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on Dynamic General Equilibrium |
| By: | Busato, Francesco; Cisco, Gianluigi; De Simone, Marco; Marzano, Elisabetta |
| Abstract: | Climate change has led to an increase in extreme weather events, causing significant challenges for macroeconomic stability and monetary policy, particularly in small open economies (SOEs). This paper investigates the optimal monetary policy response to weather shocks in an SOE framework, using a Dynamic Stochastic General Equilibrium (DSGE) model calibrated for Turkey. The model includes sectoral price rigidities, trade openness, and climate-related productivity shocks affecting agricultural output. We evaluate alternative monetary policy rules, including those that target aggregate inflation, sector-specific inflation, and output stabilization. Our findings suggest that an aggressive monetary policy response to agricultural inflation mitigates short-term economic disruptions and accelerates recovery, albeit at the cost of a deeper initial contraction. The Ramsey-optimal policy prioritizes inflation stability while minimizing the long-term persistence of weather-induced output losses. Our results offer insights into the role of monetary policy in addressing climate-induced economic fluctuations in SOEs, highlighting the importance of tailored monetary policies that account for sectoral heterogeneities. |
| Keywords: | Agricultural output, Weather shocks, Dynamic Stochastic General Equilibrium Model |
| JEL: | E32 Q51 Q54 |
| Date: | 2025–03–17 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125175 |
| By: | Pascal Paul; Mauricio Ulate; Jing Cynthia Wu |
| Abstract: | We develop a quantitative New Keynesian DSGE model with monopolistic banks to study the macroeconomic effects of introducing a central bank digital currency (CBDC). Households benefit from an expansion of liquidity services and higher deposit rates as bank deposit market power is curtailed, while bank profitability and lending decline. We assess this trade-off for a wide range of economies that differ in their level of interest rates. We find substantial welfare gains from introducing a CBDC with an optimal rate that can be approximated by a simple rule of thumb: the maximum between 0% and the policy rate minus 1%. |
| JEL: | E3 E4 E5 G21 G51 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33968 |
| By: | Ioannis Kalientzidis; Amelie Barbier-Gauchard; Moises Sidiropoulos |
| Abstract: | This paper develops a New Keynesian Environmental Dynamic Stochastic General Equilibrium (EDSGE) model to analyze the role of government investment in facilitating the transition to a green economy. We extend the standard framework by incorporating two types of capital—polluting (brown) and non-polluting (green)—both of which are used in production. Firms choose their capital mix while being subject to carbon taxation, and the government directly invests in capital formation, with preferences over green and brown investments. The model includes adjustment costs for the production of green capital, capturing the frictions associated with its deployment and the slow adaptation of firms to green alternatives. Our analysis explores the macroeconomic and environmental effects of fiscal policy under different government investment preferences. We find that when the government invests only in brown capital, the crowding-out effect on private investment leads to lower output, reduced consumption, and increased emissions. In contrast, when the government prioritizes green capital, economic growth accelerates while emissions decline, despite the presence of a private investment crowd-out effect. A mixed investment strategy, where the government allocates resources to both types of capital but still favors brown investment, yields results similar to the green-focused scenario but with more moderate effects. A key result of our analysis is that both the full-green and mixed investment strategies reduce the returns on green capital, highlighting that targeted government policies can mitigate production frictions in green capital accumulation. This result underscores the importance of public sector intervention in lowering the financial barriers to green investment and ensuring a smoother transition toward a more sustainable production structure. Moreover, our findings emphasize the broader policy trade-offs involved in financing the green transition. While carbon taxation effectively reduces emissions, its interaction with investment decisions creates supply-side constraints that could slow economic growth if not accompanied by complementary public investment. Overall, our research highlights the pivotal role of government intervention in shaping the dynamics of green transition. By explicitly modeling capital accumulation frictions, carbon taxation, and government investment preferences, we provide a framework that can be used to evaluate climate policies when private sector adaptation is constrained. Our findings reinforce the argument that proactive fiscal policies are highly recommended to align economic incentives with long-term environmental goals, ensuring that the transition to a greener economy is both economically viable and socially optimal. |
| Keywords: | Green Public Capital, New Keynesian Model, Environmental DSGE, Climate Change Policy, Fiscal Policy, Carbon Tax, Emission Reduction, Green Public Investments. |
| JEL: | E62 H23 Q52 Q58 Q54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2025-22 |
| By: | Christian Bayer (University of Bonn, CEPR, CESifo, & IZA); Alexander Kriwoluzky (Freie Universität Berlin & DIW Berlin); Gernot J. Müller (University of Tübingen, CEPR, & CESifo); Fabian Seyrich (Frankfurt School of Finance & Management & DIW Berlin) |
| Abstract: | Attitudes toward fiscal policy differ: "fiscal conservatism" and "fiscal liberalism" vary in their willingness to tolerate budget deficits. We challenge the view that such attitudes reflect national preferences. Instead, we offer an economic explanation based on a two-country Heterogeneous Agent New Keynesian model, bringing its implicit political economy dimension to the forefront. We compute the welfare implications of alternative fiscal policies at the household level to assess the conditions under which a policy commands majority support. Whether the majority supports fiscal conservatism or liberalism depends on a country’s debt level, its wealth distribution, and the nature of the economic shock. |
| Keywords: | HANK, Two-country model, Political Economy, Government debt, Fiscal policy, household heterogeneity |
| JEL: | E32 H63 F45 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:368 |
| By: | Emmanouil SOFIANOS; Thierry BETTI; Emmanouil Theophilos PAPADIMITRIOU; Amélie BARBIER-GAUCHARD; Periklis GOGAS |
| Abstract: | Forecasting public debt is essential for effective policymaking and economic stability, yet traditional approaches face challenges due to data scarcity. While machine learning (ML) has demonstrated success in financial forecasting, its application to macroeconomic forecasting remains underexplored, hindered by short historical time series and low-frequency (e.g., quarterly/annual) data availability. This study proposes a novel hybrid framework integrating Dynamic Stochastic General Equilibrium (DSGE) modeling with ML techniques to address these limitations, focusing on the evolution of France’s public debt. We first generate a large synthetic macroeconomic dataset using an estimated DSGE model for France, which allows for efficient training of ML algorithms. These trained models are then applied to actual historical data for directional debt forecasting. The results show that the best machine learning model is an XGBoost achieving 90% accuracy. Our results highlight the viability of combining structural economic models with data-driven techniques to improve macroeconomic forecasting. |
| Keywords: | DSGE, Machine Learning, Public Debt, Forecasting, France. |
| JEL: | C53 E27 E37 H63 H68 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2025-18 |
| By: | Ginters Buss; Guido Traficante |
| Abstract: | This paper studies monetary policy in a New Keynesian model with incomplete information regarding the persistence of cost-push shocks. The central bank and the private sector gradually learn about the persistence of the shock as it propagates through the economy. The central bank adopts a look-through policy in response to temporary cost-push shocks; otherwise, it follows a Taylor rule. If agents initially believe the cost-push shock to be temporary, while the true shock is persistent, it takes some time for the central bank, acting initially under an incorrect assumption, to realise its mistake and switch to monetary tightening. As a result, the actual inflation is higher than in a complete information case. Data-dependent discretionary early liftoff strategies can partially mitigate the effects of the initial policy misjudgment. Contrary to the full-information conditions, the findings cast doubt on the effectiveness of look-through policies in environments of incomplete information, irrespective of the actual persistence of the cost-push shock. |
| Keywords: | monetary policy, imperfect information, cost-push shock, high inflation |
| JEL: | D83 E17 E31 E47 E52 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-40 |
| By: | Saman Darougheh; Renato Faccini; Leonardo Melosi; Alessandro Villa |
| Abstract: | We develop a model where heterogeneous agents choose whether to engage in on-the-job search (OJS) to improve labor income. The model accounts for untargeted microdata patterns: fiscal incentives affect job-to-job mobility and wage growth of stayers—but not leavers—across the income distribution, pointing to OJS as a key driver of labor costs. Calibrated to micro and macro moments, the model shows that OJS cost shocks significantly affect real activity and inflation. The permanent decline in OJS costs—driven by ICT and AI-based tools—offers a novel explanation for the weakening of the unemployment-inflation relationship documented in empirical studies. |
| Keywords: | Job ladder; Inflation; Wages; Tax incentives |
| JEL: | E31 J64 E12 |
| Date: | 2025–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:101279 |
| By: | José Vicente Romero; Sara Naranjo-Saldarriaga; Jonathan Alexander Muñoz-Martínez |
| Abstract: | This paper examines the macroeconomic impacts of adverse weather shocks on the Colombian economy, with a specific focus on agricultural output, food prices, and headline inflation. Drawing on empirical evidence from events such as the 2015–2016 El Niño, we document that these shocks tend to reduce agricultural output and increase inflation while having a limited effect on aggregate GDP growth. Motivated by these stylized facts, we develop a small open economy New Keynesian model for Colombia that introduces a mechanism in which weather shocks alter the relative prices of agricultural and non-agricultural goods. This framework allows us to capture the inflationary pressures induced by adverse climate events in a structural setting. Under our proposed calibration, food inflation, headline inflation, and inflation expectations rise in response to the shock, prompting the monetary authority to raise the interest rate to anchor inflation expectations. *****RESUMEN: Este documento examina los impactos macroeconómicos de choques climáticos adversos sobre la economía colombiana, con un enfoque específico en la producción agrícola, los precios de los alimentos y la inflación total. A partir de la evidencia empírica, documentamos que estos choques tienden a reducir la producción agrícola y aumentar la inflación, aunque con un efecto limitado sobre el crecimiento del PIB total. Motivados por estos hechos estilizados, se desarrolla un modelo neokeynesiano para una economía pequeña y abierta que introduce un mecanismo mediante el cual los choques climáticos afectan los precios relativos de bienes agrícolas y no agrícolas. Este marco permite capturar las presiones inflacionarias inducidas por eventos climáticos adversos de manera estructural. Bajo la calibración propuesta para Colombia, la inflación de alimentos, la inflación total y las expectativas de inflación aumentan en respuesta al choque, lo que lleva a la autoridad monetaria a incrementar parcialmente la tasa de interés con el fin de anclar las expectativas de inflación. |
| Keywords: | Extreme Weather events, El Niño Southern Oscillation (ENSO), Inflation, Small Open Economy New Keynesian Models, Eventos climáticos extremos, Fenómeno de El Niño (ENSO), Inflación, Economía pequeña y abierta, Modelos neokeynesianos. |
| JEL: | Q54 E52 E31 E32 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1319 |
| By: | Karadi, Peter; Nakov, Anton; Nuño, Galo; Pasten, Ernesto; Thaler, Dominik |
| Abstract: | We characterize optimal monetary policy under state-dependent pricing. The framework gives rise to nonlinear inflation dynamics: The flexibility of the price level increases after large shocks due to an endogenous rise in the frequency of price changes. In response to large cost-push shocks, optimal policy leverages the lower sacrifice ratio to curb inflation. When faced with total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability. The optimal long-run inflation rate is just above zero. JEL Classification: E31, E32, E52 |
| Keywords: | large shocks, nonlinear Phillips curve, optimal monetary policy, state-dependent pricing |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253068 |
| By: | Maria Garcia-Osipenk (Arizona State University); Nicholas Vreugdenhil (Arizona State University); Nahim Bin Zahur (Queen's University) |
| Abstract: | We investigate how endogenous rigidities inhibit physical capital reallocation. We focus on the role of contract duration - a classic example of an adjustment rigidity. We argue when agents sign longer contracts in booms when markets are thin, they generate a contracting externality which further amplifies thinness and impedes the adjustment of markets to shocks. We develop a framework with booms and busts where agents search and choose match duration. Applying the framework to the containership leasing market, we find substantial misallocation from endogenous rigidities, particularly in the transition after a crash. We also quantify implications for designing industrial policy. |
| Keywords: | TBA |
| JEL: | D22 D23 L14 L22 L91 R40 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:qed:wpaper:1536 |
| By: | Estelle CAMPENET; David DESMARCHELIER |
| Abstract: | The literature has highlighted the potential occurrence of a limit cycle through a Hopf bifurcation near the steady state of a competitive Ramsey economy when pollution significantly increases the marginal utility of consumption (compensation effect). This latter condition is necessary but not sufficient. More specifically, pollution inertia must be strong when pollution originates from production but not when it stems from consumption. This paper investigates the reasons for this difference and emphasizes the role of decreasing marginal productivity of capital in explaining it. |
| Keywords: | Ramsey model, Pollution inertia, Hopf bifurcation. |
| JEL: | E32 O44 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2025-10 |
| By: | Liu, Kai (Faculty of Economics, University of Cambridge); Mogstad, Magne (Dept. of Economics, University of Chicago); Salvanes, Kjell Gunnar (Dept. of Economics, Norwegian School of Economics and Business Administration) |
| Abstract: | We measure the returns to education in the presence of earnings uncertainty and employment risk over the life cycle. The context of our study is Norway, offering a credible instrument for schooling and population panel data with nearly career long earnings histories. We first characterize the causal relationship between schooling, earnings, and employment over the life cycle. This relationship allows us draw conclusions about how additional schooling affects the probability of having a job as well as the level and dispersion of earnings over the life cycle. To disentangle uncertainty from heterogeneity, we next model the underlying earnings process, targeting the estimated causal relationship between schooling, earnings, and employment over the life cycle. We then fit a life-cycle model with precautionary saving motive to the estimated earnings process and observed consumption profiles. The estimated model allows us to quantify how earnings uncertainty and employment risk affect the incentives to invest in education, and to examine the extent to which the progressive tax-transfer system distorts these incentives. |
| Keywords: | Returns to education; life-cycle earnings; income uncertainty; employment risk; precautionary savings |
| JEL: | D91 I26 J24 J31 |
| Date: | 2025–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhheco:2025_014 |
| By: | d'Avernas, Adrien; Vandeweyer, Quentin; Petersen, Damon |
| Abstract: | This paper studies how Treasury market dynamics depend on adjustments to the central bank balance sheet. We introduce a dynamic model of Treasury bonds with traditional and shadow banks. In the model, both Treasury and repo market disruptions arise as a joint consequence of three frictions: (i) balance sheet costs, (ii) intraday reserves requirements, and (iii) imperfect substitutability between repo and bank deposits. Our model highlights the critical role of both sides of the central bank’s balance sheet as well as agents’ anticipation of shocks and policy interventions in matching observed market dynamics. JEL Classification: E43, E44, E52, G12 |
| Keywords: | basis trade, hedge funds, liquidity risk, repo, reserves, shadow banks |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253066 |
| By: | Taco Prins (University of Amsterdam); Frederick van der Ploeg (University of Amsterdam and Tinbergen Institute); Ton S. van den Bremer (University of Amsterdam and Tinbergen Institute) |
| Abstract: | We analyse optimal investment in one of the most important forms of climate adaptation: flood protection. Investments to build and heighten dykes and surge barriers involve considerable adjustment costs, so that their construction locks in the level of flood protection for some time. Investment decisions must take into account both economic and sea level rise uncertainty over a horizon of several decades, where the latter is to a large extent driven by global warming. We put forward a tractable macro-finance DSGE model that includes flood risk. We obtain solutions for optimal flood protection as a function of these uncertainties, costs, and preferences regarding impatience, risk aversion and intertemporal substitution. Sea level rise uncertainty always leads to more flood protection. Economic uncertainty leads to less (more) protection if the elasticity of substitution is greater (less) than one. We illustrate our results with a calibrated case study for the Netherlands. |
| Keywords: | Sea level rise, flood risk, macroeconomic risk, climate adaptation, discounting, risk aversion, intertemporal substitution |
| JEL: | F64 Q51 Q54 |
| Date: | 2025–04–25 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20250030 |
| By: | Lukas Janasek (Institute of Economic Studies, Charles University, Prague, Czech Republic) |
| Abstract: | This paper develops a novel gradient-based reinforcement learning algorithm for solving dynamic quantile models with uncertainty. Unlike traditional approaches that rely on expected utility maximization, we focus on agents who evaluate outcomes based on specific quantiles of the utility distribution, capturing intratemporal risk attitudes via a quantile level ? ? (0, 1). We formulate a recursive quantile value function associated with time consistent dynamic quantile preferences in Markov decision process. At each period, the agent aims to maximize the quantile of a distribution composed of instantaneous utility combined with the discounted future value, conditioned on the current state. Next, we adapt the Actor-Critic framework to learn ?-quantile of the distribution and policy maximizing the ?-quantile. We demonstrate the accuracy and robustness of the proposed algorithm using an quantile intertemporal consumption model with known analytical solutions. The results confirm the effectiveness of our algorithm in capturing optimal quantile-based behavior and stability of the algorithm. |
| Keywords: | Dynamic programming, Quantile preferences, Reinforcement learning |
| JEL: | C61 C63 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2025_12 |