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on Dynamic General Equilibrium |
| By: | Diego R. Känzig; Maximilian Konradt; Lixing Wang; Donghai Zhang |
| Abstract: | We study how business cycle fluctuations shape the pace and direction of innovation. Non-green innovation is procyclical, while green innovation is countercyclical, both over the cycle and in response to economic shocks. We explain this divergence in a dynamic general equilibrium model with endogenous green and non-green innovation. Green patents derive more value from distant profits, making green innovation less sensitive to short-run fluctuations. Endogenous innovation costs reinforce this mechanism, making green and non-green innovation effective substitutes. Evidence from market-implied patent valuations and scientist earnings supports the mechanism. The model implies larger and greener effects of innovation subsidies during downturns. |
| JEL: | E32 O31 Q55 Q58 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35795 |
| By: | Yongsheng Xu; Naoki Yoshihara |
| Abstract: | In a simple Overlapping Generations model, we define ‘improvements’ due to technological progress in the economy and introduce and study the notion of Hicksian optimism, which captures the idea that no one, in the ‘long-run’, is left behind due to such improvements in the economy, and show that the market mechanism with technological progress unavoidably leaves some individuals behind and cannot deliver the Hicksian optimism. This negative result holds for a broader class of intertemporal resource allocation mechanisms. |
| Date: | 2026–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tergaa:500 |
| By: | Vasilev, Aleksandar |
| Abstract: | Housing stock, and the accumulation of utility-enhancing housing capital are introduced as an additional mechanism into a real-business-cycle setup augmented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2024). The quantitative importance of the presence of housing capital accumulation is investigated for the propagation of cyclical fluctuations in Bulgaria. In particular, allowing for housing considerations in the setup improves the model fit vis-a-vis data by increasing the variability of employment and decreasing the variability of consumption and investment. However, those improvements are at the cost of decreasing the volatility of wages. The model severely over-predicts variability of housing investment, and wrongly concludes that it is counter-cyclical. Still, the model with housing is a clear improvement relative to the standard RBC setup. |
| Keywords: | housing, business cycles |
| JEL: | E32 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:344032 |
| By: | Bolivar, Carlos; Dueñas, Federico; Valencia, Oscar |
| Abstract: | This paper studies how sovereign default risk shapes public investment in climate adaptation. We build a sovereign default model in which governments invest in adaptation to reduce disaster damages. Sovereign risk depresses adaptation through two mechanisms: higher borrowing costs and debt overhang under long-term debt. These effects generate feedback between risk and disaster exposure. Using a new panel of adaptation spending from budget records, we show that after catastrophic disasters spreads rise where prior adaptation was low, and that losses are smaller where adaptation budgets recently increased. In our calibration, adaptation yields the largest welfare gains near the default boundary, where financing is tightest. |
| JEL: | F41 F34 H63 Q54 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14759 |
| By: | Isaac Baley (Universitat Pompeu Fabra); Ana Figueiredo (Vrije Universiteit Amsterdam); Cristiano Mantovani (University of Melbourne); Alireza Sepahsalari (University of Bristol) |
| Abstract: | We study how workers' wealth and skills shape recovery from job displacement in turbulent labor markets. Unemployment depletes liquid assets, while turbulent transitions may place workers in jobs where accumulated skills transfer poorly. We develop and quantify a heterogeneous-agent directed-search model with incomplete markets, skill dynamics, and heterogeneous job tiers. Reemployment is a multidimensional allocation problem: skills determine where workers are most productive, while wealth shapes which job tier they can pursue. Workers self-insure through savings and tier mobility, so incomplete markets distort asset-skill sorting and make low-wealth workers more likely to downgrade. In U.S. data, persistent wage losses after turbulent transitions concentrate among low-wealth workers who move to lower tiers. The calibrated model reproduces these patterns and generates negative duration dependence in reemployment wages through wealth-driven downgrading. Policy counterfactuals show that unemployment insurance delivers larger welfare gains, whereas targeted vacancy subsidies generate larger output gains. |
| Keywords: | self-insurance; job displacement; turbulence risk; precautionary savings; directed search; job tiers; skill loss; unemployment insurance |
| Date: | 2026–10–05 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20260078 |
| By: | Carlos Carrillo-Tudela; Ludo Visschers; David Wiczer |
| Abstract: | Career changes across occupations are central to the cyclical behavior of workers’ earnings growth. Using SIPP data, we show that workers who switch both employers and occupations account for 58 percent of the increase in the left-skewness of earnings growth during recessions. This is driven mainly by cyclical variation in the earnings changes upon a transition, rather than in transition flows. In a business cycle model with on-the-job search over employer and occupation ladders, cyclical shifts in the quality of worker-occupation matches are the main source of cyclical earnings risk, but they generate procyclical skewness only through workers’ optimal mobility decisions: without these, procyclical skewness becomes countercyclical variance. Our results give a structural foundation to reduced-form income processes with higher-order risk, and point to policies that target occupational reallocation directly. |
| Keywords: | earnings; unemployment; business cycle; search; occupational mobility |
| JEL: | E24 E30 J62 J63 J64 |
| Date: | 2026–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:103822 |
| By: | Colin J. Hottman; Ricardo M. Reyes-Heroles |
| Abstract: | We study how international trade has affected U.S. inflation dynamics. We develop a multi-region New Keynesian model of an open monetary union in which regional Phillips curve slopes depend on exposure to imported goods. Guided by the model, we construct state-level measures of import penetration in final consumption and exploit cross-state variation to estimate regional Phillips curves over 1976-2017. Greater import exposure leads to significantly flatter state-level Phillips curves. We estimate that rising import exposure accounts for roughly 40 percent of the flattening of the U.S. Phillips curve over this period. Increased import exposure also shifted the U.S. Phillips curve downward, reducing inflation by about 0.17 percentage point annually between 1976 and 2008. A reversal of globalization to early-1990s levels would substantially alter monetary policy trade-offs, reducing the sacrifice ratio by almost one-half. Our findings show that international trade has played a quantitatively important role in shaping U.S. inflation dynamics. |
| Keywords: | globalization; inflation; Phillips curve; international economics |
| JEL: | E10 E30 F00 F40 F60 |
| Date: | 2026–09–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103848 |
| By: | Pascal Belan; Djob Li Ngue Bikob (CY Cergy Paris Université, THEMA) |
| Abstract: | We study intergenerational and intragenerational redistribution in an overlappinggenerations economy with monopolistic competition, in which workers differ in skill and firms pay a fixed entry cost in physical capital. This capital-based fixed cost implies that greater market power raises the equilibrium real interest rate by lowering wages and aggregate saving. We characterize Pareto-efficient steady states and show that productive and dynamic efficiency require correcting the markup distortion and attaining the Golden Rule. Because skill is unobservable, however, the available fiscal instruments cannot in general decentralize an arbitrary distribution along the Pareto frontier, and financing the Pigouvian subsidy may widen wage and consumption inequality. At the second best, the capital correction remains efficient. With homogeneous time preferences, this implies the Golden Rule and leaves labor taxation as the main intragenerational redistributive instrument. With heterogeneous patience, capital policy acquires a redistributive role and the optimal allocation may depart from the Golden Rule. |
| Keywords: | monopolistic competition, overlapping generations, optimal taxation, skill heterogeneity |
| JEL: | D43 E13 H21 O41 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2026-10 |
| By: | Dean Corbae; Pablo D'Erasmo |
| Abstract: | We develop a simple model of banking industry dynamics to study the relation between market structure and financial stability. Motivated by data, we analyze an environment where a small number of dominant (nonatomistic) banks strategically interact with a large number of small (atomistic) banks. A nontrivial endogenous bank size distribution arises out of entry and exit in response to aggregate and regional shocks to borrowers’ production technologies and banks’ idiosyncratic deposit inflows. Since the model has nonatomistic banks that generate granular spillovers from idiosyncratic shocks and pose systemic risk, we use the model to study the implications of too-big-to-fail policies. |
| Keywords: | Macroprudential policy; bank size distribution; industry dynamics with imperfect competition |
| JEL: | E44 G21 L11 |
| Date: | 2026–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103867 |
| By: | Christine Braun (University of Warwick); Ana Figueiredo (Vrije Universiteit Amsterdam) |
| Abstract: | We study how labor market beliefs shape the gender wage gap in an equilibrium search model with endogenous wage setting and hiring, in which workers hold subjective expectations about wage offers, job arrival rates, and separation risk. Using data from the Survey of Consumer Expectations to estimate the model, we find that gender differences in beliefs account for 25% of the gender wage gap. Correcting these beliefs partly narrows the gap but is not welfare-improving, as it reduces lifetime earnings for both men and women. In contrast, equalizing labor market fundamentals substantially reduces the wage gap while increasing women's lifetime earnings. |
| Keywords: | Gender wage gap; Labor market beliefs; Job search |
| JEL: | J16 J31 J64 |
| Date: | 2026–10–05 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20260077 |
| By: | Laurence M. Ball |
| Abstract: | This paper studies the effects of population growth on welfare in an OLG model, in which lower population growth raises output per worker but also reduces the ratio of workers to retirees. Under fairly mild restrictions on the model’s parameters, there exists an optimal population-growth rate—one that maximizes steady-state welfare. This growth rate may well be negative: it may be optimal for the population to shrink over time. The introduction of a pay-as-you-go social security system reduces the optimal population-growth rate. |
| JEL: | H55 J11 O41 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35823 |
| 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. |
| JEL: | E23 F12 L91 R40 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35808 |
| By: | Pierre Cahuc; Pauline Carry; Franck Malherbet; Pedro Martins |
| Abstract: | Employment protection legislation often varies with firm or establishment size and age, and many evaluations of EPL reforms exploit these thresholds. This paper develops a search-and-matching model with multi-establishment firms to disentangle direct effects from general-equilibrium spillovers. We combine the model with quasi-experimental evidence from a 2009 Portuguese reform that restricted fixed-term contracts in young establishments of large firms. Spillovers barely distort the reduced-form estimate, yet they overturn the aggregate conclusion: extrapolating the reduced-form estimate implies a 1.51% employment decline, compared with a 0.11% increase in general equilibrium. Counterfactuals show that conditioning EPL on size versus age can yield opposite welfare effects, even when employment effects are similar, and that fixed-term contract and firing restrictions must be evaluated jointly. |
| Keywords: | Employment protection legislation; general-equilibrium spillovers; fixed-term contracts; contingent regulation; directed search; structural estimation. |
| JEL: | E24 J41 J63 J68 C54 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:26238 |