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on Dynamic General Equilibrium |
| By: | Yasuo Hirose; Donghoon Yoo |
| Abstract: | This paper investigates the quantitative implications and empirical relevance of behavioral expectations (BE) in dynamic stochastic general equilibrium (DSGE) models under equilibrium indeterminacy. Alongside the rational expectations (RE) benchmark, we examine two BE frameworks-diagnostic expectations (DE) and cognitive discounting (CD)-in both expectation formation and forecast error specifications. Using a simple example, we show that each combination yields a distinct equilibrium law of motion and different dynamic responses to fundamental and sunspot shocks. To evaluate their empirical relevance, we then estimate a medium-scale DSGE model for Japan’s prolonged zero interest rate period, a likely episode of indeterminacy, under various BE specifications. The DE model with RE-based forecast errors outperforms other specifications in replicating key macroeconomic dynamics, particularly the overreaction of aggregate variables to major shocks. Variance and historical decompositions reveal technology and sunspot shocks as primary drivers of output and inflation, respectively. Sunspot shocks stabilize output but amplify inflation volatility. Relative to the RE benchmark, the DE model assigns greater importance to sunspot shocks, highlighting the role of BE and indeterminacy in Japan's macroeconomic fluctuations. |
| Keywords: | equilibrium indeterminacy, diagnostic expectations, cognitive discounting, rational expectations, Bayesian estimation |
| JEL: | C32 C62 E32 E71 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-02 |
| By: | Vanessa B. Schmidt |
| Abstract: | I study the role of home production in determining the labor income channel through which monetary policy affects consumption inequality. To this end, I develop a Two-Agent New Keynesian model with home production. In the context of my model, hand-to-mouth households experience a sharper decline in labor income compared to richer households in response to a contractionary monetary policy shock. However, they increase home production to a greater extent than richer households do. The resulting labor income channel is therefore one third the size when accounting for home production. In line with my theoretical results, I show empirically that individuals living hand-to-mouth respond to contractionary monetary policy shocks by increasing home production by more than richer people do. |
| Keywords: | constrained households, consumption inequality, home production, monetary policy, TANK models |
| JEL: | E21 E52 J22 |
| Date: | 2025–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0082 |
| By: | Christophe Cahn; Patrick Fève; Julien Matheron |
| Abstract: | This paper examines the long-run macroeconomic effects of a Fiscal Rebalancing reform that shifts taxation from payroll to consumption under a balanced-budget constraint. Using a heterogeneous-agent model calibrated to French data, we compare pre- and post-reform steady states. The reform increases both aggregate labor and capital, with a stronger impact on capital in the heterogeneous-agent model than in its representative-agent counterpart. It also heightens wealth inequality, as a disproportionate share of the increase in aggregate wealth accrues to wealthier households. A welfare analysis that accounts for the transition dynamics reveals a positive average welfare effect overall, although high-wealth and, separately, low-productivity households experience welfare losses. The results are robust across alternative calibrations and model specifications. |
| Keywords: | Fiscal Policy, Fiscal Rebalancing, Income and Wealth Distributions, Heterogeneous-Agent Models |
| JEL: | E62 D31 C54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1028 |
| By: | Di Iorio Juan Pablo |
| Abstract: | This study examines the effects of incorporating fiscal dominance, based on the Fiscal Theory of the Price Level, into a New Keynesian Small Open Economy (NK-SOE) model. This framework enables a comparison between the responses of an economy characterized by fiscal dominance and those of canonical NK-SOE models when faced with monetary or external shocks. Notable differences emerge in nominal variables, such as inflation rates and nominal devaluation, as well as in household consumption and the real exchange rate. I show that introducing fiscal dominance into an otherwise standard NK-SOE model can help explain two important puzzles in the literature: the “price puzzle” and the “exchange rate response puzzle.” Furthermore, the model is expanded to account for government debt issued in foreign currency, introducing a fiscal channel related to the currency composition of the government’s debt. Additionally, the structure of taxes and government expenditures—particularly fiscal revenues tied to the non-tradable sector—plays a significant role in shaping the economic response when the government issues debt in foreign currency. |
| JEL: | F4 E6 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4794 |
| By: | Maria Manuel Campos; José Miguel Cardoso da Costa; Sandra Gomes; Pascal Jacquinot |
| Abstract: | This paper studies the effect of alternative monetary policy responses and the implementation of different fiscal policy measures to an inflationary shock in a monetary union, through the lens of a global DSGE model calibrated to the euro area. We find that a more aggressive monetary policy response mitigates the inflation surge, but has a detrimental impact on economic activity that imposes a stronger increase of public debt, reducing the fiscal policy space. We also find that some fiscal policy measures may alleviate the negative impact of the shock on households and firms, but do not significantly alter the inflation dynamics: a reduction of consumption taxes reduces inflation only temporarily, while an increase of transfers or of public investment slightly increase inflation initially, even if the latter may have a protracted negative impact. Overall, an appropriate mix of monetary and fiscal policies may be needed to ensure a swift return of inflation to target, while mitigating the impact on consumption. Targeting transfers to support constrained households has a mild impact on inflation, but may be a way to mitigate the impact on the most vulnerable with a less detrimental effect on public debt. |
| JEL: | E52 E62 E63 F45 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202515 |
| By: | Jesús Fernández-Villaverde; Tomohide Mineyama; Dongho Song |
| 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. |
| JEL: | D57 D58 D63 D72 F1 F2 F4 F6 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34672 |
| By: | Cwik, Tobias; Winter, Christoph |
| Abstract: | In the aftermath of the Great Financial Crisis, central banks from several advanced, small, open economies have used FX interventions (FXI) in order to stimulate inflation, given that their policy rates were very low. We present a quantitative DSGE model that allows us to study the effectiveness of this unconventional monetary policy tool. We apply the model to Switzerland, a country that has seen frequent and sizable central bank interventions. The model implies that FXI are effective and long-lasting: FXI of approximately CHF 27 billion (5% of annual GDP) are necessary to prevent the Swiss franc from appreciating by 1.1%. The effect is stronger the longer the central bank can commit to keep its policy rate constant in response to the inflationary effect of the interventions. We also find that FXI create significant additional leeway for monetary policy in small, open economies. This effect can be shown by the "shadow rate", the policy rate required to keep CPI inflation on its realised path without FXI. This "shadow rate" was up to 1 pp below the realised policy rate and close to -1.5% from 2015 to mid-2022 in Switzerland. Our framework also allows us to study the sensitivity of the shadow rate in an environment in which the policy rate is at (or close to) its lower bound. If the persistence of the policy rate increases at the lower bound, the shadow rate rises in absolute terms. |
| Keywords: | Monetary policy, FX intervention, shadow rate, DSGE model |
| JEL: | C54 E52 F41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:335029 |
| By: | Castiella Mauro |
| Abstract: | This paper develops a General Equilibrium model to quantify the economic cost of corruption by incorporating it as a distinct activity within a closed economy. Unlike traditional approaches that treat corruption as an exogenous friction, our model endogenizes the choice between productive labor and rent-seeking activities. Specifically, we introduce an auxiliary technology that captures the role of corruption in diverting labor away from the formal sector and distorting resource allocation, thereby reducing overall economic output. Our findings reveal that corruption can reduce the steady-state output by over 4%, highlighting its significant impact on economic welfare. The model also suggests that policies such as reduced labor taxes or improved oversight could mitigate these losses by discouraging the shift of labor into unproductive corruption activities. This framework offers a new perspective on the costs of corruption and serves as a tool for policymakers to evaluate interventions that could enhance productivity by curbing rent-seeking incentives. |
| JEL: | E2 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4786 |
| By: | I. Sebastian Buhai |
| Abstract: | Wage dispersion and job-to-job mobility are central features of modern labour markets, yet canonical equilibrium search models with exogenous job-offer ladders struggle to jointly account for these facts and the magnitude of frictional wage inequality. We develop a continuous-time equilibrium search model in which match surplus follows a diffusion process, workers choose on-the-job search and separation, firms post state-contingent wages, and the cross-sectional distribution of match states endogenously determines both outside options and the job ladder. On the theoretical side, we formulate the problem as a stationary mean field game with a one-dimensional surplus state, characterize stationary mean field equilibria, and show that equilibrium separation is governed by a free-boundary rule: matches continue if and only if surplus stays above an endogenous threshold. Under standard regularity and Lasry-Lions monotonicity conditions we prove existence and uniqueness of stationary equilibrium and obtain comparative statics for the separation boundary, wage schedules, and wage dispersion. On the quantitative side, we solve the coupled HJB and Kolmogorov system using monotone finite-difference methods and interpret the discretization as a finite-state mean field game. The model is calibrated to micro evidence on stochastic match productivity, job durations, tenure-dependent separation hazards, wage growth, and job-to-job mobility. The stationary equilibrium delivers a structural decomposition of wage dispersion into stochastic selection along job spells, equilibrium on-the-job search and the induced job ladder, and equilibrium wage policies with feedback through outside options. We use this framework to quantify how firing costs, search subsidies, and changes in match-productivity volatility jointly shape mobility, the job ladder, and the cross-sectional distribution of wages. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.07024 |
| By: | Neil Rankin |
| Abstract: | Staggered prices and finitely-lived agents create scope for a debt-financed tax cut to raise output. We study analytically how the impact multiplier depends on whether debt is expected gradually to return to its original level or else to rise to a permanently higher level, and on the speed of this. Under a simple Taylor Rule, the first debt path raises, but the second lowers, output on impact. With the first debt path, the multiplier is also probably hill-shaped in debt persistence. However, even a short-lived initial exogenous nominal interest-rate peg makes the multiplier probably positive with both debt paths. |
| Keywords: | fiscal deficit, staggered prices, finitely-lived agents, overlapping generations, output multiplier, debt persistence, debt gradualism, Taylor Rule, temporary nominal interest-rate peg |
| JEL: | E62 E63 H62 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:yor:yorken:26/01 |
| By: | Kroft, Kory; Norwich, Isaac; Notowidigdo, Matthew J.; Tino, Stephen |
| 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 eventstudy 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: | J61 J31 J64 J42 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:clefwp:335026 |
| By: | José R. Maria; Paulo Júlio |
| Abstract: | We estimate a small open-economy DSGE model for the euro area using data that span the COVID-19 pandemic, the inflation surge of 2022, and the onset of the Russo–Ukrainian war. The model incorporates COVID-specific shocks—distinct from standard ones in volatility and persistence—whose inclusion is warranted when conventional shocks fail to match the data without an abnormal increase in volatility. Accounting for these shocks is crucial: their omission significantly alters model dynamics, particularly impulse response functions, and distorts the interpretation of economic mechanisms. The pandemic recession is primarily driven by “forced-savings” shocks from domestic and external households and by production constraints, while labor hoarding emerges endogenously as a firm-level response to weak demand. Applying the same approach to identify war-specific shocks yields negligible effects. The 2022 inflation surge is fully explained by standard price-markup shocks, amplified by a sequence of external inflationary pressures, that can be replicated from standard shocks. The proposed specification outperforms alternative formulations, demonstrating that omitting any pandemic-related component or the rebound effect is sufficient to alter parameter estimates, impulse responses, and historical decompositions, as well as to lower the marginal data density. |
| JEL: | C11 C13 E10 E20 E32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202526 |
| By: | Alice Albonico; Guido Ascari; Alessandro Gobbi |
| Abstract: | We consider a medium-scale macroeconomic model where the zero lower bound on interest rates remains binding permanently. We estimate the model for the Japanese economy, encompassing both active and passive fiscal policy scenarios. Our findings reveal a predominantly passive fiscal policy stance during the period spanning from 1995 to 2023. We compute fiscal multipliers for various policy instruments, showing that under the backdrop of passive fiscal policy: i) multipliers are lower than in an active fiscal policy regime; ii) government spending multipliers remain below one; iii) tax reductions can be associated with a decrease in output and in ation. A counterfactual analysis suggests that a more active fiscal policy would have resulted in a higher price level without increasing output volatility. |
| Keywords: | permanent liquidity trap, indeterminacy, active and passive fiscal policy, fiscal multipliers, Japan. |
| JEL: | E52 E62 H63 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:566 |
| By: | Domínguez Juan Ignacio |
| Abstract: | Exchange controls are a common policy tool in emerging economies. This study develops a tractable model with capital accumulation to formalize their macroeconomic consequences in an environment where the government finances its deficit through domestic credit expansion while maintaining a fixed exchange rate. The analysis shows that exchange controls generate a wedge between official and parallel exchange rates, reduce output and permanent consumption, and, under certain conditions, tighter import restrictions can increase money demand and delay the collapse of the fixed rate regime. Moreover, the share of legal exports declines as the exchange rate gap widens. When import restrictions are endogenously adjusted in response to the amount of legal exports, domestic prices rise persistently over time. The main contributions are: (i) formalizing and summarizing the effects of exchange controls in a tractable model with capital accumulation and monetized deficits under a fixed exchange rate, and (ii) identifying a money-demand channel through which import restrictions can influence the timing of a first generation balance-of-payments crisis. |
| JEL: | F31 F41 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4795 |
| By: | Sosa Raúl Alberto; Vazquez Franco Martín |
| Abstract: | Minimum slaughter-age (or weight) rules delay harvest rather than tax quantities. We develop a continuous-time model of cattle as biological capital that maps slaughter age into harvest flow through a decreasing harvest fraction. The model yields closed-form steady states with and without a binding floor and characterizes the optimal transition after repeal. A binding floor necessarily enlarges the herd and lowers the marginal value of stock; long-run beef supply is non-monotone in the tightness of the floor—moderate floors can raise throughput, while strict floors reduce it. Repeal generates an immediate slaughter surge and monotone convergence back to the interior allocation. The framework is robust to preferences, biological growth, age-specific survival, and holding costs, and it delivers a simple sufficient-statistic measure of the policy’s dynamic efficiency cost. |
| JEL: | C61 Q18 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4840 |
| By: | George-Marios Angeletos; Chen Lian; Christian K. Wolf |
| Abstract: | How does the fiscal framework affect the central bank's ability to stabilize output and inflation? The textbook answer, which assumes Ricardian households, recommends that fiscal adjustment should be fast enough to allow for monetary dominance. We instead argue that, with non-Ricardian households, the central bank may indeed welcome slow, or even no, fiscal adjustment. On the demand side, slow fiscal adjustment helps stabilize aggregate spending; on the supply side, it eases tax distortions, improving the output-inflation trade off. And while the first channel favors slow fiscal adjustment only when the business cycle is dominated by demand shocks, the second channel extends this preference to supply shocks. A quantitative exercise affirms our lessons in the U.S. context, with the central bank preferring virtually no fiscal adjustment over the business cycle. |
| JEL: | E52 E62 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34654 |