|
on Dynamic General Equilibrium |
| By: | Vasilki Dimakopoulou; George Economides; Apostolis Philippopoulos |
| Abstract: | This paper investigates whether the new expenditure rule of the European Union (EU) can restore dynamic stability and determinacy with bounded public debt in an otherwise unstable economic environment. We build upon the standard New Keynesian dynamic general equilibrium model so as to compare our results to the well-known results of Leeper (1991, 2016) and, more generally, to the literature on the fiscal-monetary policy mix. We find that the EU's new fiscal rule, despite its intentions, works practically like active fiscal policy. Given this, it does not leave room for active monetary (interest rate) policy; instead, the central bank has to accommodate the active fiscal policy which means that the policy interest rate can react only weakly to inflation. This will undermine the ECB's key mandate. |
| Keywords: | fiscal rules, macroeconomic policy assignment |
| JEL: | E62 E63 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12139 |
| By: | Anastasiia Antonova; Gernot Müller |
| Abstract: | When confronted with sectoral shocks, policymakers often resort to targeted, sector-specific taxes in an \emph{ad hoc} fashion. Based on the New Keynesian Network model, we characterize the optimal tax response to sectoral shocks: it features twice as many tax instruments as there are sectors, is budget-neutral, and not confined to the sector where the shock originates. We show that the optimal policy can be approximated by a simple rule that responds to inflation in the shocked sector and adjusts tax instruments in other sectors according to input-output linkages. We study its quantitative performance in a calibrated version of the model. |
| Keywords: | sectoral shocks, sales taxes, production subsides |
| JEL: | E32 E62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12144 |
| By: | Zheng Gong |
| Abstract: | I establish the existence of a distributionally neutral benchmark for aggregate shock transmission in incomplete-market heterogeneous-agent (HA) economies, where all agents are equally exposed to the shock. In this benchmark, aggregates satisfy the equilibrium conditions of a fictitious representative-agent (RA) economy. Leveraging this result, I develop a tractable framework to identify and quantify redistribution mechanisms that drive the divergence between HA and RA outcomes. The framework (i) uncovers the mapping from deep structural parameters to redistribution and (quantitatively) to general-equilibrium dynamics; (ii) clarifies the roles of fiscal policy and investment; (iii) provides rescalable sufficient statistics portable across shock types; and (iv) identifies new redistribution channels in two-asset HANK and overlapping generation models. |
| Keywords: | Heterogeneous households; Monetary Policy; Fiscal Policy; Incomplete markets; Inequality; Business cycles. |
| JEL: | D31 E21 E43 E52 E62 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_624v2 |
| By: | Morteza Ghomi (BANCO DE ESPAÑA); Jochen Mankart (DEUTSCHE BUNDESBANK AND NÁRODNÁ BANKA SLOVENSKA); Rigas Oikonomou (UC LOUVAIN AND UNIVERSITY OF SURREY); Romanos Priftis (EUROPEAN CENTRAL BANK) |
| Abstract: | Government spending effectiveness depends critically on how it is financed. Using state-dependent SVAR models and local projections on post-war US data, we show that fiscal expansions financed with short-term debt generate significantly larger output multipliers than those financed with long-term debt. This difference mainly stems from private consumption responses: short-term financing crowds in consumption while long-term financing does not. To rationalize this finding, we construct an incomplete markets model in which households invest in short-term and long-term assets. Short assets provide liquidity/safety services; households can (more readily) use them to cover sudden idiosyncratic spending needs. An increase in the supply of these assets, through a short-term debt-financed government expenditure shock, boosts private consumption. We first show this mechanism analytically in a simplified model, and then quantify it in a carefully calibrated New Keynesian model. We find that fiscal multipliers differ substantially across financing modes, with short-term-financed shocks typically exceeding unity while long-term-financed shocks typically fall below unity. We show these differences persist across monetary and fiscal policy regimes, with important implications for optimal debt management and stimulus design. |
| Keywords: | spending multiplier, fiscal policy, debt maturity, incomplete markets, SVAR, local projections |
| JEL: | D52 E31 E43 E62 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2532 |
| By: | Tommaso Gasparini |
| Abstract: | Uncertainty shocks, by propagating through the banking sector, play a crucial role in driving business cycle fluctuations. To examine how the recent decline in U.S. banking competition has affected the transmission of these shocks, I develop a dynamic stochastic general equilibrium model featuring heterogeneous banks, imperfect banking competition and financial frictions. The model shows that reduced competition in the banking sector leads to higher borrowing rates and increased risk-taking by borrowers. As a result, uncertainty shocks generate more pronounced increases in defaults and sharper contractions in investment and output in less competitive banking environments. Quantitatively, the model implies that the recent decline in U.S. banking competition results in a 0.1 percentage points larger drop in GDP one year after an uncertainty shock. This finding is supported by panel local projection evidence indicating that lower banking competition amplifies the negative impact of uncertainty on GDP. |
| Keywords: | Financial Frictions, Financial Intermediaries, Heterogeneous Agents, Market Power, Uncertainty |
| JEL: | E32 E44 G21 L13 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:997 |
| By: | Raquel Fonseca; Étienne Lalé; François Langot; Thepthida Sopraseuth |
| Abstract: | In this paper, the authors develop a general equilibrium overlapping generations model with human capital to analyze the evolution of the wage premium associated with university education and lifetime earnings profiles in the United States between 1940 and 2020. The model incorporates choices related to schooling and on-the-job training, along with aggregate economic shocks and cohort-specific trends in initial skill endowments and learning abilities. The estimated model replicates the W-shaped pattern of the college wage premium as well as the flattening and subsequent steepening of earnings over the life cycle. The results show that variations in labor efficiency—rather than shifts in relative skill prices—are the primary drivers of these dynamics. The authors also highlight the significant role of declining initial skills and learning capacities among more recent cohorts. However, adjustments in educational attainment and relative wages help offset these disadvantages. Without such market mechanisms, the lifetime earnings gap between individuals with and without university degrees would widen substantially, and the college premium would double. Dans ce document, les auteur‧e‧s développent un modèle d’équilibre général à générations imbriquées avec capital humain pour analyser l’évolution de la prime salariale liée aux études universitaires et des profils de revenus sur l’ensemble de la vie active aux États-Unis entre 1940 et 2020. Le modèle prend en compte les choix de scolarisation et de formation en emploi, ainsi que des chocs économiques d’ampleur variable et des tendances propres aux différentes générations quant à leurs compétences initiales et leurs capacités d’apprentissage. Le modèle estimé reproduit la trajectoire en « W » de la prime universitaire ainsi que la tendance des revenus à s’aplatir, puis à s’accentuer à nouveau au cours de la vie professionnelle. Les résultats montrent que ce sont les variations dans l’efficacité du travail — plutôt que dans les écarts de rémunération selon le niveau de compétence — qui expliquent principalement ces changements. Les auteur‧e‧s soulignent également le rôle déterminant de la baisse des compétences initiales et des capacités d’apprentissage chez les générations récentes. Toutefois, les ajustements dans les niveaux de scolarité atteints et dans les salaires relatifs permettent de compenser en partie ces désavantages. En l’absence de ces mécanismes, les écarts de revenus sur l’ensemble de la vie entre travailleur‧euse‧s diplômé‧e‧s et non diplômé‧e‧s se creuseraient davantage, et la prime universitaire doublerait. |
| Keywords: | College premium, Life-cycle wage profile, On-the-job training, Human capital, Technological progress, Prime d'études, Profil salarial tout au long du cycle de vie, Formation en cours d'emploi, Capital humain, Progrès technologique |
| JEL: | E24 E25 J24 J31 |
| Date: | 2025–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:cir:cirwor:2025s-28 |
| By: | Giacomo Mangiante; Pascal Meichtry |
| Abstract: | This paper investigates the distributional effects of conventional monetary policy and forward guidance. Using a structural VAR model, we estimate their impact on macroeconomic aggregates and consumption inequality in the United States. While aggregate real and financial variables respond similarly to both policy tools, their effects on consumption inequality diverge significantly. Conventional monetary policy shocks lead to countercyclical inequality, whereas forward guidance announcements result in a procyclical response, driven by heterogeneous reactions across the household spending distribution. We rationalize these contrasting outcomes both empirically and through a tractable New Keynesian model featuring household heterogeneity and government redistribution. In the model, a fiscal adjustment that differs in timing and magnitude induces a sharper decline in consumption among financially constrained households following conventional rate hikes but a more muted effect under forward guidance. These findings highlight the importance of accounting for the distributional consequences of different monetary policy tools and emphasize the critical role of fiscal policy in shaping inequality dynamics. |
| Keywords: | Household Heterogeneity, Forward Guidance, Inequality, Monetary Policy, Hand-to-Mouth, Fiscal Transfers |
| JEL: | D31 E21 E52 E58 E62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:996 |
| By: | Mikayel Sukiasyan |
| Abstract: | What is the best macroprudential regulation when households differ in their exposure to profits from the financial sector? To answer the question, I study a real business cycle model with household heterogeneity and market incompleteness. In the model, shocks are amplified in states with high leverage, leading to lower investment. I consider the problem of a Ramsey planner who can finance transfers with a distortive tax on labor and levy taxes on the balance sheet components of experts. I show that the optimal tax on capital purchases is zero and the optimal policy relies mostly on a tax on deposit issuance. The latter redistributes between agents by affecting the equilibrium rate on deposits. The welfare gains from optimal policy are due to both redistribution and insurance and are larger the more unequal the initial distribution is. A simple tax rule that targets a level of leverage can achieve most of the welfare gains from optimal policy. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.10933 |
| By: | Daniela Del Boca; Christopher Flinn; Ewout Verriest; Matthew Wiswall |
| Abstract: | We construct a dynamic model of child development where forward-looking parents and children jointly take actions to increase the child’s cognitive and non-cognitive skills within a Markov Perfect Equilibrium framework. In addition to time and money investments in their child, parents also choose whether to use explicit incentives to increase the child’s self-investment, which may reduce the child’s future intrinsic motivation to invest by reducing the child’s discount factor. We use the estimated model parameters to show that the use of extrinsic motivation has large costs in terms of the child’s future incentives to invest in themselves. |
| Keywords: | Time allocation, Child development, Parenting styles |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:cca:wchild:127 |
| By: | Adrian Ifrim; Robert Kollmann; Philipp Pfeiffer; Marco Ratto; Werner Roeger |
| 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. |
| Date: | 2025–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:eca:wpaper:2013/394303 |
| By: | Chao Gu; Janet Hua Jiang; Liang Wang |
| Abstract: | We construct a New Monetarist model with labor market search and identify two channels that affect the long-term relationship between inflation and unemployment. First, inflation lowers wages through bargaining because unemployed workers rely more heavily on cash transactions and suffer more from inflation than employed workers: this wage-bargaining channel generates a downward Phillips curve without assuming nominal rigidity. Second, inflation increases the firm’s financing costs, which discourages job creation and increases unemployment; this cash-financing channel leads to an upward-sloping Phillips curve. We calibrate our model to the U.S. economy. The improvement in firm financing conditions can explain the observation that the slope of the long-run Phillips curve has switched from positive to negative post-2000. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates; Inflation and prices; Labour markets |
| JEL: | E24 E31 E44 E51 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-26 |
| By: | Martin Gervais; Roozbeh Hosseini; Lawrence Warren |
| Abstract: | This paper studies how unemployment insurance (UI) generosity affects reservation wages, re-employment wages, and benefit take-up. Using Benefit Accuracy Measurement (BAM) data, we estimate a cross-sectional elasticity of reservation wages with respect to weekly UI benefits of 0.014. Exploiting state variation in Pandemic Unemployment Assistance (PUA) intensity and the timing of federal supplements, we find that expanded benefits during COVID-19 increased reservation wages by 8–12 percent. Using CPS rotation data, we also document a 9 percent rise in re-employment wages for UI-eligible workers relative to ineligible workers. Over the same period, the UI take-up rate rose from roughly 30 to 40 percent; Probit estimates indicate that higher benefit levels, rather than changes in observables, account for this increase. A directed search model with an endogenous filing decision replicates these facts: generosity primarily operates through the extensive margin of take-up, which mutes the pass-through from benefits to wages. |
| Keywords: | Unemployment Benefits, Reservation/Re-Employment Wage, BAM, CPS |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:25-59 |
| By: | Lorenzo Caliendo (Yale University); Samuel Kortum (Yale University); Fernando Parro (University of Rochester) |
| Abstract: | We develop a dynamic multi-country Ricardian trade model with aggregate uncertainty, where trade imbalances emerge as countries exchange goods and assets. We introduce a method for computing counterfactuals in this setting, which doesn't require specifying the stochastic process of shocks or solving for asset prices. Applying the model to tariff shocks, we quantify their effects on prices, income, spending, and trade imbalances. We find that higher U.S. tariffs reduce the U.S. trade deficit through general equilibrium adjustments, but raise domestic prices and lower real consumption. Our findings highlight that movements in trade imbalances are shaped by the structure of global trade and finance, and that attempts to influence external balances through changes in trade barriers carry significant implications for real economic outcomes. |
| Date: | 2025–08–25 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2448r1 |