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on Dynamic General Equilibrium |
| By: | Wei Jiang; Jingwei Wu |
| Abstract: | We examine optimal government education expenditure policies in the form of cash transfers to school-aged children, with the objectives of enhancing intergenerational income mobility and reducing the skill premium. Using a calibrated overlapping generations (OLG) model tailored to recent empirical data from the Chinese economy, we analyse the welfare-maximizing policy design of this policy. Our findings indicate that optimal policy involves directing greater cash transfers toward children with lower initial ability, as their educational attainment requires higher relative effort. This aligns with China’s nationwide higher education expansion initiative launched in 1999. Quantitatively, the optimal policy enhances upward income mobility by 56%, reduces the skill premium by 58%, and increases aggregate welfare by approximately 13%. |
| Keywords: | Chinese economy; intergenerational income mobility; skill premium; government cash transfers |
| JEL: | E24 E62 I25 I28 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ukc:ukcedp:2602 |
| By: | Oscar Iván Ávila-Montealegre; Juan J. OspinaTejeiro; Anderson Grajales-Olarte; Mario A. Ramos-Veloza |
| Abstract: | We analyze how the minimum wage affects a typical emerging economy with high labor informality. Using an extended New Keynesian small open economy model, we find that an unexpected increase in the minimum wage disproportionately affects low-skilled workers, with limited effects on inflation and the monetary policy rate. A higher minimum wage raises production costs and induces the substitution of formal workers with informal labor and machinery, leading to lower output, employment, and net exports. We also find that the existence of a minimum wage alters the transmission of productivity, demand, and monetary shocks, resulting in a more persistent impact on macroeconomic variables and lower effectiveness of monetary policy in controlling inflation. While the minimum wage mitigates consumption inequality in the short run, it increases employment volatility. The macroeconomic implications of minimum wages are significant, and the mechanisms differ from those highlighted in the literature for advanced economies. |
| Keywords: | DSGE model, minimum wage, informal labor markets, monetary policy, heterogeneous agents |
| JEL: | E13 E50 J31 J46 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-018 |
| By: | Nina Biljanovska; Jordi Galí; Lucyna Gornicka; Alexandros P. Vardoulakis |
| Abstract: | Recessions that follow asset price booms accompanied by high credit growth are deeper and longer-lasting than those following asset price booms without strong debt accumulation. We develop a dynamic general equilibrium model with a rational asset bubble and an occasionally binding borrowing constraint that reproduces these empirical regularities. The bubble raises collateral values and relaxes borrowing limits during upswings, but tightens them when it bursts. We derive the time-consistent optimal policy and characterize simple borrowing-tax rules approximating it, showing such policies substantially reduce frequency and severity of recessions triggered by bursting of leveraged bubbles. |
| JEL: | E32 E44 G01 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35050 |
| By: | Marina Azzimonti-Renzo; Nirvana Mitra |
| Abstract: | Emerging economies exhibit pro-cyclical fiscal policy, counter-cyclical sovereign spreads, and recurrent debt crises, whereas advanced economies sustain high debt with low spreads and lower volatility in outcomes. We document that these differences are systematically related to institutional strength, measured by horizontal accountability, and to the prevalence of clientelistic allocation of public resources in a panel of 51 countries (1994-2023). We develop a dynamic political-economy model of sovereign borrowing with long-term debt in which institutional constraints discipline clientelistic transfers and shape default incentives. Variation in institutional strength generates both emerging-market and developed-economy outcomes within a unified framework and accounts for heterogeneous post-democratization trajectories in emerging markets. |
| Keywords: | Sovereign Debt Crises; Tax Smoothing; Checks and Balances; Clientelism; Sovereign De fault; Fiscal Policy; Emerging Markets; Long-term Debt |
| JEL: | D72 E43 F34 E62 F41 |
| Date: | 2026–03–30 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:102967 |
| By: | Ernst, Anne; Hinterlang, Natascha; Jäger, Marius; Stähler, Nikolai |
| Abstract: | Since 2018, tariffs have re-emerged as a tool for protecting domestic economies, particularly in the US. This paper examines the macroeconomic and welfare effects of various import tariff scenarios using a four-region dynamic general equilibrium model with a multi-sectoral production network. The scenarios include unilateral US tariffs, coordinated US-EU tariffs, Chinese retaliation, Europe's non-participation, and sector-specific versus broad tariffs. Our results show that tariffs initially boost domestic value-added output by making local goods relatively cheaper. While consumption can increase permanently, the output benefits are short-lived. Increased production costs and reduced global income largely offset the output gains over time. Tariff-targeted countries have an incentive to retaliate, and when they do, these output/consumption gains do not materialize. As a result, welfare effects are negative. Regardless of direct involvement in tariff conflicts, the rest of the world suffers from reduced aggregate income. The effects of tariffs and strategic interac- tions depend on which sectors are subject to tariffs. Overall, tariffs appear to be an inefficient tool for economic protection due to the high probability of retaliation. |
| Keywords: | Tariffs, Trade Conflict, Protectionism, International Trade, DynamicGeneral Equilibrium Model, Production Network |
| JEL: | F12 F13 F40 D57 E27 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:340010 |
| By: | Jonathan Swarbrick (University of St Andrews) |
| Abstract: | This paper studies monetary policy in a New Keynesian economy with frictional bank lending, rationalising evidence that lending conditions can remain tight despite liquidity injections. The model features a policy trade-off in which increases in banking sector liquidity can incentivise more lending by lowering the overnight rate and the marginal cost of funds, but can also incentivise less lending by compressing bank margins as interest rates approach the policy floor, worsening adverse selection and credit rationing. As a result, quantitative easing can exert a contractionary effect when the economy is away from the effective lower bound, with outcomes depending on borrower risk and the size of the programme. However, both channels raise inflation expectations, and so liquidity policies are always expansionary at the lower bound. Optimal policy features a deflation bias under credit rationing, while commitment to future accommodation eases current credit conditions and implies gradualism in quantitative tightening. |
| Keywords: | Monetary policy; quantitative easing; small business lending; credit rationing; bank liquidity |
| JEL: | E5 E44 G21 |
| Date: | 2026–03–25 |
| URL: | https://d.repec.org/n?u=RePEc:san:econdp:2601 |
| By: | Rainald Borck; Tadashi Morita; Yasuhiro Sato |
| Abstract: | We build a dynamic quantitative spatial model with mobile households and endogenous fertility to analyze the efficiency of equilibrium fertility choices and city size distribution. City size affects the economy through three channels: a larger city population increases productivity, affects amenity levels (positively or negatively), and increases the cost of child care. We find that the competitive equilibrium is inefficient due to the intergenerational externality. We calibrate our model to German county data and find that excessively large cities have excessively low fertility rates, which yields a 14% welfare loss. |
| Keywords: | optimal city system, mobility, endogenous fertility, agglomeration |
| JEL: | R12 R13 J13 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12595 |
| By: | Diego Ascarza-Mendoza (Tecnológico de Monterrey); Christian Velasquez (Banco Central de Reserva del Perú) |
| Abstract: | This paper studies the dynamics of mental health over the life cycle and introduces a parsimonious statistical model suitable for structural economic applications. Using data from the Panel Study of Income Dynamics (PSID), we document new facts on mental health dynamics: mental health generally improves with age, although it has worsened in more recent cohorts. Recovery rates are high and increase with age, and individuals are likely to remain in good mental health, with transitions depending on duration in the current state. Mental health is strongly correlated with fixed labor productivity and with the presence of depression early in life, suggesting that ex-ante conditions play a key role in shaping its evolution. Inequality in mental health remains stable across age. We estimate the model using the Simulated Method of Moments and show it replicates key empirical patterns. We then incorporate the statistical model into a life-cycle framework with endogenous labor supply decisions, calibrated to match observed differences in labor supply—both at the extensive and intensive margins—by mental health status. We find large monetary and welfare losses from depression symptoms, with significant heterogeneity by ex-ante conditions. |
| Keywords: | Mental health, recovery, depression, physical health. |
| JEL: | D91 E21 I13 I18 J22 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:rbp:wpaper:2025-010 |
| By: | Leandro Lyra Braga Dognini |
| Abstract: | This paper bridges social security design and general equilibrium theory to conceive optimally balanced pay-as-you-go systems. The design is based on the backward calculation algorithm from Dognini (2025), which is used to find optimal monetary equilibria of prone-to-savings non-stationary overlapping generations economies with heterogeneous households. In particular, this algorithm makes the design applicable for reforming pay-as-you-go systems in countries undergoing demographic transitions. Due to households balanced budgets under equilibrium prices (i.e., Walras' law), these optimally balanced pay-as-you-go systems resemble the well-known notional accounts systems. The design is illustrated in a simplified framework using the past and forecast demographic and productivity dynamics of Brazil, China, India, Italy, and the United States from 1950 to 2070. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.12125 |
| By: | Benjamin Born (University of Bonn, CEPR, CESifo, & ifo Institute); Gernot J. Müller (University of Tübingen, CEPR, & CESifo); Johannes Pfeifer (University of the Bundeswehr Munich); Susanne Wellmann (Unternehmer Baden-Württemberg) |
| Abstract: | Interest rate spreads vary widely across time and countries and are a central driver of business cycles in emerging market economies (EMEs). Since 2008, advanced market economies (AMEs) have exhibited persistently higher and more volatile spreads, alongside increased macroeconomic volatility and stronger co-movement with EMEs. We document six facts showing that AMEs have become more similar to EMEs along key dimensions. We interpret these patterns through a small open economy model and uncover a stark dichotomy: higher spreads reflect greater indebtedness and lower debt tolerance, whereas greater macroeconomic volatility and co-movement are driven by stronger global shocks. |
| Keywords: | Country spreads, debt, interest rate shocks, business cycle, financial frictions |
| JEL: | F41 G15 E32 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:403 |
| By: | Corrado, L.; Grassi, S.; Paolillo, A.; Ravazzolo, F. |
| Abstract: | We study how the COVID-19 pandemic and Russia’s invasion of Ukraine reshaped energy prices and macroeconomic conditions in the Euro area. We develop and estimate a two-sector model in which oil, coal, and gas are combined to produce refined energy used by households and firms. The model allows for complementarities between energy and non-energy inputs, so shocks to individual energy markets propagate broadly through production, consumption, and inflation. Focusing on shocks specific to oil, coal, and gas from the onset of the pandemic to 2022:Q3, we find that they raised energy inflation by about 36 percentage points and headline inflation by 1.8 percentage points. Complementarities, wage indexation, and monetary policy amplify these effects, while subsidies offset them only partially. |
| Keywords: | Fossil Energy, Supply Shocks, Inflation, Complementarities, Monetary Policy, Fiscal Policy |
| JEL: | E31 E32 E52 E62 Q43 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2629 |
| By: | Akiomi Kitagawa |
| Abstract: | This paper investigates the macroeconomic effects of tuition sub-sidies in an overlapping-generations model with endogenous growth and innovation. Calibrated to the Japanese economy, the model ex-plores the “growth puzzle” where expanded educational attainment often yields modest aggregate productivity gains. We identify a “para-dox of innovation productivity”: while subsidies can achieve a Pareto improvement in low-innovation environments, highly productive inno-vation may cause technological progress to outpace capital accumula-tion. This dynamic destabilizes the tax base by eroding the capital-effective labor ratio, rendering aggressive subsidies fiscally infeasible in equilibrium. Our findings suggest that the feasibility of free college policies depends critically on the economy’s innovation productivity and its resulting impact on the dynamic interaction between techno-logical progress and the fiscal foundation. |
| Date: | 2026–03–30 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:82 |
| By: | Sebastian Galiani; Raul A. Sosa |
| Abstract: | Being around babies makes people want babies. We formalize this observation as the empathy channel: exposure to infants in the social environment activates neurobiological mechanisms that increase the desire for parenthood. As children become scarcer, this affective stimulus weakens, further eroding the motivation to have children. We embed the mechanism in a two-group overlapping-generations quantity-quality model. The empathy channel generates a positive externality, since each birth raises others’ desire for children, making the decentralized equilibrium inefficient. We characterize the optimal per-child subsidy and show that the first-order Pigouvian rate substantially overshoots the general-equilibrium optimum. The optimal targeting rule follows a Ramsey-like logic, directing the subsidy at the group with the most externality per fiscal dollar, not the group with the largest externality per child. The calibrated model suggests that the empathy channel can account for 3–33% of the fertility decline, with 13.4% at the baseline. At this baseline, the Pigouvian overshoot is 23–32% and the optimal subsidy raises welfare by 0.22% in consumption-equivalent terms. |
| JEL: | J13 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35021 |
| By: | Zach Weingarten (University of Pennsylvania); Jere R. Behrman (University of Pennsylvania); Andrew Postlewaite (University of Pennsylvania) |
| Abstract: | Social-skill formation during adolescence depends on peer environments, but those environments are equilibrium outcomes shaped by individual choices. To account for this endogeneity, we develop and estimate a dynamic model in which parents invest in adolescents, adolescents choose whether to participate in social activities (athletics and extracurricular clubs), and these choices jointly determine the neighborhood-peer environment that influences the accumulation of social skills, cognitive skills, and mental health. The model matches empirical patterns of skill accumulation, parental investment, and activity participation among U.S. adolescents, and links terminal adolescent-skill stocks to adult educational attainment and labor-market outcomes. In policy counterfactuals, subsidizing parental investment generates large gains in college completion and earnings, and subsidizing club participation generates larger long-run gains than subsidizing athletic participation. We also find that a counterfactual that eliminates peer effects reduces athletic and club participation by 15 and 9 percentage points, terminal adolescent social and cognitive skills by 0.05–0.08 standard deviations, college completion by 3%, and adult income by nearly 1%. |
| Keywords: | social skills, skill formation, peer effects, parental investments, adolescent development, athletics, clubs |
| JEL: | I24 J24 |
| Date: | 2026–03–26 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:26-004 |