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on Dynamic General Equilibrium |
| By: | Karsten Chipeniuk (Reserve Bank of New Zealand); Gulnara Nolan (Reserve Bank of Australia); Matt Nolan (e61 Institute) |
| Abstract: | In this paper we study the propagation of demand and supply shocks in a heterogeneous agent New Keynesian model. Calibrating the model to Australia, we explore how inequality in the model affects shock transition, as well as how shocks impact individuals differently across the distribution. Contrary to much of the literature, with a single asset in the model we find a dampening in the response of the real economy to a monetary policy shock, driven by falling consumption in the extremes of the distribution. This dampening is likely due to the high holdings of liquid assets by many households in the model, which allows these households to effectively smooth their consumption, emphasising the need to include further asset classes. In the case of supply shocks, we likewise find a dampened response of the real economy to both a labour disutility shock and a mark-up shock. These results highlight the need to explore models with more realistic asset classes in the Australian context. |
| Keywords: | heterogeneous agents; supply; inflation |
| JEL: | E21 E31 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbardp:rdp2025-04 |
| By: | Fausto Cavalli; Ahmad Naimzada; Daniela Visetti |
| Abstract: | We study a model encompassing economic, epidemiological and environmental domains, which feature reciprocal interactions. The economy is described by an overlapping generations model in which productivity and agents’ preferences are affected by the epidemiological situation. The evolution of an epidemic is represented through a susceptible-infected-susceptible model, in which the disease spread depends on the pollution level and can be reduced through the government expenditure. The pollution level increases during the production process and can be reduced by allocating resources to its abatement. Resources are collected through the capital taxation and the regulator must decide how to share them between healthcare and environmental protection. For the resulting model, we show the possible existence of a unique steady state, either characterized by the presence of epidemics or disease-free. We study its comparative statics depending on the policy parameter regulating the share of resources that is devoted to improve the epidemiological situation with respect to the environmental one. We investigate the emergence of dynamics non convergent toward the equilibrium, with possible complex and quasi-periodic trajectories. |
| Keywords: | OLG model, Epidemiological and environmental domains, Dynamical analysis, Bifurcations. |
| JEL: | C61 O11 Q56 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:555 |
| By: | Abdoulaye Ndiaye (New York University); Zhixiu Yu (Louisiana State University) |
| Abstract: | Raising the retirement age is a common policy response when social security schemes face fiscal pressures. We develop and estimate a dynamic life cycle model to study optimal retirement and tax policy when individuals face health shocks and income risk and make endogenous retirement decisions. The model incorporates key features of Social Security, Medicare, income taxation, and savings incentives and distinguishes three channels through which health affects retirement: nonconvexities in labor supply due to health-dependent fixed costs of working, earnings reductions, and mortality risk. We estimate our model to match US microdata and show that labor supply nonconvexities play a dominant role in driving early retirement, making rigid increases in the retirement age welfare reducing. In contrast, more flexible policies, such as increasing the dependence of Social Security benefits on the claiming age, can improve welfare and pay for themselves with a fiscal surplus. We map a range of policy reforms to their marginal values of public funds (MVPFs), showing that certain incentives to delay claiming offer MVPFs of infinity while broad-based retirement age increases have negative willingness-to-pay. These findings offer novel retirement policy prescriptions and challenge the prevailing emphasis on raising the retirement age. |
| Keywords: | dynamic models, Medicare, income taxation, savings, Labor Supply, marginal value of public funds, MVPF, willingness to pay |
| JEL: | J26 H55 H21 I10 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:hka:wpaper:2025-005 |
| By: | Michael P. Keane; Xiangling Liu |
| Abstract: | We present a dynamic life-cycle model of demand for owner-occupied housing, investment property and liquid assets. Households face transaction costs, downpayment requirements, liquidity constraints, and tax preferences for owner-occupied housing. The model replicates key facts about home ownership, liquid assets, debt and consumption. It predicts taxing imputed rent would raise enough revenue to fund a 9.15% income tax rate cut, and increase ex ante welfare of all agents. Eliminating the mortgage interest deduction (MID) also gives a Pareto improvement. Replacing MID with a refundable 24.6% mortgage interest credit would increase the ownership rate by 5.9%. Gains are concentrated among low to middle income households and young households, as housing becomes more affordable for them. |
| JEL: | G11 G51 H20 H31 R21 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33809 |
| By: | Yuki Murakami (Graduate School of Economics, Waseda University) |
| Abstract: | This paper focuses on the time-varying volatility of aggregate fluctuations in emerging markets. Both Latin American and Asian emerging economies experience volatility spikes during financial crises; however, only the latter group exhibits a long-run decline in volatility. Using business cycle data from South Korea, we estimate a small open economy real business cycle model with Markov-switching shock variances. We compare the model fit across alternative specifications of shock volatility structures and investigate the underlying drivers of volatility changes. The results indicate that the data favor the model in which all shock variances switch regimes synchronously. The estimated model captures both the declining trend in volatility over time and temporary volatility spikes during episodes of financial turmoil. It suggests that the long-run decline in volatility is not primarily driven by a reduction in the variance of the interest rate premium shock, though this shock contributes to temporary volatility spikes during crises. The model replicates key business cycle features of emerging markets and highlights that the drivers of aggregate fluctuations depend on the volatility regime. |
| Keywords: | Small open economy; real business cycles; regime switching |
| JEL: | E32 F41 C13 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2514 |
| By: | Francesco Morelli (Link Campus University) |
| Abstract: | This paper examines the effectiveness of public spending in different phases of the business cycle through a state-dependent macroeconomic model. We estimate a two-agent New-Keynesian (TANK) model with sticky wages in a Markov-switching framework for the U.S. economy (1960–2013). The model extends Gali, L´opez-Salido, and Vall´es 2007 by incorporating wage rigidity as in Colciago 2011. Our findings indicate that the share of hand-to-mouth agents (?) plays a crucial role in determining fiscal multipliers, with higher ? values associated with recessions and stronger public spending effects. While monetary policy regime shifts influence outcomes, ? remains the key driver of multiplier heterogeneity. Our results suggest that temporary fiscal interventions during downturns yield the highest impact, reconciling elements of both neoclassical and New-Keynesian perspectives. These insights have important policy implications for the design of countercyclical fiscal policies. |
| Keywords: | Fiscal multipliers, New-Keynesian model, Markov-Switching estimation, Hand-tomouth consumers, Sticky wages |
| JEL: | E32 E62 E12 C32 E52 |
| Date: | 2025–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:606 |
| By: | Giovanni Favara; James Graham; Geng Li |
| Abstract: | Home-related spending in categories such as furnishings, renovations, and repairs is tied to housing market activity, with significant implications for aggregate expenditure dynamics. We refer to this relationship as the home purchase channel of expenditure. Using household-level panel data we estimate that home purchases lead to sizable increases in home-related spending, but not to increases in goods and services unrelated to home purchase. These findings are robust to the use of close-control groups and placebo tests. We then build a heterogeneous household model with housing, home renovations, and home-related durables that is calibrated to match our household-level evidence. Model simulations of housing market shocks generate large fluctuations in home-related and total expenditure. We show that the home purchase channel amplifies aggregate expenditure dynamics, with home-related spending accounting for around half of total spending fluctuations over the housing cycle. |
| Keywords: | Housing; Home purchase; Household spending; Housing cycle |
| JEL: | D12 D15 E21 E32 R31 |
| Date: | 2025–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-45 |
| By: | Hornstein, Andreas; Karabarbounis, Marios; Kurmann, André; Lalé, Etienne; Ta, Lien |
| Abstract: | Unemployment insurance (UI) acts both as a disincentive for labor supply and as a demand stimulus, which may explain why empirical studies often find limited effects of UI on employment. This paper provides independent estimates of the disincentive effects arising from the largest expansion of UI in U.S. history, the pandemic unemployment benefits. Using high-frequency data on small restaurants and retailers from Homebase, we control for demand effects by comparing neighboring businesses that largely share the positive impact of UI stimulus. We find that employment in low-wage businesses recovered more slowly than employment in neighboring high-wage businesses in labor markets with larger differences in the relative generosity of pandemic UI benefits. According to a labor search model that replicates the estimated employment differences between low- and high-wage businesses, the disincentive effects from the pandemic UI programs held back the aggregate employment recovery by 3.4 percentage points between April and December 2020. |
| Keywords: | Unemployment Insurance, Disincentive Effects, Search and Matching Models |
| JEL: | E24 E32 J64 J65 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:clefwp:319878 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt. A large economy has a natural advantage in ensuring its currency becomes dominant, but if it lacks the fiscal capacity to absorb the global demand for liquid assets, the multipolar equilibrium emerges. |
| Keywords: | Dominant Currency; International Monetary System; Interest-Rate Policy; Fiscal Capacity |
| JEL: | E42 E58 G21 |
| Date: | 2025–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:101163 |
| By: | Aneli Bongers (Department of Economics, University of Malaga); Jose L. Torres (Department of Economics, University of Malaga) |
| Abstract: | This paper introduces the DISE-2024 (Dynamic Integrated Space Economy) model, an Integrated Assessment Model (IAM) designed to analyze the economics of efficient mitigation policies for orbital debris. The DISE-2024 model integrates an optimal neoclassical economic growth framework with a physical model of the Earth's orbital environment, capturing the dynamics of orbital debris and the likelihood of collisions. The economic component of the model determines the optimal consumption path and investments across two capital assets: Earth capital and space capital (i.e., satellites). The physical component models the endogenous generation of orbital debris, accounting for factors such as launch activity, in-orbit breakups, and collisions. The model is simulated over a 200-year horizon under various policy scenarios, including no intervention, de-orbiting policy, no breakups, reusable launch vehicles, debris-free launch systems, collision avoidance, and the European Space Agency's (ESA) zero debris policy. A key finding of the study is that mitigation policies targeting debris emissions alone have a limited impact on reducing the long-term accumulation of orbital debris. Only scenarios involving complete collision avoidance can prevent the catastrophic chain reaction predicted by Kessler syndrome. |
| Keywords: | Outer space; Orbital debris; Satellites; Integrated assessment model; Debris migitagion guidelines; Optimal policy. |
| JEL: | D62 E21 Q53 Q58 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bhw:wpaper:06-2025 |