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on Dynamic General Equilibrium |
| By: | Claudia Foroni Paolo Gelain Marco Lorusso Massimiliano Marcellino |
| Abstract: | We quantify the effect of severe weather shocks on the US economy in an environment in which the economy can switch between periods of financial stability and financial instability, like the Great Recession. We estimate a New Keynesian dynamic stochastic general equilibrium model with banks and severe weather events. We show that severe weather shocks: 1) have a negative impact on real and financial US variables, sizable only in periods of financial instability, but muted effects on nominal variables; 2) are never a relevant source of business cycles fluctuations; 3) transmit mainly via a deterioration in the quality of capital. |
| Keywords: | Severe weather shocks, Actuaries Climate Index, NK DSGE models, Financial frictions, Markov Switching |
| JEL: | Q54 E32 E44 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp26266 |
| By: | Michail Anthropelos; Jasmina Hasanhodzic; Laurence J. Kotlikoff |
| Abstract: | This paper addresses two fundamental macroeconomics questions. First, are macro shocks large enough to alter the course of the economy? Second, are they large enough to materially impact economic welfare? Lucas and many others have addressed these issues, but do so primarily in the context of representative agent models. We study these questions using a large-scale, general equilibrium, stochastic, overlapping generations model. We consider 80 generations overlapping in an economy buffeted by realistically calibrated total factor productivity and capital depreciation shocks. The model is solved using Marcet’s projection method taking explicit account of the full state space, which comprises 81 variables. Our findings, some recapitulated from prior studies by Hasanhodzic and Kotlikoff, suggest macro shocks are second order both with respect to their impact on aggregate variables and individual welfare. Specifically, the probability that the stochastic economy’s long-run aggregates materially deviate from their deterministic counterparts is less than one percent. Furthermore, the realized (simulated) lifetime utility of generations born in the long run rarely differs from deterministic long-run utility levels by more than 1 percent, measured as consumption-compensating differentials. These findings are supported by the model’s small equity premium. Moreover, they are essentially indifferent to the presence of a bond market. Both results suggest agents are minimally concerned with precautionary savings against these shocks. Our RBC-in-OLG findings suggest that what really moves the macroeconomy and demands attention is policy, not shocks. |
| JEL: | E0 E39 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34896 |
| By: | Morteza Ghomi (Banco de Espana); Jochen Mankart (Narodna Banka Slovenska); Rigas Oikonomou (UC Louvain & University of Surrey); Romanos Priftis (European Central Bank) |
| Abstract: | Government spending effectiveness depends critically on how it is financed. Using state-dependent SVAR models and local projections on post-war US data, we show that fiscal expansions financed with short-term debt generate significantly larger output multipliers than those financed with long-term debt. This difference mainly stems from private consumption responses: short-term financing crowds in consumption while long-term financing does not. To rationalize this finding, we construct an incomplete markets model in which households invest in short-term and long-term assets. Short assets provide liquidity/safety services; households can (more readily) use them to cover sudden idiosyncratic spending needs. An increase in the supply of these assets, through a short-term debt-financed government expenditure shock, boosts private consumption. We first show this mechanism analytically in a simplified model and then quantify it in a carefully calibrated New Keynesian model. We find that fiscal multipliers differ substantially across financing modes, with short-term-financed shocks typically exceeding unity while long-term-financed shocks typically fall below unity. We show these differences persist across monetary and fiscal policy regimes, with important implications for optimal debt management and stimulus design. |
| JEL: | D52 E31 E43 E62 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1129 |
| By: | Pablo Aguilar (BANCO DE ESPAÑA AND ECB); Rubén Domínguez-Díaz (BANCO DE ESPAÑA); José-Elías Gallegos (BANCO DE ESPAÑA); Javier Quintana (BANCO DE ESPAÑA) |
| Abstract: | We analyze how production networks transmit foreign price shocks and reshape monetary policy trade-offs in an open-economy New Keynesian model with domestic and international input–output linkages. Analytically, we show that closing the output gap does not generally stabilize domestic inflation, as sector-level terms-of-trade movements and trade imbalances become additional drivers of inflation dynamics. Quantitatively, we study an international energy price shock in a model calibrated to major euro area countries and their trade partners. We find that production networks significantly amplify the cumulative headline inflation response and substantially worsen monetary policy trade-offs, as measured by the sacrifice ratio. |
| Keywords: | open economy, production networks, New Keynesian, monetary policy |
| JEL: | E31 E32 E52 E70 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2607 |
| By: | Chen, Yongmin; Li, Zhuozheng; Zhang, Tianle |
| Abstract: | We study the impacts of repeat purchases on consumer search and price competition in an overlapping generations model. Search incentives are higher for “new” consumers and lower for “old” consumers in each generation, which changes price competition directly for these consumers and also indirectly through intertemporal rivalry. There exist two types of consumer loyalty, with remarkably different competitive effects. Relative to the single-purchase benchmark, equilibrium price is lower when brand preference is unlikely to persist, but higher when discount factors are relatively low. |
| Keywords: | search, repeat purchase, dynamic search incentive, price competition |
| JEL: | D8 L1 |
| Date: | 2026–02–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127995 |
| By: | Scavino Alfaro, Vicenzo |
| Abstract: | This paper develops a DSGE model with heterogeneous households (HANK) to study how automation shocks psi_t affect the functional distribution of income and inequality when (i) substitution between effective labor and automated capital and (ii) aggregate market power, captured by markups disciplined by antitrust enforcement with real resource costs, coexist. Households face idiosyncratic risk, liquidity constraints, and mobility frictions, and dynamically choose an occupational/sectoral path j; automation can also affect effective productivity heterogeneously across paths. On the policy side, a Citizen Sovereign Wealth Fund partially captures rents associated with automation and market power and finances an in-kind floor and a citizen dividend under explicit operational rules (non-negativity, feasibility, and an institutional cap on public equity ownership). The main contribution is a fully closed framework in terms of timing, detrending, and ex-dividend flow-of-funds, delivering transparent theoretical predictions for the labor share, inequality, and the transmission of technological shocks under heterogeneity, along with a methodological appendix to guide future empirical implementations. |
| Keywords: | automation, artificial intelligence, HANK, market power, markups, antitrust, sovereign wealth fund, citizen dividend, occupational mobility |
| JEL: | D43 D63 E24 E61 L41 O33 |
| Date: | 2025–12–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127515 |
| By: | Sagiri Kitao; Kanato Nakakuni |
| Abstract: | Advanced economies have experienced a sharp decline in fertility and marriage rates over the past several decades, alongside rising educational attainment and substantial shifts in women’s time allocation. To investigate the forces behind these trends, we develop a quantitative general equilibrium model with endogenous marriage, fertility, educational investment, and women’s time use. The model incorporates factor-neutral, skill-biased, and gender-biased technological change, which jointly determine the wage structure and the trade-offs households face. Calibrating the model to Japan, we find that skill- and gender-biased technological change jointly account for about 30% of the decline in fertility between 1970 and 2020, with technologies favoring female labor supply explaining most of this effect. These forces operate through higher opportunity costs of childrearing and weaker incentives to marry. Counterfactual experiments show that ignoring the joint determination of education and time allocation leads to substantial misattribution of the drivers of fertility decline. Together, the results demonstrate that understanding long-run demographic change requires a unified framework that integrates these interconnected household decisions. |
| Keywords: | Fertility, Marriage, Home Production, Women’s Time Allocation, Skill-biased Technological Change, Gender-biased Technological Change, Japan. |
| JEL: | D10 E10 J10 O11 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_735 |
| By: | Alex Ilek; Nimrod Cohen |
| Abstract: | We propose a semi-structural DSGE model for the Israeli economy, as a small open economy, which contains a financial friction in the household sector credit market. Such a friction is reflected in a positive relationship between households' leverage ratio and their interest rate (credit spread) on debt, as evident in the Israeli data. Our main purpose is to evaluate the implications of such a friction on the implementation of monetary policy and macroprudential policy. Our two main findings are: First, it is important that the monetary policy will react also to developments in the credit market, such as credit spread widening, to increase effectiveness in achieving its main goals of stabilizing inflation and real activity. Second, macroprudential policy may increase the sensitivity of households' credit spread to their leverage. Thus, this policy can mitigate or even prevent over-borrowing and reduce the risk of a debt deleveraging crisis. Moreover, in a case of demand weakness and debt deleveraging, in addition to accommodative monetary policy, the macroprudential policy may contribute to stimulating demand due to a corresponding reduction in credit spread. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.11013 |
| By: | Ursula Berresheim; David Koll |
| Abstract: | In the United States, 35–40% of all marriages end in divorce. Yet, we provide survey evidence that, on average, married respondents expect a divorce likelihood of 15%, with most respondents significantly underestimating their predicted divorce risk. Our survey reveals that individuals with more overoptimistic divorce expectations exhibit higher within-couple inequality in market hours and earnings and accumulate significantly less wealth than their rational counterparts. Building on this evidence, we incorporate overoptimistic divorce expectations into a household life-cycle model with endogenous accumulation of human capital, assets, and ex-ante heterogeneity in spouses’ wages. Couples jointly choose their market hours, home production, and joint savings. We quantify the model using U.S. microdata and show that overoptimism leads to (1) higher within-couple specialization and (2) lower savings, as overoptimistic lower-wage spouses fail to internalize the insurance value of human capital and assets in the event of divorce. Overoptimism during marriage persists beyond divorce through lower assets and human capital upon divorce, with particularly adverse consequences for the lower-wage spouse. The model thus provides a novel explanation for the high poverty rates observed among divorced mothers. Finally, we show that joint taxation of married couples amplifies specialization among overoptimistic couples. |
| Keywords: | Intra-household decisions, Divorce, Subjective Expectations, Human Capital, Savings, Gender Equality, Taxation |
| JEL: | D10 D84 E24 J12 J18 J22 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_734 |
| By: | Faberman, Jason (Federal Reserve Bank of Chicago); Mueller, Andreas (University of Zurich); Sahin, Aysegül (Princeton University) |
| Abstract: | This paper studies gender gaps in labor-market outcomes, with a focus on job ladder dynamics. We show that women experience substantially lower wage growth conditional on prior wages despite nearly identical job-to-job transition rates for men and women. To reconcile these observations, we document gender differences in the valuation of nonwage job amenities and in job search behavior, and develop a multi-dimensional job-ladder model with endogenous search effort where workers value both wages and amenities. The model allows for gender heterogeneity in separation rates, search effort, the value of nonemployment, amenity valuations, and bargaining power, enabling a joint analysis of gender wage and employment gaps. A quantitative decomposition shows that differences in preferences for nonwage amenities account for nearly 40 percent of the gender pay gap. Differences in the value of nonemployment and bargaining power explain most of the remainder, with only a limited role for differences in separation rates and search behavior. Finally, we show that increases in job amenities — such as the expansion of remote work — raise the gender wage gap while reducing gender differences in employment. |
| Keywords: | gender wage gap, job search, job amenities, on-the-job search |
| JEL: | J16 J60 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18418 |
| By: | Masashige HAMANO; Kongphop WONGKAEW; Yuki MURAKAMI; Toshihiro OKUBO |
| Abstract: | This paper studies the link between product-level dynamics and macroeconomic fluctuations using rich census data from Kobe covering the period 1992-2013. The dataset includes two major disruptions—the 1995 Kobe earthquake and the 2008 global financial crisis—and provides annual information for more than 1, 000 six-digit product categories. To isolate the effects of the earthquake, we construct counterfactual cities, such as Nagoya. We estimate a multi-product firm DSGE model using maximum likelihood with a computationally robust estimation strategy. The results reveal substantial heterogeneity in product-level responses to shocks, with important implications for aggregate dynamics, the propagation of large disasters, and the role of product-specific characteristics in shaping macroeconomic resilience. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26019 |
| By: | Ismaila Y. Jammeh (Department of Economics and Social Sciences, Universita' Politecnica delle Marche (UNIVPM)); Federico Giri (Department of Economics and Social Sciences, Universita' Politecnica delle Marche (UNIVPM)); Alberto Russo (Department of Economics and Social Sciences, Universita' Politecnica delle Marche (UNIVPM)) |
| Abstract: | This paper studies the long-run distributional effects of inheritance taxation and redistribution within an agent-based overlapping-generations model featuring heterogeneous agents who differ in demographics, returns to wealth, education, and consumption behaviour. The results show that progressive inheritance taxation combined with redistribution substantially reduces wealth inequality, while consumption inequality declines more gradually and with a delay. This lag reflects lifecycle dynamics: younger households predominantly save transfers, whereas middle-aged households consume at peak earning stages. Importantly, these policies do not erode aggregate wealth. Instead, they reallocate wealth across households without shrinking the total wealth stock. The top 1% and top 10% experience losses in both wealth shares and absolute wealth levels, while the bottom 50% gain in both dimensions. These effects intensify over time and become particularly pronounced after several decades, as redistribution translates into higher human capital accumulation and improved lifetime earnings for lower-wealth households. Overall, the findings suggest that the conventional equity–efficiency trade-off is significantly weakened when tax revenues operate as a form of pre-distribution rather than mere ex post redistribution. In this framework, the true efficiency loss stems not from taxation, but from the long-run compounding of dynastic wealth concentration under policy inaction. |
| Keywords: | Intergenerational Transmission, Wealth Inequality, Agent-Based Model, Overlapping Generations, Inheritance taxation, Redistribution |
| JEL: | C63 D31 H23 J11 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:anc:wpaper:505 |
| By: | Felipe Alves; Giovanni L. Violante |
| Abstract: | As the economy emerges from a crisis, macroeconomic policy confronts a dilemma: a protracted stimulus can foster a more inclusive labor market recovery, yet risks igniting inflation that ultimately undermines workers’ welfare through real income erosion. This tension amplifies in the presence of the ZLB and aggregate capacity constraints. We embed this insight into a quantitative model of the US economy. We study how monetary and fiscal policies managed this inflation-inclusion trade-off after the pandemic, contrasting actual outcomes with counterfactual scenarios. Our experiments yield five findings: (i) the trade-off was unusually difficult because policy was squeezed between these two constraints; (ii) inflationary pressures arose from the joint deployment of prolonged monetary and fiscal stimulus; either policy alone would have produced milder price dynamics; (iii) either inclusive fiscal policy or inclusive monetary policy in isolation would have been sufficient to contain the negative labor market hysteresis at the bottom of the distribution; (iv) inclusive fiscal policy combined with a more traditionally inflation-focused central bank would have achieved higher welfare for the vast majority of households; (v) welfare effects reflect mostly corrections of incomplete-market inefficiencies rather than gains from aggregate stabilization. |
| JEL: | E21 E24 E31 E32 J24 J30 J64 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34894 |
| By: | John R. Grigsby; Nathan Zorzi |
| Abstract: | Sectoral shifts require costly labor reallocation for workers, fueling concerns about how quickly they occur. We study how the pace of such sectoral shifts affects workers at risk of displacement. We develop a life-cycle model with skill heterogeneity and job ladders where labor demand gradually rises in one sector and declines in another. The model reveals three novel insights. First, workers’ lifetime earnings are strongly non-linear and even nonmonotonic in the horizon over which the transition unfolds. Second, more and more workers benefit on the extensive margin as the transition accelerates, but the tail of losses becomes thicker on the intensive margin. Third, labor market frictions are important to quantify these non-linearities. We apply our model to the climate transition and find substantial earnings losses from a transition ending in 2060. Completing the transition ten years earlier reduces average losses, but raises losses in the tail by a fifth. |
| JEL: | E0 E20 E24 E60 E64 J20 J23 J24 J3 J62 Q52 Q58 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34922 |
| By: | Ursula Berresheim |
| Abstract: | The rise of work-from-home (WfH) has become a durable feature of 21st-century labor markets, raising a key question for gender equality: Is WfH a stepping stone or a stumbling block for women’s careers? While WfH could help women reconcile professional and family responsibilities, it may also slow career advancement through productivity losses and lead to stronger specialization in domestic work. To study the short- and long-run macroeconomic implications of an expansion in WfH opportunities, I develop a quantitative general-equilibrium, overlapping-generations model calibrated to pre-COVID U.S. data. Couples jointly choose their time allocation between market and domestic work, WfH adoption, and occupation. The model predicts that expanding WfH opportunities strengthens mothers’ careers in the long-run: women’s earnings growth between ages 25 and 40 increases by 7.2 percentage points, and the gender earnings gap narrows by 7.4 percent. Women benefit both from their own and their spouses’ WfH adoption as well as through re-sorting into higher-paying occupations. However, some women experience career losses when working in occupations where WfH entails high productivity penalties. At the aggregate level, welfare rises by 11.1 percent and output by 0.5 percent. Important for the current policy debate, I find short-run losses in women’s earnings from WfH adoption, as occupational choices are fixed and the expansion of WfH is large and unexpected. |
| Keywords: | Work from Home, Gender Inequality, Occupational Sorting, Human Capital, General Equilibrium, Life-Cycle Model, Time allocation, Productivity Penalties |
| JEL: | J16 J22 J24 J31 D13 O33 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_733 |
| By: | Stéphane Auray; Michael B. Devereux; Aurélien Eyquem |
| Abstract: | Can protectionism revive domestic production, slow automation, and help routine workers? We address this question in a dynamic open-economy model with heterogeneous firms, endogenous entry, and task-based production in which routine tasks can be performed by workers or robots. Import tariffs reallocate demand toward domestic goods, reshape markups and entry incentives, and generate fiscal revenues rebated to households. As a result, tariffs raise GDP and consumption measured at market prices and temporarily slow automation, even though intermediate output at factor prices and trade volumes decline. The gains are unevenly distributed: routine workers benefit robustly through transfers and reduced training, non-routine workers face opposing wage and rebate effects, and firm owners gain in aggregate as higher domestic demand and entry expand total profits despite lower per-firm values. Aggregate welfare gains hinge critically on key assumptions (automation, training, endogenous entry) and on how tariff revenues are rebated. In the baseline with uniform transfers, the welfare-maximizing tariff lies below the classical monopoly formula, while alternative rebate schemes can shift it substantially. Overall, the results caution against viewing tariffs as a simple tool for reindustrialization and highlight the role of technology adoption and fiscal incidence in evaluating protectionist policies. |
| JEL: | F30 F40 F41 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34935 |
| By: | Yan Bai; Dan Lu; Xu Tian; Yajie Wang |
| Abstract: | This paper reassesses the role of financial frictions in capital misallocation through a model disciplined by both firm-level borrowing costs and the average revenue product of capital (ARPK). Using Chinese manufacturing data, we document substantial dispersion in ARPK, alongside a strong positive relationship between ARPK and the borrowing costs firms face---patterns absent in U.S. data. We develop a heterogeneous-firm model with endogenous firm-specific borrowing costs and additional capital distortions modeled as exogenous wedges. In this model, eliminating financial frictions raises total factor productivity (TFP) by 25 percentage points. In contrast, without other capital distortions, removing financial frictions increases TFP by less than 2 percentage points. The stark difference arises from the interaction between financial frictions and permanent firm-level distortions, which generate endogenous financial heterogeneity and selection, making productive firms the most constrained. Our findings suggest that financial frictions can be highly distortionary when other sources of misallocation are present. |
| JEL: | E2 F3 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34930 |