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on Dynamic General Equilibrium |
| By: | Tatiana Kirsanova; Eric M. Leeper; Campbell B. Leith; Ding Liu |
| Abstract: | Standard New Keynesian models with time-consistent policy predict minimal debt responses to conventional shocks, as a debt stabilization bias dominates tax-smoothing motives. We show that two mechanisms can generate debt movements of the magnitude observed in the data: increases in policymaker myopia and declines in real interest rates, such as during flight-to-safety episodes. Other potential drivers—changes in markups, debt maturity, government transfers, or large recessions—cannot account for such fluctuations. |
| JEL: | E50 E62 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35222 |
| By: | Lee, Sunwoo |
| Abstract: | This paper estimates a hybrid Behavioral New Keynesian (BNK) model for the South Korean economy, extending the cognitive discounting framework of Gabaix (2020) with a reduced- form inertia parameter to capture the path dependency characteristic of economies with concentrated illiquid asset holdings. Using Generalized Method of Moments (GMM) estimation on quarterly Korean macroeconomic data spanning 1991–2025, I identify a cognitive discount factor of approximately 0.74 and a structural inertia weight of 0.44, both significantly different from the US benchmark. The estimated behavioral parameters generate a non-monotonic fiscal multiplier trajectory: an initial dampened response followed by a gradual build-up and a persistent hump — a pattern that departs from the immediate peak and monotonic decay predicted by standard rational expectations models. Robustness checks under alternative expectation assumptions, interest rate regimes, and augmented instrument sets confirm the stability of the estimates. These findings suggest that fiscal policy transmission in Korea operates through a delayed amplification channel rooted in cognitive frictions and structural inertia. |
| Keywords: | Behavioral New Keynesian Model, Cognitive Discounting, Fiscal Multipliers, Expectation Formation |
| JEL: | C52 D84 D91 E12 E32 E62 |
| Date: | 2026–02–16 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129219 |
| By: | Wabenga, James Yango; Moran, Kevin |
| Abstract: | This paper develops a two-country, open-economy quantitative model to analyze the macroeconomic implications of demographic shifts, including population aging, declining population growth rates, increased longevity, and international migration. The model builds on the overlapping generations (OLG) framework of Gertler (1999), incorporating both young and old households in each country. Entry (population growth), retirement, and exit (death) rates are calibrated to match observed demographic patterns, such as population growth rates, average retirement ages, and life expectancy. The model accommodates various demographic scenarios-such as differential population growth across countries and migration from developing to developed economies-as well as economic scenarios, including divergent productivity levels and imperfect global financial integration. As such, it provides a valuable quantitative tool for policy analysis on these issues. The model’s capabilities are demonstrated through simulations of key demographic and economic scenarios, focusing primarily on how population aging, international migration, and productivity differences affect external balances (net exports and the current account) in two regions, seen as the global North and the global South. The findings highlight the importance of demographic trends as a main factor influencing overall savings and external balances. Specifically, demographic shocks lead to trade and current account surpluses in the North, while productivity differences shape investment patterns across regions. The results indicate that, over time, an aging economy like the global North is likely to run a trade deficit, save more, have a favorable net external position, and maintain a current account surplus. |
| Keywords: | Open economy macroeconomics; Current account balance; Trade balance; International migration; Financial markets; Demographic trends |
| JEL: | E21 E44 E62 F22 F32 F41 J11 |
| Date: | 2024–10–03 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129082 |
| By: | Javier Bianchi; Greg Kaplan |
| Abstract: | In plausibly calibrated heterogeneous-agent models, marginal propensities to consume (MPCs) are highly non-linear in wealth, falling sharply away from borrowing constraints. As a result, the aggregate consumption response to a fiscal transfer is strongly concave in its size: larger transfers shift households out of high-MPC regions and thereby dampen the consumption response. Across partial- and general-equilibrium settings, linear methods substantially overstate the effects of fiscal stimulus at empirically relevant sizes. Local methods are not reliable for studying shocks and policies where a failure of Ricardian equivalence is important. |
| JEL: | C63 D15 D31 D52 E21 E62 G51 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35311 |
| By: | Wabenga Yango, James |
| Abstract: | This paper develops a general-equilibrium overlapping-generations model with endogenous fertility, in which firms accumulate both physical and artificial intelligence (AI) capital, and uses it to study the macroeconomic transmission of two structural disturbances: an AI technology shock and a longevity shock. The AI shock acts as a capital-demand disturbance: it raises all rates of return, most sharply the return to AI capital, reallocates investment from physical to AI capital, and produces a frontloaded expansion of output that decays monotonically. The longevity shock acts as a saving-supply disturbance: it deepens the aggregate capital stock, compresses returns and the real interest rate, and generates hump-shaped, persistent dynamics. The two shocks move fertility in opposite directions: AI raises it modestly through an income effect, while longevity lowers it by strengthening the life-cycle saving motive and the opportunity cost of child-rearing. A forecast-error variance decomposition attributes the bulk of the volatility in most aggregate variables to the longevity shock, while the AI shock accounts for the largest share of the variance in the return to AI capital. Fertility is strongly countercyclical and almost perfectly negatively correlated with hours worked, placing the household time-allocation margin at the center of the transmission mechanism. A robustness analysis confirms that these conclusions reflect structural properties of the model: variation in the capital share and in the persistence of the AI shock leaves the signs of the wage, fertility, output, and consumption responses unchanged, and only the labor–AI elasticity of substitution can reverse them, beyond a threshold that lies well above standard empirical estimates. |
| Keywords: | Artificial intelligence; endogenous fertility; longevity; general equilibrium; life-cycle model; capital accumulation; demographic transition. |
| JEL: | E22 E32 J11 J13 J26 O33 O41 |
| Date: | 2026–06–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129480 |
| By: | Jorge Abad; Saki Bigio; Salomon Garcia-Villegas; Joël Marbet; Galo Nuño |
| Abstract: | How does heterogeneity in banks' interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. Calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks suffer net interest margin compression---funding costs increase while legacy loan income stays unchanged---eroding capital and triggering sharper deleveraging. The lending elasticity to monetary policy is one-third larger in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. The results provide a rationale for macroprudential and monetary policy coordination and for monetary policy gradualism. |
| JEL: | E44 E50 G21 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35239 |
| By: | Zhorin, Victor |
| Abstract: | Heterogeneous-agent macroeconomics has reformed the income and wealth sides of the household problem. The HANK program established that aggregate dynamics require the cross-sectional distribution of marginal propensities to consume, balance-sheet exposures, and permanent income. Every model in this program inherits, without examination, a smooth actuarial mortality hazard calibrated to population life tables. This is the last unreformed input, and it is structurally wrong. The expected residual life of an agent is a value function defined on a manifold whose boundary is death. That function has a geometric property rarely stated in the economic literature: its curvature diverges at a specific power law rate as the agent approaches the boundary. Every lifecycle model that represents mortality as a smooth hazard imposes a bounded-curvature approximation on a function whose curvature is unbounded. No function in the smooth hazard class can encode the shock structure of catastrophic diagnoses that dominate individual mortality trajectories near the boundary, regardless of how many parameters the hazard contains. We establish three structural consequences. First, the population-level response to symmetric interventions is asymmetric: the worsening direction systematically exceeds the improving direction by a factor governed by a single cross-sectional moment, the covariance between boundary curvature and intervention exposure. Second, this covariance is not a small correction in clinical settings: unlike the borrowing-constraint analog in macroeconomics, where the boundary binds for a minority of agents, the mortality boundary is universal, and the population-level curvature integral diverges in a way the macroeconomic scaling intuition cannot accommodate. Third, the representation class that correctly encodes the boundary geometry exists: trained networks with piecewise-linear activation produce value functions that are exactly tropical polynomials in the max-plus semiring, with the density of the piecewise structure near the boundary encoding the curvature divergence that smooth functions cannot. A constellation of puzzles that the lifecycle literature has documented and not resolved, covering wealth decumulation, bequest dispersion, annuitization, retirement timing, portfolio composition, health expenditure at end of life, long-term care insurance, Social Security claiming, and pension tax choices. These are projections of a single geometric fact. Correcting the mortality input generates each of them as equilibrium properties of the model rather than as calibrated parameters or behavioral anomalies. |
| Keywords: | lifecycle models; heterogeneous agents; mortality; absorbing boundaries; tropical geometry; sufficient statistics; bequest motives; annuity puzzle; retirement; portfolio choice; health expenditure |
| JEL: | C14 E21 G11 G22 H55 I10 |
| Date: | 2026–05–15 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129315 |
| By: | Masashige Hamano (Waseda University, School of Political Science and Economics); Toshihiro Okubo (Faculty of Economics, Keio University) |
| Abstract: | This paper investigates the relationships between aggregate shocks and individual products in the economy, aiming to inform macroeconomic policy and address sectoral imbalances. Using Japanese man- ufacturing census data from 1992 to 2013, we analyze product sales growth (intensive margins) and the number of product-producing plants (extensive margins) to identify patterns and heterogeneity across products and product categories. We employ a structural model to analyze the sources of product busi- ness cycles, finding that product-specific demand shocks play a crucial role in explaining product sales dynamics, while both product-specific and plant-product specific shocks are essential for understanding extensive margins. Our findings offer important implications for the design of targeted and effective poli- cies that promote stability, growth, employment, and inclusiveness across diverse sectors of the economy. |
| Keywords: | Product Dynamics; Firm Heterogeneity; DSGE |
| JEL: | D24 E23 E32 L11 L60 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2602 |
| By: | Thomas Drechsel; Michael McLeay; Silvana Tenreyro; Enrico D. Turri |
| Abstract: | We show that the optimal monetary policy and exchange rate framework depend critically on the economy’s commodity exposure. We develop a flexible but tractable model economy with commodity exports and imports, in which international financial conditions may vary with the commodity cycle, and we compute the welfare-optimal policy in the presence of price and wage rigidities. Stabilizing domestic prices is welfare-optimal for commodity exporters, in line with standard open-economy policy prescriptions. But for economies that use commodities as inputs in production, optimal policy largely ‘looks through’ the direct and indirect effects of commodity shocks on domestic prices; this contrasts with some earlier findings and policy practice (which only ‘looks through’ the direct effect). Exchange-rate pegs increase welfare for commodity importers because they stabilize wages and employment, though it is not a robustly optimal policy. In emerging and developing economies, where financial conditions are more tied to the commodity cycle, trade-offs are starker and implementing the optimal policy may be challenging, since it requires enough credibility to keep inflation expectations anchored amidst greater volatility in some nominal variables. |
| JEL: | E31 E52 E58 Q02 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35164 |