|
on Dynamic General Equilibrium |
| By: | Ifrim, Adrian; Kollmann, Robert; Pfeiffer, Philipp; Ratto, Marco; Roeger, Werner |
| Abstract: | Based on an estimated two-region dynamic general equilibrium model, we show that the persistent productivity growth differential between the Euro Area (EA) and rest of the world (RoW) has been a key driver of the EA trade surplus since the launch of the Euro. A secular decline in the EA’s spending home bias and a trend decrease in relative EA import prices account for the stability of the EA real exchange rate, despite slower EA output growth. By incorporating trend shocks to growth and trade, the analysis departs from much of the open-economy macroeconomics literature which has focused on stationary disturbances. Our results highlight the relevance of non-stationary shocks for the analysis of external adjustment. |
| Keywords: | global growth divergences, trade balance, real exchange rate, estimated DSGE model, Euro Area, demand and supply shocks, persistent growth shocks |
| JEL: | C5 E2 E3 F3 F4 |
| Date: | 2025–07–21 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125401 |
| By: | Alexis Akira Toda |
| Abstract: | Since McCallum (1987), the presence of a productive non-reproducible asset ("land") has been thought to rule out inefficiency in overlapping generations (OLG) models, though theoretical controversies remain. This paper proves that if the natural interest rate (the counterfactual interest rate without land) is lower than the land rent growth rate and the elasticity of substitution between land and non-land factors in the production function exceeds 1, a land bubble necessarily emerges, which makes the economy efficient. We also present an example of an inefficient equilibrium when the natural interest rate is higher than the rent growth rate. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.16002 |
| By: | Michael Barczay (European University Institute and Study Center Gerzensee) |
| Abstract: | This paper studies the optimal design of differentiated consumption taxes in the presence of progressive labor income taxes and capital income taxation. A quantitative heterogeneousagent model with non-homothetic preferences and uninsurable idiosyncratic risk is estimated using US consumption and price data to match expenditure patterns across the income distribution. Solving the Ramsey problem in which the government jointly chooses labor income and commodity taxes, the optimal policy prescribes a subsidy on necessities of -52% and a positive tax of 7% on luxuries, accompanied by a reduction in labor tax progressivity. Three mechanisms account for these results: subsidized necessities provide consumption insurance, taxation of luxuries acts as an implicit tax on existing wealth, and differentiated rates strengthen labor supply incentives among highly productive households. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:szg:worpap:2503 |
| By: | Ding Dong; Allen Hu; Zhaorui Li; Zheng Liu |
| Abstract: | Using novel measures of information acquisition, we document causal evidence of a feedback loop between firms’ credit access and information acquisition. To examine the macroeconomic implications of this feedback loop, we develop a tractable general equilibrium framework with financial frictions and endogenous information acquisition. In line with the empirical evidence, the model predicts that a rise in information costs raises the level of uncertainty and reduces a firm’s equity value, hampering its credit access. On the other hand, tightened credit constraints restrain activity of high-productivity firms, leading to misallocation that reduces aggregate productivity and firm profits, and discouraging information acquisition. This feedback loop creates a finance-uncertainty trap that substantially amplifies and prolongs business cycle fluctuations. |
| Keywords: | information acquisition; endogenous uncertainty; financial frictions; misallocation; Business Cycles |
| JEL: | D83 E32 E44 |
| Date: | 2025–07–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:101432 |
| By: | Piergallini, Alessandro |
| Abstract: | I develop flexible- and sticky-price general equilibrium models that embody endogenous corporate financing decisions affecting firm value due to distortionary taxes. Nominal interest-rate variations impact the costs of debt and equity capital asymmetrically and thereby induce firms to modify the financial structure, altering the gap between the optimization-based weighted average cost of capital and the real interest rate. Under these circumstances, I characterize conditions under which rules-based monetary policies that set the nominal interest rate as an increasing function of the inflation rate induce aggregate stability in the form of a unique stable equilibrium. In contrast to what is commonly argued, I demonstrate that both passive interest rate policies, which underreact to inflation, and mildly active interest rate policies, which overreact to inflation but below a threshold reflecting both tax and capital structures, ensure determinacy of equilibrium. Conversely, excessively aggressive inflation-fighting monetary actions are destabilizing in the presence of price stickiness by generating either multiple equilibria or the nonexistence of stable equilibria. Under the stabilizing monetary regimes, I prove that macroeconomic dynamics following either interest rate normalization or temporary monetary tightening critically depend upon the tax code and the steady-state debt-equity ratio. |
| Keywords: | Corporate Finance; Firm Financial Structure; Weighted Average Cost of Capital; Distortionary Taxation; Interest Rate Policy; Equilibrium Dynamics; Monetary Policy Shocks. |
| JEL: | E31 E52 G32 H24 H25 |
| Date: | 2025–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125362 |
| By: | Admire Tarisirayi Chirume; James Hurungo; Brandon Aaron Chinoperekweyi |
| Abstract: | This study explores the effects of climate shocks on South Africas macroeconomic stability and monetary policy dynamics through a simulation-based dynamic stochastic general equilibrium model. It incorporates climate variability as a key factor influencing inflation expectations, output and other macroeconomic variables. The paper examines how climate-induced disruptions such as changes in agricultural productivity, natural disasters and environmental conditions affect inflation, employment, exchange rates and interest rates over a 50-year horizon (20252075). The findings reveal that climate variability significantly affects inflation expectations and economic output, necessitating adaptive monetary policies that incorporate climate risks. The study underscores the importance of integrating climate considerations into macroeconomic frameworks to enhance the resilience of South Africas economy, emphasising policy measures such as interest rate adjustments, climate-informed inflation targeting and long-term strategic planning to mitigate climate-related economic disruptions. |
| Date: | 2025–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:rbz:wpaper:11087 |
| By: | James Cloyne; Òscar Jordà; Sanjay R. Singh; Alan M. Taylor |
| Abstract: | Using long-run cross-country panel data, we document that (i) contemporaneous credit growth strongly predicts contemporaneous equity returns with positive sign, and (ii) lagged credit growth strongly predicts contemporaneous equity returns with negative sign. This correlation reversal is robust to added controls for contemporaneous and lagged consumption growth and these credit factors have greater explanatory power than the consumption factors. We find that a general equilibrium model with financial frictions and rational expectations fails to match the empirically estimated sign on regression coefficients. Diagnostic expectations, instead, help recover the empirically estimated contemporaneous sign as well as the reversal observed in the data. The two features of diagnostic expectations – extrapolation and systematic reversal – are key to improving the asset pricing implications of the general equilibrium model. |
| Keywords: | financial frictions; expectations; asset prices; credit growth |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:101463 |
| By: | Yasin Kürsat Önder; Jose Villegas (-) |
| Abstract: | A central challenge of macroeconomic policy is stimulating demand during crises. We show that the price of credit, not just access, is a key friction. Exploiting Belgium’s 2020 Credit Guarantee Scheme—where guaranteed loan rates fell 25 basis points for firms below 50 employees, with fees remitted to the government—we isolate a pure borrowing-cost shock. Lower rates increased investment, employment, revenues, and survival, mainly through substitution away from costlier market loans. A structural quantitative model matches empirical elasticities and shows that unexpected guarantees raise welfare, but recurrent policies increase leverage, elevate default risk, and can generate welfare losses. |
| Keywords: | Credit guarantees, price frictions, defaults, regression discontinuity design, debt overhang |
| JEL: | E32 G21 H81 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:25/1118 |
| By: | Jiacheng Fan; Xue Dong He; Ruocheng Wu |
| Abstract: | We study a dynamic asset pricing problem in which a representative agent is ambiguous about the aggregate endowment growth rate and trades a risky stock, human capital, and a risk-free asset to maximize her preference value of consumption represented by the {\alpha}-maxmin expected utility model. This preference model is known to be dynamically inconsistent, so we consider intra-personal equilibrium strategies for the representative agent and define the market equilibrium as the one in which the strategy that clears the market is an intra-personal equilibrium. We prove the existence and uniqueness of the market equilibrium and show that the asset prices in the equilibrium are the same as in the case when the agent does not perceive any ambiguity but believes in a particular probabilistic model of the endowment process. We show that with reasonable parameter values, the more ambiguity the agent perceives or the more ambiguity-averse she is, the lower the risk-free rate, the higher the stock price, the higher the stock risk premium, and the lower the stock volatility. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.04093 |
| By: | Philipp Hohn; Torben Klarl |
| Abstract: | This paper suggests a micro-founded growth theory of human capital that incorporates three important ingredients: i) learning in a knowledge network, ii) possible skill-down-grading due to knowledge obsolescence, and, iii) fear of technological unemployment due to automation. Heterogeneous agents (optimally) split their time between learning-by-exchanging knowledge or working in the final goods sector. On the aggregate level, our benchmark model shows that learning and the degree of connectivity within the knowledge network directly impact the growth rate of the economy. Moreover, we show the existence of a poverty trap in which society stagnates due to an insufficient level of human capital that is in particular governed by the degree of knowledge obsolescence. In an extension, we control for the fact that learning is a cognitively demanding task associated with learning errors due to cognitive constraints. Therefore, two groups of agents are distinguished: Cognitively constrained and rational optimizers, where both can switch endogenously between a low and high-skilled state. We use this extension to numerically quantify the effects of cognitive constraints on human capital inequality. Inter alia, we show that a knowledge obsolescence shock has transitional as well as long-run negative effects on human capital inequality, where in relative terms, cognitively constrained agents are more affected than their rational counterparts. |
| Keywords: | Human capital, innovation, inequality, automation, knowledge network |
| JEL: | O11 O33 O40 E23 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:atv:wpaper:2503 |