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on Dynamic General Equilibrium |
| By: | Pablo Guerron-Quintana (Boston College); James M. Nason (Centre for Applied Macroeconomic Analysis, Australian National University) |
| Abstract: | This chapter surveys Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models. We focus on New Keynesian (NK)DSGE models because of the ongoing interest shown in this class of models by economists in academic and policy-making institutions. Their interest stems from the ability of this class of DSGE model to transmit monetary policy shocks into endogenous fluctuations at business cycle frequencies. Intuition about this propagation mechanism is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on detrending its optimality and equilibrium conditions to construct a linear approximation of the model from which we solve for its linear decision rules. This solution is mapped into a linear state space model. It allows us to run the Kalman filter generating predictions and updates of the detrended state and control vari- ables and the predictive likelihood of the linear approximate NKDSGE model. The predictions, updates, and likelihood are inputs needed to operate the Metropolis-Hastings Markov chain Monte Carlo sampler from which we draw the posterior distribution of the NKDSGE model. The sampler also requires the analyst to pick priors for the NKDSGE model parameters and initial conditions to start the sampler. We review pseudo-code that implements this sampler before reporting estimates of a canonical NKDSGE model across samples that begin in 1982Q1 and end in 2019Q 4, 2020Q 4, 2021Q 4, and 2022Q 4. The estimates are compared across the four samples. This survey also gives a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research agenda. |
| Keywords: | dynamic stochastic general equilibrium; Bayesian; Metropolis-Hastings; Markov chain Monte Carlo; Kalman filter; likelihood. |
| JEL: | C32 E10 E32 |
| Date: | 2025–09–09 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1097 |
| By: | Michal Hlavacek (Charles University, Prague, Czech Republic); Ilgar Ismayilov (Charles University, Prague, Czech Republic) |
| Abstract: | This study examines how economic inequality influences the effectiveness of fiscal policy using a three-agent New Keynesian DSGE model with incomplete financial markets. The findings suggest that economies with a high share of liquidity-constrained households exhibit larger fiscal multipliers due to their higher marginal propensity to consume. Households respond differently to fiscal stimulus due to variations in their propensity to consume and ability to smooth consumption. Additionally, house prices exhibit a temporary decline in response to fiscal stimulus within the modeled framework. Sensitivity analyses show that factors such as loan-to-value ratios, household composition, and housing preferences significantly alter the fiscal multiplier, emphasizing the need to consider inequality in macroeconomic policy design. |
| Keywords: | Fiscal Policy, Economic Inequality, DSGE Models, Fiscal Multiplier, Heterogeneous Agents |
| JEL: | E62 D31 E21 C68 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2025_18 |
| By: | Nobuhiro Abe (Bank of Japan); Yuto Ishikuro (Bank of Japan); Koki Nakayama (Bank of Japan); Yutaro Takano (Bank of Japan) |
| Abstract: | Do heterogeneity and competition among banks matter for the macroeconomy? To address this question, we develop a Heterogeneous Bank New Keynesian (HBANK) model that incorporates oligopolistic competition among banks in both loan and deposit markets into an otherwise canonical New Keynesian model. We calibrate model parameters for the cost structure and demand for loans and deposits using data of the 170 largest banks in the U.S. Differences in the parameter values reflect differences among banks in the size of duration risk they take, markups of loan rates, and markdowns of deposit rates. Based on simulation exercises, we show that aggregate lending becomes more responsive to monetary and productivity shocks in our HBANK model than in a Representative Bank New Keynesian model (RBANK), primarily because of heterogeneity in duration risk and the responsiveness of loan markups among banks. |
| Keywords: | banking, business cycles |
| JEL: | E32 E43 E44 E52 G21 |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp25e09 |
| By: | Gantert, Konstantin |
| JEL: | E21 E22 E31 E32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325386 |
| By: | Chadha, J. S.; Corrado, G.; Corrado, L.; Buratta, I. D. L. |
| Abstract: | We investigate whether macroprudential policies support broader economic stability, particularly the welfare of households. For this purpose, we develop a New Keynesian business cycle model with agents subject to credit constraints and asset price fluctuations. The model differentiates between savers, who own firms and banks, and borrowers. The commercial bank sets the loan rate as a function of risk, specifically the value of housing collateral. We use occasionally binding constraints to capture nonlinearities arising from the zero lower bound (ZLB) on the policy interest rate and the borrowing constraint faced by borrower households. We examine two macroprudential tools: a countercyclical loan-to-value (LTV) ratio and a bank reserve requirement. We find that macroprudential tools significantly reduce the volatility of consumption and lending cycles and decrease both the expected frequency and severity of ZLB episodes. More generally, by attenuating the variance of the business cycle, particularly for borrower households, macroprudential tools reduce the need for monetary policy interventions. |
| JEL: | E32 E44 E51 E58 E62 |
| Date: | 2025–09–13 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2561 |
| By: | Neyer, Ulrike; Stempel, Daniel; Stevens, Alexandra |
| Abstract: | Households differ in their consumption baskets and inflation rates along the wealth and income distribution. We use German data to show that subsistence consumption is a main driver of these differences: the share of subsistence consumption in overall consumption is significantly higher for households at the lower end of the wealth and income distribution. We construct a price index for subsistence consumption and show that this price index exhibits larger volatility than the price indices constructed for the average consumption basket and the basket of households with average and high income. We then set up a Heterogeneous Agent New Keynesian (HANK) model that incorporates these facts to analyze the consequences of different consumption baskets and inflation heterogeneity for monetary policy transmission. We find that heterogeneous consumption baskets across households weaken monetary policy transmission. This is due to the heterogeneous responses of inflation rates to monetary policy shocks across households, larger labor supply heterogeneity, and a novel indirect transmission channel of monetary policy operating through the real value of subsistence consumption. |
| Keywords: | HANK model, inflation heterogeneity, inequality, monetary policy transmission, subsistence consumption |
| JEL: | E12 E21 E31 E32 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:dicedp:327105 |
| By: | Eric Donald; Masao Fukui; Yuhei Miyauchi |
| Abstract: | We study the optimal allocation of population and consumption in a dynamic spatial general equilibrium model with frictional migration, where households' idiosyncratic location preference shocks are private information. We derive a recursive formula for the constrained-efficient allocation, capturing the trade-off between consumption smoothing and efficient migration. In a quantitative model calibrated to the US economy featuring both cross-state migration and risk-free savings, we find that the constrained-efficient allocation features lower population but higher average consumption in less productive states than the status quo, achieving efficiency and spatial redistribution simultaneously through dynamic incentives. In response to local negative productivity shocks, the constrained-efficient allocation features more front-loaded consumption than the status quo, with systematic heterogeneity linked to the location’s pre-shock fundamentals. |
| JEL: | E0 F0 R0 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34290 |
| By: | César Barreto; Christian Merkl |
| Abstract: | Our paper documents the importance of ex ante worker heterogeneity for labor market dynamics and for the composition of the unemployment pool over the business cycle. In recessions, the unemployment pool shifts toward workers with higher wages in their previous jobs. Based on administrative data for Germany and two-way worker and firm wage fixed effects, we show that this shift is mainly connected to worker heterogeneity, not to firm heterogeneity. We calibrate a search and matching model with ex ante worker heterogeneity to the estimated relative residual wage dispersion across worker fixed-effect groups. We show that a lower idiosyncratic match-specific shock dispersion for high-wage workers is key for the larger relative fluctuations of their separation rate as well as for the positive comovement between prior wages and fixed effects of unemployed workers with aggregate unemployment. We argue that firm-based explanations, such as cyclical financial frictions, are unlikely to be key drivers for the documented empirical patterns. |
| Keywords: | labor market flows, separations, fixed effects, labor market dynamics |
| JEL: | E24 J16 J31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12165 |
| By: | Henrique S. Basso (BANCO DE ESPAÑA AND CEMFI); Omar Rachedi (ESADE, UNIVERSITAT RAMON LLULL) |
| Abstract: | Leveraging variation in robot adoption across U.S. metropolitan areas, we document that automation reduces the sensitivity of inflation to unemployment. To rationalize this finding, we build a New Keynesian model with search frictions in the labor market where robot adoption flattens the Phillips curve. The key channel is the option value of automation: the threat of automating labor tasks alters workers’ effective bargaining power, muting the wage sensitivity to unemployment. We validate the relevance of this channel in the data by showing that robot adoption reduces the sensitivity of inflation to unemployment relatively more in highly unionized metropolitan areas. |
| Keywords: | E24, E31, J31, O33 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2536 |
| By: | Den Haan, Wouter J.; Ferrari, Alessandro; Mazelis, Falk; Ristiniemi, Annukka |
| Abstract: | We develop a model in which agents face unemployment risk, but also age and eventually retire. We study the impact of different retirement schemes on life-cycle consumption and the monetary transmission mechanism. Agents save because of a fall in income upon retirement, changes along the life-cycle wage profile, and unemployment risk. Changes in retirement policies affect the distribution of available assets (bonds) among the middle aged and the young, which in turn can have a strong impact on the ability of the young to insure themselves against unemployment risk. Interestingly, it is possible that an increase in retirement benefits leads to higher consumption levels during sustained unemployment spells even though the associated increase in taxes reduces unemployment benefits. The reason is that this policy induces the middle aged to save less which leaves more of the available asset supply to the young. A reduction in the interest rate has a bigger impact on those for whom labor market conditions improve the most and – due to a larger negative income effect – has a smaller impact on those who save more. In terms of the aggregate impact of monetary-policy shocks, our paper confirms conventional wisdom that the expansion is magnified in the presence of incomplete markets, since it is then accompanied by a fall in precautionary savings. The novel aspect of our analysis is that the extent of the incompleteness, i.e., the ability of those subject to unemployment risk to insure themselves, is endogenous. Specifically, it is reduced as the young (middle-aged) hold a larger (smaller) fraction of the available asset supply and this distribution is not only affected by retirement policies, but also by government bond supply and the life-cycle wage profile. Thus, understanding the distribution of assets across different age cohorts is not only important for understanding life-cycle consumption patterns, but also business cycles. JEL Classification: E43, E52, E21, E24 |
| Keywords: | aging, monetary-policy shocks, New-Keynesian model, precautionary savings, unemployment risk |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253125 |
| By: | Anushka Mitra |
| Abstract: | The unemployment rate remains elevated long after recessions, a persistence that standard search-and-matching models cannot explain. I show that noise shocks—expectational errors due to the noise in received signals about aggregate shocks—account for much of this sluggishness. Using a structural VAR, I find that absent noise shocks unemployment would have recovered to its pre-recession level six quarters earlier over 1968–2019. To interpret this evidence, I develop a search-and-matching model with on-the-job search, endogenous search effort, and wage rigidity. Embedding imperfect information generates two channels of persistence: slow learning amplifies the effects of persistent productivity shocks, and noise shocks provide an additional source of sluggishness, further magnified by sticky wages and vacancy posting. The model successfully replicates both the slow recovery of unemployment and systematic forecast errors, highlighting imperfect information as a key mechanism behind post-recession labor market dynamics. |
| Keywords: | Imperfect Information; Labor Market; Business Cycles |
| JEL: | E24 E32 E70 |
| Date: | 2025–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1423 |
| By: | Semik, Sofia |
| JEL: | E52 H23 Q43 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc25:325397 |
| By: | Lee, Jong-Wha; SONG, Eunbi |
| Abstract: | This study examines the factors underlying the sharp decline in marriage and fertility rates by integrating microdata analysis with a structural macroeconomic model. Drawing on 25 years of individual-level panel data from the Korean Labor and Income Panel Study, it employs discrete-time survival models to examine how individual and regional factors influence the incidence of first marriage and childbirth. The findings show that rising educational and marriage-related expenses significantly reduce the likelihood of marriage, whereas increased female labor force participation and escalating child education costs are associated with lower probabilities of childbirth. These empirical patterns motivate a dynamic overlapping-generations model with endogenous family formation, human capital investment, and intra-household bargaining. The model incorporates gender-based differences in partner matching and household labor, which influence time allocation and marriage utility, particularly for college- educated women. Simulation results indicate that rising marriage and child-rearing costs have been the primary drivers of declining family formation since 1990, while increases in women's education have played a modest role. The findings further suggest that a package of targeted policies--such as childcare and education support, marriage-cost subsidies, and gender-equalizing reforms in households and the labor market--could raise the fertility rate from 0.75 to around 1.2, a level comparable to that of other low-fertility advanced countries. |
| Keywords: | growth, fertility, gender equality, human capital accumulation, marriage, Korea |
| JEL: | E24 J11 J12 J13 J71 O53 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:agi:wpaper:02000249 |
| By: | Naiyue CUI; Minchung HSU; Yunfang HU |
| Abstract: | This study extends Hansen and Imrohoroglu (2016) by incorporating female labor supply and a home sector into a growth model to assess Japan’s fiscal sustainability and quantify the role of female labor in stabilizing government debt. The model is calibrated to the Japanese economy, which features a sizable gender productivity gap in the market sector, with female labor efficiency below 50% of the male level. Absent policy intervention, model simulations project the debt-to-output ratio to exceed 250% by 2035. Stabilizing debt at 60% of output using the consumption tax alone requires raising the tax rate to 40.9% starting in 2035, followed by a reduction to 24.4% once the target is achieved in 2089. We also find that reforming Japan’s current spousal tax treatment is critical. Removing the current spousal tax treatment together with the debt stabilization improves female labor supply and reduces the required consumption tax rate to 33.9% during 2035–2089 and to 18.2% at the target. Additional simulations likewise highlight the importance of gender equality for labor supply and long-run fiscal outcomes. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25095 |
| By: | Alessandra Peter |
| Abstract: | In this paper, I document systematic heterogeneity in ownership and financing of firms across Eurozone countries. To rationalize these differences, I build a quantitative general equilibrium model of workers and entrepreneurs who choose debt and equity financing of their firms, subject to rich country-specific financial frictions. The novel data on firm ownership and financing, combined with the structure of the model, allows me to quantify the level of debt and equity frictions in each country. Quantitatively, I find much larger output effects from equity frictions: harmonizing them across countries would lead to nearly four times larger output effects compared to debt frictions, and removing them would increase aggregate output by 75\% more. The larger impact on output is due not only to the estimated levels and dispersion of equity frictions, but also to the fact that equity provides greater risk sharing, which further incentivizes entrepreneurs to expand their firms. Through their effect on risk sharing, equity frictions also rationalize the observed negative relationship between equity financing and wealth inequality. Quantitatively, they are responsible for over 70\% of the explained variation in top wealth shares across countries. |
| JEL: | E02 E44 G32 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34301 |
| By: | Matthew Gudgeon; Pablo Guzman-Pinto; Johannes Schmieder; Simon Trenkle; Han Ye |
| Abstract: | We show that the non-employment effects of unemployment insurance (UI) for older workers depend critically on retirement policy. Using German data, we document large bunching in UI inflows at the age that allows workers to claim their pension following UI expiration. Inflows respond strongly to several UI and pension reforms. We probe the implications of these behavioral responses using a dynamic model and find that Germany’s UI and retirement policy changes had substantial effects on the unemployment rate of older workers. Furthermore, we calculate large fiscal externalities from extending UI for older workers, especially under generous retirement policies. |
| Keywords: | Unemployment insurance, moral hazard, retirement, older workers, interactions |
| JEL: | J26 J64 J65 |
| Date: | 2023–12 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_481v2 |
| By: | Giancarlo Corsetti; Anna Lipinska; Giovanni Lombardo |
| Abstract: | We study international risk sharing across countries differing in size, openness, and productivity distributions, emphasizing fat tails. In a canonical IRBC model, safer economies benefit through asset and terms-of-trade revaluations, while riskier ones smooth consumption at the cost of lower wealth. Calibrated to non-Gaussian shocks, country size and openness, the model predicts welfare gains between 0.03% and 6.9% of permanent consumption (median 6%). Assuming Gaussian shocks reduces gains by about 2 percentage points, while assuming equal country size and no home bias renders them negligible. Clustering economies by openness, size, and higher moments accounts for the cross-country distribution of gains. |
| Keywords: | asymmetries in risk, openness, country size, tail risk, gains from risk sharing, consumption smoothing, terms of trade, wealth transfers |
| JEL: | F15 F41 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1293 |
| By: | Jake D. Orchard |
| Abstract: | This paper shows that adverse macroeconomic shocks systematically increase inflation for low-income households relative to high-income households. I document two key facts: (i) during every U.S. recession since 1959, aggregate spending shifts toward products disproportionately purchased by low-income households (necessities); and (ii) relative prices of necessities rise during recessions. These patterns can be explained by a model with non-homothetic demand and a concave production possibility frontier: shocks that reduce expenditure induce households to reallocate spending from luxuries to necessities, raising their relative prices. I empirically show that this mechanism operates for both demand and supply shocks, using monetary policy and oil price news shocks. Incorporating this mechanism into a quantitative model reproduces most of the variation in necessity prices and shares from 1961 to 2024. The model shows that the fall in expenditure due to a recessionary shock similar to the Great Recession leads inflation to increase by more than 1.5 percentage points for low-income households relative to high-income households. The results suggest that low-income households are hit twice by adverse shocks: once by the shock itself and again as their price index increases relative to that of other households. |
| Keywords: | Inflation; Non-homotheticity; Real income inequality; Business cycle |
| JEL: | E30 D12 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-85 |
| By: | Marcelo Veracierto |
| Abstract: | This paper introduces a general method for computing aggregate fluctuations in economies with private information. Instead of the cross-sectional distribution of agents across individual states, the method uses as a state variable a vector of spline coefficients describing a long history of past individual decision rules. The model is then linearized with respect to that vector. Applying the computational method to a Mirrlees RBC economy with known analytical solution recovers the solution perfectly well. This test provides significant confidence on the accuracy of the method. |
| Keywords: | Computational methods; Heterogeneous agent; Business cycle; Private information |
| JEL: | C63 D82 E32 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:101803 |