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on Dynamic General Equilibrium |
| By: | Giulio Nicoletti (European Central Bank); Luca Pensieroso (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | This article surveys Dynamic Stochastic General Equilibrium models, from the Real Business Cycle to the New Keynesian variant. We spell out both the analytics and the empirics of the models, as well as their historical origins. |
| Keywords: | Real Business Cycle; New Keynesian Macroeconomics; New Neoclassical Synthesis |
| JEL: | E1 E3 E4 |
| Date: | 2026–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:ctl:louvir:2026001 |
| By: | Marcin Bielecki (University of Warsaw; Narodowy Bank Polski); Michał Brzoza-Brzezina (SGH Warsaw School of Economics; Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics; International Monetary Fund) |
| Abstract: | How do business cycles redistribute between generations, what are the redistribution channels and what role is played by monetary policy? We construct a New-Keynesian life-cycle model and estimate it for the United States. Business cycles redistribute significantly: fluctuations impact welfare of some cohorts by an equivalent of 30% of annual consumption. These first-order effects do not net out over a typical life cycle: some cohorts have been much less lucky than others. Life cycle aspects also amplify second-order costs of fluctuations. Monetary policy shocks are highly redistributive and, hence play an over-proportional role in driving redistribution: they are responsible for over 20% of its total amount. Systematic monetary policy has a quantitatively significant impact on redistribution as well: policy that responds strongly to inflation and output can substantially increase intergenerational redistribution. |
| Keywords: | Business Cycles, Welfare Redistribution, Monetary Policy, Life-cycle Model |
| JEL: | E24 E32 E47 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2026-2 |
| By: | Cotte Poveda, Alexander; Rangel, Alejandro; Pardo, Clara |
| Abstract: | The analysis of economic growth determinants has allowed for the development of an extensive body of literature that has recognized the role of human capital as the main explanatory variable of countries' economic growth. However, the evidence shows that this relationship does not always occur in such a precise way; therefore, it is necessary to analyse the dynamics of each economy. In Colombia, although there is empirical evidence that correlates these two variables, economic growth and human capital, there is little research that explains the behaviour of growth and human capital expected in the long term. The objective of this research was to determine the interactions between human capital and economic growth in long-term dynamics in Colombia. To achieve this goal, a dynamic stochastic general equilibrium (DSGE) model was applied with parameters calibrated from empirical evidence in Colombia. On the other hand, a vector error correction model (VECM) was applied to the student-teacher ratio series and per capita GDP in Colombia for the 1970–2019 period. The results of the DSGE model indicate that economic growth has a positive effect in the long term. These results are reinforced through the VECM. Disturbances in the productivity of education captured through the student–teacher ratio in tertiary education show the existence of short- and long-term relationships of the mentioned variable with per capita GDP, as in the DSGE model, the variables perceive convergence to new equilibria. Both models indicate that long-term physical capital and human capital have positive relationships with economic growth. |
| Keywords: | Economic growth, Human capital, Colombia, Education, Dynamic stochastic general equilibrium, Vector error correction |
| JEL: | O10 O40 |
| Date: | 2025–09–11 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126166 |
| By: | Toama Boke Aime ARNAULD; Junichi FUJIMOTO; Minchung HSU |
| Abstract: | Japan faces a dual demographic challenge: persistently low fertility and underutilization of female labor. This paper develops a quantitative life-cycle model with heterogeneous agents to study how the spousal tax system and the social norm of unequal gender division of childcare jointly shape marriage, fertility, and women’s labor supply decisions. The model incorporates endogenous marriage, fertility, and female labor participation choices, calibrated to Japanese data, and evaluates a series of counterfactual policy experiments. We find that the spousal tax treatment is a key disincentive to women’s labor market participation. Eliminating tax benefits and deductions increases female labor supply but reduces marriage and fertility. Childcare subsidies partly offset these effects by raising household resources and encouraging women’s market participation, though their effectiveness is limited in the presence of restrictive social norms. Once the childcare norm is relaxed, however, subsidies become more effective: they simultaneously raise fertility, stabilize marriage, and boost women’s labor supply across all life stages. These findings suggest that achieving both higher fertility and higher female labor force participation in Japan requires a dual strategy: financial support for childrearing and broader institutional and cultural reforms. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:26014 |
| By: | Viral V. Acharya; Guillaume Plantin; Olivier Wang |
| Abstract: | We develop a New Keynesian model with financial frictions to study how corporate capital structure shapes static and dynamic monetary policy tradeoffs through the supply side. Ex post, when corporate leverage is high, monetary tightening contracts both demand and supply. As a result, the Phillips curve is highly non-linear and state-dependent, and the “natural rate” Rⁿ ensuring price stability increases with corporate leverage. Yet the tradeoff between inflation targeting and tightening supply constraints implies that the optimal ex-post policy is to set a rate Rᵒᵖᵗ |
| JEL: | E31 E32 E43 E44 E52 E58 E61 G32 G38 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34798 |
| By: | Virginia Sánchez-Marcos; Javier Fernández-Blanco |
| Abstract: | Social Security retirement programs are designed to provide full insurance against longevity risks through a progressive scheme. In line with previous work on earnings and race, we document, using HRS data, 2.5- and 5.5-year life-expectancy gaps by wealth and health at age 56, respectively. Such significant differences in life expectancy reduce the progressivity feature of the program. We examine the welfare costs of ignoring life expectancy conditional on wealth and health at the claiming age in a parsimonious way, by adding a wealth- or health-based correction factor to the current program. We build a rich life-cycle model in which married men decide their savings, labor supply and benefits-claiming age, and are heterogeneous in many dimensions, in particular in their fixed health type. We find that the welfare losses of ignoring differences in life expectancy by wealth and health at the claiming age are equivalent to a permanent consumption fall of 2.22% and 0.30%, respectively. Moreover, the effects are very heterogeneous across health types. |
| Keywords: | health, labor force participation, Life Expectancy, retirement benefits, Wealth |
| JEL: | J22 I14 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1556 |
| By: | Joseph Abadi; Jesús Fernández-Villaverde; Daniel Sanches |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features "unipolar'' equilibria, with a single dominant international currency, and "multipolar'' equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the international monetary system's dynamics under several counterfactual scenarios. |
| JEL: | E42 E58 G21 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34817 |
| By: | Judith Méndez (School of Government and Public Transformation, Tecnológico de Monterrey); Héctor J. Villarreal (School of Government and Public Transformation, Tecnológico de Monterrey); Hermilo Cortés (School of Government and Public Transformation, Tecnológico de Monterrey) |
| Abstract: | This research develops a dynamic and stochastic partial equilibrium model with overlapping generations to simulate the effects of health condition, whether good or poor, on household consumption and indebtedness. While fiscal imbalances caused by pension system structures are currently a pressing issue, the effects of population health status will increasingly become evident in a country’s economy, particularly in consumption levels and indebtedness due to higher healthcare expenditures. Household savings levels would be under pressure to cope with unexpected expenses such as out-of-pocket health expenditures. In the model, these outof-pocket expenses are covered through a subsidy, and the government does not directly provide health services but operates a transfer scheme that partially insures households against catastrophic out-of-pocket health expenditures. In order to show the model’s capabilities, México will be used as case study. The results display a consumption pattern gap that worsens due to poor health conditions. Additionally, income levels stagnate around the same age at which the proportion of health-related expenditure needs begin to rise and increase relative to income levels. Long-term fiscal sustainability is at risk, not only due to the lack of current attention, but also resources allocated to adults and elderly could limit investment in the health of new generations, thereby compromising human capital in the future. |
| Keywords: | Macroeconomic Equilibrium, Health Economics, Overlapping Generations, Life-Cycle Model, Out-of-Pocket Expenditures, Fiscal Sustainability, Population Aging, Income Inequality, Health Shocks, Precautionary Savings, Mexico |
| JEL: | H83 K42 C38 O33 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:gnt:wpaper:25 |
| By: | Jungho Lee (Yonsei University); Sunha Myong (Kyung Hee University) |
| Abstract: | We show that financial constraints can affect the human capital accumulation of college students by influencing students' labor supply. We document that many college students work a substantial number of hours at low-skill jobs, and students who have fewer financial resources (in particular, parental transfer) tend to work more. We develop a model that incorporates college students' labor supply and its interaction with parental transfer in the presence of financial constraints. By estimating the model, we quantify the trade-off between self-financing and human capital accumulation and discuss the implications of a wage subsidy policy. |
| Keywords: | College Education, Parental Transfer, Labor Supply, Intergenerational Mobility, Financial Constraints |
| JEL: | I22 I23 I24 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-278 |
| By: | Criscent Birungi; Cody Hyndman |
| Abstract: | The decision to annuitize wealth in retirement planning has become increasingly complex due to rising longevity risk and changing retirement patterns, including increased labor force participation at older ages. While an extensive literature studies consumption, labor, and annuitization decisions, these elements are typically examined in isolation. This paper develops a unified stochastic control and optimal stopping framework in which habit formation and endogenous labor supply shape retirement and annuitization decisions under age-dependent mortality. We derive optimal consumption, labor, portfolio, and annuitization policies in a continuous-time lifecycle model. The solution is characterized via dynamic programming and a Hamilton-Jacobi-Bellman variational inequality. Our results reveal a rich sequence of retirement dynamics. When wealth is low relative to habit, labor is supplied defensively to protect consumption standards. As wealth increases, agents enter a work-to-retire phase in which labor is supplied at its maximum level to accelerate access to retirement. Human capital acts as a stabilizing asset, justifying a more aggressive pre-retirement investment portfolio, followed by abrupt de-risking upon annuitization. Subjective mortality beliefs are a key determinant in shaping retirement dynamics. Agents with pessimistic longevity beliefs rationally perceive annuities as unattractive, leading them to avoid or delay annuitization. This framework provides a behavior-based explanation for low annuity demand and offers guidance for retirement planning jointly linking labor supply, portfolio choice, and the timing of annuitization. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.02816 |
| By: | Gyarmathy, Andrei; Lukyanov, Georgy |
| Abstract: | Costly pre-play messages can deter unnecessary wars—but the same messages can also entrench stalemates once violence begins. We develop an overlapping-generations model of a security dilemma with persistent group types (normal vs. bad), one-sided private signaling by the current old to the current young, and noisy private memory of the last encounter. We characterize a stationary equilibrium in which, for an intermediate band of signal costs, normal old agents mix on sending a costly reassurance only after an alarming private history; the signal is kept marginally persuasive by endogenous receiver cutoffs and strategic mimicking by bad types. Signaling strictly reduces the hazard of conflict onset; conditional on onset, duration is unchanged in the private model but increases once a small probability of publicity (leaks) creates a public record of failed reconciliation. With publicity, play generically absorbs in a peace trap or a conflict trap. We discuss welfare and policy: when to prefer back-channels versus public pledges. |
| JEL: | D74 D83 C73 C72 D82 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131434 |
| By: | Brenzel-Weiss, Janosch; Koeniger, Winfried; Valladares-Esteban, Arnau |
| Abstract: | We calibrate a lifecycle portfolio-choice model of homeowners facing uninsurable income risk to show that tax deductions for mortgage interest payments and voluntary pension contributions have sizable effects on household portfolios and macroprudential risks. The deductions reduce the after-tax cost of debt and increase the after-tax return of pension savings so that the mortgage incidence increases and portfolios shift from home equity and liquid assets towards pension savings. Because the consumption responses to a house-price decline are heterogeneous, the distribution of household debt shapes the quantitative effect of the tax deductions on the homeowners' resilience after a house price bust. |
| Keywords: | Mortgage amortization, Tax incentives, Household consumption, Portfolio choice, Housing busts, Economic stability, Macroprudential policy |
| JEL: | D14 D15 D31 E21 G11 G21 H24 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cfswop:336755 |