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on Dynamic General Equilibrium |
| By: | Tatjana Dahlhaus (Bank of Canada); Malik Shukayev (University of Alberta); Alexander Ueberfeldt (Bank of Canada) |
| Abstract: | Natural disasters pose complex challenges for monetary policy in resource-rich small open economies. Using an open-economy dynamic stochastic general equilibrium model calibrated to Canada, we embed stochastic disaster shocks affecting capital, productivity, and the commodity sector. Drawing on detailed historical data, we quantify disaster-specific transmission channels and show that most disasters act as supply shocks, reducing output and modestly raising inflation. The magnitude and persistence of these effects depend on disaster type, sectoral exposure, and spillovers through global trade and terms-of-trade channels. The framework provides a forward-looking assessment of climate-related risks and their implications for monetary policy. |
| Keywords: | Natural Disasters; Climate Shocks; Monetary Policy Trade-offs; DSGE Model; Terms-of-trade Effects |
| JEL: | E52 Q54 F41 E12 E31 C68 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ris:albaec:023232 |
| By: | Wenli Xu |
| Abstract: | Modern world models -- Dreamer, transformer world models (IRIS, Genie), and JEPA / next-latent architectures -- learn dynamics from observed trajectories but share a weakness: their transition map is disciplined only where data were seen, so it degrades under policy-induced distribution shift and on counterfactual states off the training path. We argue that a Dynamic Stochastic General Equilibrium (DSGE) model is a structured world model: its state is a belief state -- the very object a latent world model learns, but supplied with causal structure and hard cross-equation constraints. We introduce DSGE-Gym, a benchmark of eight DSGE environments with off-path counterfactual test sets, scaling to the ECB's 230-variable New Area-Wide Model. We find that (i)learned world models match the dynamics on-path but collapse off-path (5{\sigma} tail RMSE up to \sim 40 the on-path level), and (ii)training the same architectures on data the DSGE generates across rare and counterfactual-policy states -- coverage only a structural model can synthesize -- roughly halves tail error and cuts policy-regime error 10--280 where the counterfactual rule shifts the ergodic support. Because such coverage cannot be sampled from any single history, this measures structure's ability to manufacture the missing distribution. DSGE-Gym and all code are released as a reproducible testbed for counterfactual generalization. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.03144 |
| By: | Sara Casella; Jesús Fernández-Villaverde; Stephen Hansen; Ryohei Oishi; Minchul Shin |
| Abstract: | Standard macroeconomic data do not cleanly separate the systematic and nonsystematic components of monetary policy. We show that incorporating unstructured text data into the structural estimation of a DSGE model can sharpen this distinction. We augment a standard state-space model with a non-core measurement block that links structural shocks to time series derived from FOMC transcripts, using a spike-and-slab prior to let the data select which series are informative. In a medium-scale New Keynesian model for the U.S., incorporating text improves predictive performance and materially alters structural inference: the new model estimates a lower response of the policy rate to inflation, higher price stickiness and lower price indexation, implying a flatter and less backward-looking price Phillips curve. |
| Keywords: | unstructured data; text as data; DSGE models; spike-and-slab priors; monetary policy; Phillips curve; FOMC transcripts |
| Date: | 2026–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103591 |
| By: | Piguillem, Facundo; Shakhnov, Kirill |
| Abstract: | We analyze the tight relationship between government debt and redistribution in Overlapping Generations Economies (OLG). We do so in an heterogeneous agents economy where the government collects capital and progressive labor taxes to pay government spending, debt, and redistribute income. In this environment, the Ramsey planner uses all taxes, even in the long run. We show that rising inequality leads not only to more progressivity, but also to more government debt and capital taxation. The necessary increase in debt to achieve the optimal redistribution policy can be substantial. We explore how limits to government's borrowing choices severely restrict its ability to redistribute income. We calibrate the model to the U.S. in the 2000-10 decade and estimate the optimal response to the observed change in inequality. We find that the optimal level of debt should approximately double. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20032 |
| By: | Nicoletta D'Alterio; Maria Ferrara; Alessia Paccagnini |
| Abstract: | Fiscal consolidation and decarbonization are two of the European Union's most pressing - and typically separately analyzed—policy challenges. This paper asks whether they can be pursued jointly, and at what distributional cost. We develop a Two-Agent New Keynesian model augmented with an environmental sector and compare a standard expenditure-based consolidation with an environmental-fiscal policy mix in which the carbon tax responds systematically to the debt gap, becoming an active consolidation instrument. The policy mix reaches the debt target faster under a pure announcement of future tax cuts (22 rather than 35 quarters), delivers a substantially larger reduction in emissions at a comparable output cost, generates a smaller transitional rise in consumption inequality, and lowers inequality in the long run. Automatic stabilizers cushion financially constrained households, roughly halving the transitional rise in inequality, while countercyclical monetary policy contains welfare costs for both household types. Debt reduction and decarbonization thus emerge as complementary, rather than competing, objectives under a coordinated policy design. |
| Keywords: | fiscal consolidation, environmental policies, inequality, DSGE |
| JEL: | E62 E63 Q58 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-63 |
| By: | Eichenbaum, Martin; Puglisi, Federico; Rebelo, Sergio; Trabandt, Mathias |
| Abstract: | Abstract This paper provides empirical evidence that contractionary monetary policy is less powerful in high interest-rate environments. We argue that this state dependence reflects the interaction between bank's net interest margins (the return on banks' assets minus the per-dollar cost of their funds), and households’ high marginal propensity to consume out of liquid wealth. We construct a banking model in which social dynamics shape household attentiveness to deposit rates and embed it in a nonlinear heterogeneous-agent New Keynesian model. Estimated versions of the partial and general equilibrium models account well for the observed state dependence in the response of banks' net interest margins and the response of aggregate economic activity to monetary policy shocks. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20167 |
| By: | Arnoud Stevens (National Bank of Belgium, Economics and Research Department.); Pavel Tretiakov (National Bank of Belgium, Economics and Research Department) |
| Abstract: | We study the evolution of public perceptions of monetary policy and show that Bayesian learning provides a structural account of their time variation. Using a medium-scale DSGE model estimated on U.S. data, we first document substantial and persistent time variation in agents’ perceived monetary policy reaction coefficients. We then show that a Bayesian learning framework, in which agents gradually infer policy conduct under incomplete information, provides a compelling explanation for these dynamics and delivers a markedly better empirical fit than rational expectations. Learning about the inflation reaction coefficient plays a central role. Finally, we demonstrate that evolving perceptions generate state-dependent transmission: weaker perceived inflation responsiveness amplifies and prolongs inflationary responses to shocks, while stronger perceived responsiveness stabilizes inflation, with implications for real activity that depend on the type of shock. Monetary policy actions themselves feed back into beliefs, implying that credibility evolves endogenously and acts as an additional propagation channel. |
| Keywords: | DSGE model, Monetary policy, Bayesian learning, Bayesian estimation. |
| JEL: | C11 D83 D84 E52 E58 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202608-494 |
| By: | Rubén Domínguez-Díaz (Banco de España); Marta Domínguez-Jiménez (CEMFI, Centro de Estudios Monetarios y Financieros); José-Elías Gallegos (Banco de España); Javier Quintana (Banco de España) |
| Abstract: | This paper explores the macroeconomic consequences of levying tariffs on imported investment goods, which directly affect the household’s investment Euler equation. First, we construct a new multi-country and multi-sector investment input-output matrix to trace investment goods through international production chains. Second, we embed this in an open-economy New Keynesian model with production networks. In a uniform US tariff experiment, this channel more than doubles the impact contraction in GDP, with investment-goods exposure as the best predictor of aggregate output losses. Holding the average tariff fixed, redesigning its composition to avoid the investment network cuts cumulative domestic output losses by two-thirds. |
| Keywords: | Tariffs, capital accumulation, investment goods, production networks, sectoral incidence. |
| JEL: | E22 E31 E32 F41 F44 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cmf:wpaper:wp2026_2610 |
| By: | Gabriel Montes-Rojas (IIEP-UBA/CONICET); Fernando Toledo (UNLP); Juan Manuel Rodríguez Repeti (IIEP-UBA) |
| Abstract: | This paper studies what happens when AI gets cheaper, with emphasis on the labor market outcomes, whether it creates formal jobs or whether it pushes workers into informality. We argue that the answer depends on the elasticity of substitution between imported AI capital and formal labor. We build a small open economy DSGE model with a dual labor market, imported AI capital, and country risk, calibrated to an economy where informality is pervasive. The same decline in AI prices produces sharply different labor-market outcomes depending on whether AI substitutes or complements formal workers. Under substitution, cheaper AI weakens formal labor demand and increases the role of the informal sector as an employment buffer. Under complementarity, it expands formal employment and amplifies output, wages, investment, and capital accumulation. The model therefore shows that AI can become either a source of displacement pressure or a driver of formal-sector expansion, depending on how it interacts with human labor. |
| Keywords: | Artificial Intelligence, Informal Economy, Dual Labor Markets, DSGE, Latin America |
| JEL: | E26 F41 O33 J46 C68 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:401 |
| By: | Krueger, Dirk; Wu, Chunzan |
| Abstract: | In standard life-cycle models, household consumption and welfare more strongly depend on lifetime income, but most countries base income taxes on current income and use progressive taxes to reduce inequality and provide social insurance. Is lifetime income a better tax base for governments seeking to provide such social insurance and redistribution? To answer this question, we build a quantitative life-cycle model of heterogeneous households with idiosyncratic wage risks and endogenous labor supply, and calibrate it to the U.S. economy. We document that switching to a lifetime income tax leads to a more efficient distribution of hours worked over time and across states of the world. This benefit rises with tax progressivity under a lifetime income tax, whereas the opposite is true under an annual income tax. Consequently, the optimal lifetime income tax is more progressive and achieves larger ex-ante welfare for a cohort of households than the optimal annual income tax. |
| Keywords: | Redistribution; Social insurance |
| JEL: | E60 H20 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20134 |
| By: | Kim, Daisoon; Yum, Minchul |
| Abstract: | South Korea has been facing persistently low fertility rates and large gender gaps in labor supply. In response, the government has expanded parental leave benefits to address these challenges. To evaluate the effectiveness of these policies, we develop a quantitative, heterogeneous-household life-cycle model in which couples make joint decisions on careers, labor supply, savings, and child-related choices, including fertility, childcare, and parental leave take-up. The model is calibrated to recent Korean cohorts to replicate key patterns observed in the data, including segmented labor markets where career-oriented jobs require high entry costs and long working hours. We find that generous benefits increase fertility and reduce gender gaps in labor supply and wages by enabling more women to remain in career-oriented jobs during their child's early years, facilitating career advancement later. The positive labor supply effects are particularly strong among highly educated parents, and the policy can be self-financing through higher lifetime labor supply. Finally, we find that incentivizing joint parental leave use is more effective than mandating it and that the positive fertility effects may weaken when parents place greater emphasis on child quality---a trend observed in recent years. |
| JEL: | E24 J22 D13 J13 J16 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19951 |
| By: | Kolasa, Marcin; Laseen, Stefan; Lindé, Jesper |
| Abstract: | This paper provides a comprehensive assessment of the macroeconomic and fiscal impact of unconventional monetary tools in small open economies. Using a DSGE model, we show that the exchange rate plays a critical role to amplify the favourable impact of unconventional monetary policy while it attenuates the effectiveness of conventional fiscal policy to jointly boost output and inflation. We then use the model as a laboratory to do a case study of the Swedish Riksbank asset purchases and negative policy rates 2015-2019. We find that the Riksbank unconventional policy measures provided meaningful macroeconomic stimulus to economic activity and inflation, with the dual benefit of reducing overall government debt by about 5 percent of GDP. If conventional fiscal policy had been used to provide a commensurate output boost, inflation would have risen notably less, and the fiscal cost would have amounted to a deterioration of the government debt position with nearly 5 percent of GDP. |
| Keywords: | Monetary policy; Asset purchases; Quantitative easing; Negative interest rate policy; Fiscal policy; Exchange rate channel |
| JEL: | D44 E52 E58 E63 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20223 |
| By: | Bloise, Gaetano; Reichlin, Pietro |
| Abstract: | We provide an analytical decomposition of the welfare effect of raising the contribution rate of a pay-as-you-go social security at equilibrium in an overlapping generations economy with productive uncertainty and idiosyncratic labor income risks. Based on the observed long-run pattern of GDP growth and safe rate for most advanced economies, we argue that social security is likely to be a Pareto improving policy due to the over accumulation of capital that arise from individual risk at competitive equilibria. Assuming Epstein-Zin preference representation and Cobb-Douglas technology, the welfare effect can be decomposed into a "direct" effect, which takes into account the inter-generations reallocation of consumption and risk at status quo, a "general equilibrium" effect, that takes into account the reallocation of capital and labor and an "idiosyncratic risk" component. The relevant statistics that affect these two components are the growth-adjusted dominant root of the stochastic discount factor at the competitive equilibrium and the covariance between wages and individual labor productivity. Since the estimated direct and general equilibrium effects are very small, the net effect of social security is almost entirely determined by the idiosyncratic risk component, which is shown to affect positively individuals’ welfare under crowding out. |
| Keywords: | Dynamic efficiency |
| JEL: | E21 E22 E62 H55 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20175 |
| By: | Hochmuth, Brigitte; Moyen, Stéphane; Schröter, Felix; Stähler, Nikolai |
| Abstract: | This paper links labor market reforms to an increase in the reforming country’s net foreign asset position via a precautionary savings channel. We assess how a major cut in unemployment benefits affected Germany’s current account. Using a heterogeneous agent model of a small open economy with labor market frictions, we show that accounting for precautionary savings is both qualitatively and quantitatively important. In the first five years, the reform contributed 12 percent to the dynamics of the German current account. Welfare gains and losses are distributed unequally among agents. Compared to a closed economy, the reform is more detrimental. |
| JEL: | E21 E24 F16 F41 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20092 |
| By: | Tomohiro Hirano; Alexis Akira Toda |
| Abstract: | We analyze how equilibrium housing prices are determined along with economic development in an overlapping generations model with perfect housing and rental markets, in which housing prices and rents are both endogenous. We focus on demand-side factors: home buyers income and the elasticity of substitution between consumption and housing. We characterize the long-run rent growth rate in all equilibria and show that, when this elasticity exceeds one (the empirically relevant case), rents grow more slowly than income. The economy then exhibits a two-stage phase transition in the income ratio of home buyers relative to home sellers. When this ratio is low, only fundamental equilibria exist. Above a first threshold, fundamental and bubbly equilibria coexist and the outcome is selected by self-fulfilling expectations. Above a second threshold, fundamental equilibria cease to exist and housing bubbles are necessary for equilibrium. We further prove that the fundamental equilibrium is always unique and the bubbly equilibrium is unique whenever the elasticity of intertemporal substitution is not far below 1/2. Uniqueness lets us study expectation-driven booms: if agents anticipate future income growth, housing prices rise and contain a bubble today even when current incomes lie in the fundamental region, with the price-income and price-rent ratios rising together. Finally, contrary to the common understanding that land eliminates dynamic inefficiency in overlapping generations models, we show that inefficient equilibria arise robustly, and only for intermediate income ratios. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-011e |
| By: | Huber, Johannes; Kindermann, Fabian; Kohls, Sebastian |
| Abstract: | Wealth inequality and aggregate homeownership are negatively correlated across the Euro area. We explain this within a quantitative overlapping generations model, where households consume food and shelter and make portfolio decisions. Households purchase real estate for consumption purposes or rent it out to other households on the private rental market. A reduced form wedge - correlated with empirical measures of rent control - governs rental market efficiency. Rental market efficiency is crucial in explaining cross-country variation in aggregate homeownership. Wealth inequality, however, is mainly driven by mortgage market characteristics, most importantly an interest rate spread between deposits and mortgages. |
| JEL: | C68 D15 E21 R21 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20111 |
| By: | Alice Albonico; Marco Guerzoni |
| Abstract: | Is the aggregate productivity slowdown in the U.S. driven by a decline in successful innovation? This paper addresses this question using a medium-scale DSGE model with endogenous technology growth. The model distinguishes between two innovation channels: a spillover channel, which governs the efficiency with which aggregate R&D advances the technological frontier, and a difficulty channel, which governs the probability that sectoral R&D efforts successfully generate innovation. We estimate the model on U.S. macroeconomic and R&D data over the period 1984-2019, using macroeconomic observables and incorporating a patent-text-based measure of technological creativity that is informative about innovation probability. The results show that spillover shocks are the main drivers of short and medium run fluctuations in TFP growth, while R&D difficulty shocks mainly explain the probability of successful innovation. Once creativity data are included, the estimated difficulty shock becomes less volatile and more persistent, suggesting that innovation difficulty is a slow moving force shaping successful innovation. However, its quantitative contribution to TFP fluctuations remains substantially smaller than that of spillover shocks, although it matters in specific episodes. |
| Keywords: | Innovation Difficulty, Endogenous growth, R&D investments, Bayesian estimation |
| JEL: | E3 O3 O4 C11 C13 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:580 |
| By: | Holst Partsch, Emil; Petrella, Ivan; Santoro, Emiliano |
| Abstract: | Durables’ interest-rate sensitivity and their persistent comovement with nondurable spending are hallmarks of monetary policy transmission. We develop a two-sector HANK model that replicates this pattern—both across spending categories and among households sorted by liquid asset holdings, consistent with empirical evidence. Direct effects of real interest rate changes are quantitatively important in reproducing sectoral expenditure comovement, while infrequent information updating is crucial to match the hump-shaped dynamics of sectoral and aggregate expenditures. Income effects are essential to preventing counterfactual declines in nondurable spending resulting from fiscal interventions specifically aimed at stimulating durable purchases. |
| Keywords: | Durable goods; sectoral comovement; Monetary policy; Hank |
| JEL: | E21 E31 E40 E44 E52 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20083 |
| By: | Hazell, Jonathon; Hobler, Stephan |
| 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. |
| Keywords: | Deficits; Inflation |
| JEL: | E31 E62 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19928 |
| By: | Auclert, Adrien; Rognlie, Matthew; Straub, Ludwig |
| Abstract: | We study the short-run effects of import tariffs on GDP and the trade balance in an open-economy New Keynesian model with intermediate input trade. We find that temporary tariffs cause a recession whenever the import elasticity is below an openness-weighted average of the export elasticity and the intertemporal substitution elasticity. We argue this condition is likely satisfied in practice because durable goods generate great scope for intertemporal substitution, and because it is easier to lose competitiveness on the global market than to substitute between home and foreign goods. Unilateral tariffs tend to improve the trade balance, but when other countries retaliate the trade balance worsens and the recession deepens. Taking into account the recessionary effect of tariffs dramatically lowers the optimal unilateral tariff derived in standard trade theory. |
| Keywords: | Tariff; Macroeconomics; Monetary policy |
| JEL: | E0 F10 F40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20165 |
| By: | Bilbiie, Florin; Galaasen, Sigurd; Gürkaynak, Refet; Maehlum, Mathis; Molnar, Krisztina |
| Abstract: | HANK Sufficient Statistics Out of Norway (HANKSSON) answers a core question of the heterogeneity in macroeconomics literature: does heterogeneity amplify the aggregate effects of demand policies and shocks? We provide two sufficient statistics (SS) and test them using individual-level matched data for personal characteristics, income, wealth and non-imputed, actual consumption for the Norwegian population. The first SS gauges whether heterogeneity drives a wedge between the (representative agent) average MPC and a model-consistent (heterogeneous agent) aggregate MPC. The second SS elicits whether the consumption of constrained, "hand-to-mouth, " agents is more exposed to aggregate fluctuations. Our key finding is that to analyze aggregate behavior, one does not need to keep track of heterogeneity: the average and the aggregate are about the same. We show that the amplification result currently prevalent in the literature is due to using labor earnings and is overturned when using model-consistent disposable income. This is due to the strong insurance effect of taxes and transfers; when applied to our data, even the much less progressive US tax and transfer system produces no amplification due to heterogeneity. The same “close to irrelevance†conclusion arises based on the second statistic using consumption data directly. Not even during the Great Recession do we see heterogeneity contribute meaningfully to demand shock amplification. |
| JEL: | E21 E24 E32 E52 E64 H31 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20090 |
| By: | Dolado, Juan J; Janez, Alvaro; Wellschmied, Felix |
| Abstract: | Online food delivery platforms typically operate through a controversial business model that relies on subcontracting self-employed workers, known as riders. We quantify the labor-market effects of the Spanish Riders’ Law in 2021 that established the presumption of dependent employment for riders using a search and matching model. Riders with heterogeneous preferences for leisure trade off work flexibility and easier employability as self-employed against enjoying higher wages as employees. Our main finding is that the reform led to a higher share of employees but failed to fully absorb the large flows of workers transiting out of self-employment and decreased riders’ wages leading to welfare losses. However, complementing the reform with a payroll tax cut for platforms hiring employees preserves employment levels and increases riders’ welfare. |
| Keywords: | Employees |
| JEL: | J21 J60 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19974 |
| By: | Hochmuth, Philipp; Krusell, Per; Mitman, Kurt |
| Abstract: | The EU has embarked on an ambitious path toward climate neutrality. How difficult will this transition be for the population as a whole and different subsets of consumers? This paper investigates this question using a dynamic general equilibrium model that captures a key feature of energy consumption: the relative energy content in one's consumption basket falls significantly as a function of one's relative income. Thus, poorer consumers are expected to be hit harder by the higher energy prices that we anticipate over the next few decades. In the model, energy — a complementary input to capital and labor — can be produced either using fossil fuel or a "green'" technology. We represent the EU policy in terms of a tax on fossil fuel and show that the European Commission's Fit-for-55 package implies a 168% tax on the fossil-based technology. The output losses from this tax are substantial, and GDP is 9.3% lower in the new steady state. The burden falls primarily on the poor agent who is 50% more worse off than the rich agent. The output losses can be compensated for if the economy achieves a 1.49% annual increase in energy efficiency as outlined in the Fit-for-55 package. |
| Keywords: | Green transition; Carbon tax |
| JEL: | E61 Q43 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20216 |
| By: | Makarski, Krzysztof (FAME|GRAPE & Warsaw School of Economics); Tyrowicz, Joanna (FAME|GRAPE, University of Warsaw and IZA/LISER); Komada, Oliwia (FAME|GRAPE) |
| Abstract: | This paper studies the role for progressive labor income taxation in the context of social security reform. We propose a novel reform that replaces redistributive pensions with a contribution-based system while simultaneously increasing the progressivity of labor income taxation to preserve social insurance. Using a stylized model, we show that the benefit of such reform is derived from the Frisch elasticity of labor supply. For sufficiently high values, the reform can be fiscally neutral and Pareto-improving. We then evaluate the reform in a full general equilibrium model calibrated to the U.S. economy. Quantitative results on the efficiency-insurance trade-offs are in line with our theoretical predictions. In the steady-state, for plausible values of the Frisch elasticity, the fiscal space generated by increased labor supply is sufficient to compensate through lump-sum transfers the loss of pension-based insurance. These results carry over to transition dynamics: the reform yields a Pareto improvement along the transition path. Our findings highlight the potential for tax-based redistribution to replace pension-based insurance. |
| Keywords: | social security reform, labor income tax, redistribution, insurance, welfare effects |
| JEL: | C68 E62 H55 J26 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18810 |
| By: | Oliver de Groot; Gustavo Mellior; |
| Abstract: | We study how heterogeneity in bank balance sheets and bank-customer relationships shapes the pass-through of interest rates to deposit rates and affects monetary policy. Using US branch-level deposit rates, we document two new stylized facts about the heterogeneous response of deposit rates to financial and monetary shocks. First, banks with the largest deposit bases reduce their relative deposit rates after both financial uncertainty shocks and contractionary monetary policy shocks. Second, highly leveraged banks respond differently across shocks: they lower their relative deposit rates after financial uncertainty shocks, but raise them after contractionary monetary policy shocks. To explain these facts, we develop a continuous-time general equilibrium heterogeneous-bank model in which banks face an occasionally binding leverage constraint, have market power in deposit markets, and accumulate customer capital through deep habits in household demand for banking services. The model is consistent with the cross-sectional distribution of banks and qualitatively reproduces the empirical impulse responses. It shows that customer capital amplifies the aggregate effects of financial and monetary shocks. |
| Keywords: | Balance sheet channel, Interest rate margin, Financial frictions, Customer capital |
| JEL: | C63 E44 E52 G21 |
| URL: | https://d.repec.org/n?u=RePEc:liv:livedp:202601 |
| By: | Joshua Brault; Maryam Haghighi; Jing Yang |
| Abstract: | We study the monetary policy response to AI adoption in a two-sector New Keynesian model with a task-based microfoundation, sticky prices, and downward nominal wage rigidity. We distinguish between two forms of AI-driven technological change: augmentation, which raises the productivity of labor within existing tasks, and automation, which displaces labor by reallocating tasks from workers to machines, contracting the set of tasks requiring human input. In the short run, both shocks lower labor demand on net, and with downward nominal wage rigidity, unemployment emerges unless monetary policy provides accommodation. But because monetary policy operates through aggregate demand and cannot target sectors differentially, accommodation that reduces unemployment in the AI-affected sector raises inflationary pressure in the unaffected one, opening a sectoral wedge between the policy rates required to clear the two labor markets. Since, for output-equivalent shocks, automation generates a larger decline in labor demand, the associated wedge is wider and the Phillips curve lies above and to the right of the curve for augmentation---restoring full employment comes at a greater cost of inflation. In addition to the nature of the shock, the aggregate inflationary consequences depend on the breadth of AI adoption across the economy. Under augmentation, as the AI-affected sector grows, its falling sectoral price increasingly offsets the inflation generated elsewhere by monetary accommodation---making aggregate inflation an unreliable signal of the underlying trade-off. For automation both sectoral prices rise and no such offset exists. In our framework, sector-specific AI adoption poses an unambiguous short-run labor market stabilization problem, while its implications for aggregate inflation depend on the nature of technological change, the breadth of adoption, and the response of monetary policy. |
| Keywords: | Monetary policy; Inflation dynamics and pressures; Monetary policy framework and transmission; Structural challenges; Digitalization and productivity |
| JEL: | E E2 E24 E3 E31 E32 E5 E52 J J2 J23 O O3 O33 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:26-27 |
| By: | Faia, Ester; Shabalina, Ekaterina |
| Abstract: | We assess the business cycle properties for a large set of incomplete market models with (or without) nominal and real rigidities: they are similar to those from representative and two-agent economies, both fall short of matching empirical labour market dynamic. This is true even when we consider counter-cyclical income risk, which gives implausibly high wage volatility. Augmenting the incomplete market model with heterogenous indivisible labour supply, due to discrete choices, reconciles low micro elasticities and large employment fluctuations and dampens wage volatility, more so with wage rigidity. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20297 |
| By: | Hanjo Odendaal (Department of Economics and Bureau for Economic Research, Stellenbosch University) |
| Abstract: | Does confidence move an emerging-market economy through a single channel, or does it combine animal spirits with political-risk repricing? I separate these mechanisms in a small-open-economy DSGE model that uses news sentiment, economic policy uncertainty and confidence surveys to measure two latent states. The model is estimated on South African data from 2002Q1 to 2026Q1. Bayesian model comparison strongly favours treating general sentiment and political risk as distinct forces. A one-standard-deviation improvement in sentiment raises investment and real equity-price growth by about 0.77 percentage points on impact. A political-risk shock instead weakens the rand, widens the sovereign spread, depresses investment and lowers subsequent output growth. Together, the two forces explain about 42 per cent of sovereign-spread fluctuations over eight quarters, but only 0.3 per cent of output-growth variation. Supporting demand may lift optimism, but firms are unlikely to invest unless credible institutions and predictable policy also keep political-risk premia low. |
| Keywords: | sentiment, animal spirits, political risk, Bayesian estimation, macroeconomic forecasting, South Africa |
| JEL: | C11 C53 E32 E44 F41 D84 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:sza:wpaper:wpapers398 |
| By: | Del Negro, Marco; Diagne, Ibrahima; Dogra, Keshav; Gundam, Pranay; Lee, Donggyu; Pacula, Brian |
| Abstract: | We use an estimated medium-scale HANK model to investigate how the tradeoff between stabilizing inflation and consumption volatility varies for households with different levels of wealth. Consumption for the rich is mostly affected by demand shocks via their exposure to highly procyclical profits---for them, stabilizing consumption and inflation coincide. The poor are more vulnerable to supply shocks, hence aggressively stabilizing inflation is costly in terms of their consumption volatility. While they dislike inflation because it erodes real wages, they are hurt even more by an aggressive monetary policy response to inflation, which reduces real wages further while increasing unemployment. |
| JEL: | E12 E31 E52 E58 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20084 |
| By: | Eichenbaum, Martin; Trabandt, Mathias; Rebelo, Sergio; Puglisi, Federico |
| Abstract: | Abstract We show that the response of banks’ net interest margin (NIM) to monetary policy shocks is state dependent. Following a period of low (high) Federal Funds rates, a contractionary monetary policy shock leads to an increase (decrease) in NIM. Aggregate economic activity exhibits a similar state-dependent pattern. To explain these dynamics, we develop a banking model in which social interactions influence households’ attentiveness to deposit interest rates. We embed that framework within a nonlinear heterogeneous-agent NK model. The estimated model accounts well quantitatively for our key empirical findings. |
| JEL: | E52 G21 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20247 |
| By: | Hochmuth, Brigitte; Merz, Monika; Prettenthaler, Fabian |
| Abstract: | This paper studies how individual risk attitudes shape occupational choice and wealth accumulation. Using self-reported individual risk preferences from the German Socioeconomic Panel (GSOEP), we estimate that an increase in risk tolerance raises the probability of a worker transitioning to self-employment. We also develop a life-cycle model of occupational choice with Epstein-Zin preferences and heterogeneous risk attitudes to study how risk aversion interacts with entrepreneurial ability and wealth in determining entry into self-employment and its aggregate implications. Counterfactual simulations show that increasing business risk reduces entry but improves selection by entrepreneurial skills. In contrast, Germany’s “1-Euro GmbH†reform of 2008 weakened the role of risk tolerance for entry and increased participation by more risk-averse individuals. |
| Keywords: | Recursive utility |
| JEL: | E21 E24 J24 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20286 |
| By: | Nezih Guner (CEMFI and Banco de España); Eugenio Renedo (CEMFI, Centro de Estudios Monetarios y Financieros); Emre Enes Yavuz (Reddit) |
| Abstract: | We study how the specification of wage risk in quantitative life-cycle models changes the welfare evaluation of taxes and transfers. We estimate four wage processes: a canonical linear process, a flexible nonlinear process with age dependence, non-normality, and state-dependent persistence, and two intermediate processes; comparisons across the four isolate the role of each feature: age dependence, non-normality, and nonlinear persistence. The estimated processes imply different allocations of wage risk across permanent, persistent, and transitory components: the richer processes assign less risk to short-lived transitory shocks and more to long-lived permanent and persistent components. We embed each process in the same incomplete-markets life-cycle economy with endogenous labor supply. Removing federal tax progressivity and means-tested transfers raises mean welfare by 0.72% of lifetime consumption under the nonlinear process but lowers it by 0.47% under the non-normal process. These welfare differences reflect both the total amount of wage risk and its allocation across permanent heterogeneity, persistent shocks, and transitory shocks. Holding this amount and allocation fixed, non-normal shocks create rare but severe low-income states that increase the value of public insurance, while the state-dependent mean reversion that characterizes the nonlinear specification works in the opposite direction: unusually bad persistent states tend to be undone by subsequent favorable shocks, so the wage process partly insures itself, and that lowers the value of public insurance. |
| Keywords: | Wage risk, nonlinear wage dynamics, social insurance, taxes and transfers, life-cycle models. |
| JEL: | D15 D31 E21 H21 I38 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cmf:wpaper:wp2026_2611 |
| By: | Bagga, Sadhika; Mann, Lukas; Sahin, Aysegul; Violante, Giovanni L. |
| Abstract: | We develop an equilibrium model to study the dynamic adjustment of a frictional labor market to aggregate shifts in the demand and supply of a job amenity. When preferences for the amenity are heterogeneous in the population, and its availability is heterogeneous across jobs, labor reallocation ensues. The defining traits of such reallocation (a rise in vacancies and job-to-job transitions, a fall in matching efficiency and in relative wages of jobs supplying the amenity) closely resemble those observed in the post-pandemic U.S. labor market in the aftermath of the shift to remote work. A version of the model calibrated to the U.S. experience matches the data well with shocks of plausible magnitude. Cross-sectional and survey data from various sources offer support for this mechanism. |
| Keywords: | Job Amenities; Reallocation |
| JEL: | E10 J63 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20195 |
| 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. |
| JEL: | F41 F44 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35448 |
| By: | Profitis, Romanos; Schoenle, Raphael |
| Abstract: | This paper analyzes how fiscal and macroprudential policies can jointly stabilize inflation, support output, and contain emissions after a surge in fossil fuel prices. In a New-Keynesian E-DSGE model with disaggregated energy sectors and banking frictions, we compare energy production subsidies, energy consumption subsidies, and carbon subsidies. While fiscal measures alone often raise carbon emissions, pairing them with sector-specific macroprudential tools — taxes on dirty-energy loans or subsidies on clean-energy loans — reallocates credit, strengthens macroeconomic stabilization, and curbs emissions volatility. Welfare analysis shows that combining production subsidies with “green†macroprudential support substantially reduces household welfare losses relative to fiscal measures alone. Our results show that carefully designed policy packages can cushion macroeconomic shocks without sacrificing climate objectives. |
| JEL: | E52 E62 H23 Q43 Q58 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20215 |
| By: | Christensen, Frederik; Wallenius, Johanna |
| Abstract: | Universal education systems are often said to promote intergenerational mobility in education. However, despite tax-financed post-secondary education and generous student aid, educational mobility in Denmark remains low. To rationalize this, we develop a structural life cycle model in which education choice depends on preferences, graduation probabilities, and parental transfers, which in turn vary by child ability and parental education. After estimating the model on Danish register data, we first disentangle the drivers of intergenerational persistence in education. Subsequently, we conduct counterfactual policy experiments to assess the potential of education policy to improve mobility. We find that increasing current subsidies has only small positive effects on educational attainment and mobility. Similarly, relaxing the student debt limit has virtually no effect. Our decomposition exercises suggest that this is because the persistent transmission of ability and preference heterogeneity dominate immediate pecuniary incentives. |
| Keywords: | Inequality |
| JEL: | I22 I24 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20124 |
| By: | Cremer, Helmuth; Gahvari, Firouz |
| Abstract: | This study contributes to the long-term care policy literature by exploring how, in an uncertain environment, redistributive tax policies and long-term care program design interact with informal care incentives, shaping long-term caregiving outcomes. The analysis is done within an overlapping-generations model in the steady state under full and asymetric information. Altruistic children provide informal care to their elderly parents if dependent. Not all children are altruistic. Children's level of altruism is shaped by the time and attention they received in childhood. Key findings, under asymetric information, include: (i) Allocations are distorted for redistributive purposes, except for savings, (ii) marginal income tax rates are positive, aligning with standard nonlinear income taxation models, and (iii) a consequence of government's redistributive policies is to encourage time spent with children thus incresing family caregiving. These three findings apply to both "opting out" and "topping up" schemes. (iv) Savings must be subsidized in an opting out system due to fiscal externalities; (v) if public assistance carries a stigma, it may have to be distorted upward; the opting-out policy welfare dominates the topping-up policy. Finally, if long term care provision carries no stigma, opting out is more cost-effective than topping up in both first- and second-best. |
| JEL: | H2 H5 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20060 |