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on Dynamic General Equilibrium |
| By: | Bardóczy, Bence (Federal Reserve Board); Savoia, Ettore (Research Department, Central Bank of Sweden); Vel´asquez-Giraldo, Mateo (Federal Reserve Board) |
| Abstract: | We study the transmission and distributional effects of monetary policy in an environment where consumption-saving choices reflect both precautionary motives and life-cycle considerations. Age emerges as a key state variable linking multiple dimensions of heterogeneity: young households have low wealth, high marginal propensities to consume, and strongly procyclical hours. In a quantitative model matching these facts, monetary policy operates primarily by stimulating investment and boosting labor demand for young workers. Wealthy retirees are affected through asset repricing and lower future returns, but the consumption and welfare effects for most retirees are small because they hold little financial wealth. |
| Keywords: | HANK; Heterogeneous Agents; Life-Cycle Dynamics; Monetary Policy; Redistribution. |
| JEL: | D31 D91 E21 E32 E52 |
| Date: | 2026–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0461 |
| By: | Hanno Kase; Leonardo Melosi; Sebastian Rast; Matthias Rottner |
| Abstract: | When public debt is elevated, the fiscal cost of fighting inflation rises sharply, as interest rate hikes increase government interest expenditures. We formalize this mechanism in a nonlinear New Keynesian model with a state-dependent fiscal constraint on monetary policy. High debt may dampen the monetary response to inflation, generating an inflationary bias even though government debt remains fully fiscally backed. The interaction between high debt and inflationary cost-push shocks makes the fiscal limit more likely to bind, amplifying inflation. In demand-driven downturns, the fiscal constraint may become more restrictive than the zero lower bound, forcing the central bank to either print money to purchase excess debt or accept fiscal dominance. |
| Keywords: | fiscal limits, public debt, monetary policy, inflation, zero lower bound, fiscal space, nonlinear new Keynesian models |
| JEL: | E31 E52 E62 E58 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1328 |
| By: | Danilo Cascaldi-Garcia; Camilo Morales-Jimenez |
| Abstract: | U.S. employment growth slowed down notably in the second part of 2025, and a key question is how much of the weakness stems from labor demand and how much from labor supply. In this note, we examine this question from the point of view of two different models: a statistical model that uses an intuitive interpretation of the joint behavior of employment and wage growth to infer the effects of labor supply and demand (VAR), and a structural dynamic stochastic general equilibrium (DSGE) model that uses a much wider array of data. |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:102398 |
| By: | Efrem Castelnuovo (University of Padova, CESifo, and CAMA); Giovanni Pellegrino (University of Padova and Aarhus University Author-Name: Laust L. Særkjær; Aarhus University) |
| Abstract: | We study how uncertainty shocks affect the macroeconomy across the inflation cycle using a nonlinear stochastic volatility-in-mean VAR. When inflation is high, uncertainty shocks raise inflation and depress real activity more sharply. A nonlinear New Keynesian model with second- moment shocks and trend inflation explains this via an "inflation-uncertainty amplifier": the interaction between high trend inflation and firms’ upward price bias magnifies the effects of uncertainty by increasing price dispersion. An aggressive policy response can replicate the allocation achieved under standard policy when trend inflation is low. |
| Keywords: | : Uncertainty, trend inflation, nonlinear VAR model, new Keynesian model, monetary policy. |
| URL: | https://d.repec.org/n?u=RePEc:pad:wpaper:0321 |
| By: | Jerome Creel; Serena Ionta; Guido Traficante |
| Abstract: | This paper examines the effects of fiscal policy on GDP, accounting for its composition and the prevailing policy regime (fiscal or monetary dominance). Using U.S. data, we estimate a Markov-switching Taylor rule to identify time-varying regimes and assess the dynamic effects of fiscal shocks - distinguishing between public consumption and investment - through nonlinear local projections. Our results show that under fiscal dominance fiscal shocks bring about larger and more persistent output responses. A DSGE model with regime shifts rationalizes these findings, showing that public consumption mainly boosts demand, while public investment enhances productivity through capital accumulation. The difference between the two components is particularly pronounced under monetary dominance, where monetary tightening dampens the demand-driven impact of consumption but not the supply-side gains from investment. Finally, we show empirically that policy uncertainty modulates these effects: government consumption is more stimulative in low-uncertainty environments, whereas government investment seems not to depend strongly on the uncertainty scenarios. |
| Keywords: | fiscal multiplier, government investment, economic policy uncertainty, monetary-fiscal interactions, policy dominance |
| JEL: | E52 E32 C32 E58 E61 E63 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-06 |
| By: | Diego Ascarza-Mendoza (School of Government and Public Transformation, Tecnológico de Monterrey); Tomás Rosé (Analysis Group) |
| Abstract: | This paper studies the welfare effects of expanding access to standard mortgage financing for factory-built homes. We begin by outlining the regulatory barriers that prevent many low- and middle-income U.S. households from using traditional mortgage credit in this segment. Compared with chattel loans—the primary financing instrument for manufactured homes—mortgages feature longer maturities, lower interest rates, and tax deductibility of interest payments. To evaluate the welfare consequences of equalizing these conditions, we develop a dynamic life-cycle model of housing decisions that highlights a key trade-off: manufactured homes are more affordable than site-built homes but face less favorable financing terms. The model is calibrated to match both the overall homeownership rate and the distribution of site-built versus manufactured homes in the U.S. South. Our results show that even under a conservative reform—granting tax deductibility alone, while holding interest rates and maturities fixed—welfare gains are substantial, equivalent to a 2% permanent increase in real income, or a 28% increase in lifetime income in present discounted value terms. |
| Keywords: | Factory Built Homes, Mortgages, Tax Deductions |
| JEL: | D6 E2 H2 R2 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:gnt:wpaper:23 |
| By: | Marcin Lewandowski (Group for Research in Applied Economics (GRAPE)) |
| Abstract: | This paper studies wealth inequality through the lens of costly self-control, modeled as Temptation Preferences, which introduce a novel term in the consumption–saving problem that acts as an effective discount factor. Relative to standard frameworks with fixed time preferences, temptation provides a structural, behaviorally grounded account of heterogeneity in discount rates and the positive association between patience and wealth, matching several empirical regularities. A stylized setup yields two mechanisms shaping intertemporal choice: the current resources channel (the effective discount factor increases with available resources) and future income channel (under standard calibration, it decreases with expected income). Embedding this mechanism in an otherwise standard OLG model, the current resources channel dominates, generating a discount-factor gap between richer and poorer agents. This in turn enables a parsimonious temptation model to match the observed wealth distribution more closely, outperforming a rational benchmark. It also shapes the distributional impact of taxation: relative to the rational baseline, wealth taxation is more effective than income taxation at reducing wealth inequality in the presence of temptation. |
| Keywords: | temptation preferences, wealth inequality, income inequality, wealth tax, labor income tax |
| JEL: | D31 D90 E21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:fme:wpaper:112 |
| By: | Junior Maih; Nigar Hashimzade; Oleg Kirsanov; Tatiana Kirsanova |
| Abstract: | Many important episodes in modern macroeconomics are defined by temporary shifts between different economic conditions: monetary policy may switch between dovish and hawkish stances, external shocks between high and low volatility, financial markets between periods of tight and loose frictions, and so on. Standard linear DSGE models cannot accommodate such shifts in behavior. A natural extension is multiple-regime models, in which an economy at any given time is in one of several regimes and selected parameters take different values in each regime. One popular way to model transitions between regimes is via a finite-state Markov process.This framework captures recurrent episodes parsimoniously while preserving the structural discipline of DSGE modeling. The main challenge for researchers is computational: a Markov-switching rational expectations model is considerably more complex to solve and estimate than its standard single-regime counterpart. Expectations must be treated consistently across regimes, and econometric inference requires specialized f ilters, which estimate both the probability of the economy being in each regime and the values of unobserved (latent) variables, such as the output gap. The RISE toolbox for MATLAB is designed to make this workflow straightforward. It allows users to declare Markov chains and regime-specific parameters, solve switching models by perturbation methods, and estimate them using dedicated switching filters. The outputs—regime probabilities (updated and smoothed), latent variables, and regime-dependent impulse responses—are precisely what applied macroeconomists need for empirical work. |
| Keywords: | Markov switching / regime-switching models, DSGE models, State-space models; Filtering and smoothing; RISE toolbox |
| JEL: | E32 C32 A22 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2026_01 |
| By: | Diego Ascarza-Mendoza (School of Government and Public Transformation, Tecnológico de Monterrey); Alex Carrasco (Massachusetts Institute of Technology) |
| Abstract: | Why do two out of three Americans claim Social Security benefits before reaching their Full Retirement Age? Why do even sufficiently rich people claim early very often? This paper resolves this puzzling phenomenon by extending a standard incomplete markets life-cycle model to incorporate health dynamics and bequest motives. Relative to the existing literature, health plays a broader role, affecting not only medical expenses and mortality but also directly the marginal utility of consumption. This role of health is disciplined using microdata on consumption, assets, income, and health from the Health and Retirement Study (HRS) and the Consumption and Activities Mail Survey (CAMS). The calibrated model successfully replicates the fraction of early claimers. Counterfactual exercises show that health-dependent preferences and bequest motives are crucial for this result. The model’s success is explained by a novel channel that comes from the interaction between the negative effect of worsening health on the marginal utility of consumption, the downward health trend because of aging, and bequest motives. These two elements reduce the gains from delaying by (1) making individuals more impatient and (2) increasing the strength of bequest motives relative to future consumption. The results suggest that governments aiming to insure against longevity must consider the complementary interaction between individual incentives to insure against longevity and health risks. |
| Keywords: | Health, MarginalUtility, Frailty Index, Social Security, Annuities |
| JEL: | F13 D72 D83 C91 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:gnt:wpaper:22 |
| By: | Philippe Bacchetta; Kenza Benhima; Yannick Kalantzis; Maxime Phillot |
| Abstract: | We build a two-country heterogenous-agent non-Ricardian model featuring asset scarcity and financial frictions in international capital markets. Due to the non-Ricardian nature of our framework, a demand for liquidity emerges and the supply of bonds matters. We show that shocks affecting the supply or demand of assets have very different international spillovers for an economy in a liquidity trap. A decrease in the supply of assets issued abroad leads to an asset shortage domestically. In normal times, the nominal interest rate decreases, stimulating investment and output. In a liquidity trap, deflation hits instead and the currency appreciates, which may cause a recession. |
| Keywords: | International Spillovers, Zero Lower Bound, Liquidity Trap, Asset Scarcity |
| JEL: | E40 E22 F32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1032 |
| By: | Nadine Yamout (American University of Beirut) |
| Abstract: | The MENA region has faced significant socio-economic and political shocks over the past decade, which impacted the fiscal stability of its economies. This paper explores how the fiscal fundamentals of these economies and the economic shocks they face influence their fiscal space, defined as the maximum level of sustainable debt net of actual debt as a share of GDP. Using a non-linear DSGE model with a state dependent fiscal limit that is calibrated using data from six non-oil-exporting and six oil-exporting MENA countries, I estimate the fiscal limit distributions for these economies. I also examine how shocks to productivity, public spending and government revenues affect the fiscal space, as well as how fiscal policy tools such as transfers and taxation shape debt sustainability. Key findings reveal that non-oil exporting MENA countries operate with more constrained fiscal positions, that government transfers and tax capacity play a major role in shaping fiscal limits, and that the fiscal resilience of oil-exporting MENA economies is primarily attributed to the oil revenues they generate. |
| Date: | 2025–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:erg:wpaper:1787 |
| By: | Matthew Fink; Jonathan Hambur |
| Abstract: | The sharp rise in inflation following the COVID-19 pandemic has renewed interest in how firms adjust prices in response to large economic shocks and what this means for modelling inflation dynamics and setting monetary policy. Using a large dataset of web-scraped Australian retail prices, we document a decline in price rigidity and increase in the rate of price changes in 2022 and 2023, coinciding with a period of strong goods price inflation. We incorporate these microdata-based estimates of price-setting frequency into the RBA’s DSGE model to assess their macroeconomic implications. We find that failing to account for the increase in the rate of price changes during the high inflation period could have led forecasters to underpredict inflation by up to 1.5 percentage points, even if they knew exactly which shocks were hitting the economy at the time. Moreover, lower price rigidity significantly steepened the Phillips curve, reducing the policy trade-off between inflation and output. Under these conditions, policymakers with the same preferences would tend to raise rates more aggressively (by up to around 40 basis points), compared to the case where rigidity did not change. Our findings highlight the importance of considering the implications of shifts in price-setting behaviour when analysing inflation outcomes and designing monetary policy. |
| Keywords: | inflation, price setting |
| JEL: | E31 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-07 |
| By: | Etienne Lehmann; Eddy Zanoutene (CY Cergy Paris Université, THEMA) |
| Abstract: | We study the optimal taxation of corporate and dividend income when entrepreneurs can use retained earnings to reduce their tax burden. We show that eliminating dividend taxes while increasing the corporate income tax (CIT) to keep investment unchanged raises total tax revenue. Our simulations suggest net revenue gains of 0.1-0.4% of GDP. In an infinite-horizon model, the optimal policy sets dividend taxes to zero in every period. As the discount factor approaches one and when the planner values only workers’ welfare, the optimal steady-state CIT converges to a standard inverseelasticity rule. |
| Keywords: | Corporate Tax, Dividend Tax, Optimal Taxation, Capital Taxation |
| JEL: | H21 H24 H25 H26 H32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2026-02 |