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on Dynamic General Equilibrium |
| By: | Joshua Brault (Bank of Canada); Qazi Haque (The University of Adelaide); Louis Phaneuf (Université du Québec à Montréal) |
| Abstract: | Taylor rule estimation can be biased if the central bank’s inflation target is counterfactually held fixed. First, we identify in the standard New Keynesian model a downward bias affecting the OLS estimate of the policy response to inflation. Based on simulations from a similar model with positive trend inflation, we show that the policy response to inflation is nearly half the true value with large inflation target fluctuations, as purportedly exhibited by the Fed during the 1960s and 1970s. Second, we implement a procedure for estimating DSGE models using a novel population-based MCMC routine known as parallel tempering. Applying this procedure to a medium-scale DSGE model with positive trend inflation, we do not find evidence of a bias when jointly estimating model parameters and the unobserved time-varying inflation target. |
| Keywords: | Unbiased Taylor rule estimation; time-varying inflation target; parallel tempering algorithm; DSGE models; Positive Trend Inflation. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:adl:wpaper:2025-03 |
| By: | Joao Guerreiro; Jonathon Hazell; Diego R. Känzig; Ed Manuel |
| Abstract: | Do stimulus checks—one-off, deficit-financed lump-sum payments to households—boost the economy? We study a natural experiment: payments to U.S. veterans after World War II that mimic stimulus checks but were plausibly exogenous to the economy. These payments led to a temporary increase in transfers and a persistent, hump-shaped increase in consumption. The transfer multiplier—the cumulative response of consumption to transfers—reaches 1 after six months and exceeds 2 after a year. The standard heterogeneous-agent New Keynesian model cannot match the hump-shaped consumption response. A version with imperfect expectations—with households underreacting on impact but overreacting at longer horizons—can match our estimates. |
| JEL: | E21 E32 E62 H31 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35786 |
| By: | Michael B. Devereux; Charles Engel; Steve Pak Yeung Wu |
| Abstract: | We construct a two-country New Keynesian model in which the U.S. enjoys an “exorbitant privilege” as its government bonds are desired by banks both in the U.S. and abroad as superior collateral. In times of global stress, the dollar appreciates since the demand for high quality collateral drives up the “convenience yield” earned by U.S. government bonds. There is “retrenchment” - each country reduces its holdings of foreign assets - a critical determinant of which is the endogenous response of prices and returns. The model can account for the observed exchange rate and external position behavior of the U.S. While the model incorporates only a small change from a workhorse New Keynesian model with segmented financial markets, it synthesizes and reconciles three major perspectives: on exorbitant privilege, global financial intermediation, and convenience yields. |
| Keywords: | exchange rates, financial frictions, liquidity, convenience yield, dollar dominance |
| JEL: | F3 F4 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_13008 |
| By: | Braxton, John (University of Wisconsin-Madison); Eley, Marlena (University of Wisconsin); Rothbaum, Jonathan (US Census Bureau); Sledz, Shannon (Joint Committee on Taxation) |
| Abstract: | Using linked employee--employer data, we show that recessions shift earnings changes toward negative skewness through more frequent layoffs, larger post-layoff earnings losses, and fewer upward job moves. We discipline a Bewley--Huggett--Aiyagari model with directed search and aggregate productivity shocks using these empirical moments. The calibrated model reproduces the cyclical shift in earnings skewness and implies that eliminating business cycles generates a welfare gain equivalent to 4.9% of consumption on average. This gain falls to essentially zero when cyclical changes in individual labor market risk are removed. Persistent earnings losses following recessionary job loss account for most of the welfare cost. |
| Keywords: | countercyclical earnings risk, business cycles, earnings skewness, search friction, welfare costs |
| JEL: | E32 D52 J64 E21 J31 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18962 |
| By: | Kenji Miyazaki |
| Abstract: | How does an inherited cross-type wage gap enter Markov-perfect discretionary monetary policy when transfers are passive? In a two-agent New Keynesian model with sticky prices and type-specific own-lag wage adjustment, the gap changes implementable allocations and the second-order welfare loss. A positive lower bound establishes its value relevance; explicit rank conditions characterize when current price inflation, wage inflation, and the output gap fail to determine the implementing nominal rate. An illustrative parameterization satisfies these conditions, although the additional state explains little nominal-rate variance after conditioning on all three aggregate variables. Welfare comparisons with fixed rules are driven mainly by aggregate wage-inflation stabilization and do not isolate the value of distributional information. Unrestricted targeted transfers separate aggregate allocation from the legacy wage-gap transition. In the CES-consistent distribution block, optimal smoothing eliminates consumption dispersion, improves on immediate wage-gap elimination, and coincides under discretion and date-0 commitment. |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.39070 |
| By: | Alice Albonico (University of Milano-Bicocca); Guido Ascari (University of Pavia, De Nederlandsche Bank, CEPR); Qazi Haque (Adelaide University); Kostas Mavromatis (De Nederlandsche Bank, University of Amsterdam); Andra Smadu (De Nederlandsche Bank) |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | Monetary policy; Inflation; Energy; Bayesian estimation |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:adl:wpaper:2026-07 |
| By: | Pablo Aguilar (European Central Bank); Matthieu Darracq Pariès (European Central Bank); Alistair Dieppe (European Central Bank); Rubén Domínguez-Díaz (Banco de España); Antonio Eugenelo (University of Oxford); José-Elías Gallegos (Banco de España); Javier Quintana (Banco de España) |
| 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-denominated 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 euro area 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 United States, reinforces own-sector losses in China and leaves the euro area 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. |
| Keywords: | tariffs, trade, dynamic stochastic general equilibrium, multicountry, networks, dominant currency pricing |
| JEL: | E31 E32 E52 F13 F41 F42 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2632e |
| By: | Chansik Yoon (Adelaide University) |
| Abstract: | I study the aggregate implications of trade credit constraints faced by exporting firms in a small open economy general equilibrium model with heterogeneous producers. Exporters must finance fixed export costs with external credit, but borrowing capacity is limited by domestic financial development. Quantitative results show that, despite sizable firm-level distortions, trade credit constraints can have muted aggregate effects. Two general equilibrium mechanisms account for this result: tighter constraints reduce export participation but raise average exporter productivity through selection, and endogenous wage adjustment dampens the transmission of shocks to profits and export activity. The aggregate relevance of trade credit constraints increases when firm productivity is less dispersed and when labor supply is more elastic. Overall, the analysis clarifies how firm-level financial frictions interact with general equilibrium forces in shaping aggregate outcomes. |
| Keywords: | Trade credit;Business cycles;Credit constraints;Aggregate dynamics |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:adl:wpaper:2026-04 |
| By: | Qazi Haque (The University of Adelaide); Oscar Pavlov (University of Tasmania); Mark Weder (Aarhus University) |
| Abstract: | Recent decades have seen a rise in the market power of large firms. We propose a theory in which their technology involves the ability to produce multiple products. Large firms interact with smaller competitors and market share reallocations via product creation generate heterogeneous markup dynamics across the firm types. Higher market shares of large firms increase the parameter space for macroeconomic indeterminacy. Bayesian estimation of the general equilibrium model suggests the importance of the endogenous amplification of the product creation channel and animal spirits play a non-trivial role in driving U.S. business cycles. |
| Keywords: | Indeterminacy, business cycles, multi-product firms, animal spirits, Bayesian estimation. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:adl:wpaper:2025-04 |
| By: | Charles Labrousse; Yann Perdereau |
| Abstract: | The distributive effects of carbon taxation are critical for its political acceptability and depend on both income and geographic factors. Using French administrative data, household surveys, and matched employer–employee records, we document that rural households spend 2.8 times more on fossil fuels than urban households and work in firms that emit 2.7 times more greenhouse gases. We incorporate these facts into a spatial heterogeneous-agent model with migration, housing and wealth accumulation, bridging spatial and macroeconomic approaches. Carbon taxes generate 56% larger welfare losses for rural households than for urban households, as the former may be trapped due to mobility frictions and homeownership. While uniform or income-based rebates reduce inequality along the income dimension, they leave large spatial disparities that must be offset through location-based transfers. These results suggest that carbon policies should account for spatial differences to improve political feasibility. |
| Keywords: | Carbon Tax, Inequalities, Revenue Recycling, Spatial and Macroeconomic Models, Migration |
| JEL: | C61 E62 H23 Q43 Q58 R13 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1063 |
| By: | Basso, Henrique (Banco de España and CEMFI); Bover, Olympia (CEMFI); Galvez, Julio (CUNEF University); Hospido, Laura (Banco de España, CEMFI and IZA) |
| Abstract: | Household consumption and saving depend on perceived income risk, yet macroeconomic models typically discipline income processes using realized data. We show that these objects differ systematically. We develop a framework to recover flexible income processes from subjective expectations reported over fixed intervals, accounting for coarse elicitation and focal responses. Households perceive income as more persistent and less dispersed, with weaker state-dependent nonlinear dynamics than realized histories imply. These differences survive adjustments for reporting, measurement error, and horizon differences. In a life-cycle model, they affect precautionary saving and wealth accumulation; when households save according to perceived dynamics but face realized shocks, consumption insurance falls substantially. |
| Keywords: | subjective expectations, income dynamics, nonlinear persistence, consumption, precautionary saving, life-cycle, panel data |
| JEL: | D15 D31 D84 E21 C23 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18935 |
| By: | José Martínez |
| Abstract: | What explains differences in the composition of households' portfolios? Recent literature has focused on the effects of heterogeneous portfolios. This paper provides an explanation of differences in households' savings patterns that is consistent with micro-level data for the United States. I focus on the effect of heterogeneity in earnings risk to explain differences in the type of deposits. First, I find micro-evidence that relates differences in the maturity structure of households savings with earnings risk, where high idiosyncratic risk results in high demand for short-term liquid deposits, while low earnings risk allows agents to allocate a larger fraction of their assets in long-term illiquid deposits. Second, I present a continuous-time macroeconomic model with incomplete markets, heterogeneous agents, and two assets, where agents have heterogeneous demand for liquidity, driven by differences in earnings risk. The model reproduces differences in the composition of optimal portfolios, consistent with the empirical findings. |
| Keywords: | Macroeconomics;Heterogeneous Agents;Optimal Portfolios;Household Finance |
| JEL: | E00 E21 G11 G50 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2026-05 |
| By: | Richard Blundell; Monica Costa-Dias; Graham Mazeine; Costas Meghir; Tom Waters |
| Abstract: | Work experience has been found to be a key determinant of work and wages for educated women, but it seems to play a smaller role for the less educated. For them, welfare, tax credits and family composition matter more, and increasingly so does participation in disability programmes. Here we document how labor supply, wages, health, and disability claims have evolved in the UK over the last three decades, and examine how reforms to tax credits, disability benefits and other welfare programs have changed work incentives over this period. We then introduce these features into an empirical dynamic structural model of life-cycle labor supply, human capital and disability benefit application, in which human capital combines health capital, experience accumulated in work, and education. Estimating the model on a panel of working-age women in the UK, we examine the interactions between experience capital and health capital in driving life-cycle earnings across different education groups. Our results highlight the importance of interactions in the disability benefit, welfare and tax credit systems for understanding the life cycle pattern of hours, employment, earnings, and disability claims, and for evaluating policy counterfactuals. |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:26/851 |
| By: | Fernando Toledo; Gabriel Montes-Rojas |
| Abstract: | This paper studies how geo-economic fragmentation affects the international allocation of capital in an economy where artificial intelligence (AI) relies on specialized, mobile investment. We develop a heterogeneous-agent open-economy model with AI-specific capital and geopolitical frictions in cross-border asset holdings. These frictions reduce capital mobility, raise the cost of AI adoption, and generate distributional effects across countries and households. The quantitative results show that fragmentation produces welfare losses that rise nonlinearly with geopolitical distance. These losses are larger for AI-lagging economies and for low-wealth households, mainly through reduced investment, weaker labor income, and tighter financial conditions. The paper also defines a so-called Fragmented-AI Trilemma: economies cannot simultaneously preserve monetary autonomy, maintain efficient AI-capital allocation, and insulate themselves from geopolitical shocks. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2609.18976 |
| By: | Xiwen Bai; Jesús Fernández-Villaverde; Yiliang Li; Ricardo Marto; Francesco Zanetti |
| Abstract: | We study the macroeconomic and trade-policy implications of disruptions to U.S.-bound shipping routes. Standard models treat them as iceberg-cost shocks, conflating the shock with the response to it. Using satellite vessel-tracking data, we construct route-level measures of potential and effective capacity for all U.S.-bound container ships from 2016 to 2025. Utilization losses in recent disruptions ran 20 to 40 percentage points, and began months before port congestion became visible. We embed these measures in a general equilibrium model in which firms reallocate a common fleet without internalizing the congestion they create and price above marginal cost, while importers' sourcing responds to route profitability. The reallocation triggered by a disruption then has first-order welfare effects, and the route's Domar weight is not a sufficient statistic for its welfare cost. The 2021 West Coast crisis and the 2023–2024 Red Sea attacks cost 0.69% and 0.35% of output. Naval protection of Red Sea shipping generated benefits of 0.04–0.08% of output at a fiscal cost of 0.02%. Tariffs decongest the routes they tax, offsetting or even reversing their conventional welfare cost. |
| Keywords: | Automatic Identification System (AIS); shipping disruptions; shipping capacity; maritime transportation; general equilibrium; supply chains; trade policy |
| JEL: | E23 F12 L91 R40 |
| Date: | 2026–09–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:103785 |