT rule appear to be bigger. |
| JEL: | C53 G21 G28 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202504 |
| By: | Miroslav Gabrovski (University of Hawaii at Manoa); Athanasios Geromichalos (University of California Davis); Lucas Herrenbrueck (Simon Fraser University); Ioannis Kospentaris (Athens University of Economics and Business); Sukjoon Lee (New York University Shanghai) |
| Abstract: | The corporate bond market provides a vital avenue for firms to cover their borrowing needs. Moreover, the ease with which corporate bonds can be (re)traded in secondary markets affects their liquidity and, effectively, the rate at which corporations can borrow. However, the literature has also pointed out that a well-functioning secondary market can depress money demand and hurt economic activity. We perform a careful quantitative analysis of the channels through which secondary market liquidity affects the real economy in the context of a New Monetarist model. We find that a deterioration in secondary market liquidity has a negative but modest impact on output and unemployment. This small net effect, however, conceals much larger underlying forces that operate in opposite directions and largely offset each other. We also show that the results of our decomposition exercise depend on the inflation rate. Our findings highlight the importance of studying investor portfolios together with asset prices to fully capture the interaction between financial markets and the real economy. |
| Keywords: | Search frictions, Unemployment, Corporate bonds, Money, Liquidity, Inflation 6. E24, E31, E41, E44. |
| JEL: | E24 E31 E41 E44 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:hai:wpaper:202501 |
| By: | Martin Drees |
| Abstract: | This paper resolves Aaron's social insurance paradox, which suggests that introducing a pay-as-you-go (PAYG) pension system increases welfare when population growth plus average wage growth exceeds interest rates. Using a simplified overlapping generations model, we demonstrate this apparent advantage stems from asset reduction rather than inherent superiority. We analyze three pension systems - traditional PAYG, capital-funded, and capital-funded with bonus payments - and establish an equivalence between PAYG and the bonus-payment system. This equivalence reveals that systems with identical contributions and benefits differ only in accounting frameworks and asset positions, challenging the notion of PAYG superiority. Our analysis exposes a fundamental conceptual inconsistency in how sustainability is assessed across equivalent pension systems. As an alternative, we propose $\alpha$-stability, a framework using index shares to evaluate pension systems relative to economic indicators. These findings suggest that perceived advantages between pension systems often result from their formulation rather than substantive economic differences. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.00909 |
| By: | Mattias Almgren; John Kramer; Jósef Sigurdsson |
| Abstract: | Children tend to choose the same occupations as their parents. We examine the implications of this tendency for talent allocation and intergenerational mobility. Using Swedish data on skills and personality traits, we estimate a general equilibrium Roy model with unequal occupational access depending on parental background. Equalizing access halves occupational following and increases intergenerational earnings mobility by a third, benefiting low-income sons most. Exploiting long-run declines in fathers’ occupations, we find that reduced following improves sons’ skill-matching and raises earnings, aligning with our model. Our results suggest that facilitating more occupational mobility would increase intergenerational income mobility without reducing output. |
| Keywords: | occupational mobility, misallocation, roy model, comparative advantage. |
| JEL: | E24 J24 J62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11808 |
| By: | Ying Fan; Ziying Fan; Yiyi Zhou |
| Abstract: | This paper studies how dynamic changes in the search environment affect consumer search and purchase behavior. We develop a dynamic model that incorporates a non-stationary search environment and propose a feasible estimation procedure to estimate its parameters. We apply our model and estimation procedure to the Beijing housing market, utilizing detailed data on consumers’ complete search records. We show that accounting for dynamics is crucial for accurately estimating search costs. Additionally, we find that search environment dynamics have a significant impact on consumer decisions and welfare. Housing supply policies that alter search environment dynamics—by increasing the number of new listings and slowing down price increases—benefit consumers, primarily by incentivizing longer searches, more property visits, and ultimately leading to purchases that yield higher utility. |
| Keywords: | consumer search, non-stationary search environment, Beijing housing market |
| JEL: | D80 L80 R30 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11709 |
| By: | Adriano Fernandes; Rodolfo Rigato |
| Abstract: | Physical capital takes time to build. Yet, the measurement of time to build and of its response to firm behavior remain scant. We fill this gap using project-level data from India. We document new facts on cross-sectional heterogeneity in time to build; and exploit quasi-experimental variation in credit supply to establish that firms accelerate ongoing projects and start fewer new projects when credit dries up. We rationalize our findings with a novel model of endogenous time to build. A credit crunch increases firm appetite for immediate relative to delayed cash flows. Firms then accelerate projects closer to completion and postpone unbegun projects. Such a mechanism is borne out in the data: projects proxied to be more mature are sped up the most. We quantify our model to match our causal estimates, and the joint distribution of project costs and gestation lags. Endogenous time to build generates endogenous amplification and state-dependence of investment on the distribution of projects along completion stages. Endogenous time to build is policy relevant. Contractionary monetary policy faces headwinds when the distribution of projects skews towards mature projects. Tax policy, in turn, can flexibly reshuffle investment expenditures over time with tax credits. |
| Keywords: | Investment; Business Fluctuations; Corporate Finance; Time to Build |
| Date: | 2025–04–11 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/078 |
| By: | Leonid V. Azarnert |
| Abstract: | I study the effect of educational policy in the host economy on human capital accumulation and growth. The analysis is performed in a two-country growth model with endogenous fertility. I show that providing additional free educational services for immigrant children can increase the attractiveness of migration for less skilled individuals, which can outweigh the positive effect of this policy on the acquisition of human capital. In contrast, imposing taxes on immigrants in the host country reduces low-skilled immigration flows and has the potential to promote human capital accumulation if the resulting revenues are channeled into educational subsidies. |
| Keywords: | migration, child education, fertility, human capital, growth, brain drain, brain dilution tax |
| JEL: | D30 F22 J10 J13 J24 O15 O40 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11727 |
| By: | Edmund Crawley |
| Abstract: | I combine microdata on the intertemporal marginal propensity to consume with 10 structural macro shocks to identify the role of intertemporal substitution in consumption behavior. Although some of the structural shocks that I examine lead to large and persistent changes in real interest rates—which in many models would induce a large intertemporal substitution effect—I find no evidence that households shift the timing of their consumption in response to these interest rate changes. Indeed, changes to the expected path of income explain almost all the aggregate consumption response, leaving no role for intertemporal substitution. |
| Keywords: | Intertemporal Substitution; HANK; Monetary Policy; Consumption |
| JEL: | E21 E32 E52 |
| Date: | 2025–03–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-21 |