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on Dynamic General Equilibrium |
| By: | Emil Holst Partsch; Ivan Petrella; Emiliano Santoro |
| Abstract: | Durable and nondurable consumption comovement is central to monetary policy trans mission. Using a two-sector Heterogeneous Agent New Keynesian model, we generate re alistic sectoral comovement while capturing key household spending patterns. Both direct and indirect effects matter: intertemporal substitution strongly influences durable spend ing, while income effects drive persistence in nondurable responses. Comovement also extends to households sorted by liquid asset holdings. Distinguishing transmission chan nels is crucial for understanding the macroeconomic impact of targeted fiscal policies, as subsidies for durable goods purchases. |
| Keywords: | Durable goods, sectoral comovement, monetary policy, HANK |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:cca:wpaper:736 |
| By: | Galo Nuño (BANCO DE ESPAÑA, CEMFI, CEPR); Philipp Renner (UNIVERSITY OF LANCASTER); Simon Scheidegger (UNIVERSITY OF LAUSANNE) |
| Abstract: | This paper studies monetary policy in a New Keynesian model with persistent supply shocks, that is, sustained increases in production costs due to factors such as wars or geopolitical fragmentation. First, we demonstrate that Taylor rules fail to stabilize long-term inflation due to endogenous shifts in the natural interest rate. Second, we analyze optimal policy responses under discretion and commitment. Under discretion, a systematic inflationary bias emerges when the shock impacts the economy. Under commitment, the optimal policy adopts a lean-against-the-wind approach without compensating for past inflation, implying that “bygones are bygones”. This result is reinforced if monetary policy is constrained by the zero lower bound. |
| Keywords: | deep learning, Markov switching model, cost-push shocks |
| JEL: | E32 E58 E63 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2529 |
| By: | Takushi Kurozumi; Willem Van Zandweghe |
| Abstract: | Recent research indicates substantial differences in price-setting behavior between small and large firms, as only large firms exhibit strategic complementarities in price setting. Using firm survey data, we present new evidence that the cost-price pass-through decreases with firm size. To examine the implications for inflation dynamics, we develop a DSGE model that features heterogeneous complementarities across firm size. While standard DSGE models with homogeneous firms generate real rigidity in relative prices, there is little such rigidity in our model. Heterogeneity in strategic complementarity by firm size weakens real rigidity because large firms that exhibit strategic complementarities bring their product prices in line with those of small firms that more fully pass through cost changes. Our findings challenge the notion of strategic complementarity as a source of real rigidity in DSGE models. |
| Keywords: | firm heterogeneity; pass-through; monetary non-neutrality |
| JEL: | E31 E52 L11 |
| Date: | 2025–06–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:100041 |
| By: | Francesco Ferrante; Andrea Prestipino; Immo Schott |
| Abstract: | Long-term debt is the main source of firm-financing in the U.S. We show that accounting for debt maturity is crucial for understanding business cycle dynamics. We develop a macroeconomic model with defaultable long-term debt and equity adjustment costs. With long-term debt, firms have an incentive to increase leverage in order to dilute the value of outstanding debt. When equity issuance is costly, this incentive helps firms raise more debt through a debt dilution channel and mitigates the decline in net worth through a balance sheet channel, dampening the decline in investment in response to a negative financial shock. Using firm-level data, we estimate equity issuance costs and incorporate our findings into an estimated medium-scale DSGE model. Accounting for debt maturity and the cost of equity financing implies that credit supply shocks are the primary drivers of business cycle fluctuations. |
| Keywords: | Long-term debt; Financial frictions; Debt overhang; Macroeconomic activity |
| JEL: | E32 E44 E51 |
| Date: | 2025–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1409 |
| By: | Iván Werning; Guido Lorenzoni; Veronica Guerrieri |
| Abstract: | We study the optimal monetary policy response to the imposition of tariffs in a model with imported intermediate inputs. In a simple open-economy framework, we show that a tariff maps exactly into a cost-push shock in the standard closed-economy New Keynesian model, shifting the Phillips curve upward. We then characterize optimal monetary policy, showing that it partially accommodates the shock to smooth the transition to a more distorted long-run equilibrium—at the cost of higher short-run inflation. |
| JEL: | E5 E6 F4 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33772 |
| By: | Gustafsson, Johan (Department of Economics, Umeå University); Lanot, Gauthier (Department of Economics, Umeå University) |
| Abstract: | We analyze the impact of increased automation on the size and distribution of pension benefits, as well as on the optimal size and design of public pension systems. To this end, we build an overlapping generations model of a closed economy with heterogeneous agents who make decisions regarding skill formation, consumption, savings, and retirement. Automation is conceptualized either in terms of capital-skill complementarity or in a task-based fashion. We find that any productivity gains from automation, realized as increased capital returns, disproportionately benefit high-skilled workers who are less dependent on illiquid public pensions. A redistributive pension system can reduce public pension inequality but may increase inequality in private retirement savings. In our calibrated economy, the optimal size of the pension system is larger in the task-based specification, where the displacement effects of automation are accounted for. |
| Keywords: | Automation; General Equilibrium; Overlapping Generations; Public Pensions |
| JEL: | H55 J22 J26 |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:umnees:1036 |
| By: | Matteo Iacoviello; Ricardo Nunes; Andrea Prestipino |
| Abstract: | We study optimal credit market policy in a stochastic, quantitative, general equilibrium, infinite-horizon economy with collateral constraints tied to housing prices. Collateral constraints yield a competitive equilibrium that is Pareto inefficient. Taxing housing in good states and subsidizing it in recessions leads to a Pareto-improving allocation for borrowers and savers. Quantitatively, the welfare gains afforded by the optimal tax are significant. The optimal tax reduces the covariance of collateral prices with consumption, and, by doing so, it increases asset prices on average, thus providing welfare gains both in steady state and around it. We also show that the welfare gains stem from mopping up after the crash rather than a pure ex-ante macroprudential aspect, aligning with prior research that emphasizes the importance of ex-post measures compared to preventive policies alone. |
| Keywords: | Credit Market; Housing; Collateral Constraints; Macroprudential Policy; Fiscal Policy; Financial Crises |
| JEL: | E32 E44 G18 H23 R21 |
| Date: | 2025–05–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1406 |
| By: | Sadhika Bagga; Lukas Friedrich Mann; Ayşegül Şahin; Giovanni L. Violante |
| Abstract: | We introduce aggregate shocks to workers' value of job amenities in a frictional equilibrium model of the labor market with on-the-job search, where the job creation cost is sunk and quits trigger vacancies. We examine how key labor market indicators respond to this shock: when the valuation of the amenity is heterogeneous in the population, labor reallocation ensues. A calibrated version of the model can quantitatively account for many distinct traits of the post-pandemic labor market recovery through three aggregate shocks: a temporary fall in productivity to account for the short, but sharp, downturn; a decline in the willingness to work; and, crucially, a persistent increase in workers' evaluation of job amenities. Cross-sectoral patterns of vacancies, quit rates, job-filling rates, and wages—where sectors are ranked by their share of teleworkable jobs—provide support to the view that the key amenity in question is the ability to work remotely. |
| JEL: | J01 J2 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33787 |
| By: | Eduardo D‡vila (Yale University); AndrŽs Rodr’guez-Clare (UC Berkeley); Andreas Schaab (UC Berkeley); Stacy Tan (Yale University) |
| 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. |
| Date: | 2025–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2444 |
| By: | Roberto Gomez Cram; Howard Kung; Hanno Lustig; David Zeke |
| Abstract: | Unfunded fiscal shocks are a significant source of risk premia in Treasury markets when central banks and governments decide to insulate taxpayers and expose bondholders' wealth to government funding needs. We illustrate this bond risk premium mechanism analytically in a two-agent model featuring monetary-fiscal interactions and a fraction of constrained agents. Surprise government transfer spending devalues real Treasury payoffs through fiscal inflation, while fiscal redistribution makes these high marginal utility states for bond investors, leading to risky government debt. We show that this fiscal redistribution mechanism can quantitatively explain the nominal term premium in a TANK framework. |
| JEL: | E62 G12 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33769 |
| By: | Frantisek Brazdik; Karel Musil; Tomas Pokorny; Tomas Sestorad; Jaromir Tonner; Jan Zacek |
| Abstract: | We present the upgraded version of g3+, the Czech National Bank's core forecasting model, which became operational in April 2024 and summarizes its additional modifications over 2024. This paper outlines the innovative features of the model and the motivations behind their adoption. The enhancements also reflect the period from 2020 to 2022, which was marked by extraordinary events such as the Covid-19 pandemic and a significant surge in energy commodity prices. The upgraded g3+ now includes, among others, the endogenous decomposition of foreign economic activity into gap and trend components, a refined structure of foreign producer prices, and adjusted links between foreign and domestic economies. In addition, several model parameters have been recalibrated to reflect current and anticipated economic conditions. The introduction of these model changes and parameter adjustments lead to improved forecasting performance relative to the previous version of the model. |
| Keywords: | Conditional forecast, DSGE, energy, g3+ model, small open economy, two-country model |
| JEL: | C51 C53 E27 E37 F41 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/7 |
| By: | Kazuo Nishimura (Kobe University); Florian Pelgrin (EDHEC - EDHEC Business School - UCL - Université catholique de Lille); Alain Venditti (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper introduces a novel mechanism driving endogenous business cycle fluctuations within a frictionless three-sector intertemporal equilibrium model. We emphasize the critical role of consumer preferences as a primary driver of cyclical dynamics by considering a consumption bundle composed of a pure consumption good and a mixed consumption-investment good that simultaneously serves as both a final consumption good and a capital-accumulating investment good. Endogenous fluctuations naturally arise from sectoral capital intensity differences, an intertemporal consumption trade-off between the two goods, or the interaction of both mechanisms. We offer a detailed characterization of the economy's dynamics, identifying the Hopf bifurcation conditions that trigger persistent cyclical behavior. Additionally, we explore the periodicity of the resulting limit cycles, providing insights into how shifts in preferences and sectoral complementarities can generate self-sustained macroeconomic fluctuations. |
| Keywords: | Three-sector intertemporal equilibrium growth models, Business cycles fluctuations, Hopf bifurcation, Endogenous cycle, Periodicity |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05085177 |
| By: | Federico Ravenna; Carl E. Walshy |
| Abstract: | Central banks are increasingly debating monetary policies aimed at reducing inequality and ensuring employment gains are spread widely across all parts of the labor market. What are the trade-offs faced by íinclusive policiesí, and the implications for the e¢ ciency of the aggregate economy? We address this question within a model that allows for workers with different levels of productivity competing in the same job market. We compare traditional and íinclusiveípolicies in terms of their impact on earnings and employment inequality, on the labor market outcomes of lower-productivity, lower-income workers, and in terms of their ináation outcomes. Inclusive policies come at a high cost in terms of ináation, but they can substantially reduce the uneven burden of a recessionary shock on the lowest productivity workers. We provide a normative assessment, and show that while making monetary policy more inclusive is beneÖcial for the overall economy, making monetary policy much more inclusive results in sizeable deviations from the Örst best allocation. |
| Keywords: | Unemployment, heterogeneity, selection, COVID-19, monetary policy. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cca:wpaper:734 |
| By: | Yotaro Ueno (Graduate School of Economics, Kyoto University and Junior Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN) |
| Abstract: | Poverty traps arise when households remain poor due to insufficient capital assets. While traditional mechanisms emphasize occupational choices, re-analysis of Balboni, Bandiera, Burgess, Ghatak and Heil (2022b) suggests that long-run divergence in household capital may be more closely linked to wives' empowerment. To explore this, I develop a dynamic collective household model incorporating intra-household bargaining, where decisions on capital investment and labor allocation are influenced by husbands' conservative social preferences. This framework demonstrates the existence of interpretable multiple steady states that differ in household capital accumulation and wives' labor supply, even in the absence of market frictions. Empirical data validate a distinctive feature of the model: increases in household capital are proportionally linked to increases in women's labor supply. These findings suggest that women's empowerment can effectively complement "big push" policies aimed at poverty reduction. |
| Keywords: | Poverty traps; Intra-household bargaining |
| JEL: | O12 D10 J22 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-17 |
| By: | Galo Nuño (BANCO DE ESPAÑA, CEMFI AND CEPR) |
| Abstract: | The natural interest rate is the real rate that would prevail in the long run. The standard view in macroeconomics is that the natural rate depends exclusively on structural factors, such as productivity growth and demographics. This paper challenges this view by discussing three alternative, and complementary, views: i) that the natural rate depends on fiscal policy via the stock of risk-free assets; ii) that it depends on monetary policy via the central bank inflation target; and iii) that it depends on persistent supply shocks, such as tariffs or wars. These three theories share the relevance of precautionary saving motives. The paper concludes by drawing some lessons for monetary policy design. |
| Keywords: | financial HANK model, monetary-fiscal interactions, deep learning, cost-push shocks |
| JEL: | E32 E58 E63 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2528 |
| By: | Makoto WATANABE; Tarishi Matsuoka |
| Abstract: | This paper examines the role of Central Bank Digital Currency (CBDC) in a monetary model in which fundamental-based bank runs arise endogenously. We demonstrate that introducing a CBDC designed to replicate the properties of cash displaces physical cash and, when offered at a sufficiently attractive rate, can increase the likelihood of a bank run. In contrast, when the CBDC is designed to resemble bank deposits, cash, CBDC, and deposits can coexist as media of exchange, and a high CBDC rate can eliminate the risk of runs. We further characterize the optimal CBDC policy within this framework. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:25-015e |