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on Dynamic General Equilibrium |
| By: | Bilbiie, F. O.; Melitz, M. J. |
| Abstract: | We study productivity shocks in a New Keynesian model with endogenous entry, selection, and nominal rigidities. Adjustment along the extensive margin fundamentally alters the transmission of TFP shocks. Under sticky prices, productivity disturbances generate a large "entry multiplier": firm entry-exit responds much more strongly than under flexible prices, even when output is allocatively efficient to first order. Introducing wage stickiness breaks this neutrality. Adverse TFP shocks reduce profits, trigger exit, and generate a negative output gap while remaining inflationary. Productivity shocks therefore behave as true supply shocks, without resorting to ad hoc cost-push or markup disturbances. Unlike standard markup shocks, TFP shocks in our framework imply procyclical profits and entry, consistent with the data. When wages are sufficiently sticky, expansionary monetary policy raises entry, closes the negative out-put gap, and improves welfare. The model remains analytically tractable and isomorphic to the standard New Keynesian framework, with entry and selection appearing as simple wedges. |
| Keywords: | Entry, Aggregate Demand and Supply, Variety, Sticky Prices, Sticky Wages, Monetary Policy, Recessions |
| JEL: | E30 E40 E50 E60 |
| Date: | 2026–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2655 |
| By: | Lawrence J. Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen |
| Abstract: | This paper provides an analytic characterization of the speed of convergence under learning to a rational expectations equilibrium (REE) for a large class of multivariate models. We show that learning is slower when people's beliefs about model outcomes are more self-fulfilling. The paper also investigates which features of a model economy make beliefs more self-fulfilling, using variants of the simple new-Keynesian model and a medium-scale DSGE model. For empirically plausible specifications of these models, convergence of a learning equilibrium to the REE is so slow that analysis based on rational expectations can be misleading. |
| Keywords: | monetary policy; dynamic stochastic general equilibrium (DSGE) models; fiscal policy; inflation expectations |
| JEL: | D84 E10 E52 E62 |
| Date: | 2026–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103399 |
| By: | Foroni, Claudia; Gelain, Paolo; Lorusso, Marco; Marcellino, Massimiliano |
| Abstract: | We quantify the effect of severe weather shocks on the US economy in an environment in which the economy can switch between periods of financial stability and financial instability, like the Great Recession. We estimate a New Keynesian dynamic stochastic general equilibrium model with banks and severe weather events. We show that severe weather shocks: 1) have a negative impact on real and financial US variables, sizable only in periods of financial instability, but muted effects on nominal variables; 2) are never a relevant source of business cycles fluctuations; 3) transmit mainly via a deterioration in the quality of capital. |
| Keywords: | Financial frictions |
| JEL: | Q54 E32 E44 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21213 |
| By: | Bellifemine, Marco; Couturier, Adrien; Jamilov, Rustam |
| Abstract: | We study how regional heterogeneity shapes the aggregate transmission of monetary policy and its distributional implications across space. We build a multi-region Heterogeneous-Agent New Keynesian model with 3, 140 U.S. counties and cross-county differences in (i) intertemporal Marginal Propensities to Consume (MPCs) and (ii) non-tradable employment shares. We analytically characterize the nationwide consumption response to monetary policy in terms of the joint distribution of (i) and (ii). Using U.S. and Italian micro-data, we construct novel empirical measures of regional MPCs to validate our theory. Quantitatively, geographic heterogeneity leads to large distributional consequences of monetary policy across space and can sizably amplify its aggregate effects. |
| Keywords: | Monetary policy |
| JEL: | E12 E21 E23 E52 F41 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21076 |
| By: | Antonova, Anastasiia; Matvieiev, Mykhailo; Poilly, Céline |
| Abstract: | Recessions are often accompanied by heightened uncertainty. We build an imperfect-information New Keynesian model in which procyclical information quality generates endogenous countercyclical uncertainty, and the nonlinear structure allows for a precautionary saving motive. We show theoretically that endogenous uncertainty operates entirely through aggregate demand. For negative supply shocks, the induced rise in uncertainty can depress demand enough to dominate the shock's inflationary force, turning the shock deflationary. Monetary policy can fully eliminate the adverse effect of endogenous uncertainty by stabilizing the output gap. We quantify the endogenous uncertainty channel in the US data and find it to be strong enough to generate deflation in response to negative supply shocks. |
| Keywords: | Endogenous uncertainty; Precautionary saving; Aggregate demand; Imperfect information |
| JEL: | E32 D81 E52 D83 E21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21197 |
| By: | Hui He; Yao Zhao; Dayong Zhou |
| Abstract: | The paper develops a new monetarist DSGE model to examine the macroeconomic implications of fiat-money-backed stablecoins and the effectiveness of prudential policies in mitigating associated risks. The model features two segmented sectors: a centralized real economy where fiat money facilitates consumption and investment, and a decentralized virtual economy characterized by anonymous bilateral search and matching, in which transactions are exclusively conducted using stablecoins. Calibrated to the U.S. economy, the simulation results reveal that stablecoins amplify the propagation of exogenous shocks to key macroeconomic variables by weakening the effectiveness of monetary policy. However, prudential regulations—specifically those governing the backing ratio of stablecoins to fiat-denominated reserve assets, analogous to banking liquidity requirements—can serve as stabilizing instruments, dampening volatility and enhancing macroeconomic resilience in the presence of stablecoins. |
| Keywords: | Stablecoin; DSGE; Monetary Search; Currency Competition; Prudential Regulation; IMF working papers; Dayong Zhou; dampening volatility; views of the IMF; digital currency; can stablecoins; Real interest rates; Dynamic stochastic general equilibrium models; Consumption; Global |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/129 |
| By: | Baley, Isaac; Figueiredo, Ana; Mantovani, Cristiano; Sepahsalari, Alireza |
| Abstract: | We study how wealth shapes workers’ outcomes in turbulent labor markets, where job displacement exposes workers to the risk of skill loss. We develop and quantify a heterogeneous agent directed search model with incomplete markets, skill dynamics, and job “tiers†with distinct risk–return profiles. Workers self-insure against separation and turbulence risks through savings and search decisions, both within and across tiers, generating post-separation outcomes that vary sharply with wealth. In U.S. data, poor workers face the most significant and most persistent wage losses, driven by wealth-induced downgrades into low-tier jobs. Policy experiments reveal clear trade-offs: unemployment insurance improves welfare, while job-creation subsidies more effectively expand output. |
| JEL: | D31 E21 E24 J24 J31 J63 J64 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20918 |
| By: | Bence Bardóczy; Akshay Shanker; Mateo Velásquez-Giraldo |
| Abstract: | The sequence-space Jacobian (SSJ) method of Auclert et al. (2021a) has made heterogeneous-agent models far easier to solve, fueling an explosion of applications. But even SSJ strains against capacity constraints when state spaces grow very large, as in economies with overlapping generations of heterogeneous agents (HA-OLG). We show how to exploit the special properties of age—finite planning horizons and deterministic transitions between ages—to compute the Jacobians of a general class of HA-OLG models orders of magnitude faster. We provide rigorous proofs, age-specific Jacobians that decompose aggregate dynamics across cohorts, an application to the dynamic general-equilibrium effects of secularly declining birth rates, and an accessible cookbook for adopting our method. |
| Keywords: | life cycle; heterogeneous-agent models; sequence-space Jacobian; population aging; R-star |
| JEL: | C61 C63 D15 |
| Date: | 2026–06–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103447 |
| By: | Winberry, Thomas; Auclert, Adrien; Rognlie, Matthew; Straub, Ludwig |
| Abstract: | The Heterogeneous-Agent New Keynesian literature has revisited the transmission of monetary and fiscal policy to consumption using models where heterogeneous households face idiosyncratic income risk and borrowing constraints. We show that the key lessons from this literature also apply to investment using a model where heterogeneous firms face idiosyncratic productivity risk and financial frictions: constrained firms' investment depends on their free cash flow, generating indirect effects of monetary policy and implying that transfer payments stimulate investment demand. Quantitatively, the strength of these new mechanisms is governed by firms' marginal propensities to invest (MPIs), similar to the role of marginal propensities to consume (MPCs) for households. But unlike MPCs, we currently lack quasi-experimental evidence about MPIs that we can use to directly discipline the new mechanisms. |
| Keywords: | Heterogeneous households; Heterogeneous firms |
| JEL: | D1 D2 E21 E22 E31 E32 E43 E52 E62 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20976 |
| By: | Yang, Yucheng; Wang, Chiyuan; Schaab, Andreas; Moll, Benjamin |
| Abstract: | We present a new approach to formulating and solving heterogeneous agent models with aggregate risk. We replace the cross-sectional distribution with low-dimensional prices as state variables and let agents learn equilibrium price dynamics directly from simulated paths. To do so, we introduce a "structural reinforcement learning" (SRL) method which treats prices via simulation while exploiting agents’ structural knowledge of their own individual dynamics. Our SRL method yields a general and highly efficient global solution method for heterogeneous agent models that sidesteps the Master equation and handles models traditional methods struggle with, like those with nontrivial market-clearing conditions. We illustrate the approach in the Krusell-Smith model, the Huggett model with aggregate shocks, and a HANK model with a forward-looking Phillips curve, all of which we solve globally within minutes. |
| Keywords: | Reinforcement learning |
| JEL: | E00 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20980 |
| By: | Mr. Gee Hee Hong; Naowar Mohiuddin; Rasmané Ouedraogo; Danila Smirnov; Maryam Vaziri |
| Abstract: | High-debt euro area economies face fiscal consolidation in a low-growth environment. We use a Heterogeneous Agent New Keynesian model to assess how consolidation composition shapes aggregate and distributional outcomes in a representative high-debt economy. The status quo is not neutral: delay generates its own costs through lower investment, higher debt service, and damage to constrained households. For a given fiscal effort, expenditure-based consolidation achieves faster debt reduction with lower growth and distributional costs than revenue-based consolidation. As a complementary exercise, pairing the expenditurebased path with growth-enhancing structural reforms further improves outcomes by lifting real wages, a channel that disproportionately benefits hand-to-mouth households. Across both strategies, modest well targeted transfers to low-income households can substantially mitigate distributional costs at minimal fiscal expense while supporting aggregate demand. |
| Keywords: | HANK model; fiscal policy; public debt; distributional effects; MPC; transfers; consolidation composition; IMF working papers; area economy; expenditure-based consolidation; aggregate demand; Income; Consumption; Fiscal consolidation |
| Date: | 2026–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/121 |
| By: | Alves, Felipe; Violante, Giovanni L. |
| Abstract: | The current monetary policy framework of the Fed intends to be more ’inclusive’ by running the economy hot for longer during expansions. The logic of this strategy rests on Okun’s (1973) hypothesis that sustaining a ‘high-pressure economy’ persistently improves labor market outcomes of low-wage workers. To evaluate this conjecture, we develop a Heterogeneous Agent New Keynesian framework with a three-state frictional model of the labor market where low-skilled workers are more exposed to the business cycle and recessions have a long-lasting effect on their labor force participation and earnings, in line with the evidence. Under a canonical Inflation Targeting rule, the ZLB generates a deflationary bias and severely amplifies the persistent scars of recessions at the bottom of the wage distribution. The Lower-for-Longer strategy is an effective antidote to the ZLB-driven hysteresis and leads to notable earnings gains for low-wage workers and a reduction to overall earnings inequality. If pursued aggressively, however, the policy reverts the inflation bias from negative to positive. Since policymakers might prioritize differently inflation relative to inclusion, we conclude by quantifying the inflation-inclusion trade-off implied by various monetary policy rules. |
| Keywords: | Monetary policy |
| JEL: | E21 E24 E31 J24 J64 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21189 |
| By: | Boullot, Mathieu; Cahn, Christophe; Challe, Edouard; Matheron, Julien |
| 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 fromthe 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: | C68 D15 J11 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21270 |
| By: | Kang, Kee-Youn |
| Abstract: | We study when productivity volatility raises hiring. In the U.S., total productivity volatility predicts higher unemployment and lower labor-market tightness. After removing the component explained by current aggregate conditions and their recent history, however, volatility predicts lower unemployment, higher tightness, and higher job finding. We develop a labor search model with aggregate productivity risk, match-specific productivity, hiring costs, and flexible or sticky wage setting. Volatility affects job finding through state-dependent hiring cutoffs and vacancy creation. The aggregate response is positive when these margins improve in states with large unemployment weight. Sticky wages amplify this response by limiting pass-through of surplus gains to workers. |
| Keywords: | Labor search, uncertainty, state-dependent volatility, endogenous hiring, sticky wages, hiring cost |
| JEL: | E0 E2 E24 |
| Date: | 2026–06–02 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129454 |
| By: | Luetticke, Ralph; Meyer, Timothy; Müller, Gernot; Schularick, Moritz |
| Abstract: | Using historical income and wealth data, we show that war reduces inequality: the top-1% income share falls by 20% and the top-1% wealth share by 10%. We measure three key drivers of inequality-capital destruction, taxation, and inflation-in the data and quantify their role with a Heterogeneous Agent New Keynesian (HANK) model. Destruction depresses profits and thus top incomes. Taxation primarily influences wealth dynamics, while inflation has little effect on top shares, but reduces indebtedness among poorer households. We validate our findings using new data on inequality across German towns in World War 2 and cross-country data on profits. |
| Keywords: | Inequality; Distribution; Inflation; Taxes |
| JEL: | F40 F50 E50 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20943 |
| By: | Nirei, Makoto; Ragot, Xavier |
| Abstract: | This paper presents a business cycle model where animal spirits shocks, originating from idiosyncratic productivity shocks, drive the comovement of investment, consumption, hours worked, and inflation. In the fully characterized comovement mechanism, real wage rigidity and diminishing returns to labor, resulting from the presence of capital, play a crucial role: a positive investment demand shock raises labor demand, decreases the marginal product of labor, and increases the marginal cost of producing final goods. Our model features a firm’s lumpy investment, leading to a state-dependent multiplier effect, which depends on the firm’s capital profile within an inaction band. Lumpy investments, propagated through the aggregate demand externality, generate an investment avalanche. This offers a microfoundation for our animal spirits shocks and produces aggregate fluctuations without assuming exogenous aggregate shocks. Additionally, by including a time-to-build process for capital formation, the model can explain the autocorrelation structure. |
| JEL: | E32 E31 E22 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21143 |
| By: | Adamopoulou, Effrosyni; Hannusch, Anne; Kopecky, Karen; Obermeier, Tim |
| Abstract: | US college-educated couples with children marry at higher rates than those without a college degree. We argue that marriage, which entails lower separation risk and more equitable asset division if separation occurs, provides insurance to the lower-earning spouse, facilitating child investment. Investing in children is more valuable for college-educated couples, who are more likely to send their children to college. Using an OLG model of marriage, cohabitation, wealth accumulation, and educational investments where college is costly and completion is risky, we find that high college costs reduce incentives to marry among couples without a college degree. These differences in union choice by education heighten differences in children’s educational attainment and reduce intergenerational mobility. |
| Keywords: | Marriage and cohabitation; Child development; Human capital accumulation; college costs; Intergenerational mobility |
| JEL: | D15 E24 J12 J22 J24 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20802 |
| By: | James Wabenga Yango |
| 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 front-loaded output expansion 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 cost of childrearing. A forecast-error variance decomposition attributes most aggregate volatility to the longevity shock, while the AI shock dominates the variance of the return to AI capital. Fertility is strongly countercyclical and almost perfectly negatively correlated with hours worked, placing household time allocation at the center of the mechanism. Robustness checks across the capital share, the shock persistence, and the utility specification show that only an empirically implausible labor-AI elasticity reverses the wage and fertility signs. A welfare analysis finds the AI shock welfare-improving under complementarity, whereas longevity produces a short-run welfare loss that recedes as capital deepening raises wages, since households initially compress consumption and fertility to finance a longer retirement. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.22037 |
| By: | Douenne, Thomas; Dyrda, Sebastian; Hummel, Albert Jan; Pedroni, Marcelo |
| Abstract: | How should governments design climate policies in the presence of inequality, uninsurable risk, and fiscal constraints? To address this question, we develop a climate—economy model with incomplete markets and idiosyncratic labor-income risk, where Ricardian equivalence fails and optimal long-run capital taxes are positive. We analytically show that the optimal carbon tax equals the social cost of carbon (SCC) adjusted for fiscal distortions. Calibrating the model to the U.S., we show that these deviations are quantitatively negligible: high levels of household inequality, income risk, and fiscal distortions do not, in themselves, justify lowering climate ambitions. Welfare gains under the optimal policy come almost entirely from efficiency and environmental amenities, with almost no effect on redistribution and insurance, and are fairly evenly distributed across households. |
| Keywords: | Climate policy; Carbon taxes; Optimal taxation; Heterogeneous agents; Incomplete markets |
| JEL: | E62 H21 H23 Q5 D52 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20820 |
| By: | Bilbiie, Florin; Hanks, Fergal; Lavender, Sean |
| Abstract: | Complementarity between consumption and work is essential for heterogeneous-agent models' ability to generate realistic multiplier effects from aggregate demand shocks, while avoiding puzzling predictions. We show how parameterizing complementarity — in the spirit of Frisch's “utility acceleration†— separately from income effects is necessary to achieve both. HANK models equipped with such complementarity deliver plausible fiscal multipliers and simultaneously resolve two key challenges in the literature: a “trilemma†of matching marginal propensities to earn (MPEs) and to consume (MPCs), and a Catch-22 “dilemma†of resolving the forward guidance puzzle. We establish these results analytically in a tractable HANK framework and confirm them in a calibrated quantitative HANK model. Standard utility functions, however, constrain either complementarity or income effects — or both — thereby forcing multipliers to depend exclusively on one or the other. We introduce two flexible parametric forms that allow arbitrary, independent calibration of complementarity and income effects: a quasi-separable “GHH-CRRA†utility and a “CCRRA†(constant complementarity and relative risk aversion) specification. |
| JEL: | D11 E32 E52 E62 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20804 |
| By: | Kengo NUTAHARA |
| Abstract: | This paper investigates asset-price-targeting monetary policy in a New Keynesian model with money illusion. Money illusion is introduced as misperceptions of current and expected future inflation. We derive a necessary and sufficient condition for equilibrium determinacy and express it as an extended Taylor principle. In the benchmark case, a policy response to asset prices may weaken determinacy. With current inflation misperception, however, higher inflation can raise dividends and asset prices, making asset-price targeting stabilizing. The results show that the effects of asset-price targeting depend on both nominal rigidities and inflation perceptions. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-010e |
| By: | Jiao Wang; Sambit Bhattacharyya; Stephen Lartey; Chirantan Chatterjee |
| Abstract: | What is the welfare cost of demonetisation in emerging economies? We find Kenya's 2019 demonetisation accelerated mobile money use, improved aggregate crime perception, and imposed income losses. Using a Two-Agent New Keynesian (TANK) model with cash-in-advance constrained households and working capital constrained informal firms, we establish three underlying general equilibrium mechanisms. First, precautionary cash hoarding by informal firms drain household liquidity and is contractionary. Second, cash-digital complementarity in agriculture exposes cash-only households to welfare losses. Third, crime perception of urban unconstrained households increases due to local wage collapse, whereas the same for constrained households decline due to reduced theft exposure. |
| Keywords: | demonetisation, mobile money, TANK, financial inclusion, informal sector, crime |
| JEL: | E26 E41 O11 O17 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-58 |
| By: | Kengo NUTAHARA |
| Abstract: | This paper compares alternative ways of modeling money illusion in New Keynesian frameworks. We examine nominal consumption in utility, real-wage misperception, and inflation misperception under labor-augmenting technological growth. The first two approaches generally introduce direct dependence on the price level or require additional preference normalizations to preserve the benchmark balanced-growth path. Modeling money illusion as misperception of current and expected inflation preserves the standard growth structure while generating wedges in labor supply and intertemporal demand. Inflation misperception provides a tractable benchmark for future quantitative macroeconomic analysis. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-009e |
| By: | Brülhart, Marius; Eyquem, Aurélien; Martínez, Isabel Z.; Rubolino, Enrico |
| Abstract: | We study how inheritance affects labor supply over the life cycle, and we quantify its aggregate impact. Tracking earnings histories around some 135, 000 inheritances and 5, 000 lottery wins, we exploit the quasi-random timing and size of these events to identify labor supply responses with high precision. Earnings responses are negative at all ages but peak between ages 55 and 64, largely due to early retirement. Inheritances generate smaller impact responses than comparable lottery wins, consistent with anticipation effects. Our estimates match the predictions of a life-cycle model with endogenous labor supply and early retirement. Aggregating model-based responses across the population, our point estimate of the GDP cost of inheritance is 1.1%. The timing, size, and anticipation of inheritance all contribute to shaping its macroeconomic consequences. |
| JEL: | J22 D31 D64 G51 H31 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20837 |
| By: | Carry, Pauline |
| Abstract: | This paper examines the effects of working time regulations on the allocation of workers and hours. I exploit a unique reform introducing a minimum workweek of 24 hours in France in 2014, affecting 15% of jobs. Drawing on administrative data and an event study design, I find a firm-level reduction in total hours worked, showing imperfect substitutability between workers and hours. The effects differ by gender: women working part-time were replaced by men working longer hours. Importantly, workers also reallocate between firms. To quantify the aggregate impact accounting for these effects, I build and estimate a search and matching model with firm and worker heterogeneity. Overall, the minimum workweek reduced employment by 1.4%, largely driven by women, and decreased total hours by 0.5%. |
| Keywords: | Hours of work; Gender inequality |
| JEL: | J08 J23 J41 E24 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21267 |
| By: | Boaz Abramson (Columbia GSB); Job Boerma (University of Wisconsin-Madison); Diego Daruich (University of Southern California); Aleh Tsyvinski (Yale University) |
| Abstract: | We develop a quantitative macroeconomic theory of child mental health. The theory is grounded in child psychiatry, formalized in a life-cycle heterogeneous agent model of child development, and disciplined using micro data on mental health of children and parents. Intergenerational transmission of mental illness arises due to both biological factors and parental behavior. Parents experiencing mental illness have negative expectations and lose time due to rumination. As a result, they invest less in their child's mental health. We use the model to evaluate policies designed to improve child mental health. We show that subsidizing mental health treatment for children generates sizable welfare gains. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2528 |
| By: | Adam, Christopher; Luk, Paul; Vines, David |
| Abstract: | This paper shows that coordination of monetary policy and fiscal policy can be desirable in the face of a temporary supply side shock. To calibrate our study we use the sharp rise – and subsequent reversion - of energy prices as a result of Russia’s invasion of Ukraine in early 2022. We take as the objective of policy the control of inflation, and the avoidance of a wage-price spiral, without it being necessary to greatly increase interest rates. We show how such a coordinated strategy could make use of a temporary subsidy to consumption following the energy-price shock. We demonstrate that it would be possible to follow such a strategy without creating either excess demand in the short run or Ponzi-game-like fiscal outcomes in the longer run. Our model is a modified version of the new-Keynesian DSGE model due to Christiano, Eichenbaum and Evans (2005) and Smets and Wouters (2007), to which we have added a fiscal-policy process and an energy-sector enclave. We examine the macroeconomic and welfare outcomes of our policy strategy. We show why the welfare outcomes might be better than those which would emerge in the absence of any consumption subsidy, in which case monetary policy would be the only means used to control inflation. We discuss broader implications of our results in the concluding section of the paper. |
| Keywords: | Energy-price shock; Inflation targeting; energy-price subsidy; fiscal and monetary cooperation ; real wage resistance |
| JEL: | E31 E47 E52 E61 E62 E65 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21147 |
| By: | Domenico Ferraro; Giuseppe Fiori; Damián Pierri |
| Abstract: | We develop a business cycle model with perfectly competitive product and labor markets in which production requires a minimum labor input, generating endogenous capacity utilization. The aggregate production function is kinked, featuring constant returns to scale below capacity—typically in recessions—and decreasing returns at capacity in expansions. Motivated by new empirical evidence that narratively identified labor tax shocks have significantly larger effects on hours and output when capacity utilization is below trend, we calibrate the model to U.S. data and show that the aggregate hours elasticity is higher in recessions, differing markedly from the micro elasticity implied by preferences. |
| Keywords: | minimum labor requirements; hours constraints; capacity utilization; state dependence; labor taxation; elasticity of aggregate hours |
| JEL: | E22 E23 E24 E32 E62 H24 H25 |
| Date: | 2026–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:103520 |
| By: | Alves, Felipe; Violante, Giovanni L. |
| Abstract: | As the economy emerges from a crisis, macroeconomic policy confronts a dilemma: a protracted stimulus can foster a more inclusive labor market recovery, yet risks igniting inflation that ultimately undermines workers’ welfare through real income erosion. This tension amplifies in the presence of the ZLB and aggregate capacity constraints. We embed this insight into a quantitative model of the US economy. We study how monetary and fiscal policies managed this inflation-inclusion trade-off after the pandemic, contrasting actual outcomes with counterfactual scenarios. Our experiments yield five findings: (i) the trade-off was unusually difficult because policy was squeezed between these two constraints; (ii) inflationary pressures arose from the joint deployment of prolonged monetary and fiscal stimulus; either policy alone would have produced milder price dynamics; (iii) either inclusive fiscal policy or inclusive monetary policy in isolation would have been sufficient to contain the negative labor market hysteresis at the bottom of the distribution; (iv) inclusive fiscal policy combined with a more traditionally inflation-focused central bank would have achieved higher welfare for the vast majority of households; (v) welfare effects reflect mostly corrections of incomplete-market inefficiencies rather than gains from aggregate stabilization. |
| Keywords: | Distribution; Hysteresis; Inclusion; Inflation |
| JEL: | E21 E24 E31 E32 E52 J24 J64 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21188 |
| By: | Lentz, Rasmus; Maibom, Jonas; Moen, Espen Rasmus |
| Abstract: | We present a tractable, hybrid framework that nests random and perfectly directed search, in which workers are more likely to direct their search toward submarkets with higher returns, while still searching in inferior submarkets with positive probability. The choice of submarket is governed by a logit choice model with noise parameter $\mu\in[0, \infty)$. In the respective limits, search becomes either completely random or perfectly directed. We characterize the model equilibrium and show that even the perfectly directed search limit is inefficient, in contrast to its otherwise close cousin, competitive search. We proceed to quantify the extent of directedness on Danish matched employer--employee data. Identification relies on the insight that the two benchmark models differ qualitatively in their implications for job-to-job worker reallocation. We find evidence of substantial directedness in search. Finally, we study the implications for underinvestment due to holdup problems and show that the observed degree of directedness substantially reduces underinvestment relative to a setting with random search. |
| Keywords: | Partly directed search; Structural estimation; Efficiency |
| JEL: | J62 J63 D83 D4 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21073 |
| By: | Aguilar, Pablo; Darracq Pariès, Matthieu; Dieppe, Alistair; Domínguez-Díaz, Rubén; Gallegos, José-Elías; Quintana, Javier; Eugenelo, Antonio |
| Abstract: | We study the short-run macroeconomic transmission of a US–China tariff war in an open economy multi-sector New Keynesian model with input–output linkages, sectoral nominal rigidities, and heterogeneous currency invoicing. A reciprocal 10 percentage-point tariff increase generates asymmetric incidence: the tariff-imposing country bears more of the inflationary burden, while the targeted country experiences the larger output contraction. Production networks amplify this contraction by propagating the shock beyond the directly tariffed bilateral margin. Currency invoicing further shapes transmission. Under heterogeneous invoicing, dollar-priced border prices weaken the expenditure-switching role of exchange rates, deepening the contraction in China relative to producer-currency pricing and altering third-country spillovers. The EA response is small in the aggregate, but only because positive trade-diversion margins are offset by weaker demand from China and multilateral adjustments. We then exploit the model’s sectoral structure by imposing tariffs on one Chinese sector at a time. Sectoral incidence is highly concentrated, but aggregate effects cannot be inferred from the directly tariffed sector alone: domestic propagation offsets own-sector gains in the US, reinforces own-sector losses in China, and leaves the EA as a net object shaped by opposing trade margins. The results show that tariff incidence depends jointly on where the tariff lands, how the shock propagates through production networks, and how invoicing governs border-price adjustment. A framework that combines these margins delivers a materially different assessment from one built on bilateral trade shares alone. JEL Classification: E31, E32, E52, F13, F41, F42 |
| Keywords: | dominant currency pricing, DSGE, multicountry, networks, tariffs, trade |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263254 |
| By: | Greg Kaplan; Ken Miyahara |
| Abstract: | We build a model that combines (i) heterogeneous households with incomplete markets, and (ii) state-dependent pricing with strategic complementarities by firms, to analyze the effects of large macroeconomic shocks and policy interventions. Both features significantly influence the transmission of fiscal stimulus and monetary policy—heterogeneous households because of failures of Ricardian equivalence, and state-dependent pricing because of its nonlinear effects on inflation. We use our model to quantify how monetary and fiscal policy shaped macroeconomic dynamics in response to the large shocks of 2020, and how alternative policy choices could have led to different aggregate and distributional outcomes. We find large departures from Ricardian equivalence and strong stepping-on-a-rake effects of interest rate changes. The large unfunded fiscal transfer program helped prevent deflation in 2020 and significantly raised output throughout 2021 and 2022, but led to permanently higher prices. The monetary easing through 2020 and 2021 also contributed to preventing deflation, but had a minimal impact on GDP. The monetary tightening from 2022 lowered the maximum inflation rate, but contributed to persistently above-trend inflation. These policies led to net welfare gains for low-wealth households and net welfare losses for high-wealth households, but those welfare effects are due to incomplete markets for idiosyncratic risk not aggregate stabilization. Alternative commitments to funding fiscal stimulus could have achieved similar short-term effects on inflation and output with a much smaller long-term increase in the price level. |
| JEL: | D3 D4 E3 E5 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35400 |
| By: | Jonathon Hazell (London School of Economics (LSE)); Stephan Hobler (London School of Economics (LSE)) |
| Abstract: | This paper measures the causal effect of deficits on inflation using a “high frequency narrative approach”. We identify an event that released news about the 2021 deficits in the United States—the Georgia Senate election runoff. We calculate the size of the shock using new narrative data from investment banks. We then study the high frequency response of inflation forecasts from asset prices, in order to separate deficits from other factors affecting inflation. We estimate an “inflation multiplier” of 0.19% price level growth over two years, for a 1% deficit-to-GDP shock. Our estimate implies that the 2021 deficits caused around a third of the 2021-22 inflation—meaning deficits were important but not the only cause. A heterogeneous agent New Keynesian model quantitatively matches the size and dynamics of the inflation multiplier. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2505 |
| By: | Becerra, Oscar; Briglia, Luigi-Maria; Leon-Diaz, John; Valencia, Óscar; Luetticke, Ralph |
| Abstract: | How should governments design progressive labor-income taxes when workers can shift labor supply into untaxed informal work? Using household surveys for Brazil, Colombia, Mexico, and Peru, we document steep gradients in informality, employment, and unemployment across the income distribution. We analyze non-linear tax schedules in a heterogeneous-agent model with search frictions, savings, and an endogenous formal — informal labor-supply margin. Progressivity operates through an inclusion margin at the bottom-negative income taxes increase formal attachment — and an evasion margin at the top, where higher marginal tax rates shift labor supply into the untaxed sector. These opposing forces imply that both welfare and formality are hump-shaped in progressivity; in a calibration to Mexico, the welfare-maximizing degree of progressivity is about five times the current level. |
| Keywords: | Informality; Progressive taxation; Developing countries |
| JEL: | E26 H24 H26 O17 D31 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21229 |
| By: | Vasco M. Carvalho; Matias Covarrubias; Galo Nuño |
| Abstract: | In dynamic multisector economies, the planner’s optimal capital allocation can serve to minimize the aggregate impact of shocks cascading through nonlinear production networks. We show analytically in a simplified model that, under complementarity and if risk aversion is not too low, (i) optimal capital allocation under uncertainty involves deliberately over-investing, relative to the deterministic optimum, in upstream sectors in order to mitigate severe economic downturns; (ii) this strategy can reduce the average level of consumption and give rise to a high welfare cost of business cycles. Deploying novel deep-learning techniques in a general environment, we show quantitatively that: (iii) the ergodic distribution of the simulated nonlinear economy features higher mean capital levels in key upstream sectors, lower mean levels of macroeconomic aggregates, realistic aggregate volatility, and a welfare cost of business cycles two orders of magnitude larger than in standard one-sector models. |
| Keywords: | deep learning, production network, nonlinear propagation |
| JEL: | E32 C63 C67 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12796 |
| By: | Díaz, Antonia |
| Abstract: | Wealthier, risk-averse buyers pay more to expedite up transactions in competitive search markets. This, coupled with forward-looking intermediaries who hold vacant homes overnight, implies that a credit expansion produces a boom in prices that slowly recedes over time. This boom is due to a combination of two effects. First, search and matching frictions imply that buyers are willing to pay a higher price to trade faster, not only to consume housing services. Second, the fact that intermediaries are forward-looking implies that trading probabilities today depend on the future evolution of prices. Since agents forecast that prices are higher than in the initial steady state, they turn to trading today. Our theory produces a boom in prices that slowly recedes and a gradual rise of homeownership rate. |
| Keywords: | Competitive search; Wealth effects; Housing prices; Credit constraints; Housing supply; Rental housing; Transitional dynamics |
| JEL: | D31 D83 E21 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20900 |
| By: | Brianti, Marco; Forni, Mario; Gambetti, Luca; Granese, Antonio |
| Abstract: | Building on a frequency-domain identification within a nonlinear Structural Dynamic Factor Model, we study the nonlinear transmission of demand and supply shocks, the two shocks accounting for the bulk of fluctuations in U.S. macroeconomic variables. Supply shocks propagate symmetrically and are well described by linear dynamics. Demand shocks, by contrast, display strong sign asymmetries: contractionary shocks generate larger and more persistent declines in real activity, with limited adjustment of prices and nominal wages, an asymmetry amplified in booms. A New Keynesian model with downward nominal wage rigidity rationalizes these findings, highlighting the role of nominal rigidities as a source of nonlinearities. |
| JEL: | C32 C51 E12 E32 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21333 |
| By: | Sushant Acharya; Edouard Challe; Louphou Coulibaly |
| Abstract: | We show that incorporating uninsurable countercyclical income risk into a standard international RBC model can qualitatively and quantitatively account for the quantity puzzles in open-economy macro, namely (i) the Backus-Smith puzzle, (ii) the Backus-Kehoe-Kydland puzzle, and (iii) the weak correlation between the trade balance and the exchange rate. We also show that our model can simultaneously account for the Fama puzzle and the evidence that high interest rate countries have stronger currencies—which representative-agents models that rely only on financial or demand shocks cannot jointly account for. Crucially, our model resolves all these puzzles while relying solely on productivity shocks and thus generates the observed domestic and cross-country macroeconomic comovement. |
| Keywords: | incomplete markets; countercyclical risk; exchange rate; open-economy macro puzzles; macroeconomic comovements |
| JEL: | F41 F44 |
| Date: | 2026–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103524 |
| By: | Joan Alegre Canton |
| Abstract: | Structural models often fix (calibrate) some parameters and estimate the rest, but this calibration-estimation partition is usually chosen by convention. This paper treats that choice as an econometric partition-selection problem. For each admissible partition, we construct a scalar sensitivity statistic measuring the local response of a target object -- such as a policy effect, welfare measure, impulse response, or treatment effect -- to perturbations of the calibrated parameters. The selected partition minimizes this statistic and therefore minimizes worst-case local bias from calibration errors. We first illustrate the decision problem in two canonical examples. We then apply it to the New Keynesian model of Nakamura and Steinsson (2018), where the partition choice has large implications for credibility: some partitions remain reliable under sizeable miscalibrations, whereas others generate large bias from small calibration errors. The procedure requires only local derivatives, avoids repeated re-estimation, and applies to a broad class of structural models. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.25688 |
| By: | Luca Guerrieri; Jinill Kim; Arsenii Mishin |
| Abstract: | Within narrowly defined industries, the most productive firms produce far more than the least productive from the same inputs, and this dispersion widens in downturns. We build a tractable representative-agent model in which financial frictions—adverse selection and moral hazard—make firms sort endogenously into lenders, strategic defaulters, and producers. As credit conditions vary, the resulting misallocation gives aggregate total factor productivity (TFP) an endogenous component that accounts for about 30 percent of the variance of TFP at business-cycle frequencies, a third of it from strategic default. We show that our tractable model can match key features of the observed distribution of productivity across firms and its co-movement with output growth and credit conditions in the data. |
| Keywords: | productivity dispersion; endogenous productivity; financial intermediation; business cycles |
| JEL: | E23 E32 E44 |
| Date: | 2026–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103448 |
| By: | Andersen, Torben M; Løchte Jørgensen, Cecilie Marie; Soerensen, Allan |
| Abstract: | Can future generations achieve living standards at least equal to those of the present? We analyse this question in overlapping-generations (OLG) models, both a small analytical and a calibrated version, where natural capital is introduced following Dasgupta (2021). In standard OLG models, dynamic efficiency requires that the market rate of return exceeds population growth, r > n. With natural capital, the condition becomes r > n+e, where e reflects externalities from the natural capital stock. Economies may therefore satisfy r > n yet remain dynamically inefficient. Along the competitive equilibrium path, degrading natural capital can trigger tipping points in production and welfare, undermining intergenerational sustainability |
| Keywords: | Sustainability |
| JEL: | Q01 Q20 E21 D62 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21292 |