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on Dynamic General Equilibrium |
| By: | Siddhartha Chib; Fei Tan |
| Abstract: | We show how state-of-the-art large language models (LLMs), seemingly inapplicable to the small samples typical of macroeconomics, can be trained to learn the language of macroeconomy. We estimate a large-scale dynamic stochastic general equilibrium (DSGE) model on an initial segment of the data and obtain a posterior distribution over structural parameters. We sample from this posterior to generate millions of theory-consistent synthetic panels that, when mixed with actual macroeconomic data, form the training corpus for a time-series transformer with attention. The trained model is then used to forecast out-of-sample through 2025. The results show that this hybrid forecaster, which combines the theoretical coherence of DSGE models with the representational power of modern LLMs, successfully learns the macroeconomic language. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.21031 |
| By: | Sami Alpanda; Serdar Kabaca; Kostas Mavromatis |
| Abstract: | This paper examines the optimal coordination of conventional and unconventional mone-tary policy tools in an environment characterized by household heterogeneity and mortgage debt. We develop a dynamic stochastic general equilibrium (DSGE) model with three types of households—savers, borrowers, and renters—and incorporate housing investment, fixed-rate long-term mortgages, and a housing production sector. The central bank controls both the short-term interest rate and the long-term rate via the relative supply of long-term bonds. We show that household heterogeneity significantly alters the optimal policy response to macroeconomic shocks. In particular, following a cost-push shock, the optimal policy involves raising the short-term rate to combat inflation while lowering the long-term rate to alleviate financial burdens on indebted households and renters. This policy mix accelerates investment recovery but increases consumption inequality. In contrast, in a representative-agent economy, both rates are raised. Our findings highlight the importance of accounting for distributional effects in monetary policy design and suggest that yield curve control can be a valuable tool in heterogeneous economies. |
| Keywords: | Monetary policy, household heterogeneity, yield curve control |
| JEL: | E40 E43 E52 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:853 |
| By: | Yucheng Yang; Chiyuan Wang; Andreas Schaab; Benjamin Moll |
| Abstract: | We present a new approach to formulating and solving heterogeneous agent models with aggregate risk. We replace the cross-sectional distribution with low-dimensional prices as state variables and let agents learn equilibrium price dynamics directly from simulated paths. To do so, we introduce a structural reinforcement learning (SRL) method which treats prices via simulation while exploiting agents' structural knowledge of their own individual dynamics. Our SRL method yields a general and highly efficient global solution method for heterogeneous agent models that sidesteps the Master equation and handles problems traditional methods struggle with, in particular nontrivial market-clearing conditions. We illustrate the approach in the Krusell-Smith model, the Huggett model with aggregate shocks, and a HANK model with a forward-looking Phillips curve, all of which we solve globally within minutes. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.18892 |
| By: | Jorge Miranda-Pinto; Eugenio Rojas; Felipe Saffie; Alvaro Silva |
| Abstract: | We study how production networks shape the severity of Sudden Stops. We build a small open economy model with collateral constraints and input–output linkages, derive a sufficient statistic that maps network structure onto the amplification of tradable shocks, and show that a planner optimally introduces sectoral wedges to reduce amplification. Using OECD input-output data and Sudden Stop episodes, we document systematic network differences between emerging and advanced economies and show they predict crisis severity. A calibrated three-sector DSGE model disciplined by these differences reveals that endowing an advanced economy with an emerging-market production network moves most of the way toward the observed emerging–advanced Sudden Stop gap. |
| Keywords: | networks; financial crises; sudden stops; macroprudential policy |
| JEL: | D85 D57 E32 |
| Date: | 2025–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:102336 |
| By: | Aleksandar Vasilev (Lincoln International Business School, UK) |
| Abstract: | Housing stock, and the accumulation of utility-enhancing housing capital are introduced as an additional mechanism into a real-business-cycle setup augmented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2024). The quantitative importance of the presence of housing capital accumulation is investigated for the propagation of cyclical fluctuations in Bulgaria. In particular, allowing for housing considerations in the setup improves the model vis-a-vis data by increasing the variability of employment and decreasing the variability of consumption and investment. However, those improvements are at the cost of decreasing the volatility of wages. The model severely over-predicts variability of housing investment, and wrongly concludes that it is counter-cyclical. Still, the model with housing is a clear improvement relative to the standard RBC setup. |
| Keywords: | business cycles, housing, Bulgaria |
| JEL: | E24 E32 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:sko:wpaper:bep-2026-01 |
| By: | Matthias Burgert (SWISS NATIONAL BANK); Matthieu Darracq Pariès (EUROPEAN CENTAL BANK); Luigi Durand (BANK OF CHILE); Mario González (CENTRAL BANK OF CHILE); Romanos Priftis (EUROPEAN CENTRAL BANK); Oke Röhe (DEUTSCHE BUNDESBANK); Matthias Rottner (BIS AND DEUTSCHE BUNDESBANK); Edgar Silgado-Gómez (BANCO DE ESPAÑA); Nikolai Stähler (DEUTSCHE BUNDESBANK); Janos Varga (EUROPEAN COMMISSION) |
| Abstract: | This paper presents a novel model comparison to examine the challenges for monetary policy posed by changes in carbon-intensive energy prices. The environmental monetary models employed have a detailed multi-sector structure. The comparison assesses the effects of both a temporary and a permanent energy price increase, with a particular focus on the euro area and the United States. The temporary and permanent price shocks are both inflationary. However, the inflationary impact of the permanent shock depends on the underlying model assumptions and monetary policy response. In addition, the analysis establishes that these models share significant commonalities in their quantitative and qualitative results, while also revealing cross-country differences. |
| Keywords: | climate change, monetary policy, multi-sector models, model comparison, DSGE models |
| JEL: | C54 E52 H23 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2550 |
| By: | Hamish Low (University of Oxford); Costas Meghir (Yale University); Luigi Pistaferri (Stanford University); Alessandra Voena (Stanford University) |
| Abstract: | This paper studies the impact of the social safety net on marriage, labor supply, and divorce. We specify and estimate a life-cycle model of single and married individuals to evaluate the welfare and behavioral effects of the 1996 PRWORA reform, which introduced time limits and work requirements. The model incorporates limited commitment between spouses, endogenous marriage and divorce, and human capital accumulation. We find that the reform led to a significant decline in welfare participation, an increase in employment, and a decrease in divorce rates, particularly for lower-educated women. Our results highlight the importance of accounting for the long-run impacts on household formation and intra-household insurance when evaluating welfare policy. |
| Date: | 2025–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2121r3 |
| By: | Kaan Celebi (Chemnitz University of Technology); Christina Anderl (Bank of England) |
| Abstract: | This paper examines the FDI-unemployment nexus in OECD countries from both theoretical and empirical perspectives. We first build a search and matching model which accounts for inward and outward FDI capital stocks and identifies key channels through which FDI affects unemployment. In a subsequent empirical panel ARDL estimation, we show that both inward and outward FDI can reduce unemployment conditional on technological and institutional factors. Inward FDI is most unemployment-reducing in less innovative and less technologically advanced countries, while for outward FDI this is the case in technologically more advanced countries with sufficient absorptive capacity and stronger bargaining institutions. For inward (outward) FDI, the technology diffusion (reverse spillover and head-office) channel dominates these long run effects. Our findings imply that policies which strengthen absorptive capacity, diffusion, and domestic linkages can make FDI more employment-friendly, whereas in advanced economies the composition and integration of FDI may matter more than broad FDI-attraction alone. |
| Keywords: | FDI, unemployment, panel ARDL, matching model |
| JEL: | E F |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2026.01 |
| By: | Lindsey Uniat |
| Abstract: | What is the contribution of changes in female labor supply to the decline of employment in routine jobs observed in the U.S. between 1970 and 2000? While typically attributed to changes in labor demand, the decline of routine employment has been larger for women than for men, as women moved out of routine clerical roles and into high-skill professions. This paper assesses the contribution of the Quiet Revolution—a concurrent shift in women’s life-cycle labor supply from intermittent to continuous—to the reallocation of aggregate employment from routine to abstract jobs over this period. The Quiet Revolution plausibly contributed to women’s movement out of routine and into abstract occupations because the latter feature stronger human capital dynamics, offering returns to continuous work. I develop and calibrate an equilibrium model of the labor market that incorporates both the Quiet Revolution and changes in production technology. Counterfactual analyses reveal that while the Quiet Revolution accounts for 12% to 22% of the drop in the aggregate routine employment share, technology is the dominant force in explaining changes in the overall distribution of employment. Nonetheless, the Quiet Revolution is essential for gender-specific trends: without it, women would neither have entered the labor force nor transitioned into abstract occupations to the extent observed. |
| JEL: | E24 J16 J21 J22 J24 O33 |
| Date: | 2026–01–09 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102313 |
| By: | Subhrasil Chingri (Indian Institute of Technology Delhi); Debasis Mondal (Indian Institute of Technology Delhi); Klaus Prettner (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | Can human capital accumulation mitigate the adverse effects of automation on the global labor share? To answer this question, we build two theoretical models-first an automation augmented growth model with exogenous human capital to illustrate the general effects of education in the context of automation; and then an automation augmented endogenous human capital accumulation framework in which individuals decide how much of their time they devote to education. We show that while automation puts downward pressure on the labor share, this downward pressure is reduced by human capital investment. Quantitatively, however, the effect of human capital accumulation in limiting the decrease in the labor share is rather small given actual data on the change in the use of industrial robots and in the years of schooling between 1990 and 2024. Achieving a full stabilization of the labor share requires unrealistically high and sustained investments in education. Our findings underscore the importance of education as a policy lever in the age of automation but they also clarify that education policies alone are insufficient given the challenges ahead. |
| Keywords: | Human Capital, Automation, Labor Share, Economic Growth, Neoclassical Growth Model |
| JEL: | J24 O33 O41 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp392 |
| By: | Jose Joaquin Lopez (University of Memphis); Ashantha Ranasinghe (University of Alberta) |
| Abstract: | We analyze micro-scale businesses in Mexico and find large gender gaps in sales, profit, and access to finance. Accounting for differences in education and entrepreneurial commitment, women-owned firms perform worse and receive less financing than comparable men-owned firms. We interpret these patterns in a model economy where individuals with different managerial abilities choose between wage work and entrepreneurship, while women face discrimination in labor and credit markets. The model replicates observed gender differences in occupations and capital use. Equalizing credit access sharply reduces gender gaps in entrepreneurial earnings, but implies only modest aggregate gains on productivity and output. Size-dependent taxes or income subsidies generate smaller impacts or far more costly gains. |
| Keywords: | informality; gender; micro-firms; misallocation; finance |
| JEL: | J16 O10 O40 O50 |
| Date: | 2025–12–31 |
| URL: | https://d.repec.org/n?u=RePEc:ris:albaec:021996 |
| By: | Kory Kroft; Isaac Norwich; Matthew J. Notowidigdo; Stephen Tino |
| Abstract: | Many temporary foreign worker programs issue “closed” visas that effectively tie workers to a single employer, restricting worker mobility and weakening bargaining power. We study the labor market return to temporary foreign workers (TFWs) gaining permanent residency (PR), which loosens this mobility restriction. Using administrative data linking matched employer-employee data in Canada to temporary and permanent visa records from 2004–2014 along with an event-study design, we find that gaining PR leads to a sharp, immediate, and persistent increase in the job switching rate of 21.7 percentage points and an increase in earnings of 5.7 percent three years after PR. Workers also sort into high-wage firms after gaining PR, and the increase in the firm pay premium is roughly 56 percent of the total earnings gain. We find larger earnings gains for job switchers across industries, low-skilled workers, and workers from low-income countries. To guide and interpret our reduced-form results, we develop a search-and-matching model featuring heterogeneous workers and firms. Permanent residents and native-born workers search for jobs in the same labor market and engage in on-the-job search, while TFWs search separately within a segmented labor market and do not receive outside wage offers. We calibrate the model to match our reduced-form results, and we use it to simulate the long-run effects of PR and consider two counterfactual policies: (1) increasing the cost to firms of posting a TFW vacancy and (2) allowing TFWs to switch employers freely under “open” visas. We evaluate how these policies affect output, wages, profits, and overall social welfare. |
| JEL: | F22 J42 J61 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34630 |