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on Dynamic General Equilibrium |
| By: | Stefano Grancini; Mr. Marcos Poplawski Ribeiro; Danila Smirnov |
| Abstract: | Understanding how policies can stabilize household welfare during recessions requires a framework that captures household heterogeneity, unemployment risk, and general-equilibrium labor market dynamics. We study a contractionary demand shock in a Heterogeneous-Agent New-Keynesian model with search-and-matching friction on the labor market (HANK–SAM) and compare the effectiveness of alternative income-stabilization policies. Using a common fiscal envelope, we contrast increases in unemployment insurance generosity, with targeted transfers to hand-to-mouth households, and universal transfers. Policy effectiveness is assessed through the aggregate consumers’ welfare, measured in consumption-equivalent variation units. In an economy calibrated to U.S. data, unemployment insurance yields the largest welfare gain per percentage point of fiscal cost, followed by targeted transfers, while universal transfers are the least effective. A temporary increase in unemployment insurance generates the highest welfare, as it combines immediate cash-flow support with insurance effects, disproportionally benefiting households with high marginal propensities to consume. |
| Keywords: | Income stabilization; Heterogeneous-agent New Keynesian (HANK); Search-and-matching; Unemployment insurance; Targeted transfers; Consumption-equivalent variation; Public debt envelope; Policy effectiveness; IMF working papers; stabilization policy; household heterogeneity; contractionary demand shock; Unemployment; Unemployment benefits; Insurance; Consumption; Labor markets; Global |
| Date: | 2026–04–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/076 |
| By: | Giovanni Di Bartolomeo; Francesco Ferlaino; Carolina Serpieri |
| Abstract: | This paper studies why inflation inattention varies across households and over time, and how such variation shapes monetary transmission. We propose a behavioral mechanism, grounded in reference dependence and relative consumption, through which inflation inattention depends on the consumption gap between asset holders and non-asset holders. Consistent with this intuition, U.S. data suggest a negative reduced-form relationship between the consumption gap and inflation inattention. Motivated by this pattern, we develop a Two-Agent New Keynesian model with imperfect information in which asset holders endogenously reduce inattention when the consumption gap widens. The mechanism improves the accuracy of inflation expectations and inflation stabilization after cost-push shocks, but at the cost of a deeper contraction in real activity and lower welfare in inefficient steady states. |
| Keywords: | behavioral macroeconomics; inflation; inattention; expectations; consumption gap; monetary policy. |
| JEL: | E31 E52 E58 E71 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp280 |
| By: | Miguel Faria-e-Castro; Pascal Paul; Juan M. Sanchez |
| Abstract: | Should firms in financial distress be saved to stabilize an economy, even if less productive ones are kept alive, possibly reducing economic growth? To assess this fundamental stabilization-vs.-growth trade-off, we develop a new dynamic general equilibrium model with business cycles, endogenous growth, and innovation externalities. We discipline key parameters using microeconomic data and an instrumental-variable approach that links firm productivity growth to R&D expenditure. Based on the calibrated model, we find that economies that save distressed firms with credit guarantees, debt restructuring, or loan evergreening experience lower volatility but also slower growth. Even though welfare is higher in an economy without such interventions, the various "soft credit" regimes can still arise as equilibrium outcomes when a benevolent government intervenes in credit markets under discretion. |
| Keywords: | business cycles; endogenous growth; financial frictions |
| JEL: | E43 E44 E60 G21 G32 |
| Date: | 2026–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:103046 |
| By: | Hyeongwoo Kim; Ren Zhang; Shuwei Zhang |
| Abstract: | The labor market effects of government employment shocks in the United States have varied markedly across the postwar period. Using a Bayesian structural VAR with max-share identification, we document three distinct regimes: before the Volcker disinflation, public hiring crowded in private employment, raised real wages, and reduced unemployment; during the Great Moderation, the same shocks became contractionary; and after the Global Financial Crisis, their effects were largely muted. We account for these changes with a New Keynesian DSGE model featuring public employment, alternative monetary--fiscal regimes, and a maturity structure of government debt. The model shows that while monetary--fiscal coordination holds in both the pre-Volcker and post-GFC periods, debt maturity differs sharply across them. Longer debt maturity weakens fiscal transmission even under passive monetary policy, whereas aggressive anti‑inflationary policy renders government employment shocks contractionary regardless of debt maturity. |
| Keywords: | Debt Maturity; Government Employment; Max-Share Identification; Policy Coordination; Time-varying Effectiveness |
| JEL: | E32 E61 E62 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2026-04 |
| By: | Clancy, Daragh (Central Bank of Ireland); Lozej, Matija (Central Bank of Ireland) |
| Abstract: | European countries plan to boost their defence capabilities to deter external security threats. This implies a substantial change in the volume and composition of fiscal expenditure, as well as the structure of the industrial base. We analyse the macroeconomic implications of alternative policy choices to boost national security. We augment a global dynamic general equilibrium model to include a public good role for defence capabilities, a defence industry with R&D externalities, trade in military equipment, and public investment in dual-use goods. We show that rising security concerns can reduce all forms of economic activity. Enhancing defence capabilities mitigates this effect and boosts aggregate output (GDP) through increased defence industry production and government value added. However, this reorientation leads to a permanent crowding out of private consumption and a minimal effect on CPI inflation, unless the shock is temporary. |
| Keywords: | Defence spending; Geoeconomics; Knowledge spillovers. |
| JEL: | E62 F41 F52 H56 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:wpaper:03/rt/26 |
| By: | Mathieu Boullot; Christophe Cahn; Edouard Challe; Julien Matheron |
| Abstract: | We study the aggregate and distributional implications of a permanent increase in government spending of the magnitude implied by the 2025 change in NATO “core defence” spending target. Our framework of analysis is a calibrated Overlapping-Generations model with Heterogeneous Agents and a rich fiscal side that includes fully specified tax-and-transfer and pay-as-you-go social-security systems. We examine how alternative fiscal adjustments to the shock shape macroeconomic outcomes, aggregating them up from the distributions of individual labour-supply and consumption responses. We highlight the presence of a tradeoff, when choosing among fiscal adjustments, between mitigating aggregate crowding-out of private consumption versus reducing consumption inequality. |
| Keywords: | Overlapping Generations, Heterogeneous Agents, Government Spending, Inequality |
| JEL: | C62 D15 J11 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1039 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel R. Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the dynamics of the international monetary system under counterfactual scenarios. |
| Keywords: | dominant currency; international monetary system; strategic complementarities; history dependence |
| JEL: | E42 E58 G21 |
| Date: | 2026–04–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103040 |
| By: | Nakatani, Ryota; Miyamoto, Hiroaki |
| Abstract: | This paper studies the optimal tax-and-transfer policy when automation raises productivity but displaces unskilled workers. Using a general equilibrium model calibrated to the U.S. economy, we compute the steady-state social welfare-maximizing rate of each of four tax instruments: capital income taxation, unskilled wage taxation, taxation on automation capital (i.e., a robot tax), and consumption taxation. Following an increase in the productivity of automation-related capital, the welfare-maximizing capital income tax rate and robot tax rate are zero, as their long-run investment distortions outweigh their redistributive social benefits. In the baseline simulation, aggregate welfare is maximized by cutting the unskilled wage tax rate and, especially, the consumption tax rate. However, when unskilled labor and automation-related capital are highly substitutable, the optimal consumption tax rate increases, and the additional government revenue is redistributed to displaced unskilled workers. |
| Keywords: | Automation; Optimal Taxation; Capital Income Tax; Labor Income Tax; Consumption Tax; Robot Tax |
| JEL: | C68 E25 H21 H24 H25 O31 O40 |
| Date: | 2026–03–19 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128480 |
| By: | Adam Hallengreen Joergensen (Department of Economics, University of Copenhagen); Thomas H. Joergensen (Department of Economics, University of Copenhagen); Annasofie M. Olesen (Department of Economics, University of Copenhagen) |
| Abstract: | Dynamic household bargaining models are growing in popularity but are computationally demanding to solve and estimate. We propose a modification to the endogenous grid method (EGM) that allows this class of models to reap the benefits of the EGM. The method, which we refer to as interpolated EGM (iEGM), precomputes optimal intertemporal consumption as a function of the expected marginal value of wealth before solving the dynamic bargaining model. We illustrate the implementation of the iEGM in a simple example, where the iEGM is around 20 times faster than standard value function iterations. In a more complex quantitative model it is about 50 times faster, without compromising accuracy. We apply the iEGM to a rich household model to study how productivity shocks affect consumption inequality. Our results suggest that the degree of commitment of household members can affect the consequences of individual labor productivity shocks, such as e.g. skill-biased technological change. |
| Keywords: | Household Bargaining, limited commitment, life cycle, couples, numerical dynamic programming. |
| JEL: | D13 D15 C61 C63 C78 |
| Date: | 2026–04–17 |
| URL: | https://d.repec.org/n?u=RePEc:kud:kucebi:2605 |
| By: | Stéphane Auray; Michael B. Devereux; Anthony M. Diercks; Aurélien Eyquem; Joon Kim |
| Abstract: | Inflation expectations derived from financial markets exhibited unprecedented dynamics in 2025: the correlation between one-year inflation swaps and one-year-ahead one-year forward rates turned significantly negative for the first time on record. We show that this decoupling occurred primarily on days when tariff news dominated market pricing, using a two-stage event classification validated by Bloomberg news trends. Standard small open-economy New Keynesian models in which tariffs generate a one-time price-level increase imply positive comovement across horizons and cannot explain this pattern. We explain these occurrences through the lens of an amended small open-economy New Keynesian model. Three ingredients prove critical for reproducing the observed negative conditional correlation between spot and forward inflation after tariff shocks: targeting year-on-year inflation, substantial interest-rate inertia, and persistent tariffs. Under empirically plausible calibrations, the model generates a negative correlation conditional on tariff shocks while preserving a positive unconditional correlation, suggesting that the 2025 twist in the term structure reflects expectations of a persistent policy response to trade shocks. |
| JEL: | C50 E10 G1 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35076 |
| By: | Guido Ascari; Andrea Colciago; Marco Membretti |
| Abstract: | Under monetary tightenings, employment at small, high-churn firms con-tracts more than at large incumbents, raising the employment share of large firms. A mixed-frequency BVAR on U.S. data (1983–2018) shows that tight-enings reduce firm entry and new-entrant hiring, severing inflows into small firms, while higher exit destroys small-firm employment. Large incumbents are comparatively insulated, rarely exiting and exhibiting weak sensitivity to entry conditions. This mechanism raises employment concentration, defining an em-ployment concentration channel of monetary policy. An estimated structural model with heterogeneous firms, endogenous entry and exit, and equilibrium unemployment matches this effect, showing that the concentration channel is quantitatively important in accounting for the empirical output-inflation trade-off. |
| Keywords: | Monetary policy; employment concentration; unemployment; heterogeneous firms; BVAR. |
| JEL: | E52 E32 C13 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:859 |
| By: | Hyeongwoo Kim; Shuwei Zhang |
| Abstract: | This paper characterizes optimal monetary policy responses to technology shocks in a two-country model with sticky prices, local currency pricing, and international technology diffusion. We show that technology shocks originating in the tradable sector, regardless of their country of origin, elicit symmetric and closely coordinated monetary policy responses across countries, providing a rationale for a fixed exchange rate regime. By contrast, technology shocks originating in the nontradable sector generate asymmetric policy responses and depreciate the source country's currency, supporting the case for exchange rate flexibility. We further show that the international transmission of technology shocks amplifies real sector dynamics through news effects, prompting central banks to adopt contractionary policies, a result that stands in sharp contrast to the prior literature. |
| Keywords: | Exchange Rate Regimes; Interest Rate Rules; Local Currency Pricing; Sticky Price; Technology Diffusion |
| JEL: | F31 F41 O0 E52 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2026-05 |
| By: | Dudley Cooke; Tatiana Damjanovic |
| Abstract: | This paper studies macroprudential policy in a small open economy with financial intermediation and nominal rigidity. Fluctuations in bank deposit rates - which depend on the focus of monetary policy - create liability-side volatility, destabilize net interest margins, and reduce output. A macroprudential policy which shifts bank funding away from deposits towards equity enhances domestic risk-sharing and mitigates volatility. Optimal macroprudential policy generates bank capital ratios that differ by up to 5 percentage points depending on whether monetary policy stabilizes domestic prices or the exchange rate. Relative to an unregulated economy, macroprudential policy raises welfare by between 0.4 percent and 0.9 percent of steady-stateconsumption. |
| JEL: | E52 F41 G11 G15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202601 |
| By: | Fernández, Gastón P. (Luxembourg Institute of Socio-Economic Research (LISER)); Kovaleva, Mariia (London School of Economics) |
| Abstract: | This paper examines how personality shapes intra-household bargaining, marital stability, and the allocation of resources within marriages. We use rich data from the HILDA Survey that combines information on spouses' personalities, wages, time use, and marital histories. In the data, personality is strongly associated with labor-market productivity, marriage and divorce patterns, and the division of paid work and childcare within couples. To interpret these patterns, we estimate a life-cycle collective household model with limited commitment and endogenous marriage and divorce. Within this framework, personality affects: individual wage processes, the quality of marital matches, and preferences over home production. We use the estimated model to quantify the mechanisms through which personality generates heterogeneity in household behavior. The results show that personality matters not only through wage differences but also by altering spouses' outside options and the set of feasible allocations. Counterfactual simulations highlight how personality influences specialization patterns, the evolution of bargaining power over the life cycle, and the way welfare losses from adverse shocks are shared between spouses. |
| Keywords: | marriage, limited commitment, personality, intra-household bargaining |
| JEL: | D10 D13 D91 J12 J22 R20 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18519 |