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on Dynamic General Equilibrium |
| By: | Tomohiro Hirano; Joseph E. Stiglitz |
| Abstract: | This paper considers growth and fluctuations in a standard Overlapping Generations (OLG) model with rational expectations, with land (a non-produced asset), credit frictions, and endogenous growth. Under plausible conditions, there can be multiple momentary equilibria, with the multiplicity itself depending on capital and land prices; this can give rise in turn to an infinity of rational expectations trajectories, all operating within bounds that can be calculated. Improvements in technology, while in the short run increasing GDP, may result in the equilibrium being unstable and fragile—and in the long run lead to a stagnation trap with lower GDP. The introduction of land increases the scope for fluctuations; the only rational expectations trajectories may entail fluctuations, with episodic unemployment and dynamic inefficiencies. With credit frictions, expansionary credit and financial policies may lead to lower growth, with the additional funds unevenly going to land speculation, diverting savings from productive investments, results consistent with empirical evidence. The analysis resolves several theoretical puzzles, such as how can land prices be finite with an interest rate less than the growth rate. It shows that even with two state variables, a tractable OLG model can be constructed providing a global analysis of complex dynamics. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:25-012e |
| By: | Masashige Hamano (School of Political Science and Economics, Waseda University) |
| Abstract: | This paper examines how heterogeneity in product-level tastes and firm-level technologies shapes macroeconomic fluctuations. We develop a general equilibrium model with multiproduct firms and endogenous entry, where firms adjust their product mix in response to aggregate shocks. Calibrated to U.S. data, the model replicates key business cycle moments and shows that low taste dispersion amplifies aggregate volatility by limiting per-product profit adjustments, whereas high dispersion dampens fluctuations. While firm-level productivity granularity also affects volatility, its impact is comparatively minor. A simplified analytical model reinforces these findings, highlighting the critical role of aggregate shock propagation to firm- and product-level fixed costs, as well as heterogeneity in tastes and technologies, in determining macroeconomic volatility. |
| Keywords: | Firm Heterogeneity, Multi-Product Firms, Business Cycles, Product Quality |
| JEL: | D24 E23 E32 L11 L60 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2502 |
| By: | Ṣebnem Kalemli-Özcan; Can Soylu; Muhammed A. Yildirim |
| Abstract: | We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and trade distortions. We decompose the general equilibrium response to trade shocks into distinct channels that account for demand shifts, policy effects, exchange rate adjustments, expectations, price stickiness, and input–output linkages. Tariffs act simultaneously as demand and supply shocks, leading to endogenous fragmentation through changes in trade and production network linkages. We show that the net impact of tariffs on domestic inflation, output, employment, and the dollar depends on the endogenous monetary policy response in both the tariff-imposing and tariff-exposed countries, within a global general equilibrium framework. Our quantitative exercise replicates the observed effects of the 2018 tariffs on the U.S. economy and predicts a 1.6 pp decline in U.S. output, a 0.8 pp rise in inflation, and a 4.8% appreciation of the dollar in response to a retaliatory trade war linked to tariffs announced on “Liberation Day.” Tariff threats, even in the absence of actual implementation, are self-defeating—leading to a 4.1% appreciation of the dollar, 0.6% deflation, and a 0.7 pp decline in output, as agents re-optimize in anticipation of future distortions. Dollar appreciates less or even can depreciate under retaliation, tariff threats, and increased global uncertainty. |
| JEL: | E0 F40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33686 |
| By: | Hashmat Khan (Department of Economics, Carleton University); Sergio Lago Alves (Department of Economics, Carleton University) |
| Abstract: | The equilibrium in the standard New Keynesian (NK) model with Calvo pricing becomes explosive at low levels of trend inflation (4 to 7 percent). Even halfway before this threshold, optimal prices, price dispersion, and costs rise rapidly to large values, while output plummets. We show that these well-known issues stem not from Calvo pricing itself but from its interaction with the widely used Dixit-Stiglitz demand structure in NK models. Using a framework with general firms’ demand functions and Calvo pricing, we demonstrate that for NK models to have a stable equilibrium at any level of trend inflation, the demand function must not increase unboundedly as relative prices decrease — a condition the Dixit-Stiglitz structure fails to meet. We propose a model with price wedges to modify existing demand structures to satisfy this condition. Applying this approach to models with Dixit-Stiglitz and Kimball-demand aggregators, we show that the generalized NK model with price wedges stabilizes price dispersion under rising trend inflation and prevents output from collapsing. Moreover, this model exhibits superior theoretical and empirical properties, aligning better with micro and macro evidence. It also introduces new implications for the slope of the Phillips curve and the effects of monetary shocks. |
| Keywords: | New Keynesian models, Calvo pricing, trend inflation, steady state problem, demand functions. |
| JEL: | E31 E32 E52 |
| Date: | 2025–02–07 |
| URL: | https://d.repec.org/n?u=RePEc:car:carecp:25-01 |
| By: | Dirk Krueger; Chunzan Wu |
| Abstract: | Household consumption and welfare are more strongly associated with lifetime income, but most countries base income taxes on current income and use progressive taxes to reduce inequality and provide social insurance. Is lifetime income a better tax base for a government seeking to provide social insurance and redistribution? To answer this question, we build a quantitative life-cycle model of heterogeneous households with endogenous labor supply and idiosyncratic wage risks, and calibrate it to the U.S. economy. We document that switching to a lifetime income tax leads to a more efficient distribution of hours worked over time and across states of the world. This benefit rises with tax progressivity under a lifetime income tax, whereas the opposite is true under an annual income tax. Consequently, the optimal lifetime income tax is more progressive and achieves larger ex-ante welfare for a cohort of households than the optimal annual income tax. |
| JEL: | E60 H20 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33664 |
| By: | Dolado, Juan J. (Universidad Carlos III de Madrid); Jáñez, Álvaro (Stockholm School of Economics); Wellschmied, Felix (Universidad Carlos III de Madrid) |
| Abstract: | Online food delivery platforms typically operate through a controversial business model that relies on subcontracting self-employed workers, known as riders. We quantify the labor-market effects of the Spanish Riders' Law in 2021 that established the presumption of dependent employment for riders using a search and matching model. Riders with heterogeneous preferences for leisure trade off work flexibility and easier employability as self-employed against enjoying higher wages as employees. Our main finding is that the reform led to a higher share of employees but failed to fully absorb the large flows of workers transiting out of self-employment and decreased riders' wages leading to welfare losses. However, complementing the reform with a payroll tax cut for platforms hiring employees preserves employment levels and increases riders' welfare. |
| Keywords: | riders, food delivery platforms, self-employed, employees |
| JEL: | J21 J60 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17740 |
| By: | Paweł Kopiec (Narodowy Bank Polski) |
| Abstract: | This paper examines the non-linear impact of unemployment levels on the effectiveness of monetary policy. Using a standard heterogeneous-agent model with uninsured income risk, integrated with a canonical frictional labor market framework, I compare two versions of the model calibrated to reflect high- and low-unemployment regimes in the Polish economy. The findings reveal that the output response to a policy rate change is 60% larger in the high-unemployment scenario than in the low-unemployment one, while price reactions are more pronounced when unemployment is low. Additionally, I investigate the role of incomplete insurance markets in the transmission of monetary policy and assess the welfare implications of policy changes, both at the aggregate level and across different household subgroups. |
| Keywords: | Monetary Policy, Heterogeneous Agents, Frictional Markets, Unemployment |
| JEL: | D30 D31 D52 E21 E24 E43 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:nbp:nbpmis:375 |
| By: | Alistair Macaulay (University of Surrey); Chenchuan Shi (University of Oxford) |
| Abstract: | This paper studies how wealth and aging affect portfolio choices in a life-cycle model with ambiguity aversion. Ambiguity aversion implies that wealthier and older agents are endogenously more optimistic about risky asset returns, relative to poorer younger agents. As life expectancy grows, old agents become even more optimistic, while young agents become more pessimistic, amplifying the age gaps in portfolio composition, and implying further increases in intergenerational inequality. We find evidence for the mechanism in survey data on portfolios and subjective life expectancy. In a quantitative extension of the model, plausible life expectancy projections imply a 26% increase in the age-gradient of conditional risky asset shares between 2019 and 2100. |
| JEL: | D84 E21 G11 J11 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0425 |
| By: | J. Andrés; J.E. Boscá; A. Di Gennaro; R. Doménech; J. Ferri |
| Abstract: | This paper analyzes the driving factors behind the business cycle dynamics of carbon emissions in the U.S. economy from 1975Q1 to 2023Q3. We first identify some key stylized facts regarding the correlation between carbon emissions and the different components of the Kaya decomposition, some of which exhibit a sharp change in sign around the trend reversal of the environmental Kuznets curve in the late 20th century. From the estimated distribution of shocks in a dynamic stochastic general equilibrium environmental model, we find that: (a) innovations in green energy production play a marginal role in U.S. emissions cycles; (b) barely 17 percent of total emissions cycles are explained by aggregate shocks like those to total factor productivity or household consumption, while the rest stem from innovations in the efficiency in production of brown energy (brown energy productivity shock) and emissions per unit of brown energy; (c) since 2000, brown energy shocks have positively affected (increased) emissions growth, while emissions technology shocks have negatively impacted emissions, particularly following a structural break around 2007; and (d) without these shocks, the U.S. would have experienced a negative emissions gap for over 40 years. Since 2007, emissions reduction has accelerated, leading to convergence of observed and counterfactual Kuznets curves at around $16, 000 per capita GDP. Our findings explain the intriguing negative correlation between emissions and the share of dirty energy observed over the past twenty years. They suggest a connection to innovations in shale oil and gas production, highlighting both the limited potential for emission reduction through advances in producing a "cleaner" brown energy mix, and the urgent need for a decisive shift to renewable energy to achieve long-term climate goals. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:fda:fdaddt:2025-04 |
| By: | Lawrence Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen |
| Abstract: | This paper compares inflation in true price indices to inflation in fixed-weight price indices. We construct model-based inflation measures in time-dependent pricing models that are analogous to measures of inflation in the data, e.g., the Consumer Price Index. In the standard new Keynesian model, when inflation rises rapidly, the differences between inflation in those indices and true price indices are increasing in the degree of price stickiness and the elasticity of substitution across goods. For commonly used parameter values, those differences are large and persistent for increases in inflation of the size seen after 2020 in the U.S. |
| JEL: | E0 E31 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33665 |
| By: | Aliaksandr Zaretski |
| Abstract: | I study the optimal regulation of a financial sector where individual banks face self-enforcing constraints countering their default incentives. The constrained-efficient social planner can improve over the unregulated equilibrium in two dimensions. First, by internalizing the impact of banks' portfolio decisions on the prices of assets and liabilities that affect the enforcement constraints. Second, by redistributing future net worth from new entrants to surviving banks, which increases the current forward-looking value of all banks, relaxing their enforcement constraints and decreasing the probability of banking crises. The latter can be accomplished with systemic preemptive bailouts that are time consistent and unambiguously welfare improving. Unregulated banks can be both overleveraged and underleveraged depending on the state of the economy, thus macroprudential policy requires both taxes and subsidies, while minimum bank capital requirements are generally ineffective. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.04636 |
| By: | Adjemian, Stéphane; Juillard, Michel |
| Abstract: | The Stochastic Extended Path (SEP) method enhances the traditional Extended Path technique by integrating numerical methods to estimate conditional expectations. In contrast to the deterministic Extended Path, which presumes that future shocks will align with their expected values, SEP accommodates stochastic non-linearity by performing integration over future shocks. We employ numerical techniques, including Gaussian quadrature and unscented transforms, to efficiently approximate integrals while alleviating the challenges posed by the curse of dimensionality. To further enhance accuracy, we propose a hybrid strategy that merges SEP with perturbation methods to effectively address long-run uncertainty effects. We evaluate the performance of SEP in an asset pricing model with a closed-form solution and demonstrate the methodology using a Real Business Cycle (RBC) model featuring irreversible investment. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpm:dynare:084 |
| By: | Christian R. Proano; Jonas Dix |
| Abstract: | This paper investigates the implications of output gap uncertainty for the conduct of fiscal policy using a small-scale macroeconomic model with boundedly rational agents. Specifically, agents use an adaptive updating mechanism to approximate the unobservable potential output that suffers, similarly to the Hodrick and Prescott (1997), from an end-point bias. This generates an unintendedly procyclical fiscal policy that affects the government’s credibility and by extension the sovereign risk premium. Our simulations highlight the importance of this so-called bond vigilantes channel, as well as of the government’s credibility among financial markets, for the sustainability of government debt and for macroeconomic stability. |
| Keywords: | output gap uncertainty, fiscal policy, sovereign risk, government credibility, bounded rationality |
| JEL: | E62 E63 H63 E32 D84 G12 D83 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-27 |
| By: | Robert M. Sauer; Noemi Mantovan; Guido Cozzi |
| Abstract: | This paper develops a discrete choice dynamic programming model of women’s career and family decisions that incorporates the joint evolution of both mental and physical health. The framework also models decisions about psychotherapy attendance and cigarette smoking, as well as Bayesian learning about marital match quality. Structural parameters are estimated by the Simulated Method of Moments with Indirect Inference, using data on prime-aged women from the British Household Panel Study. The analysis yields several novel findings: (i) wage returns to mental health exceed those to physical health; (ii) a persistent mental health deficit lowers both lifetime earnings and utility more than an equivalent physical health deficit; and (iii) mental health shocks, match quality uncertainty, and low therapy effectiveness have larger effects on lifetime utility than conventional income- and price-based policies that alter non employment support, childcare costs, or the price of therapy and smoking. |
| Keywords: | Dynamic Discrete Choice, female labor supply, mental health, Bayesian learning, marital match quality, fertility, structural estimation. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:cca:wchild:122 |
| By: | Pablo Andrés Neumeyer; Francisco J. Buera; Roberto N. Fattal Jaef; Hugo Hopenhayn; Yongseok Shin |
| Abstract: | We analyze the economic ripple effects of a temporary shutdown, such as those experienced during the Covid-19 pandemic. Using a model incorporating financial and labor market frictions, we explore how varying magnitudes and durations of shutdowns impact output, employment, and firm dynamics. We find that the effects are not persis- tent if workers on temporary layoffs can be recalled without frictions and if government policies effectively protect the balance sheets of financially constrained firms. With im- perfect insurance, young firms are disproportionately affected. Additionally, we find that recovery is more prolonged if shutdowns are accompanied by other shocks that cause additional reallocation within or across industries. Although motivated by the Covid-19 pandemic, the model can be applied to other large, temporary shocks such as wars, cyber-attacks/outages, and natural disasters. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025_06 |
| By: | Matthias Doepke; Hanno Foerster; Anne Hannusch; Michèle Tertilt |
| Abstract: | During the first half of the twentieth century, many US states enacted laws restricting women’s labor market opportunities, including maximum hours restrictions, minimum wage laws, and night-shift bans. The era of so-called protective labor laws came to an end in the 1960s as a result of civil rights reforms. In this paper, we investigate the political economy behind the rise and fall of these laws. We argue that the main driver behind protective labor laws was men’s desire to shield themselves from labor market competition. We spell out the mechanism through a politico-economic model in which singles and couples work in different sectors and vote on protective legislation. Restrictions are supported by single men and couples with male sole earners who compete with women for jobs. We show that the theory’s predictions for when protective legislation will be introduced are well supported by US state-level evidence. |
| Keywords: | protective legislation, political economy, women's rights, labor market competition, structural transformation, family economics, gender |
| JEL: | D13 D72 D78 E24 J12 J16 N30 O10 O43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_686 |