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on Dynamic General Equilibrium |
| By: | Budnik, Katarzyna |
| Abstract: | Free movement of labour across borders can influence business cycle dynamics in the affected countries. This paper studies the macroeconomic implications of temporary migration using a two-country dynamic stochastic general equilibrium model calibrated to represent the “old” EU Member States (EU15) and the “new” Member States (NMS12). The model introduces fully endogenous temporary migration and combines it with search-and-matching frictions in labour markets. Workers migrate temporarily in response to differences in labour market conditions and wages, allowing productivity shocks to affect local labour supply. The results show that productivity shocks in the host economy attract temporary migrants and increase labour supply. This migration response amplifies output fluctuations while leaving inflation dynamics largely unaffected. Migration also smooths wage responses but increases the volatility of employment. At the same time, temporary migration dampens the macroeconomic effects of productivity shocks in the sending economy by redistributing labour across regions. These findings highlight the role of labour mobility as an adjustment mechanism within an integrated economic area and suggest that cross-border migration can significantly shape business cycle dynamics in Europe. JEL Classification: E20, E32, F16, F22, F41 |
| Keywords: | business cycle, dynamic stochastic general equilibrium model, EU enlargement, integration, labour market, labour migration |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263226 |
| By: | Shutao Cao (Department of Economics, Trent University); Yahong Zhang (Department of Economics, University of Windsor) |
| Abstract: | We build a two-agent New Keynesian (TANK) model, augmented with the central bank balance sheet and government budget constraint, to quantify macroeconomic effects of the fiscal and monetary stimulus measures in Canada during the COVID-19 pandemic. The model is calibrated to the Canadian economy, and shock processes are estimated. The model closely replicates the observed dynamics of the economy over the pandemic period. Counterfactual experiments reveal that transfer payments played a key role in cushioning the initial contraction by supporting the consumption of hand-to-mouth (HtM) households, while forward guidance and quantitative easing strengthen these effects through the investment channel and by forestalling a severe deflationary episode. At the same time, the prolonged maintenance of low policy interest rate, in conjunction with large-scale fiscal transfers, contributed substantially to the post-pandemic surge in inflation. We show that an earlier normalization of monetary policy would have significantly reduced post-pandemic inflation at only modest cost to output, suggesting that a more gradual tightening path could have reduced the need for the aggressive interest rate increases that followed. |
| Keywords: | fiscal policy, monetary policy, inflation, pandemic |
| JEL: | E31 E52 E58 E62 E63 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:wis:wpaper:2602 |
| By: | Andrew Binning; Murat Özbilgin; Christie Smith (The Treasury) |
| Abstract: | New Zealand’s population is ageing. Public spending on public pensions (NZ Superannuation) and health are particularly sensitive to this trend and are expected to increase accordingly. Current and future government policies aimed at addressing this challenge will not only influence macroeconomic outcomes and growth, but also generate distributional effects both within and across generations. This paper constructs an overlapping generations (OLG) model for New Zealand to analyse these issues. We show that the model replicates both macroeconomic and fiscal moments for the New Zealand economy. We then approximate Stats NZ’s median demographic projections to trace the rising trajectory of government expenditures driven by population ageing. The model suggests that significant policy adjustments will be required regardless of the rate of technological progress, and that more favourable demographic scenarios offer only partial and temporary relief. This paper forms part of a series of papers using Treasury’s OLG model to investigate the fiscal impacts of New Zealand’s ageing population. Other papers in the series look at the implications of tax and debt financing demographics-driven increases in health and pension spending, and the savings from pension reforms and spending restraint, amongst other issues. |
| Keywords: | Overlapping generations models; fiscal policy; fiscal sustainability; demographics; superannuation; pensions; public debt |
| JEL: | E62 H31 H55 H62 H63 |
| Date: | 2026–03–30 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztwps:wp26/01 |
| By: | Perazzi, Elena |
| Abstract: | The forward-guidance puzzle refers to the implausibly large effects of anticipated future interest rate changes on current output and inflation, as predicted by standard New Keynesian models. In this paper, we analyze both theoretically and numerically the nonlinear model that underlies the canonical linearized framework, explicitly tracking the full distribution of prices across firms. We show that large output expansions arise only under extreme and economically implausible circumstances: firms that are unable to reset prices are forced to sell below marginal cost while satisfying unbounded demand, thereby accumulating arbitrarily large losses. When we modify the model so that non-reoptimizing firms can at least set prices equal to marginal cost, output and inflation remain bounded and moderate. However, under this modification not all forward-guidance announcements are feasible in equilibrium. Our results identify a neglected microeconomic assumption as the root cause of the forward-guidance puzzle and clarify the limits of New Keynesian models in the analysis of large or persistent monetary shocks. |
| Keywords: | Forward Guidance; Nonlinear New Keynesian model; Equilibrium Feasibility |
| JEL: | E4 E5 E6 |
| Date: | 2026–02–09 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128045 |
| By: | Pawel Krolikowski; Andrew H. McCallum |
| Abstract: | We study tariffs in a general equilibrium dynamic model with search frictions between heterogeneous exporting producers and importing retailers. We show the model has a unique equilibrium and analytically characterize home unilateral import tariffs that maximize welfare given a passive foreign country. Search frictions add two terms to the standard optimal tariff expression: One lowers tariffs when contact rates are low; another when private export costs exceed social opportunity costs. Search frictions also introduce new incentives to subsidize imports due to market thickness effects. We calibrate our baseline to U.S. and Chinese 2016 data. We compare this baseline to a counterfactual with international search costs reduced to domestic levels but with all other parameters fixed. We find that higher baseline search costs reduce optimal U.S. unilateral and Nash tariffs and attenuate welfare responses to tariff changes. |
| Keywords: | international trade; trade policy; search and matching models; general equilibrium models; welfare economics |
| JEL: | C78 D62 D83 F12 F13 |
| Date: | 2026–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103194 |
| By: | Alexandre Cunha; Guilherme Gallego; Marcelo Santos; Bernardus Van Doornik |
| Abstract: | This paper studies the labor market impacts of implementing a Universal Basic Income (UBI) in developing economies with large informal sectors. We study an unexpected reform in the unemployment insurance policy in Brazil that tightened the eligi bility criteria for most (but not all) formal workers. We provide evidence that unemployment insurance (UI) benefits reduce formal employment, and this effect is amplified by informality. We then study the consequences of replacing the existing trans fer and UI policies with a universal basic income using a search-and-matching model where workers and firms jointly sort between formal and informal jobs. We calibrate the general equilibrium model to match key moments concerning unemployment, wage, and wealth distributions, as well as the distribution of transfers. Our model captures important trade-offs of UBI in developing countries. While UBI improves incentives to work formally relative to traditional welfare, its implementation raises concerns about financial sustainability due to limited tax revenue. We show that a universal basic in come of nearly $80 for each household per month, which replaces the existing transfer programs and UI benefits, can lead to welfare gains, particularly for less skilled individuals. We show that the increase in formal sector activity helps offset the higher tax burden and is a key channel through which outcomes for low-education groups improve with the reform. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:646 |
| By: | Simon Scheidegger |
| Abstract: | This script offers an implementation-oriented introduction to deep learning methods for solving and estimating high-dimensional dynamic stochastic models in economics and finance. Its starting point is the curse of dimensionality: heterogeneous-agent economies, overlapping-generations models with aggregate risk, continuous-time models with occasionally binding constraints, climate-economy models, and macro-finance environments with many assets and frictions generate state and parameter spaces that strain classical tensor-product grid methods. The exposition is organized around four complementary methodologies. Deep Equilibrium Nets embed discrete-time equilibrium conditions into neural-network loss functions. Physics-Informed Neural Networks approximate continuous-time Hamilton--Jacobi--Bellman, Kolmogorov forward, and related partial differential equations. Deep surrogate models provide fast, differentiable approximations to expensive structural models, while Gaussian processes add a probabilistic layer that quantifies approximation uncertainty; together they support estimation, sensitivity analysis, and constrained policy design. Gaussian-process-based dynamic programming, combined with active learning and dimension reduction, extends value-function iteration to very large continuous state spaces. Applications span representative-agent and international real business cycle models, overlapping-generations and heterogeneous-agent economies, continuous-time macro-finance, structural estimation by simulated method of moments, and climate economics under uncertainty. Companion notebooks in TensorFlow and PyTorch invite hands-on experimentation. These notes are a deliberately subjective and inevitably incomplete snapshot of a rapidly evolving field, aimed at equipping PhD students and researchers to engage with this frontier hands-on. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.14493 |
| By: | Sylwia Radomska (Institute of Economics, Polish Academy of Sciences (INE PAN); Group for Research in Applied Economics (GRAPE)); Marek Kapicka (Center for Economic Research and Graduate Education - Economics Institute (CERGE-EI)) |
| Abstract: | This paper studies optimal education finance in a dynastic Mirrlees economy in which parents derive direct utility from their children’s human capital alongside standard dynastic discounting. Education-specific parental altruism adds a non-productive utility return to investment: it raises parental utility independently of the output it generates. We show that this second channel alters the constrained-efficient human-capital wedge: sufficiently strong altruism reverses the wedge from negative to positive, the optimal education subsidy is decreasing in altruism, and stronger altruism shifts intergenerational transfers away from financial bequests toward education. Calibrated to the U.S. economy, the model implies that optimal education support is non-monotonic in income and decreasing in bequests: low-income dynasties receive support due to borrowing constraints, while middle-income families face the weakest case for intervention. Income-contingent loans raise schooling, output, and welfare, but widen educational dispersion. Income-dependent subsidies reduce educational inequality more directly, at the cost of labor-supply distortions and lower aggregate output. |
| Keywords: | optimal taxation; human capital, parental altruism, asymmetric information, dynastic Mirrlees model, income-contingent loans, education subsidies, intergenerational transfers, bequests. |
| JEL: | H21 H52 I22 J24 D82 D64 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:fme:wpaper:116 |
| By: | Andrew Binning; Murat Özbilgin; Christie Smith; Hanna Vu (The Treasury) |
| Abstract: | New Zealand, like many advanced economies, faces long-term fiscal pressures arising from population ageing. Over coming decades, demographic change is projected to increase government expenditure on New Zealand Superannuation and public health care relative to the size of the economy. Addressing these pressures will require policy choices about how government revenue, expenditure, and public debt evolve over time. This Analytical Note is one of a series of background papers that informed the Treasury’s 2025 Long-term Fiscal Statement (LTFS). The LTFS considers a wide range of possible responses to long-term fiscal pressures, including changes to revenue, expenditure, and the design of major government programmes. The background papers supporting the LTFS provide more technical detail on particular modelling approaches and policy scenarios, complementing the more accessible analysis presented in the LTFS itself. In this paper we use the Treasury’s overlapping generations (OLG) model to describe the macroeconomic, fiscal, and distributional effects of strategies that adjust tax policies to ensure fiscal sustainability in the face of rising pension and health expenditure. The scenarios presented are hypothetical analytical exercises designed to illustrate the mechanisms at play within the model rather than represent specific policy proposals. New Zealand raises the bulk of its tax revenue from labour income, consumption expenditure, and capital income, with source deductions on labour income representing the largest source of tax revenue. In this paper we meet expenditure pressures by deploying labour income tax strategies that vary in their degree of progressivity. In all scenarios, tax rates adjust over time to fund projected increases in pension and health spending and to stabilise the government debt-to-GDP ratio. The paper compares four stylised tax strategies: a Baseline strategy where marginal tax rates increase by the same percentage point amounts across all income brackets; a Current progressivity strategy that broadly preserves the current degree of progressivity in the tax system (as represented by the ratios of labour tax rates); an Increased progressivity strategy where the lowest tax rate is held constant while higher tax brackets increase; and a Reduced progressivity adjustment where relatively larger increases occur in lower tax brackets. The modelling highlights several mechanisms relevant to long-term fiscal policy. In particular, the distribution of income across tax brackets affects the size of the tax bases available to fund increased expenditure. The model indicates that changes to labour taxes could suffice to meet expenditure pressures arising from an ageing population, but that tax increases would need to be shared across tax brackets because the share of labour income in the highest two tax brackets is not large enough to fund the entire projected increase in expenditure. The alternative tax strategies explored in the paper result in different macroeconomic and fiscal outcomes. The model suggests that more progressive increases in marginal tax rates on labour income tend to be more distortionary, leading to larger reductions in labour supply, capital accumulation, and economic activity than strategies that spread tax increases more broadly across the labour income tax base. In the model, less progressive tax increases generate higher effective labour supply, higher per capita capital, and higher aggregate income and consumption in the long run. While the model highlights the efficiency implications of different tax structures, there are also other well-established reasons why governments may choose to maintain progressive tax systems, including redistribution or equity considerations, and the role progressive taxation can play in providing insurance against income risk. These considerations are important but are not the primary focus of the analysis presented in this note. The OLG framework also enables us to examine how alternative tax strategies affect people with different lifetime income profiles and those born in different years. The results illustrate that different households respond differently to the tax strategies considered, and that the strategies have different consequences for their wellbeing across generations. Importantly, the scenarios examined in this paper consider only one dimension of the broader set of policy choices discussed in the LTFS. Governments have a range of potential tools available to address long-term fiscal pressures, including changes to spending programmes, eligibility settings, the mix of taxes used to raise revenue, and policies that influence economic growth and labour force participation. The purpose of this note is therefore to provide technical insight into how different labour income tax structures interact with demographic change within our modelling framework. Together with the other background papers released alongside the LTFS, this analysis contributes to the evidence base supporting public discussion of New Zealand’s long-term fiscal sustainability. |
| JEL: | H24 H3 |
| Date: | 2026–03–30 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an26/04 |
| By: | Sushmita Kumari; Siddharth Gavhale |
| Abstract: | This paper develops a two-period dynastic overlapping-generations (OLG) model in which parents simultaneously choose consumption, savings, fertility, and three distinct dimensions of child quality-education, physical health, and mental health-under a pay-as-you-go (PAYG) pension system. The central innovation is modelling mental health as an independent productivity-enhancing input with its own elasticity $\theta$ in a Cobb-Douglas human-capital technology. This yields simple proportional allocation rules and shows how pension policy affects not only the overall level but also the composition of human capital investments. In steady state, higher PAYG contribution rates raise fertility through the Yakita effect but crowd out per-child investments in all quality dimensions, including mental health. An increase in the mental-health elasticity $\theta$ shifts resources toward non-cognitive skill development while reducing fertility. These results reveal a fundamental policy tension for developing economies: pension systems that rely on children for old-age support simultaneously increase birth rates while reducing long-term human capital formation, with disproportionate effects on non-cognitive skills. The framework provides theoretical guidance for complementary policies that protect mental-health investments, with particular relevance for countries such as India where children remain a primary source of retirement security and mental-health services are underfunded. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.07377 |
| By: | Anton Cheremukhin; Sewon Hur; Ronald R. Mau; Karel Mertens; Alexander W. Richter; Xiaoqing Zhou |
| Abstract: | The U.S. experienced an extraordinary surge in immigration from 2021 to 2024, which triggered widespread discussions about its macroeconomic impact, particularly on inflation. To determine the impact of the immigration surge, we first document the salient features of these new immigrants: they are primarily low-skilled relative to the existing workforce and more likely to be hand-to-mouth consumers. We then incorporate these features into a heterogeneous agent model with capital-skill complementarity. We find that the supply- and demand-side effects of the immigration surge roughly cancel out, causing a negligible response of inflation. |
| JEL: | E21 E22 E31 F22 J11 J15 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35168 |
| By: | Francesco Menoncin; Paolo Panteghini |
| Abstract: | The article studies differential capital taxation — distinct rates on interest income and risky profits — in a continuous-time representative-agent general equilibrium model with complete markets. It derives closed-form expressions for the equilibrium risk-free rate and the market price of risk. A sharp and non-trivial separation result emerges: although interest-income taxation enters the agent's wealth dynamics and could in principle affect portfolio choice, it leaves equilibrium risk premia entirely unchanged. In contrast, profit taxation generally affects both equilibrium prices, except under CRRA preferences. |
| Keywords: | capital income taxation, interest-income tax, market price of risk, general equilibrium, neutrality |
| JEL: | E44 G12 H24 H25 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12640 |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Müller; Sebastian Schmidt; Ben Schumann |
| 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: | F41 F42 E31 |
| Date: | 2026–05–05 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0096 |
| By: | Sylwia Radomska (Institute of Economics, Polish Academy of Sciences (INE PAN) and Group for Research in Applied Economics (GRAPE)) |
| Abstract: | This paper studies optimal intergenerational transfers when altruistic parents can transfer resources to their children through financial bequests or through investment in human capital. The key distinction is that education is a productive transfer: it changes the mapping from privately observed ability to output, whereas bequests are budgetary transfers. The paper characterizes how this distinction affects information rents in a dynastic Mirrlees environment. The main result is a decomposition of the informational effect of education relative to bequests. With endogenous labor supply, both instruments affect incentive provision through marginal-utility and labor-supply responses. Education, however, generates an additional productivity-rent component governed by the cross-partial between ability and human capital in production. This component is absent for purely budgetary transfers. When ability and human capital are sufficiently complementary, the productivity-rent component can dominate the standard labor-requirement channel, so that education may be optimally distorted downward relative to the bequest margin. The analysis clarifies why education and bequests are not equivalent instruments of intergenerational redistribution. The difference is not only that education has risky returns, but also that it changes the sensitivity of output to privately observed ability. This distinction provides a force that can work against the standard education-subsidy logic in Mirrlees models. |
| Keywords: | optimal taxation; intergenerational transfers; human capital; financial bequests; private information; education wedge; ability risk. |
| JEL: | D64 D82 H21 H24 I26 J24 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:fme:wpaper:115 |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | We argue that the mainstream macroeconomic models (DSGE-models) are models that operate like “watches”, while behavioural macroeconomic models operate like “clouds”. We define what this means. We contrast the predic ons these two simple canonical macroeconomic models make about the transmission of supply shocks. We find that in the cloud model the fog surrounding the transmission of these shocks is much denser than in the watch model, making it difficult to make condi onal forecasts. |
| Keywords: | behavioural macroeconomics; supply shock; cloud model; watch model; heuristics |
| JEL: | D84 D91 E17 E32 |
| Date: | 2026–04–25 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:137712 |