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on Dynamic General Equilibrium |
| By: | George-Marios Angeletos; Joao Guerreiro; Dalton Rongxuan Zhang |
| Abstract: | We offer guidance and tools for augmenting macroeconomic models with a realistic friction in expectations and for quantifying its implications. We start by distilling the common essence of a few popular alternatives to FIRE (Full Information Rational Expectations), including noisy or sticky information, rational or behavioral inattention, level-k thinking and cognitive discounting. We then develop a new specification, which captures the same essence while maximizing tractability. We show how this works in both RANK (the Representative-Agent New Keynesian model) and HANK (Heterogeneous-Agent New Keynesian models). We further clarify the separate partial- and general-equilibrium effects of informational frictions or bounded rationality; emphasize the interaction of such frictions with the Intertemporal Keynesian Cross and other forms of strategic complementarity; review concrete lessons for business cycles and macroeconomic policy; and discuss how to discipline the theory with appropriate survey evidence. |
| JEL: | E0 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34596 |
| By: | Vito Polito (School of Economics, University of Sheffield, Sheffield S10 2TU, UK); Paulo Santos Monteiro (Department of Economics and Related Studies, University of York, UK); Mike Wickens (Cardiff University, University of York, CEPR, CESifo, UK) |
| Abstract: | This paper analyses the government expenditure multiplier at the zero lower bound (ZLB) in the presence of quantitative easing (QE), using a tractable New Keynesian model with financial frictions. We show that sufficiently large exogenous QE can lift the economy off the ZLB, thus yielding multipliers below one even for a small fiscal stimulus. Pre-commitment to a gradual QE unwinding further reduces the fiscal stimulus needed to keep multipliers below unity. When QE instead follows an instrument rule that responds to conventional monetary shortfalls, the multiplier can remain below one even at the ZLB. This result also holds under an optimally designed, welfare-based QE policy. Our analysis provides theoretical support for the growing empirical evidence that government spending multipliers can remain below unity at the ZLB. |
| Keywords: | Government expenditure multiplier, Zero lower bound, Quantitative easing |
| JEL: | E52 E58 E62 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:shf:wpaper:2025011 |
| By: | Jing Cynthia Wu; Shihan Xie; Yinxi Xie; Ji Zhang |
| Abstract: | We conduct a large-scale information randomized controlled trial to study fiscal policy impacts. Surveying approximately 9, 000 households across five eurozone countries with varying debt-to-GDP ratios enables a clean cross-country comparison. The key finding is that the fiscal multiplier depends jointly on the financing method and the country’s debt burden: multipliers are smaller in high-debt countries when debt-financed but remain similar across countries when tax-financed. Finally, we develop a New Keynesian model featuring fiscal discipline, which reproduces the empirical patterns observed in the survey and highlights their underlying economic mechanisms. |
| JEL: | C83 D84 E62 H60 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34551 |
| By: | Katsunori Minami; Ryo Sakamoto |
| Abstract: | Gender equality plays a pivotal role in fostering human prosperity, shaping labor markets, fertility decisions, and the sustainability of social institutions. This study investigates how the prevailing gender norms in a country influence the fertility rate and long-term economic growth. To this end, we develop an overlapping generations model featuring endogenous fertility and labor supply in which both gender norms and research and development activities are explicitly incorporated. We show that conservative gender norms reduce both the fertility rate and the rate of income growth in the steady state. We further explore the impact of a policy intervention that relaxes gender norms and analyze the ensuing transition dynamics, deriving implications for policy design and welfare. Finally, we extend the model to examine how a gradual evolution in gender norms affects the long-run development of the economy. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1291r |
| By: | Stefano Maria Corbellini (School of Economics, University of Sheffield, Sheffield S10 2TU, UK) |
| Abstract: | This paper analyzes the monetary policy trade-off between defending purchasing power of consumers and keeping moderate debt cost for borrowers, in the framework of a heterogeneous agent New Keynesian open economy hit by a foreign energy price shock. Raising the interest rate indeed combats the loss in purchasing power due to the energy shock through a real exchange rate appreciation: however, this comes at the expense of higher interest payments for debtors. The trade-off can be resolved by adopting a milder interest rate policy during the crisis in exchange for a prolonged contraction beyond the energy shock time span. This interest rate smoothing approach allows to still experience a real appreciation today, while spreading the impact on debt costs more evenly over time. This policy counterfactual is analyzed in a quantitative model of the UK economy under the 2022-2023 energy price hike, where the loss of consumers’ purchasing power and the vulnerability of mortgage costs to higher policy rates have been elements of paramount empirical relevance. |
| Keywords: | monetary policy, energy, heterogeneity, inequality, household debt |
| JEL: | D14 D31 E52 G21 G51 Q43 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:shf:wpaper:2025014 |
| By: | Victor Almeida; Carlos Esquivel; Timothy J. Kehoe; Juan Pablo Nicolini |
| Abstract: | We develop a sovereign default model with debt renegotiation in which interest-rate shocks affect default incentives through two mechanisms. Under the standard mechanism, higher interest rates tighten the government’s budget constraint. Under the renegotiation mechanism, higher rates increase lenders’ opportunity cost of holding delinquent debt, which makes lenders accept larger haircuts and makes default more attractive for the government. We argue that our novel renegotiation mechanism reconciles standard sovereign default models with the narrative that the sharp increase in the real interest rate in the United States was a relevant factor in the defaults of the early 1980s. |
| JEL: | F34 F41 G28 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34555 |
| By: | Anastasiia Antonova (Bank of Canada); Mykhailo Matvieiev (Bank of Canada); Céline Poilly (Aix-Marseille Univ., CNRS, AMSE, Marseille, France) |
| Abstract: | Recessions are often accompanied by heightened uncertainty. We look at the effect of endogenous uncertainty on aggregate demand and its implications for monetary policy. We enrich a non-linear New-Keynesian model with imperfect noisy information, where the precision of signals is pro-cyclical. The endogenous uncertainty channel amplifies aggregate demand effects through precautionary saving. Ultimately, it can even reverse sign of the output-gap response to a supply shock. Monetary policy can eliminate both pricing and information-induced inefficiencies by closing the output gap. Based on U.S. household income forecast errors data, we estimate a sizable and significant degree of pro-cyclicality in the precision of signals. |
| Keywords: | Endogenous uncertainty, precautionary saving, aggregate demand, imperfect information |
| JEL: | D81 D83 E21 E32 E40 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2538 |
| By: | Rendon, Silvio (Georgetown University) |
| Abstract: | This paper connects classical preference theory to quantitative job search and savings models. We treat job acceptance as a choice between stochastic income lotteries. By integrating Decreasing Absolute Risk Aversion (DARA) and Prudence (DAP), we derive five contributions. First, we prove the standard positive wealth effect on reservation wages is driven by the gap between the risk premium (equating total utilities) and the prudence premium (equating marginal utilities), while resolving value function concavity. Second, a unified theorem shows the wealth effect depends on the stochastic dominance of on-the-job search (OJS) versus unemployed search. We uncover a novel "Investment Fund" regime: when OJS is superior, reservation wages decrease with wealth as agents purchase access to high-growth states. Third, this explains consumption puzzles, showing the high MPC of the unemployed is an endogenous response to background risk. Fourth, we demonstrate an isomorphism between labor and savings: the reservation wage exhibits the same prudence-driven diminishing sensitivity as the consumption function. Fifth, borrowing constraints amplify wealth sensitivity without altering qualitative risk rankings. |
| Keywords: | risk-aversion, consumption, wealth, job search, prudence |
| JEL: | E21 H55 J64 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18320 |
| By: | Jesús Fernández-Villaverde (University of Pennsylvania); Tomohide Mineyama (International Monetary Fund); Dongho Song (Johns Hopkins University) |
| Abstract: | We study how uneven gains from globalization can endogenously generate protectionism as a political equilibrium. Using U.S. data, we document that regions more exposed to import competition display stronger opposition to globalization, especially among households with little financial wealth, and that firms in trade-exposed sectors sharply increase lobbying expenditures. To interpret these patterns, we develop and quantify a general equilibrium Ricardian model with heterogeneous households, input–output linkages, and endogenous trade policy shaped by voting and lobbying. Distributional shocks reallocate political support among voters, while lobbying propagates through production networks, generating strategic complementarities that sustain protectionism. Calibrated to U.S.–China sectoral data from 1991–2019, the model accounts for rising inequality, declining support for globalization, and key aggregate trends in consumption and trade. |
| Keywords: | Globalization, heterogeneous households, multi-sector, production network, Ricardian trade, voting, political lobbying |
| JEL: | D57 D58 D63 D72 F1 F2 F4 F6 |
| Date: | 2026–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:26-001 |
| By: | Ryo Sakamoto; Katsunori Minami |
| Abstract: | Sustainable growth has emerged as a critical policy challenge worldwide. We investigate the influence of conventional gender norms on fertility and economic growth to explain the phenomena recently observed across high-income countries. To this end, we construct an overlapping generations model with endogenous fertility and labor supply, incorporating gender norms and R&D activities. We demonstrate that conventional gender norms can impede fertility and economic growth. Specifically, when gender norms are sufficiently conservative, income growth stagnates and population erosion eventually occurs. Our results underscore the need to address and correct gender norms to achieve sustainable growth and improve welfare. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1255r |
| By: | Youngsoo Jang (University of Queensland); Svetlana Pashchenko (University of Georgia); Ponpoje Porapakkarm (National Graduate Institute for Policy Studies) |
| Abstract: | What is the best way to reform Social Security? Academic literature offers diverging advice. There is a well-known result that the optimal size of Social Security is zero, implying it is best to phase the program out. Other studies argue that much can be gained by redesigning the program, given its current size. We provide a unified analysis that examines how the optimal size of Social Security depends on the key features of its design. We first develop a theoretical decomposition tracing the program's welfare effects to (i) income redistribution, (ii) distortions on the annuitization level, and (iii) intertemporal distortions. We then quantitatively assess the role of these channels. We show that the zero-optimal-size result arises because Social Security is too distortive and not redistributive enough. Once these design flaws are corrected, it is even optimal to increase the size of the program. |
| Keywords: | pensions, annuities, consumption and saving, life-cycle model |
| JEL: | D15 E60 H55 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:hka:wpaper:2025-012 |
| By: | Marco Fongoni |
| Abstract: | This paper advances a theory of unemployment hysteresis—transitory shocks leave permanent effects—based on a model of endogenous path-dependent wage rigidity under incomplete employment contracts. Workers’ relative wage comparisons—incumbents’ aversion to wage cuts and new hires’ concern with pay inequality—imply wage increases are partially irreversible, generating path dependence and asymmetry in wage adjustments. During recessions, hiring wages fail to adjust fully downward, depressing job creation and producing hysteresis effects and large unemployment fluctuations. A quantitative assessment shows that these effects can be significant under plausible calibrations of the cost of wage cuts and the sensitivity of workers to relative wages. A 1% transitory shock can generate a permanent increase in unemployment of about 0.5% to 15%, with benchmark values around 1.5–5.5%. The paper concludes by discussing the implications of the theory for the effectiveness of monetary policy and the empirical research on hysteresis effects, suggesting promising directions for future research. |
| Keywords: | incomplete contracts; wage rigidity; irreversibility; hysteresis; unemployment |
| JEL: | E32 E52 E71 J23 J30 J60 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2540 |
| By: | Neha Bairoliya (University of Southern California); Giovanni Gallipoli (Vancouver School of Economics, UBC); Kathleen McKiernan (Vanderbilt University) |
| Abstract: | The interaction between late-life uncertainty and end-of-life (EOL) motives generates demand for death-contingent liquidity, shaping saving, insurance, and labor-supply behaviour. Using evidence on wills, life insurance, and bequest intentions, we document the prevalence of EOL motives across household types. A quantitative life-cycle model embeds three motives—precautionary, survivor, and warm-glow—and exploits the asymmetry between liquid wealth and life insurance to identify EOL preferences. We examine how these motives interact with Social Security's illiquid annuity and assess reforms that replace part of annuity benefits with guaranteed death-contingent payouts or expand access to actuarially fair life insurance. Both policies generate portfolio "de-risking, " shifting resources toward guaranteed EOL liquidity. Significant welfare gains accrue to single, low-wealth individuals, a group often overlooked in the debate over EOL motives. |
| Keywords: | life insurance, portfolio choice problem, old age security, annuities, Consumption, Labor Supply, Marriage, inequality, wealth |
| JEL: | D31 G11 G51 G52 J26 E21 H55 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:hka:wpaper:2025-010 |
| By: | Arcidiacono, Peter (Duke University); Gyetvai, Attila (Banco de Portugal); Maurel, Arnaud (Duke University); Jardim, Ekaterina (Amazon) |
| Abstract: | This paper applies some of the key insights of dynamic discrete choice models to continuous-time job search models. Our framework incorporates preference shocks into search models, resulting in a tight connection between value functions and conditional choice probabilities. In this environment, we establish constructive identification of the model parameters, including the wage offer distributions off- and on-the-job. Our framework makes it possible to estimate nonstationary search models in a simple and tractable way, without having to solve any differential equations. We apply our method using Hungarian administrative data. Longer unemployment durations are associated with lower offer arrival rates, resulting in accepted wages falling over time. Counterfactual simulations indicate that increasing unemployment benefits by 90 days results in a 14-day increase in expected unemployment duration. |
| Keywords: | dynamic discrete choice, identification, job search |
| JEL: | J64 C31 C41 J31 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18309 |
| By: | Raouf Boucekkine (Aix-Marseille Univ., CNRS, AMSE, Marseille, France); Giorgio Fabbri (Univ. Grenoble Alpes, CNRS, INRA, Grenoble INP, GAEL, Grenoble, France); Salvatore Federico (Dipartimento di Matematica, Universit`a di Bologna, Bologna, Italy); Fausto Gozzi (Dipartimento di Economia e Finanza, Libera Universit`a Internazionale degli Studi Sociali “Guido Carli”, Rome, Italy); Ted Loch-Temzelides (Rice University, Houston, USA); Cristiano Ricci (Universita di Pisa, Italy) |
| Abstract: | In order to investigate strategic interactions between a “global north” and a “global south” we introduce a two-country extension of the model in Golosov et al. (2014). We consider different transfers between the two regions, including transfers that can improve the abatement technology. Our model can accommodate several kinds of heterogeneity, including in preferences, time discount rates, and damages resulting from the stock of accumulated GHG. We solve for both planner’s solutions and non-cooperative equilibria. We then calibrate our model in order to study quantitative differences between these solutions and to quantitatively explore the role of heterogeneity and Knightian uncertainty. We characterize emissions, damages, consumption, transfers, and welfare by computing the Nash equilibria of the associated dynamic game. We then compare these to efficiency benchmarks. Further, we investigate how (deep) uncertainty affects climate outcomes. We develop a general model for the study of optimal control and differential games that are linear-in-state, which we term the Integral Transformation Method (ITM), which encompasses several existing models as special cases. |
| Keywords: | Integral Transformation Method, Analytical integrated assessment model, differential game, climate policy, robust control |
| JEL: | C7 Q5 Q54 D62 H23 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2534 |
| By: | Burda, Michael C. (Humboldt University Berlin); Goeth, Anna-Maria (World Bank); Zessner-Spitzenberg, Leopold (TU Wien) |
| Abstract: | In the context of a green energy transition, capital adjustment costs render effective substitution between clean and dirty energy sources finite and endogenous, despite infinite long-run substitutability. Ramsey optimal paths robustly frontload clean investment before exhaustion of a given carbon budget, but also generally imply some capital stranding. Along the path of emissions reduction, new investment is quantitatively more important than reduced output or labor redeployment. An ambitious climate goal in our benchmark calibration implies modest levels of stranded capital at 1.5% of GDP, but this rises to more than 7% if implementation is delayed by a decade. |
| Keywords: | growth model, energy transition, optimal investment, capital adjustment costs, carbon pricing |
| JEL: | E22 H23 O41 Q43 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18356 |
| By: | Claudio Daminato; Irina Gemmo |
| Abstract: | Sound retirement planning requires individuals to have precise beliefs about their survival chances. Based on an online survey experiment administered to a representative sample of the US population, we provide first evidence of the patterns of individuals’ uncertainty about their survival probabilities, i.e., survival ambiguity, over the life-cycle. To this end, we devise a novel direct measure of survival ambiguity at the individual level, using the variance of the distribution of subjective survival probabilities. Leveraging experimental variation, we find that providing information about objective survival chances decreases individuals’ degree of survival ambiguity. Further, we show that individuals’ survival ambiguity is strongly negatively associated with individuals’ savings rates. Finally, we provide a realistic life-cycle model of savings and portfolio choice that rationalizes the empirical evidence. Our findings provide an explanation for the observation that many individuals “save too little” for their retirement and support information campaigns about individuals’ objective survival chances in addition to financial education programs to improve retirement security, as survival ambiguity presents a previously unexplored determinant of financial well-being. |
| Keywords: | Life Cycle, Savings Behavior, Subjective Expectations, Survival Ambiguity |
| JEL: | D15 D91 G51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:rsi:irersi:21 |