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on Dynamic General Equilibrium |
| By: | Luis Herrera (BANCO DE ESPAÑA); Jesús Vázquez (UNIVERSITY OF THE BASQUE COUNTRY (UPV/EHU)) |
| Abstract: | This paper contributes to two strands of business cycle literature –news shocks and bounded rationality– by assessing the empirical importance of total factor productivity (TFP) news shocks while relaxing the rational expectations assumption. We estimate a medium-scale dynamic stochastic general equilibrium (DSGE) model, incorporating financial frictions and TFP news shocks, under two different expectation formation mechanisms: rational expectations (RE) and adaptive learning (AL). The results suggest that AL amplifies the effects of financial market frictions, leading to three key findings. First, AL improves the model’s fit, as shown in the related literature, and better replicates the volatility of several aggregate variables. Second, the AL amplification results in a deflationary response and a more persistent reaction of lending spreads to TFP news shocks. Third, AL increases the importance of pure news shocks (i.e. purely anticipated shocks), amplifying their effects through both expectation and credit channels. Finally, we show that the dynamics generated by the DSGE model under AL align more closely with empirical vector autoregression evidence than those produced by the RE version of the DSGE model. |
| Keywords: | news shocks, bounded rationality, financial frictions |
| JEL: | E30 E32 E44 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2531 |
| By: | Sardone, Alessandro |
| Abstract: | This paper examines the macroeconomic and distributional effects of the European Union's transition to Net Zero emissions through a gradually increasing carbon tax. I develop a New Keynesian Environmental DSGE model with two household types and distinct energy and non-energy sectors. Five alternative uses of carbon tax revenues are considered: equal transfers to households, targeted transfers to Hand-to-Mouth households, subsidies to green energy firms, and reductions in labor and capital income taxes. In the absence of technological progress, the carbon tax policy induces a persistent increase in energy prices and a reduction in GDP, investment, and consumption. Headline inflation falls below zero in the medium run, reflecting weaker aggregate demand. Distributional outcomes vary significantly depending on the implemented revenue recycling scheme: targeted transfers are the most progressive but entail larger macroeconomic costs, while subsidies and tax cuts mitigate output and investment losses but are less effective in narrowing the consumption gap. A limited foresight scenario, in which agents learn about policy targets sequentially, generates more volatile adjustment paths and temporary inflationary spikes around announcements, but long-run outcomes remain close to the baseline. |
| Keywords: | DSGE, fiscal redistribution, green transition, inequality, macroeconomic effects, net zero, TANK |
| JEL: | E32 H23 P28 Q43 Q52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:330172 |
| By: | Francesco Zezza |
| Abstract: | Following the Great Financial Crisis of 2008-9, there has been a shift in mainstream economic policy modeling toward "realism, " with dynamic stochastic general equilibrium (DSGE) models partly diverging from the representative agent framework, and large-scale, New-Keynesian structural models addressing real-financial interactions in greater detail. Still, the need for tractability of the former, and the lack of theoretical structure of the latter prevented the complete introduction of a modern--and complex--multi-sector/multi-asset financial system in policy models in use at central banks and treasuries. However, empirical models adopting the Stock-Flow Consistent (SFC) approach resolved most of these complications with a surge in the number of country models over the last few years. The present work lays out the main out-of-sample features of a quarterly SFC model of the Italian economy (MITA). |
| Keywords: | Empirical Stock-Flow Consistent Models; Monetary Policy; Fiscal Policy; Italy |
| JEL: | C54 E12 E17 E44 E58 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1063 |
| By: | Federico Gabriele; Aldo Glielmo; Marco Taboga |
| Abstract: | Current macroeconomic models with agent heterogeneity can be broadly divided into two main groups. Heterogeneous-agent general equilibrium (GE) models, such as those based on Heterogeneous Agents New Keynesian (HANK) or Krusell-Smith (KS) approaches, rely on GE and 'rational expectations', somewhat unrealistic assumptions that make the models very computationally cumbersome, which in turn limits the amount of heterogeneity that can be modelled. In contrast, agent-based models (ABMs) can flexibly encompass a large number of arbitrarily heterogeneous agents, but typically require the specification of explicit behavioural rules, which can lead to a lengthy trial-and-error model-development process. To address these limitations, we introduce MARL-BC, a framework that integrates deep multi-agent reinforcement learning (MARL) with Real Business Cycle (RBC) models. We demonstrate that MARL-BC can: (1) recover textbook RBC results when using a single agent; (2) recover the results of the mean-field KS model using a large number of identical agents; and (3) effectively simulate rich heterogeneity among agents, a hard task for traditional GE approaches. Our framework can be thought of as an ABM if used with a variety of heterogeneous interacting agents, and can reproduce GE results in limit cases. As such, it is a step towards a synthesis of these often opposed modelling paradigms. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.12272 |
| By: | Raquel Fonseca; Etienne Lalé; François Langot; Thepthida Sopraseuth |
| Abstract: | We develop a general-equilibrium OLG model of human capital to study the dynamics of the U.S. college premium and lifetime wage profiles between 1940 and 2020. The model features endogenous education and on-the-job training, along with exogenous aggregate (skill-neutral and skill-biased) shocks and cohort-specific trends in initial human capital endowments and learning capabilities. The estimated model replicates the W-shaped evolution of the college premium and the flattening then steepening of lifetime wage profiles. We show that changes in labor efficiency, rather than changes in relative skill prices, are the main driver of these dynamics. We quantify the contribution of estimated exogenous drivers and find a key role for the deterioration of human capital endowments and learning abilities among more recent cohorts. Crucially, endogenous adjustments in educational attainment and skill prices serve as powerful equalizing forces. Without these market mechanisms, the gap between the lifetime wage profiles of skilled and unskilled workers would widen and the college premium double. |
| Keywords: | College premium, Life-cycle wage profile, On-the-job training, Human capital, Technological progress. |
| JEL: | E24 E25 J24 J31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:rsi:creeic:2503 |
| By: | Damián Pierri (Universidad de Buenos Aires. Facultad de Ciencias Económicas. CONICET–Universidad de Buenos Aires. Instituto Interdisciplinario de Economía Política (IIEP). Buenos Aires, Argentina.); Domenico Ferraro (Arizona State University. Department of Economics.) |
| Abstract: | The paper develops a business cycle model with multi-plant firms featuring minimum labor requirements that generate occasionally binding capacity constraints, implying state-dependent and nonlinear effects of labor tax changes on aggregate hours. |
| Keywords: | Capacity utilization; Labor taxes; Aggregate hours elasticity; Multi-plant firms; Hours constraints |
| JEL: | E22 E23 E24 E32 E62 H24 H25 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ake:iiepdt:2024-96 |
| By: | Leandro Lyra Braga Dognini |
| Abstract: | A well-known feature of overlapping generations economies is that the First Welfare Theorem fails and equilibrium may be inefficient. The Cass (1972) criterion furnishes a necessary and sufficient condition for efficiency, but does not address the matter of existence of efficient equilibria, and Cass, Okuno, and Zilcha (1979) provide nonexistence examples. I develop an algorithm based on successive approximations of a nonstationary, consumption-loan, prone to savings, overlapping generations economy with finite-lived heterogeneous agents to find elements of its set of equilibria as the limit of nested compact sets. These compact sets are the result of a backward calculation through equilibrium equations that departs from the set of Pareto optimal equilibria of well-behaved tail economies. The equilibria calculated through this algorithm satisfy the Cass (1972) criterion and are used to derive the existence results on efficient equilibria. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.19019 |
| By: | Francesco PappadÃ; Yanos Zylberberg |
| Abstract: | This paper examines how the dynamics of informality affects optimal fiscal policy and default risk. We build a model of sovereign debt with limited commitment and informality to assess the consequences of dynamic distortions induced by fiscal policy. In the model, fiscal policy has a persistent impact on taxable activity, which affects future fiscal revenues and thus default risk. The interaction of tax distortions and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to (i) more frequent default episodes and (ii) costly fluctuations in consumption. |
| Date: | 2025–04–02 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:25/795 |
| By: | Charles Gottlieb; Jan Grobovsek; Alexander Monge-Naranjo |
| Abstract: | We revisit the role of human capital in cross-country income differences. We develop a general equilibrium model where workers of different skill groups sort into occupations by comparative advantage. Wages and employment depend on workers' skill quality, occupation-specific country-embedded productivity, and occupational distortions. Using harmonized microdata for 50 countries, we infer these components from the model's equilibrium conditions. Workers in rich countries exhibit higher skill quality and substantially greater productivity, especially in white-collar occupations. Human capital explains 52 percent of output-per-worker gaps, largely through the complementarity between skill composition and quality, and further amplified by technology choices biased toward skilled labor. Adopting the US distribution of skill groups yields limited gains for poor countries without higher quality. Occupational distortions are more severe in low-income countries, reducing white-collar employment and raising wage premia, but with modest aggregate effects. |
| Keywords: | human capital; development accounting; occupational sorting; country-embedded productivity; wage premia |
| JEL: | O47 O15 J24 J31 E24 |
| Date: | 2025–10–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:101966 |
| By: | Lukyanov, Georgy; Ablyatifov, Emin |
| Abstract: | We embed honesty-based reputation into a Ramsey taxation framework with com-petitive firms and households. In a static benchmark with exogenous trust, there is a sharp cutoff below which the optimal policy sets no taxes and above which the optimal tax take rises with trust. In the dynamic model, beliefs evolve through noisy public monitoring of delivered public goods; the planner’s problem is well posed, the value is increasing and convex in beliefs, and optimal revenue is monotone in reputation with a trust threshold that is weakly below the static cutoff. With multiple broad instruments and symmetric monitoring, the dynamic force acts through the total revenue scale; the tax mix is indeterminate along an equivalence frontier. Blackwell-improving monitor-ing and greater type persistence expand the optimal scale and shift the trust threshold inward. The model delivers clear policy prescriptions for building fiscal capacity in low-trust environments and testable links between measured trust, verifiability, and revenue. |
| Keywords: | Optimal taxation; Government reputation; Ramsey problem; Credibility; Fiscal capacity |
| JEL: | H21 H30 E62 D82 C73 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131041 |
| By: | Valerio Dionisi |
| Abstract: | Industry dimension is increasingly dominant to investigate the upward trend of inequality. This paper examines the key drivers of U.S. wage inequality through a general equilibrium model, emphasising the role of heterogeneous capital-labour substitution elasticities across industries in shaping wage dispersion. Key is the distinction of a quantity effect (changes in the composition of capital and labour inputs) and a structural effect (reflecting technological transformations in inputs substitutability) from Skill-Biased Technological Change (SBTC). Findings suggest that industry-level transformations on the labour side − differentials in job tasks substitutability and workforce composition − constitute the principal drivers of real wage inequality, overshadowing the contribution of capital-side adjustments. A structural estimation of the model reveals that trend-asymmetries in the elasticities of substitution between ICT capital, routine and non-routine workers account for 94% of observed wage variance, while stronger sorting and segregation effects further exacerbate such dispersion. Upon neutralising structural differences between industries, SBTC reckons merely 6-15% of the observed wage inequality. |
| Keywords: | wage inequality, structural transformations, industry, tasks, labour force composition, elasticity of substitution |
| JEL: | E24 J31 J82 L16 O33 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:558 |
| By: | Guerrazzi, Marco |
| Abstract: | In this paper, I develop a frictionless two-sector optimal growth model with endogenous labour supply in which the non-reproducible factor can be employed only in the production of consumption goods. From a theoretical point of view, I show that in this setting the optimal allocation of labour is constant over time, whereas its actual utilization relies on the availability of a convex technology. In parallel, a convex technology in the sector of investment goods is instead sufficient for the determinacy of meaningful equilibrium paths. Furthermore, calibrating the model to the US economy, I show that such a two-sector economy smooths the complementarity between the marginal propensities to consume and to save, and it also able to replicate the countercyclical (procyclical) pattern of the relative price of capital goods (real wages). |
| Keywords: | Capital accumulation; Investment; Consumption; Two-sector growth model; Labour supply; Relative price of capital goods; Real Wage. |
| JEL: | C61 E21 E22 O11 |
| Date: | 2025–09–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126101 |
| By: | Vasco Curdia |
| Abstract: | The natural rate of interest is an elusive concept in theory and practice. However, it is essential for central banks’ calibration of the policy rate. Model consistent measures are often too extreme to be used in practice. On the other hand, empirical measures lack the full backing of theory to make them proper benchmarks. This paper proposes a medium-run measure of the natural rate that averages out some excessive fluctuations, while retaining enough connection to economic theory to make it optimal under certain circumstances. The discussion also provides a framework on how to evaluate and meaningfully address concerns by policymakers regarding the natural rate. The results suggest that a medium-run measure that concentrates on natural rate fluctuations in the range of two to five years ahead can be reasonable empirically and theoretically. |
| Keywords: | DSGE models; r-star; neutral rate; interest; central banks |
| JEL: | C32 E43 E52 E58 |
| Date: | 2025–10–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:101956 |
| By: | Giuseppe Ciccarone (Sapienza University of Rome); Francesco Giuli; Enrico Marchetti (University of Naples Parthenope); Gabriele Maugeri |
| Abstract: | This study examines intergenerational welfare e¤ects of COVID-19 policy responses, focusing on containment measures, …scal expansions, and debt repayment schemes. Using a life-cycle model, we …nd: (i) without containment, welfare losses fall mainly on older agents via demographics; (ii) lockdowns shift burdens toward younger cohorts; (iii) debt-…nanced …scal expansions have modest e¤ects compared to social distancing; and (iv) debt repayment strategies are decisive—front-loaded repayment penalizes the young, while postponed repayment favors the old. These results highlight critical tradeo¤ s for equity and policy design in managing future large-scale crises. |
| Keywords: | COVID-19 epidemic, generational e¤ects, intergenerational welfare, containment policies, fiscal policy |
| JEL: | E13 I18 H51 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:rtr:wpaper:0288 |