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on Dynamic General Equilibrium |
| By: | Andrew Binning; Susie McKenzie; Murat Özbilgin; Christie Smith (The Treasury) |
| Abstract: | This paper illustrates microeconomic evidence on wages, hours and net worth, which is used to inform the calibration of the overlapping generations (OLG) model under development at the Treasury. Using cross-sectional survey data, we compute quantiles of lifetime profiles for wages, net worth, and hours-worked. Hourly wages are a particularly important input into the OLG model since they affect both productivity and retirement decisions. Our microeconomic evidence is used to characterise five exogenous types of agents with varying productivity levels. These exogenous types approximate the diversity of wage outcomes and wealth levels seen in New Zealand, reflecting high-, low-, and middle-income people. Wage and asset heterogeneity is important in our OLG model to be able to evaluate policies that affect different groups of people differently. For example, a degree of heterogeneity is needed to consider how different tax rates or tax types (such as a capital income or wealth taxes) might affect people with few and many assets or how changes to the universality of superannuation might affect distributional and aggregate outcomes. |
| JEL: | J31 J1 J22 D31 C21 |
| Date: | 2025–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an25/06 |
| By: | Adamopoulou, Effrosyni (ZEW); Hannusch, Anne (University of Bonn); Kopecky, Karen A. (Federal Reserve Bank of Atlanta); Obermeier, Tim (University of Leicester) |
| Abstract: | US college-educated couples with children marry at higher rates than those without a college degree. We argue that marriage, which entails lower separation risk and more equitable asset division if separation occurs, provides insurance to the lower-earning spouse, facilitating child investment. Investing in children is more valuable for college-educated couples, who are more likely to send their children to college. Using an OLG model of marriage, cohabitation, wealth accumulation, and educational investments where college is costly and completion is risky, we find that high college costs reduce incentives to marry among couples without a college degree. These differences in union choice by education heighten differences in children’s educational attainment and reduce intergenerational mobility. |
| Keywords: | college costs, human capital accumulation, child development, marriage, cohabitation, intergenerational mobility |
| JEL: | D15 E24 J12 J22 J24 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18237 |
| By: | Pham, Ngoc Sang; Le Van, Cuong; Bosi, Stefano |
| Abstract: | We study an overlapping generations (OLG) exchange economy with an asset that yields dividends. First, we derive general conditions, based on exogenous parameters, that give rise to three distinct scenarios: (1) only bubbleless equilibria exist, (2) a bubbleless equilibrium coexists with a continuum of bubbly equilibria, and (3) all equilibria are bubbly. Under stationary endowments and standard assumptions, we provide a complete characterization of the equilibrium set and the associated asset price dynamics. In this setting, a bubbly equilibrium exists if and only if the interest rate in the economy without the asset is strictly lower than the population growth rate and the sum of per capita dividends is finite. Second, we establish necessary and sufficient conditions for Pareto optimality. Finally, we investigate the relationship between asset price behaviors and the optimality of equilibria. |
| Keywords: | exchange economy, overlapping generations, asset price bubble, fundamental value, low interest rate, Pareto optimal |
| JEL: | C6 D5 D61 E4 G12 |
| Date: | 2025–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125772 |
| By: | Arce, Fernando; Bengui, Julien; Bianchi, Javier |
| Abstract: | In this paper, we revisit the scope for macroprudential policy in production economies with pecuniary externalities and collateral constraints. We study competitive equilibria and constrained-efficient equilibria and examine the extent to which the gap between the two depends on the production structure and the policy instruments available to the planner. We argue that macroprudential policy is desirable regardless of whether the competitive equilibrium features more or less borrowing than the constrained-efficient equilibrium. In our quantitative analysis, macroprudential taxes on borrowing turn out to be larger when the government has access to ex-post stabilization policies. |
| Keywords: | Macroprudential policy;Overborrowing;Underborrowing |
| JEL: | E58 F31 F32 F34 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14343 |
| By: | Andrea Modena; Luca Regis; Giorgio Rizzini |
| Abstract: | In this paper, we invesstigate how mortality risk affects agents optimal decisions and asset prices within a general equilibrium framework. In our model, risk averse households facing a stochastic mortality rate allocate their net worth among consumption, risky capital production, and risk-free bonds to maximise intertemporal utility. In this setting, we show that a negative and time-varying correlation exists between mortality and risky asset prices, even when production and mortality risks are mutually independent. The correlation arises because higher mortality rates reduce the incentive to save for the future, leading to increased current consumption and decreased capital investment. As a result, higher mortality lowers the prices of risky capital and raises the risk-free rate in equilibrium. Calibrated simulations suggest that endogenous price effects account for the largest share of welfare gains and losses following sharp changes in mortality, such as pandemics or rapid increases in longevity. |
| Keywords: | equilibrium; mortality risk; portfolio choice; stochastic optimal control |
| JEL: | C6 G11 G52 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_709 |
| By: | Nicolas Abad (LERN - Laboratoire d'Economie Rouen Normandie - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université); Johanna Etner (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique); Natacha Raffin (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, AMU - Aix Marseille Université) |
| Abstract: | We use an overlapping generations model with physical and human capital, and two reproductive periods to explore how fertility decisions may differ in response to economic incentives in early and late adulthood. In particular, we analyze the interplay between fertility choices—related to career opportunities—and wages, and investigate the role played by work experience and investment in both types of capital. We show that young adults postpone parenthood above a certain wage threshold and that late fertility increases with work experience. The long run trend is either to converge to a low productivity equilibrium, involving high early fertility, investment in physical capital and relatively low income, or to a high productivity equilibrium, where households postpone parenthood to invest in their human capital and work experience, with higher late fertility and higher levels of income. A convergence to the latter state would explain the postponement of parenthood and the mitigation or slight reversal of fertility decrease in some European countries in recent decades. |
| Keywords: | Fertility, overlapping generations, work experience, postponement |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04577278 |
| By: | RANAIVOSON, Tojonirina Miada Zafindraibe; LAZAMANANA, Pierre Andre |
| Abstract: | The massive release emission of greenhouse gases into the atmosphere, which has emerged as a pressing global concern, entails detrimental consequences for both the environment and the economic system. As a consequence, the severity of the consequences of climate change has disrupted economic issues and strategies. Major reorientations of economic policies, particularly climate policies, mainly based on CO2 emission levels have been adopted during various Conferences of the Parties (COP).This issue has therefore led us to investigate the effects of such climate policies on the economy as a whole. To achieve our objective, a climate DSGE model reflecting the characteristics of Madagascar has been implemented. The results of impulse response function reveal that dynamic carbon taxation proves more effective in reducing CO2 emissions compared to a quota policy, which is a source of volatility. Climate finance, on the other hand, is insufficient to stimulate the economy if not combined with carbon pricing. |
| Keywords: | Climate policies, Greenhouse gases, Carbon pricing, DSGE, Conferences of the Parties, Climate change |
| JEL: | H23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126370 |
| By: | Arce, Fernando; Bengui, Julien; Bianchi, Javier |
| Abstract: | We propose a macroprudential theory of foreign reserve accumulation that can rationalize the secular trends in public and private international capital flows. In middle-income countries, the increase in international reserves has been associated with elevated private capital inflows, both in the aggregate and in the cross-section, and economies with a more open capital account have accumulated more reserves. We present an open economy model of financial crises that is consistent with these features. We show that optimal reserve management policy leans against the wind, raising gross private borrowing while improving the net foreign asset position and reducing exposure to crises. |
| Keywords: | Macroprudential policy;International reserves;Financial Crises;Gross capital flows |
| JEL: | E58 F31 F32 F34 F51 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14336 |
| By: | Mr. Giovanni Melina; Stefania Villa |
| Abstract: | This paper investigates the macroeconomic implications of the rising wave of investment in information and communication technology (ICT)—including AI-related hardware and software—in the U.S. economy. The analysis uses a structural macroeconomic model that treats ICT as a distinct type of capital and explores the degree to which ICT complements or substitutes for labor. The findings reveal three key insights. First, labor and ICT have historically been only moderately substitutable. Second, technological innovations that make it easier to turn ICT investment into productive capital act like demand shocks, boosting output and inflation. Third, given the uncertainty surrounding the interaction between AI-driven ICT capital and labor, the paper presents scenarios of possible trajectories for ICT investment under alternative assumptions. When ICT tends to complement labor, the economy experiences strong gains in output, but also inflationary pressure; the natural interest rate increases, requiring tighter monetary policy. Conversely, if ICT tends to replace labor, the same ICT investment path warrants a looser monetary policy stance. |
| Keywords: | Artificial Intelligence; Generative AI; ICT investment; Natural rate of interest; Monetary policy; DSGE modeling |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/224 |
| By: | Felix H\"ofer |
| Abstract: | We study a model of the Fiscal Theory of the Price Level (FTPL) in a Bewley-Huggett-Aiyagari framework with heterogeneous agents. The model is set in continuous time, and ex post heterogeneity arises due to idiosyncratic, uninsurable income shocks. Such models have a natural interpretation as mean-field games, introduced by Huang, Caines, and Malham\'e and by Lasry and Lions. We highlight this connection and discuss the existence and multiplicity of stationary equilibria in models with and without capital. Our focus is on the mathematical analysis, and we prove the existence of two equilibria in which the government runs constant primary deficits, which in turn implies the existence of multiple price levels. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.26065 |
| By: | Wang, Di; Wang, Xilin |
| Abstract: | This paper explores the dynamic effects of labor unions on economic growth and income inequality in a Schumpeterian growth model with heterogeneous households and endogenous market structure. Income inequality arises from an unequal distribution of wealth and heterogeneous labor productivity. In the short run, increasing union bargaining power reduces both growth and inequality when the union is wage-oriented. In the long run, stronger unions continue to lower inequality without affecting the steady-state growth rate. The model identifies the channels through which unions shape inequality: an income-share shift from asset income to labor income, wage compression, and changes in the wealth-wage correlation. Calibrating the model to U.S. data, we find that increasing union bargaining power significantly reduces long-run income inequality. |
| Keywords: | Labor unions; Economic growth; Income inequality; Endogenous market structure |
| JEL: | D30 J50 O30 O40 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125948 |
| By: | Jesús Bueren (European University Institute); Josep Pijoan-Mas (CEMFI, Centro de Estudios Monetarios y Financieros); Dante Amengual (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We study the effect of lifestyles on the education gradient of life expectancy. We use panel data on health behavior and health outcomes to estimate latent lifestyle types and their impact on health dynamics. We find that the higher frequency of health-protective lifestyles among the more educated individuals explains almost 1/2 of the education gradient in life expectancy. To understand lifestyle formation, we build a life cycle model where lifestyles and education are jointly chosen early in life. These two investments are complementary because of the more educated’s higher income and the higher yield of their health-protective behavior. Importantly, with these complementarities, individuals with lower costs of healthier lifestyles self-select into higher education. Quantitatively, we find the three mechanisms similarly important in explaining the correlation between education and healthy lifestyles. We also find that the increase in the college wage premium over the last decades has widened the education gradient in lifestyles, resulting in a one-year increase in the education gradient of life expectancy across cohorts born in the 1930s and 1970s. Of this increase, 40% is driven by the direct effect of wage changes and 60% by the induced changes in the composition of college graduates and high school dropouts. |
| Keywords: | Health inequality, healthy lifestyles, education, latent types. |
| JEL: | E21 D15 I12 I14 I24 C38 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cmf:wpaper:wp2025_2526 |