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on Dynamic General Equilibrium |
| By: | Thomas Dengler; Britta Gehrke; Leopold Zessner-Spitzenberg |
| Abstract: | During the Covid-19 crisis, most OECD countries used short-time work (subsidized reductions in working hours) to preserve employment. This paper documents that short-time work affects the behavior of firms (supply) and households (demand). First, using household survey data from Germany, we show that the consumption risk of short-time work is lower than that of unemployment. Second, we construct a New Keynesian model with heterogeneous workers and firms, incomplete asset markets, and labor market frictions. Short-time work weakens workers' precautionary savings motive and lowers labor costs. This reduces the level and volatility of both the separation and unemployment rate at the cost of tying workers to less productive firms. Quantitatively, the positive employment effects dominate the productivity losses. |
| Keywords: | Short-time work, fiscal policy, incomplete asset markets, unemployment risk, matching frictions |
| JEL: | E21 E24 E32 E52 E62 J63 |
| Date: | 2025–05–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0066 |
| By: | GUERRÓN QUINTANA, Pablo A.; JINNAI, Ryo; YAMAMOTO, Yohei |
| Abstract: | This chapter studies the relationship between asset price bubbles and macroeconomic fluctuations through both empirical analysis and theoretical modeling. We begin by applying the right-tailed unit root tests of Phillips et al. (2015a, b) to real stock and housing price indices in G-7 economies. These tests identify explosive dynamics in asset prices, and our findings show that such bubbly episodes frequently align with periods of economic expansion, suggesting a strong empirical link between asset booms and business cycle upswings. To investigate the mechanisms behind this co-movement, we modify the canonical bubble models of Tirole (1985) and Martin and Ventura (2012) by incorporating endogenous labor supply. However, in both cases, the emergence of a bubble fails to generate a robust macroeconomic expansion. Output and investment either decline or respond sluggishly, while labor hours fall in response to bubble formation. We then turn to the model of Guerron-Quintana et al. (2023), which embeds a variable capacity utilization mechanism into a dynamic general equilibrium framework. This amplification channel allows the model to produce simultaneous increases in output, consumption, investment, and labor during bubbly periods, consistent with empirical patterns. We also discuss the quantitative implementation challenges faced by this approach, highlighting the trade-offs involved in quantitatively modeling bubble-driven fluctuations. |
| Keywords: | asset price bubble, business cycles |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hituec:768 |
| By: | Robert J. Barro |
| Abstract: | Articles from the 1970s applied a general-disequilibrium framework to the determination of output and employment with sticky nominal prices and wages. Quantities are determined on the short sides of the goods and labor market and involve non-price rationing. With general excess supply, where prices and wages are “too high, ” output and employment are determined by the Keynesian demand multiplier, based on the marginal propensity to consume. In the case of general excess demand, where prices and wages are “too low, ” output and employment are determined by a supplier multiplier, based on the marginal propensity to work. In these two cases, output and employment are independent of the real wage. However, starting from general market clearing, deviations from the general-market-clearing real wage in either direction reduce output and employment. The New Keynesian Model, which also relies on sticky prices, amounts to an extension of the general-excess-supply case of the Old Keynesian Model. The New Keynesian Model assumes that quantities are always demand determined, but this assumption is tenable only under general excess supply. A promising alternative to the non-price rationing of quantities in the Old Keynesian Model is a setup with search-and-matching frictions in the markets for goods and labor. |
| JEL: | E12 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33850 |
| By: | Guido Menzio; Saverio Spinella |
| Abstract: | Recent empirical evidence documents that different individuals earn systematically different rates of return, even after controlling for portfolio composition. We propose a general equilibrium theory of residual heterogeneity in rates of return on wealth by embedding a financial market with search frictions into a monetary incomplete-market model. We show that the distribution of rates of return offered in the financial market is endogenous and depends on the marginal product of capital, the return on fiat money, and the joint distribution of households across wealth and financial human capital. When calibrated, the model succeeds in reproducing the extent of residual dispersion in returns to wealth across individuals. We use the calibrated model to study various policies and counterfactuals, with a particular focus on monetary policy. |
| JEL: | D52 D83 E21 E44 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33868 |
| By: | Eduardo Dávila; Andrés Rodríguez-Clare; Andreas Schaab; Stacy Tan |
| Abstract: | The classic tariff formula states that the optimal unilateral tariff equals the inverse of the foreign export supply elasticity. We generalize this result and show that an intertemporal tariff formula characterizes the efficient tariff in a large class of dynamic heterogeneous agent (HA) economies with multiple goods. Intertemporal export supply elasticities and relative tariff revenue weights are sufficient statistics for the optimal tariff that decentralizes the efficient allocation. We also develop a general theory of second-best optimal tariffs. In dynamic HA incomplete markets economies, Ramsey optimal tariffs trade off intertemporal terms of trade manipulation against production efficiency, risk-sharing, and redistribution. Intertemporal export supply elasticities and relative tariff revenue weights remain sufficient statistics for the intertemporal terms of trade manipulation motive of second-best optimal tariffs. We apply our results to a quantitative heterogeneous agent New Keynesian (HANK) model with trade. |
| JEL: | F13 F41 H21 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33898 |
| By: | Rubio, Margarita (University of Nottingham); Yao, Fang (Central Bank of Ireland) |
| Abstract: | This paper examines loan-to-value (LTV) policy as a macroprudential tool and its interactions with monetary policy in an inflationary environment. The combination of inflation shocks and collateral constraints introduces additional trade-offs for policymakers, emphasizing the need for coordination between macroprudential and monetary policies. Using a DSGE model with collateral constraints, we evaluate the implications of an optimized LTV rule for a welfare-based loss function that incorporates economic and financial stability. Our core finding indicates that, under inflation shocks, policy coordination reduces welfare-based losses compared to a non-coordination regime. In particular, the LTV rule is active (responding to cyclical factors, e.g. house prices) when monetary policy responds weakly to inflation shocks, but the LTV rule becomes passive (only responding to structural factors) when monetary policy chooses to be hawkish towards inflation. |
| Keywords: | LTV policy, Monetary Policy, macroprudential policy coordination, collateral constraints, financial friction, cost-push shocks. |
| JEL: | E32 E44 E58 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:1/rt/25 |
| By: | Hiroatsu Tanaka |
| Abstract: | I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. Imperfect information can justify a shock to signals about productivity that does not lead to actual changes in productivity, which can be interpreted as a demand shock. When incorporated in a DSGE term structure model with a standard productivity shock, this demand shock generates term premia that are on average higher, with sizable countercyclical variation that arises endogenously. The model helps reconcile the empirical evidence that term premia have been on average positive and countercyclical, with numerous studies pointing to demand shocks as a key driver of business cycles over the last few decades. |
| Keywords: | Yield curve; Term premium; Term structure of interest rates; DSGE model; Imperfect information; Learning |
| JEL: | D83 E12 E43 E44 E52 G12 |
| Date: | 2024–08–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:100032 |
| By: | Margherita Borella; Mariacristina De Nardi; Fang Yang; Johanna P. Torres Chain |
| Abstract: | This paper develops and estimates a dynamic life-cycle model to quantify why households save and work. The model incorporates multiple sources of risk—health, marital status, wages, medical expenses, and mortality—as well as endogenous labor supply and human capital accumulation, retirement, and bequest motives at the death of the first and last household member. We estimate it using PSID and HRS data for the 1941–1945 cohort via the Method of Simulated Moments. Eliminating bequest motives reduces aggregate wealth by 23.8% and labor earnings by 1.2%; removing medical expenses lowers them by 13.1% and 0.7%. Wage risk is crucial for early-life saving: its removal reduces wealth by 10.4% but raises earnings by 2.3%. Eliminating marriage and divorce dynamics leads couples—numerous and wealthier—to save and work slightly less, and singles—fewer and poorer—to save and work considerably more. These effects largely offset in the aggregate. Removing all saving motives beyond retirement needs and lifespan uncertainty lowers wealth by 56.9% and earnings by 2.7%. These findings show that capturing multiple risks and behavioral margins jointly is essential to understanding household saving and labor supply. |
| JEL: | E20 I1 J0 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33874 |
| By: | Paul Bergin; Giancarlo Corsetti |
| Abstract: | Central banks around the world have grappled with the question of how to respond to the mix of inflationary and output implications of a trade war. Recent tariff changes have impacted a wider cross-section of goods than was true in the previous tariff round, targeting final consumption goods in addition to materials such as aluminum and steel. This paper studies the optimal monetary stabilization of tariffs using a New Keynesian model enriched with comparative advantage between multiple traded sectors that differ in terms of tariff exposure as well as market structure and price rigidity. We find that, in the aggregate, the optimal monetary response is expansionary, supporting activity and producer prices at the cost of tolerating short-run headline inflation – both in response to tariffs aimed at differentiated consumption goods and to tariffs on non-differentiated goods. The output and export dynamics arising from tariffs on each sector differ sharply, as do the motivations for an expansionary monetary response. Sectoral reallocation is an order of magnitude larger than predicted by standard macro models featuring one tradable and one nontradable sector. |
| JEL: | E52 F42 F44 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33845 |
| By: | Xu, Yongsheng; YOSHIHARA, Naoki |
| Abstract: | The Hicksian optimism, a neoclassical economic creed, says that the consistent implementation of ‘Pareto-efficient policies’ sequentially would eventually improve the welfare of every individual from the initial position in the long run. In this paper, we formulate the Hicksian optimism as an axiom and then examine whether the market mechanism with the consistent application of technological progress policies can fulfill the Hicksian optimism. We show in a simple Overlapping Generations model that the market mechanism with technological progress unavoidably leaves some individuals behind. This negative result holds for a broad class of intertemporal resource allocation mechanisms. |
| Keywords: | dynamic market competition with technological progress, Hicksian Optimism |
| JEL: | D30 D51 D60 O33 P10 P20 P40 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hituec:769 |
| By: | James Hebden; Fabian Winkler |
| Abstract: | We propose an efficient procedure to solve for policy counterfactuals in linear models with occasionally binding constraints in sequence space. Forecasts of the variables relevant for the policy problem, and their impulse responses to anticipated policy shocks, constitute sufficient information to construct valid counterfactuals. Knowledge of the structural model equations or filtering of structural shocks is not required. We solve for deterministic and stochastic paths under instrument rules as well as under optimal policy with commitment or subgame-perfect discretion. As an application, we compute counterfactuals of the U.S. economy after the pandemic shock of 2020 under several monetary policy regimes. |
| Keywords: | Sequence space; DSGE; Occasionally binding constraints; Optimal policy; Commitment; Discretion |
| JEL: | C61 C63 E52 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:100035 |
| By: | Anastasiia Antonova; Luis Huxel; Mykhailo Matvieiev; Gernot J. Muller; Gernot Müller |
| Abstract: | Imports feature at all stages of production as well as in final consumption, and this is key to how tariff shocks play out. If imposed on imports in upstream sectors, import tariffs lower domestic output in downstream sectors; if imposed downstream, they raise upstream production. The aggregate effect of tariffs can be recessionary or expansionary—depending on the strength of upstream and downstream effects. Tariffs raise inflation no matter what, but how persistently they do so also depends on the network structure. We establish these results in a New Keynesian small open-economy model with an input-output network and provide supporting evidence based on US import tariffs. Simulating the "Liberation Day" tariff package, we find it highly stagflationary. |
| Keywords: | tariffs shocks, business cycle, upstream sectors, downstream sector, input-output network, monetary policy, inflation |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11917 |
| By: | Gideon Bornstein |
| Abstract: | Over the past four decades, the U.S. economy has seen a decline in the share of young firms alongside a rise in the profit share of GDP. This paper explores how population aging contributes to these twin trends through a demand-side channel. The core hypothesis is that younger households exhibit lower consumer inertia—a tendency to stick with previously chosen products—than older households. As demand shifts toward more inertial consumers, entry becomes harder, incumbents raise markups, and market share tilts toward larger firms. To quantify this mechanism, I develop and calibrate a firm dynamics model with overlapping generations of consumers who differ in their degree of inertia. Using detailed micro data, I show that younger households are significantly less inertial. The model implies that population aging accounts for 20%–30% of the observed decline in young firms and rise in profits. Reduced-form evidence across U.S. states and product categories supports the model’s predictions. |
| JEL: | D40 E20 J10 L10 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33820 |
| By: | Ping Wang; Tsz-Nga Wong |
| Abstract: | How large is the impact of artificial intelligence (AI) on labor productivity and unemployment? This paper introduces a labor-search model of technological unemployment, conceptualizing the generative aspect of AI as a learning-by-using technology. AI capability improves through machine learning from workers and in turn enhances their labor productivity, but eventually displaces workers if wage renegotiation fails. Three distinct equilibria emerge: no AI, some AI with higher unemployment, or unbounded AI with sustained endogenous growth and little impact on employment. By calibrating to the U.S. data, our model predicts more than threefold improvements in productivity in some-AI steady state, alongside a long-run employment loss of 23%, with half this loss occurring over the initial five-year transition. Plausible change in parameter values could lead to global and local indeterminacy. The mechanism highlights the considerable uncertainty of AI's impacts in the presence of labor-market frictions. In the unbounded-AI equilibrium, technological unemployment would not occur. We further show that equilibria are inefficient despite adherence to the Hosios condition. By improving job-finding rate and labor productivity, the optimal subsidy to jobs facing the replacement risk of AI can generate a welfare gain from 26.6% in the short run to over 50% in the long run. |
| JEL: | E2 J2 O30 O40 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33867 |
| By: | George A. Alessandria; Jiaxiaomei Ding; Shafaat Y. Khan; Carter B. Mix |
| Abstract: | We evaluate the aggregate effects of a change in tariffs on the US and world economies when tariff revenue is used to enact fiscal reform. Our model combines a standard international model of fiscal policy with taxes and a dynamic model of trade participation and tariffs that allows for uncertainty and transitions. We consider effects of permanent and temporary tariffs–with and without retaliation–when tariff revenue is used to reduce taxes on capital or labor or to subsidize investment. Compared to a lump sum redistribution, using tariff revenue for these reforms always boosts economic activity. Key to our analysis is the effect of trade dynamics on import substitution, such that tariff revenue after an increase in tariffs is higher in the short run than in the long run. When increasing the tariff by 20 percentage points, the revenue raised is largest when tariffs are temporary, unilateral, and used to subsidize investment, increasing by about 2 percent of GDP. This case also yields a large temporary increase in the trade balance. We find the welfare-maximizing unilateral tariff is close to 18 percent when tariff revenue is used to subsidize investment compared to 0 percent under a lump sum redistribution. We also find cutting capital taxes does not generate as much growth as introducing an investment subsidy since tariffs raise the price of investment substantially. |
| JEL: | E6 F10 F4 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33784 |