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on Dynamic General Equilibrium |
| By: | Frantisek Masek |
| Abstract: | While the standard New Keynesian model implies that higher households' inflation expectations strongly raise nominal wage expectations and generate a positive consumption response, empirical evidence shows low passthrough to nominal wage expectations and a mixed sign of the consumption response. I study representative agent and heterogeneous agent New Keynesian models that allow for this low passthrough, arising from myopic nominal wage expectations. In the representative agent model, consumption still increases because households receive profits that offset the expected decline in real wages. In contrast, in the heterogeneous agent model, the consumption response becomes negative when the profit channel is weakened and the disconnect between inflation and nominal wage expectations is sufficiently strong. |
| Keywords: | Inflation Expectations, Consumption, Heterogeneous Agents |
| JEL: | E21 E31 E32 E58 E70 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2026/06 |
| By: | Daisuke Ikeda (Head of Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: daisuke.ikeda@boj.or.jp)); Hidehiko Matsumoto (Associate Professor, Faculty of Economics, Keio University (E-mail: hmatsu.hm@gmail.com)) |
| Abstract: | Banking crises are infrequent macroeconomic events with the potential to inflict significant and lasting harm on the real economy. Drawing from the empirical literature, this paper highlights five facts on banking crises from a macroeconomic perspective. It conducts a targeted review of the literature on financial frictions and banking crises in a dynamic general equilibrium framework, and introduces a dynamic general equilibrium model of bank runs. The model's ability to account for the five facts is examined, alongside its implications for policy. Finally, the paper explores the challenges of integrating macroprudential policy into the model. |
| Keywords: | Banking crises, macroeconomic models, macroprudential policy |
| JEL: | E32 E44 G21 G28 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-17 |
| By: | Tomas Sestorad; Jan Vlcek; Karel Musil |
| Abstract: | This paper examines how alternative definitions of the output gap influence the dynamics and monetary policy prescriptions of New Keynesian DSGE models used in inflation-targeting regimes. Using the Czech economy as an example of a small open economy, we compare one exogenous and seven endogenous output-gap measures, including flexible equilibrium concepts, statistical filters, and structural approaches. The results show that endogenous identification is essential for ensuring internal consistency among business cycle fluctuations and other macroeconomic variables, while only structurally identified gaps fully exploit the advantages of the DSGE framework. Technology-augmented output emerges as the most operationally robust and conceptually coherent measure for real-side policy analysis. The findings further highlight that the policy implications of output-gap stabilization are determined by the chosen measure, which should align with the policymaker's preferences. Because these mechanisms are structural rather than country-specific, the conclusions extend to other small open economies with similar characteristics. |
| Keywords: | Business cycle, DSGE model, flexible equilibrium, HP filter, monetary policy, output gap, real marginal costs, technological growth |
| JEL: | D58 E32 F41 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2026/03 |
| 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: | 2026–04–29 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103111 |
| By: | Airi Hayama (Graduate School of Economics, Keio University) |
| Abstract: | Japan is experiencing a continuous decline in Ph.D. enrollment; Develops a dynamic heterogeneous-agent model with non-pecuniary preference; Heterogeneity in “academic taste†drives Ph.D. enrollment decisions; Ignoring this heterogeneity overestimates the effects of financial aid; Financial aid has a limited impact on Ph.D. enrollment |
| Keywords: | Ph.D. Enrollment, Heterogeneous-Agent Macroeconomic Model, Non-Pecuniary Preferences, Human Capital, Financial Aid, Income Risk |
| JEL: | D15 E24 I22 I23 J24 |
| Date: | 2026–04–24 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2026-008 |
| By: | Hassan Afrouzi; Andres Blanco; Andrés Drenik; Erik Hurst |
| Abstract: | We study how an automating technology affects career dynamics, human capital, and welfare in an economy where workers acquire skill through the tasks they perform. In a continuous-time general equilibrium model, learning-by-doing is determined jointly with the share of tasks automated, the frontier of tasks managers maintain, and the worker-to-manager career transition. Economies with high learning capacity admit pairs of stationary equilibria strictly ranked by the aggregate learning rate. Cheaper technology has opposite effects across the two: in the high-learning equilibrium, it raises welfare through the learning channel itself; in the low-learning equilibrium, it tips the economy into a human-capital trap. The planner's first-best combines a tax on automation profits with a subsidy on frontier-maintenance expenditures at a common rate. |
| JEL: | E23 E24 J24 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35157 |
| By: | Mitsuru Katagiri (Associate Professor, Faculty of Commerce, School of Commerce, Waseda University (E-mail: mitsuru.katagiri@waseda.jp)) |
| Abstract: | This paper analyzes the macroeconomic effects of employment protection legislation (EPL) through workers' optimal human capital choices and the resulting changes in labor market fluidity. In a general equilibrium model, stringent EPL shifts investment from general to firmspecific human capital, reducing aggregate labor mobility across employers. Using Japanese microdata to discipline the model's human capital accumulation process, we show that although EPL increases overall human capital accumulation, the resulting decline in labor market fluidity lowers average matching efficiency and generates sizable output losses following structural changes that require labor reallocation. |
| Keywords: | Labor market fluidity, Human capital, Employment protection, Job tenure |
| JEL: | E24 J24 J62 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:26-e-01 |
| By: | Joseph Kopecky (Department of Economics, Trinity College Dublin) |
| Abstract: | Children of low‐income immigrants in the United States systematically out‐earn children of comparable natives. I develop a dynastic general‐equilibrium model to explain this 'immigrant mobility advantage' and quantify the macroeconomic costs of the institutional frictions underlying it. The central mechanism is a wedge between latent human capital and realized earnings: immigrants are positively selected on ability but face institutional frictions that decay at rate λ. Calibrated to U.S. data, the model fits key empirical patterns and reveals that immigrant frictions cost the U.S. economy 4.94% of GDP. This loss is split between a static labor‐misallocation loss (1.57 pp) and dynamic effects on intergenerational investment in human and physical capital (3.37 pp). I find that friction decay (assimilation) accounts for 87% of the second‐generation advantage, with positive selection contributing the remainder. Finally, the model identifies a 'sign‐flip' threshold at λ ≈ 0.25, beyond which frictions persist too strongly for the mobility advantage to appear. Calibrating λ across ten OECD destinations recovers a distribution of friction values that straddles this threshold, consistent with the heterogeneous mobility gaps documented in the empirical literature. |
| Keywords: | Immigration, intergenerational mobility, human capital, assimilation, general equilibrium |
| JEL: | E24 J15 J24 J61 O15 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0826 |
| By: | Fernando E. Alvarez; Francisco J. Buera; Nicholas Trachter |
| Abstract: | We study optimal policy in a dynamic general equilibrium model where heterogeneous monopolistic competitive firms pay a fixed cost to adopt a frontier technology that grows exogenously. Using Mean Field Games tools, we show that the optimal policy consists of exactly two time-invariant subsidies: one correcting the static misallocation from market power, and one correcting the dynamic under-incentive to adopt. This holds outside of balanced growth paths, for any initial distribution of technology gaps. We analyze a simplified version of the model that aggregates to a Neoclassical Growth Model with an S-shaped production function whenever complementarities are strong, and fully characterize when the optimal policy uniquely implements the first best. When it does not, two novel results emerge: the efficient allocation prescribes escaping a poverty trap—providing an explicit optimality foundation for a Big Push—and, more surprisingly, escaping an abundance trap, where dismantling adopted technologies is optimal. In both cases, a temporary, costless supplementary policy restores unique implementation. |
| JEL: | D92 O14 O25 O40 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35133 |
| By: | Ken-Ichi Akao (School of Social Sciences, Waseda University 1-6-1 Nishiwaseda Shinjuku, Tokyo 169-8050, Japan) |
| Abstract: | This paper develops a procedural foundation for the social discount factor. Building on Binmore (2005), we define a procedurally intergenerationally equitable (PIE) path as the outcome of intergenerational bargaining. We then identify the discount factor under which a Ramsey model replicates this path and interpret it as an intergenerationally justifiable (IJ) discount factor. Using tractable models, we show that the IJ discount factor is closely linked to the economic environment. In a benchmark case, the corresponding discount rate coincides with the output elasticity of capital. We further examine a non- overlapping generations model with intergenerational altruism and an overlapping- generations model with individual time preferences, and show how these factors affect the IJ discount factor. These results establish a procedural foundation for the social discount factor and reinterpret discounted utilitarianism within a social contract framework. |
| Keywords: | Intergenerational equity, procedural justice, social discount factor, Ramsey model, bargaining |
| JEL: | D63 D90 C78 Q54 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:was:dpaper:2602 |
| By: | Arrigoni, Simone; Ferrari Minesso, Massimo |
| Abstract: | This paper provides novel evidence on how income inequality shapes the heterogeneity of US monetary policy spillovers to GDP across foreign economies. Using state-dependent local projections and exploiting variation in disposable income inequality across 87 countries over 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary tightening. GDP contracts up to one and a half times more when inequality is above average. However, while higher inequality amplifies negative spillovers in advanced economies, it mitigates them in emerging markets. To rationalise this finding, we use a three-country open economy Two-Agent New Keynesian (TANK) model, which suggests this divergence is driven by differences in participation in international financial markets. Households in emerging markets face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock. JEL Classification: D31, E21, E52, E58, F42 |
| Keywords: | income inequality, local projections, spillovers, state-dependence, US monetary policy |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263221 |
| By: | Sonja Dobkowitz |
| Abstract: | I study optimal implementation of climate targets in a model with distortionary fiscal policy, learning-by-doing, and directed technical change. The key mechanism is that fiscal constraints link innovation policy to labor allocation, creating a tension between directing research and directing learning-by-doing. Analytically, I show that learning-by-doing shapes the effectiveness of carbon taxation in directing research through an expertise effect: carbon taxes are more effective at steering innovation toward green technologies when green expertise is relatively high. Quantitatively, I calibrate the model to the U.S. economy to characterize the optimal policy mix consistent with climate targets. I find that carbon should be taxed heavily, persistently exceeding the social cost of carbon. While higher carbon prices raise green expertise, they induce an excessively rapid reallocation of researchers from fossil to green technologies, generating persistent innovation misallocation. A welfare analysis shows that learning-by-doing substantially amplifies the cost of distortionary taxation, in particular during the transition to net-zero emissions. |
| Keywords: | Second-best climate policy, directed technical change, learning-by-doing, Ramsey taxation, misallocation of innovation, emissions target implementation |
| JEL: | H21 H23 O38 Q54 Q55 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2161 |
| By: | Hans A. Holter; Dirk Krueger; Serhiy Stepanchuk |
| Abstract: | This paper argues that a progressive tax system combined with individual taxation of married couples can generate more revenue than the current household-based U.S. system, especially when the extra revenues do not induce negative labor supply effects through increased government transfers. A progressive system that taxes individuals rather than couples jointly leads to larger labor force participation and higher average human capital, creates more “fiscal space”, Laffer curves shift up and social welfare potentially rises. In our model with one- and two-earner households, human capital and an extensive margin labor supply decision, the peak of the Laffer curve is 18 percentage points higher with an individual-based, progressive tax system than with the current U.S. tax system. The maximum revenue is attained with 100% more progressivity than the current system, and at an average tax rate of 42%. Progressive taxation, when imposed on individuals rather than households, lowers the average tax rate for individuals with modest potential income that are close to the participation margin. At the same time, it creates a positive income effect on the labor supply of these individuals by reducing the net income of their higher earning spouses and limiting their net earnings potential in the case of a high temporary labor productivity. Steady state social welfare is larger with individual taxation. The optimal progressivity is higher than the current U.S. status quo, and results in welfare gains of 0.8% in consumption-equivalent variation. Cohorts born during the transition also experience significant welfare gains from this reform. |
| JEL: | E62 H20 H60 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35137 |
| By: | Hiroshi Inokuma (Director, Financial System and Bank Examination Department, Bank of Japan (E-mail: hiroshi.inokuma@boj.or.jp)) |
| Abstract: | Over the past four decades in the US, routine employment has declined sharply while college attainment has risen steadily. I develop a quantitative model in which workers choose whether to attend college and whether to work in abstract or routine occupations. The calibrated model implies that computerization raises the return to educational skill within routine work, raising the within-occupation college share faster in routine jobs than in abstract jobs. I test this implication in the data by estimating how baseline task content predicts subsequent educational upgrading across occupations. The regression evidence confirms faster college-share growth in more routine-taskintensive occupations. Quantitatively, the model attributes about one half of the aggregate increase in the college share over 1980-2019 to computerization. |
| Keywords: | investment specific technological change, computerization, occupational choice, schooling choice |
| JEL: | E24 J24 O33 I21 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:26-e-05 |
| By: | Andrés Fernández (International Monetary Fund); Alejandro Vicondoa (Pontificia Universidad Católica de Chile) |
| Abstract: | We study the joint dynamics in the volume and prices of capital flows to emerging market economies (EMEs). A dynamic factor model augmented with sign and zero restrictions allows us to identify demand/supply shocks of idiosyncratic/common nature. While common credit supply shocks are the main driver of prices, idiosyncratic credit demand and supply shocks account for most of the variation in quantities. A structural multi-country SOE/RBC model is calibrated to EMEs data to further shed light on the main transmission channels. Augmented with correlated productivity and interest rate shocks, the model matches the comovement between prices and quantities as well as business cycle moments. Common credit demand drivers, captured as correlated TFP shocks, account for around half of the observed comovement in quantities but they are not a significant driver of price comovement. Fundamentals matter significantly more for capital flows than for country spreads, which are driven by a sizeable global financial cycle. |
| Keywords: | capital flows, sovereign spread, small open economy, credit supply, credit demand, external factors |
| JEL: | E31 E32 E43 E52 E58 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:393 |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Müller; Sebastian Schmidt; Ben Schumann; Gernot Müller |
| Abstract: | We confront the notion that flexible exchange rates insulate countries from external disturbances with new evidence for the euro area (EA) and 20 of its neighbors. Using high-frequency data, we first establish that countries with flexible exchange rates ("floats") let their currencies depreciate in response to EA monetary policy shocks, while "pegs" raise interest rates. Yet at business cycle frequency, these depreciations do not translate into insulation: floats contract just as much as pegs—not only in response to monetary policy shocks but also to other shocks originating in the EA. This result appears puzzling in light of received wisdom, but we show that it can be rationalized within a state-of-the-art HANK model and flesh out the underlying transmission channels. |
| Keywords: | exchange-rate regime, Insulation, external shock, exchange-rate disconnect, monetary policy |
| JEL: | F42 E31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12635 |