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on Dynamic General Equilibrium |
| By: | Oscar Iván Ávila-Montealegre; Anderson Grajales-Olarte; Juan J. Ospina-Tejeiro; Mario A. Ramos-Veloza |
| Abstract: | We examine the role of labor informality in shaping macroeconomic volatility in a small open economy. Using a DSGE model calibrated to Colombia, we focus on worker-level rather than firm-level informality. The model features heterogeneous households and a segmented labor market with formal and informal workers, incorporating wage rigidities and productivity differences. Our results show that higher informality amplifies the volatility of consumption and investment, which is consistent with the empirical evidence. The mechanism operates through the interaction of wage rigidities in the formal sector with lower productivity of informal workers. Quantitatively, the model accounts for a significant share of the observed link between informality and volatility. These findings highlight how labor market frictions magnify business cycle fluctuations in emerging economies. *****RESUMEN: En este trabajo, examinamos el papel de la informalidad laboral en la volatilidad macroeconómica en una economía pequeña y abierta. Para ello, utilizamos un modelo DSGE calibrado para Colombia en el que nos centramos en la informalidad a nivel de los trabajadores, en lugar de a nivel de las empresas. El modelo considera hogares heterogéneos y un mercado laboral segmentado, con trabajadores formales e informales, rigideces salariales y diferencias de productividad. Los resultados muestran que una mayor informalidad aumenta la volatilidad del consumo y la inversión, lo que concuerda con la evidencia empírica. Este efecto se produce a través de la interacción entre las rigideces salariales del sector formal y la menor productividad de los trabajadores informales. Cuantitativamente, el modelo explica una parte significativa de la relación observada entre la informalidad y la volatilidad. Estos resultados ponen de manifiesto cómo las fricciones del mercado laboral amplifican las fluctuaciones del ciclo económico en las economías emergentes. |
| Keywords: | DSGE, small open economy, informality, business cycles, economía pequeña y abierta, informalidad, ciclos de los negocios. |
| JEL: | E26 E32 J46 O17 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bdr:borrec:1345 |
| By: | Sangyup Choi (Yonsei University); Kyung Woong Koh (Johns Hopkins University) |
| Abstract: | Does government spending raise prices? While standard models predict an inflationary effect, empirical findings are mixed-a puzzle known as the "fiscal price puzzle." We argue that this puzzle reflects differences in aggregation rather than a failure of standard demand transmission. Using newly constructed U.S. MSA-level federal procurement data from 1989-2023 and a shift-share IV strategy, we show that regional fiscal shocks raise local consumer prices when aggregate forces are absorbed through time fixed effects. When aggregate conditions are allowed to respond endogenously, however, the same shocks generate attenuated or even negative price responses. To interpret these findings, we develop a two-region New Keynesian model with centralized monetary policy. Local fiscal expansions increase regional prices but induce union-wide monetary responses that dampen aggregate inflation. Extending the model to consumption and investment sectors, we show that government consumption shocks raise regional and sectoral prices more than investment shocks, yet can produce smaller aggregate price effects due to stronger monetary feedback. Our results highlight how general equilibrium mechanisms and spending composition jointly shape fiscal inflation dynamics. |
| Keywords: | Fiscal price puzzle; Government spending; Spending composition; Military procurement; Monetary union; Shift-share instrument |
| JEL: | E31 E52 E58 E62 F33 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-280 |
| By: | Arpad Abraham; Pavel Brendler; Eva Carceles-Poveda |
| Abstract: | We study whether redesigning the social security and income tax-transfer systems can deliver significant welfare gains. Our rich quantitative model features both realistic inequality over the lifecycle and the key channels through which redistributive policies can distort aggregate allocations. We find that there are two distinct ways to achieve significant welfare gains. The first prioritizes reducing distortions through a regressive pension system, resulting in higher inequality. The second reduces inequality through progressive pensions, complemented with a less progressive tax system to mitigate the rise in distortions. In both reform types, pension progressivity emerges as a powerful instrument to either manage distortions or redistribute income within generations. Since redistributive instruments turn out to be highly distortionary in our benchmark economy, the policy reducing distortions turns out to be optimal under utilitarian social welfare. |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:25/820 |
| By: | Rüdiger Bachmann; Benjamin Born; Olga Goldfayn-Frank; Georgi Kocharkov; Ralph Luetticke; Michael Weber |
| Abstract: | We exploit Germany’s temporary three-percentage-point VAT cut in the second half of 2020 to study the spending response to unconventional fiscal policy. We use survey and scanner data on household consumption expenditures and their perceived pass-through of the tax change into prices, and a HANK model to quantify the effects of this VAT policy. The survey and scanner data show that the temporary VAT reduction led to a relative increase in durable and, to a lesser extent, semi-durable spending for individuals with high perceived pass-through. According to the HANK model, the VAT policy increased total aggregate consumption spending by 4.4 percent on impact. |
| Keywords: | unconventional fiscal policy, value added tax, household survey data, expectations, consumption, durables, HANK model |
| JEL: | D12 E20 E21 E62 E65 H31 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_728 |
| By: | Michael Funke; Raphael Terasa |
| Abstract: | Germany has introduced a comprehensive package of staggered business tax breaks to accelerate business investment and give new momentum to economic growth. The key components of the so-called investment booster program are a temporary tax write-off on machinery and other equipment investments to a maximum of 30% in 2025, 2026, and 2027, followed by a stepwise permanent reduction of the corporate tax rate from 15% to 10% between 2028 and 2032. We first present a stochastic general equilibrium (DSGE) modeling setup and baseline results for the enacted unconventional policy measures incentivizing investment, then assess counterfactual policy regimes including various red tape streamlining supply shock scenarios. Overall, the insights into the unconventional reform package provide actionable guidelines for the design of business tax breaks aimed at stimulating investment. |
| Keywords: | business taxation, unconventional fiscal policy, investment, DSGE model, Germany |
| JEL: | E22 E60 H25 Q54 Q58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12385 |
| By: | Ping Wang; Russell Wong |
| Abstract: | How large are the effects of artificial intelligence (AI) on labor productivity and unemployment? We develop a labor-search model of technological unemployment where AI learns from workers, raises productivity, and displaces them if renegotiation fails. The model admits three steady states: no AI; some AI with limited capability, more job creation but higher unemployment; unbounded AI with endogenous growth and employment gains. Calibrated to U.S. data, the model implies a threefold productivity gain but a 23% employment loss, half within five years. Plausible parameters give rise to global and local indeterminacy with endogenous cycles in productivity and unemployment, underscoring the uncertainty of AI's impacts in line with a wide range of empirical findings. Equilibria are inefficient despite the Hosios condition; subsidizing jobs at risk of AI displacement is constrained optimal. |
| Keywords: | generative artificial intelligence; technological unemployment; search and bargaining; en dogenous growth; constrained efficiency; indeterminacy |
| JEL: | E20 J20 J64 L20 O30 O40 |
| Date: | 2026–02–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:102794 |
| By: | Bumsoo Kim; Marc De la Barrea; Masao Fukui |
| Abstract: | We develop a dynamic quantitative model of trade and labor adjustment, incorporating nominal wage rigidity and consumption–saving decisions, to study how China’s currency peg interacted with its rapid growth in shaping the US economy. We show that the peg temporarily boosts China’s export growth by preventing an appreciation of the Chinese currency, thereby amplifying the US labor-market consequences of the China shock. At the same time, the temporary export boom increases China’s savings and leads to a larger US trade deficit. Calibrating the model to match trade and labor-market flow data, we find that China’s currency peg played a quantitatively important role in the US manufacturing decline, the widening US trade deficit, and unemployment dynamics. These results underscore the importance of exchange-rate adjustment (or the lack thereof) for understanding trade shocks. We also find that the overall welfare impact of the China shock remains significant and positive. |
| JEL: | F0 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34823 |
| By: | Janosch Brenzel-Weiss; Winfried Koeniger; Arnau Valladares-Esteban |
| 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:ces:ceswps:_12436 |
| By: | Yasin Mimir; Yasin Kürşat Önder; Jose Villegas (-) |
| Abstract: | We document that grace periods are widespread, characterizing 83% of the external sovereign debt stock. This prevalence is largely driven by concessional (official) loans, which account for 73% of the stock and universally feature grace periods. To examine their macroeconomic role, we develop a quantitative model showing that grace periods enhance household welfare by reducing default risk and improving market completeness, yet also increase long-run dependence on non-contingent debt and raise sovereign spreads. We empirically validate these mechanisms using local projection estimates and conduct policy counterfactuals on shortened grace periods, voluntary debt exchanges, and the stigma premium associated with concessional finance. |
| Keywords: | Sovereign debt, default, concessional loans, grace period, stigma premium |
| JEL: | E44 F34 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:26/1137 |
| By: | Adrien Concordel; Phuong Ho; Christopher R. Knittel |
| Abstract: | This paper compares the impacts of critical mineral price and oil price on an economy in a unified neoclassical growth model. Unlike oil price shocks, which affect the cost of utilizing existing capital (e.g., cars), critical mineral price shocks influence the cost of creating new capital (e.g., electric vehicles) without altering the cost of existing capital. We find that both types of shocks ultimately reduce output and welfare. However, oil-price increases are systematically more contractionary for the economy. Mineral-price increases generate comparatively larger adjustments in investment, capital, and external borrowing but smaller and more gradual losses in output and welfare, and in capital-rich economies can slightly raise long-run employment. These results imply that oil-price shocks remain the more serious threat to aggregate activity and welfare, whereas mineral-price shocks call for policies that smooth investment and external-balance-sheet adjustment (e.g., macroprudential tools and precautionary reserves or fiscal buffers). |
| JEL: | E22 E32 F41 Q41 Q43 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34847 |
| By: | Ville Korpela (Turku School of Economics, University of Turku, Finland); Eero Mäkynen (Turku School of Economics, University of Turku, Finland) |
| Abstract: | Business dynamism has been slowing globally over the last several decades. In a recent study, Akcigit and Ates (2023) examine the relative importance of different channels behind this development and highlight weakened knowledge diffusion from the technology frontier to followers as a dominant force.1 Their study also suggests that diffusion may weaken endogenously as the technology gap widens and market power accumulates, raising the question of how innovation policy can strengthen diffusion without reducing welfare. In this paper we study leader-to-follower licensing as a policy-relevant diffusion margin, and evaluate licensing subsidies relative to direct R&D subsidies. We develop an endogenous-growth general equilibrium model in which firms compete in prices and invest in R&D; the technology leader endogenously chooses whether to license to the follower, trading off higher static profits against faster follower catch-up through knowledge diffusion. We calibrate the model to Finnish data from 2014–2019. Our first exercise evaluates whether allowing licensing is desirable by shutting down the licensing channel in the calibrated economy. In the Finnish benchmark, shutting down licensing lowers growth but increases consumption-equivalent welfare, because the level effects of reduced concentration dominate the diffusion benefits of licensing. We then vary the diffusion rate through licensing and product substitutability to characterize when licensing becomes welfare-improving. In that region, solving the policymaker’s problem shows a non-trivial interaction: higher R&D subsidies can reduce equilibrium licensing by moving leaders more quickly into the monopoly-pricing states where licensing is privately unattractive, so the optimal policy mix augments R&D support with a non-negligible licensing subsidy to sustain diffusion. |
| Keywords: | Antitrust Policy, Business Dynamism, Endogenous Growth, Innovation Policy, Licensing, Technology Diffusion |
| JEL: | E22 L10 L41 O33 O34 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:tkk:dpaper:dp174 |
| By: | Lukas Althoff; Hugo Reichardt |
| Abstract: | Artificial intelligence is changing which tasks workers do and how they do them. Predicting its labor market consequences requires understanding how technical change affects workers’ productivity across tasks, how workers adapt by changing occupations and acquiring new skills, and how wages adjust in general equilibrium. We introduce a dynamic task-based model in which workers accumulate multidimensional skills that shape their comparative advantage and, in turn, their occupational choices. We then develop an estimation strategy that recovers (i) the mapping from skills to task-specific productivity, (ii) the law of motion for skill accumulation, and (iii) the determinants of occupational choice. We use the quantified model to study generative AI’s impact via augmentation, automation, and a third and new channel — simplification — which captures how technologies change the skills needed to perform tasks. Our key finding is that AI substantially reduces wage inequality while raising average wages by 21 percent. AI’s equalizing effect is fully driven by simplification, enabling workers across skill levels to compete for the same jobs. We show that the model’s predictions line up with recent labor market data. |
| Keywords: | artificial intelligence, technology, labor markets, growth, inequality, wages, employment |
| JEL: | J24 J31 O33 J23 E24 D31 I26 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12403 |
| By: | Fan, Simon (Lingnan University); Pang, Yu (Macau University of Science and Technology); Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | Global trends in delayed childbearing and population aging have intertwined parenting and eldercare, necessitating concurrent attention to young children and elderly parents. This paper develops an overlapping-generations model where young adults, exhibiting two-sided altruism, educate their children to promote human capital accumulation and provide caregiving for their aging parents. Education can be attained through financial investments and the implementation of harsh discipline, which demands minimal parental resources but can strain parent-child relations. Eldercare is labor intensive, with its quality decreasing with the frequency of childhood discipline. Our positive analysis suggests that extended longevity may reduce the prevalence of harsh parenting, and enhanced altruism towards the elderly benefits them but can have adverse effects on private savings and children’s human capital. We then examine the steady-state first-best solution and the second-best public policies. When intergenerational altruism is limited, we advocate for the idea of taxing labor and subsidizing education from a novel perspective of adjusting parenting styles and promoting eldercare. |
| Keywords: | Parenting style ; Human capital ; Longevity ; Long-term care |
| JEL: | I21 J13 J24 |
| Date: | 2024–12–03 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2024029 |