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on Dynamic General Equilibrium |
| By: | Oscar Valencia; Alfredo Villca; Carolina Ulloa-Suárez; Gustavo Sánchez |
| Abstract: | This paper examines the macroeconomic and fiscal benefits of reducing inefficiencies in public sector wages, with a focus on the public–private wage premium. Using cross-country empirical evidence, along with a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to Latin America and the Caribbean, we show that narrowing the wage gap yields substantial benefits. A one percentage point reduction in the premium improves the primary balance, lowers debt, and raises output and private employment, without generating inflationary pressures. Extensions show that the adjustment mechanism is key: gains are larger and faster when wage rigidities are limited and reforms are sustained, while employment cuts provide stronger fiscal relief at higher economic costs. These results underscore the importance of efficient and well-designed compensation policies in enhancing fiscal sustainability and promoting long-term macroeconomic stability. |
| Keywords: | Fiscal policy; Wage premium; fiscal sustainability; DSGE models; Local Projections; Welfare. |
| JEL: | E62 H50 J31 J45 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2025-49 |
| By: | Adib Rahman (University of Hawaii); Liang Wang (University of Hawaii) |
| Abstract: | We investigate the effects of central bank digital currency (CBDC) issuance in an economy where individuals can evade taxes by using cash. Our tractable model features agent heterogeneity with unobservable idiosyncratic shocks and voluntary exchange, where CBDC and cash compete as payment methods. CBDC's transparency enables governments to collect a labor tax that proves non-distortionary in our quasi-linear environment. Agents with higher marginal utility voluntarily pay fixed fees to access interest-bearing CBDC when their debt constraints bind, allowing the implementation of optimal policy with strictly positive inflation and nominal interest rates. We demonstrate how CBDC enables redistribution between agent types that is not possible in cash-only economies. We conjecture that an optimal CBDC policy involves higher nominal interest rates and lower inflation compared to cash regimes. By reducing tax evasion incentives, the introduction of CBDC can increase both output and aggregate welfare. |
| Keywords: | Cash, CBDC, Labor Tax, Tax Evasion, Monetary Policy |
| JEL: | E42 E58 H21 H26 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:hai:wpaper:202505 |
| By: | Alireza Sepahsalari; Cristiano Mantovani; Ana Figueiredo; Isaac Baley |
| Abstract: | We study how wealth shapes workers' outcomes in turbulent labor markets, where job displacement exposes workers to the risk of skill loss. We develop and quantify a heterogeneous-agent directed search model with incomplete markets, skill dynamics, and job "tiers" with distinct risk–return profiles. Workers self-insure against separation and turbulence risks through savings and search decisions, both within and across tiers, generating post-separation outcomes that vary sharply with wealth. In U.S. data, poor workers face the most significant and most persistent wage losses, driven by wealth-induced downgrades into low-tier jobs. Policy experiments reveal clear trade-offs: unemployment insurance improves welfare, while job-creation subsidies more effectively expand output. |
| Keywords: | directed search, job displacement, job tiers, job-creation subsidies, precautionary savings, precautionary search, self-insurance, Skill loss, turbulence riks, Unemployment Insurance |
| JEL: | D31 E21 E24 J24 J31 J63 J64 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1538 |
| By: | Luetticke, Ralph; Meyer, Timothy Andreas; Müller, Gernot J.; Schularick, Moritz |
| Abstract: | Using historical income and wealth data, we show that war reduces inequality: the top-1% income share falls by 20% and the top-1% wealth share by 10%. We measure three key drivers of inequality - capital destruction, taxation, and inflation - in the data and quantify their role with a Heterogeneous Agent New Keynesian (HANK) model. Destruction depresses profits and thus top incomes. Taxation primarily influences wealth dynamics, while inflation has little effect on top shares, but reduces indebtedness among poorer households. We validate our findings using new data on inequality across German towns in World War 2 and cross-country data on profits. |
| Keywords: | Interstate Wars, Inequality, Income share, Wealth share, Distribution, Capital destruction, Inflation, Taxes, HANK |
| JEL: | F40 F50 E50 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:333888 |
| By: | Xavier Ragot (Department of Economics, Sciences Po); Makoto Nirei (Faculty of Economics, the University of Tokyo) |
| Abstract: | This paper presents a business cycle model where animal spirits shocks, originating from idiosyncratic productivity shocks, drive the comovement of investment, consumption, hours worked, and inflation. In the fully characterized comovement mechanism, real wage rigidity and diminishing returns to labor, resulting from the presence of capital, play a crucial role: a positive investment demand shock raises labor demand, decreases the marginal product of labor, and increases the marginal cost of producing final goods. Our model features a firm’s lumpy investment, leading to a state-dependent multiplier effect, which depends on the firm’s capital profile within an inaction band. Lumpy investments, propagated through the aggregate demand externality, generate an investment avalanche. This offers a microfoundation for our animal spirits shocks and produces aggregate fluctuations without assuming exogenous aggregate shocks.Additionally, by including a time-to-build process for capital formation, the model can explain the autocorrelation structure. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:tky:fseres:2025cf1263 |
| By: | Quang-Thanh Tran (Development and Policies Research Center (DEPOCEN), Suite 305 - 307, 12 Trang Thi Street, Hoan Kiem, Hanoi) |
| Abstract: | This paper studies how higher education incentives affect fertility decisions and influence long-term economic growth using an R&D-based growth overlapping-generations model with endogenous education/career choice. In this model, higher education plays a dual role – it increases earnings for skilled labor and technological progress but also discourages childbearing. When the fertility of skilled workers is sufficiently low, too many higher education pursuers may lead to a long-run secular stagnation where technology and population remain constant or even a persistent population decline. To avoid these scenarios, regulating access to higher education may be necessary, although it could impose welfare loss on some generations following the policy’s introduction. |
| Keywords: | career choice, endogenous fertility, overlapping generations, higher education |
| JEL: | E13 J11 J13 J14 J22 J24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:dpc:wpaper:0198 |
| By: | Bruno Delalibera (Universitat de Barcelona); Angélica Brum (Sao Paulo School of Economics - FGV); Luciene Pereiera (Sao Paulo School of Economics - FGV) |
| Abstract: | Over the past three decades, many countries have adopted fiscal rules. This paper studies their impact on economic growth using an overlapping generations model with endogenous growth, where the government imposes both a debt rule and a budget balance rule. The model shows that fiscal rules are not neutral: their design and interaction, through an endogenously adjusting tax rate, directly shape savings, capital accumulation, and longterm growth. The model identifies conditions under which a balanced growth path exists and highlights the possibility of multiple steady states. When fiscal rules are too loose or initial debt is too high, the economy may converge to an unstable path. Tightening fiscal rules improves long-run welfare but can reduce current utility due to higher taxes. Empirically, we estimate a growth equation and address endogeneity using an instrumental variable strategy based on the geographical diffusion of fiscal rules. The results indicate that the adoption of fiscal rules boosts growth in developing and lowincome countries. In Europe, only welldesigned rules are associated with higher growth. Across specifications, debt rules consistently outperform budget balance rules, especially in less developed economies. |
| Keywords: | Fiscal Rules, Fiscal Policy, Economic growth, OLG Model, Instrumental Variables |
| JEL: | O47 E61 E62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ewp:wpaper:487web |
| By: | Ziran Ding; Adam Hal Spencer; Zinan Wang |
| Abstract: | Amid ongoing geoeconomic tensions, industrial policy has emerged as a prominent tool for policymakers. What are the dynamic and welfare effects of these policies? How does the short-sightedness of policymakers influence their choice of instruments? What are the distributional consequences of these protectionist measures? We address these questions with a dynamic two-country general equilibrium framework that incorporates ï¬ rm heterogeneity, trade, and the offshoring of tasks. By calibrating the model to the contexts of the US and China, we explore the effects of three popular industrial policies: import tariffs, domestic production subsidies, and entry subsidies. Our findings indicate that, from an initial state free of interventions, myopic policymakers are incentivized to subsidize production, while more forward-looking ones favor imposing import tariffs. Although all of these policies initially reduce wage inequality, some result in aggregate welfare losses, either in the short run or the long run. |
| Keywords: | macroeconomic dynamics, firm heterogeneity, trade, trade-in-tasks, industrial policies, welfare, global value chains |
| JEL: | F23 F41 F51 F62 L51 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-67 |
| By: | Rodríguez-Clare, Andrés; Ulate, Mauricio; Vasquez, Jose |
| Abstract: | We present a dynamic quantitative trade and migration model that incorporates downward nominal wage rigidities and show how this framework can generate changes in unemployment and labor participation that match those uncovered by the empirical literature studying the “China shock.” We find that the China shock leads to average welfare increases in most U.S. states, including many that experience unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by around two thirds. In addition, there are 18 states that experience welfare losses in the presence of downward nominal wage rigidity that would have experienced gains without it. |
| JEL: | R14 J01 J1 |
| Date: | 2025–11–26 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:127629 |
| By: | Quang-Thanh Tran (Development and Policies Research Center (DEPOCEN), Suite 305 - 307, 12 Trang Thi Street, Hoan Kiem, Hanoi) |
| Abstract: | This paper examines the long-term consequences of population decline in a quality-ladder endogenous growth framework. The key factor in fertility decisions is child-rearing costs, modeled as a convex function of labor productivity. As technology grows, the costs of raising children (including childbearing, childcare, and educational investments) increase disproportionately. While the economy may experience rapid growth in the early stages of development, it is likely to face sharp contractions in both population and innovation as child-rearing costs outpace the incentives for having children. We show that consistent population decay is almost inevitable. Nevertheless, a pronatalist policy can increase the likelihood of achieving high long-run labor productivity and living standards for future generations, although some short-run welfare deficits are to be expected. |
| Keywords: | quality-ladder growth, overlapping generations, endogenous fertility |
| JEL: | E13 J13 J14 J22 J24 O11 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:dpc:wpaper:0199 |
| By: | Tao Liu (Central University of Finance and Economics); Dong Lu (Renmin University of China); Liang Wang (University of Hawaii) |
| Abstract: | There have been two competing views on the structure of the international monetary system: one sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that a multipolar system has been the rule, not the exception. We propose a unified theoretical framework to reconcile these two views. In a micro-founded monetary model, we examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other, and agents have the incentive to diversify their portfolio, giving rise to a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. A calibrated model shows that, all else equal, USD could lose its dominance if the US fiscal capacity deteriorates by 34\% or the US economy size shrinks by 32%. |
| Keywords: | International Currency, Money, Multipolar, Safe Assets, Unipolar |
| JEL: | E42 E52 F33 F40 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hai:wpaper:202504 |
| By: | Mota, Jose |
| Abstract: | A large body of research has established the importance of international remittances as an insurance mechanism against income shocks in developing countries. However, households have additional self-insurance mechanisms, including precautionary savings, labor supply adjustments, and multiple earners. This paper develops a model with heterogeneous two-member households and endogenous international remittances to study the relationship between remittances from overseas workers and other self-insurance mechanisms. I calibrate the model with data from the Dominican Republic, and then use the model to decompose the relative importance of the self-insurance mechanisms used by non-migrant households and households with overseas workers. I find that the response of household behavior (remittances, labor supply, and savings) differs greatly depending on whether the household is a migrant or non-migrant household and on whether the shock hits the overseas worker (usually male) or the left-behind family member (usually female). Allowing for correlated wage shocks within non-migrant households further highlights the insurance benefits of migration by reducing joint exposure to local shocks and altering the composition of self-insurance mechanisms. |
| Keywords: | Remittances; self-insurance; intra-household risk sharing; labor supply |
| JEL: | D13 D14 F24 J22 |
| Date: | 2025–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126670 |
| By: | Ulrich Roschitsch; Hannes Twieling |
| Abstract: | This paper shows that regional disparities in house price growth are more pronounced during house price busts than during booms. To explain this observation we construct a two-region currency union model incorporating a housing sector and extrapolative belief updating regarding house prices. To solve the model, we propose a new method that efficiently handles extrapolative belief updating in a wide class of structural models. We show that intensified extrapolation in busts and regional housing market heterogeneities jointly explain elevated regional house price growth dispersion in busts and muted dispersion in booms. Consistent with our theory, we provide empirical evidence that house price belief updating is indeed more pronounced in busts and we document that regional heterogeneities on the housing supply side affect regional house prices. Quantitatively, our model can match empirically observed elevated regional house price growth dispersion in busts. Moreover, we demonstrate that a monetary authority targeting house prices may reduce the volatility of output and prices as well as regional house price growth disparities. This policy is welfare-improving relative to an inflation-targeting benchmark. |
| Keywords: | Housing; Monetary policy; Monetary policy transmission |
| JEL: | E31 E32 E52 F45 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-36 |