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on Dynamic General Equilibrium |
| By: | Giovanni Di Bartolomeo; Carolina Serpieri |
| Abstract: | Uncertainty is a challenge for monetary policy. This paper introduces local model uncertainty into a behavioral New Keynesian DSGE framework to derive robust optimal monetary policies. We consider two potential forms of agents' heterogeneity, which refer to two mechanisms of expectation formation used by a fraction of (boundedly rational) agents to generate their beliefs. In contrast, the rest of the population rationally forms its expectations. The central bank ignores the fraction of boundedly rational agents and the mechanism they use to form their expectations. Non-Bayesian robust control techniques are adopted to minimize a welfare loss derived from the second-order approximation of agents' utilities. |
| Keywords: | Brainard Principle; Monetary Policy; Bounded Rationality; Expectation Formation; Non-Bayesian Robust Control |
| JEL: | E52 E58 D84 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:sap:wpaper:wp261 |
| By: | Christian Scharrer (University of Augsburg, Department of Economics); Johannes Huber (University of Regensburg, Department of Economics) |
| Abstract: | We study the effects of different financing rules for untargeted energy price brakes and subsidies on intergenerationalwelfare in a large-scale overlapping generations model. The results indicate that, in comparison to a laissez-faire solution without any government interventions, debt-financed implementations of such measures are very detrimental for young and future generations. However, the taxation of windfall profits can significantly contribute to reduce the economic burdens of these generations, whereas the positive effects on older generations are much less pronounced. |
| Keywords: | Fiscal Policy, Price Brakes, Price Subsidies, Energy Crisis, Welfare |
| JEL: | E62 E30 H20 H30 |
| Date: | 2023–08 |
| URL: | https://d.repec.org/n?u=RePEc:aug:augsbe:346 |
| By: | Pubali Chakraborty (Bates College); Anand Chopra (University of Liverpool); Lalit Contractor (Ashoka University) |
| Abstract: | We study the implications of agricultural price support programs, which offer a minimum price predominantly to farmers of staple crops, and farm input price subsidies for consumer welfare and misallocation, measured as the productivity gap between agriculture and non-agriculture. We develop a dynamic general equilibrium model with heterogeneous agents, financial frictions and endogenous occupational sorting between two sectors: agriculture and non-agriculture, and two crops: staples and cash crops. The government procures staple crops at predetermined prices and distributes them as free rations while also subsidising farm inputs. The model is calibrated to match a mix of moments and quasi-experimental evidence pertaining to the Indian economy. Our results suggest that in the absence of the minimum support price policy, labour reallocates from the agriculture to the non-agriculture sector, slightly raising aggregate output and reducing misallocation. A reduction of the input price subsidy lowers agricultural and non-agricultural output and exacerbates misallocation. Policies that replace the support price or input subsidy programs with budget-equivalent income transfers improve welfare. |
| Keywords: | agriculture; general equi-librium; Heterogeneous Agents; input subsidies; misallocation; price support; welfare |
| Date: | 2024–09–10 |
| URL: | https://d.repec.org/n?u=RePEc:ash:wpaper:123 |
| By: | Yan Bai; Patrick J. Kehoe; Pierlauro Lopez; Fabrizio Perri |
| Abstract: | Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads' fluctuations. Over the whole 1994-2024 period, however, Northern shocks account for less than 20% of these fluctuations. |
| Keywords: | international business cycles; sovereign debt; default; long run risk; Epstein-Zin preferences; global banks; global cycles |
| JEL: | E32 F44 G15 H63 |
| Date: | 2025–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99613 |
| By: | Isabel Cairó; Hess T. Chung; Francesco Ferrante; Cristina Fuentes-Albero; Camilo Morales-Jimenez; Damjan Pfajfar |
| Abstract: | Standard macroeconomic models find it difficult to reconcile slow recoveries and missing disinflations after deep deteriorations in the labor market. We develop and estimate a New-Keynesian model with search and matching frictions in the labor market, endogenous intensive and extensive labor supply decisions, and financial frictions. We conclude that the estimated combination of a low degree of nominal wage rigidities and a high degree of real wage rigidities, together with a small role for pre-match costs relative to post-match costs, is key in successfully forecasting slow recoveries in unemployment and missing disinflations in the aftermath of recessions, such as the Great Recession. We find that data on endogenous labor supply decisions (participation and hours) are very informative about the relative degree of nominal and real wage rigidities and the slope of the Phillips curve. We also show that none of the model-based labor market gaps are a sufficient statistic of labor market slack, but all contain relevant information about the state of the economy summarized in a new indicator for labor market slack that we propose. |
| Keywords: | search and matching; labor supply; labor force participation; missing disinflation; Great Recession |
| JEL: | E32 J64 J20 E37 |
| Date: | 2025–03–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:99658 |
| By: | Ertl, Martin; Rabitsch, Katrin |
| Abstract: | We explore the natural rate of interest, shortly r*, in emerging economies. If economic growth originates from convergence, then growth, say, from technological progress will be lower than we find in the data and, hence, r* will be lower. Ignoring convergence upwardly biases our estimates of r*. We extend the New Keynesian small open economy model to incorporate convergence effects and estimate it using Bayesian techniques for four emerging economies in Central and Eastern Europe: Poland, Czech Republic, Hungary and Romania. Empirical evidence of the rapid catching-up of our sample economies during the period from 2003 to 2019 assists in specifying the model estimation. Our findings confirm a decline in r* over the past decades. Accounting for capital deepening reveals meaningful differences in estimated r*, with non-negligible implications for monetary policy in emerging economies. |
| Keywords: | natural rate of interest; convergence; New Keynesian DSGE model; Central and Eastern Europe |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:wiw:wus005:72533822 |
| By: | Martin Ertl (Institute for Advanced Studies, Vienna); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | We explore the natural rate of interest, shortly r*, in emerging economies. If economic growth originates from convergence, then growth, say, from technological progress will be lower than we find in the data and, hence, r* will be lower. Ignoring convergence upwardly biases our estimates of r*. We extend the New Keynesian small open economy model to incorporate convergence effects and estimate it using Bayesian techniques for four emerging economies in Central and Eastern Europe: Poland, Czech Republic, Hungary and Romania. Empirical evidence of the rapid catching-up of our sample economies during the period from 2003 to 2019 assists in specifying the model estimation. Our findings confirm a decline in r* over the past decades. Accounting for capital deepening reveals meaningful differences in estimated r*, with non-negligible implications for monetary policy in emerging economies. |
| Keywords: | natural rate of interest, convergence, New Keynesian DSGE model, Central and Eastern Europe |
| JEL: | E3 E4 E5 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp376 |
| By: | Moritz Kuhn; Iourii Manovskii; Xincheng Qiu |
| Abstract: | Spatial differences in labor market performance are large and highly persistent. Using data from the United States, Germany, and the United Kingdom, we document striking similarities across these countries in the spatial differences in unemployment, vacancies, and job filling, finding, and separation rates. The novel facts on the geography of vacancies and job filling are instrumental in guiding and disciplining the development of a theory of local labor market performance. We find that a spatial version of a Diamond-Mortensen-Pissarides model with endogenous separations and on-the-job search quantitatively accounts for all the documented empirical regularities. The model also quanitatively rationalizes why differences in job-separation rates have primary importance in inducing differences in unemployment across space while changes in the job-finding rate are the main driver in unemployment fluctuations over the business cycle. |
| Keywords: | Local Labor Markets, Unemployment, Vacancies, Search and Matching |
| JEL: | J63 J64 E24 E32 R13 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_609 |
| By: | César Urquizo Ubillús |
| Abstract: | This paper explores the effect of hours worked on lifetime earnings inequality, a factor often overshadowed by the focus of the literature on wages. I argue that hours dispersion arises from individuals with heterogenous learning ability and leisure preferences selecting into occupations that reward hours worked with future wage growth at different rates. Using empirical evidence, I demonstrate strong correlations between occupational wage growth, cognitive test scores, and hours worked. Informed by this evidence, I develop and calibrate a life-cycle model of endogenous labor supply and occupational choice to disentangle the role of leisure preferences and learning ability in explaining hours worked and earnings dispersion. I find that cognitive ability is responsible for about one fourth of the variance in log hours at age 23, and leisure preferences are responsible for the remaining three fourths. Despite its seemingly small contribution to hours dispersion, cognitive ability accounts for three times as much of the variance of earnings at age 55 (31%) compared to leisure preferences (10%). Finally, I look into the normative implications of these findings, showing that when incorporating learning ability as a driver of hours dispersion, increases in tax progressivity are more effective at reducing inequality and less costly in terms of lifetime welfare. |
| Keywords: | Labor Supply, Occupational Choice, Life Cycle, Inequality |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:apc:wpaper:208 |
| By: | Qazi Haque; Oscar Pavlov; Mark Weder |
| 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 |
| JEL: | E32 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-20 |
| By: | Marco Del Negro; Ibrahima Diagne; Keshav Dogra; Pranay Gundam; Donggyu Lee; Brian Pacula |
| Abstract: | We use an estimated medium-scale HANK model to investigate how the tradeoff between stabilizing inflation and consumption volatility varies for households with different levels of wealth. Consumption for the rich is mostly affected by demand shocks via their exposure to highly procyclical profits—for them, stabilizing consumption and inflation coincide. The poor are more vulnerable to supply shocks, hence aggressively stabilizing inflation is costly in terms of their consumption volatility. While they dislike inflation because it erodes real wages, they are hurt even more by an aggressive monetary policy response to inflation, which reduces real wages further while increasing unemployment. |
| Keywords: | inflation; inequality; monetary policy; HANK model |
| JEL: | E12 E31 E52 E58 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:99759 |
| By: | Andrea Chiavari; Sampreet Singh Goraya |
| Abstract: | We document a technological change in production technology biased towards intangible capital, such as computerized information and software, over other inputs in the last three decades. This has led to higher investment adjustment costs for firms. A general equilibrium firm dynamics model suggests that this can result in (i) increased firm size and concentration, (ii) changes in aggregate factor shares, and (iii) rise in dispersion of total factor productivity revenue coupled with declining aggregate productivity. This paper provides an alternative mechanism behind these macroeconomic changes in the US economy, emphasizing the efficient response of firms to changes in production technology. |
| Date: | 2025–04–08 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1078 |
| By: | Bilbiie, F. O.; Galaasen, S. M.; Gurkayna, R. S.; Maehlum, M.; Molnar, K |
| Abstract: | HANK Sufficient Statistics Out of Norway (HANKSSON) answers a core question of the heterogeneity in macroeconomics literature: does heterogeneity amplify the aggregate effects of demand policies and shocks? We provide two sufficient statistics (SS) and test them using individual-level matched data for personal characteristics, income, wealth and non-imputed, actual consumption for the Norwegian population. The first SS gauges whether heterogeneity drives a wedge between the (representative agent) average MPC and a model-consistent (heterogeneous agent) aggregate MPC. The second SS elicits whether the consumption of constrained, "hand-to-mouth, " agents is more exposed to aggregate fluctuations. Our key finding is that to analyze aggregate behavior, one does not need to keep track of heterogeneity: the average and the aggregate are about the same. We show that the amplification result currently prevalent in the literature is due to using labor earnings and is overturned when using model-consistent disposable income. This is due to the strong insurance effect of taxes and transfers; when applied to our data, even the much less progressive US tax and transfer system produces no amplification due to heterogeneity. The same “close to irrelevance†conclusion arises based on the second statistic using consumption data directly. Not even during the Great Recession do we see heterogeneity contribute meaningfully to demand shock amplification. |
| Date: | 2025–03–28 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2516 |
| By: | Emmanuelle Augeraud-Véron; Giorgio Fabbri |
| Abstract: | This paper presents a macrodynamic model to examine economic insecurity, incorporating the effects of habit formation on consumption and investment decisions in the face of stochastic economic shocks. We extend the existing literature by formulating an intertemporal optimization framework in which agents face Poisson-type shocks and exhibit finite memory regarding their consumption habits. Our model quantifies economic insecurity through the optimal willingness to pay to reduce the intensity of these shocks, linking it, on the one hand, to macroeconomic parameters such as productivity and accumulated wealth, and on the other, to preferences and habit formation parameters. Key findings reveal that consumption habits significantly affect economic insecurity, which, ceteris paribus, is higher in contexts where habits are stronger, more persistent, and where habit memory is longer. Insecurity is also more pronounced when the same level of wealth is associated with a higher level of habitual consumption. At the same time, economic insecurity increases with longer expected recovery times from shocks, underscoring the role of past financial behavior and wealth accumulation as buffers against economic uncertainty. The model also enables an analysis of how shocks impact resource allocation, distinguishing agents’ efforts to hedge against future shocks from their investments in productive activities. This distinction allows the model to reproduce more realistic investment dynamics compared to frameworks where precautionary saving primarily drives increases in aggregate investment. From a technical perspective, to the best of our knowledge, we present the first fully solved optimal control problem derived from a dynamic economic model with forwardlooking agents, finite memory (and thus a state equation with delay), and a Poisson process. |
| Keywords: | Economic Insecurity, Consumption Habits, Intertemporal Optimization, Precautionary Savings, Poisson Economic Shocks, Mitigation Effort |
| JEL: | D81 E21 D14 C61 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:gbl:wpaper:2025-03 |
| By: | Jang, Tae-Seok; Sacht, Stephen |
| Abstract: | Contrary to claims in studies on financial economics, a sparse database often obscures the identification of parameters in macroeconomic models. These identification problems originate from the poorly defined mapping between a structural model and reduced-form parameters. Hence, researchers rely on prominent estimation methods, such as Bayesian approaches, which require sound knowledge of prior distributions on parameters. These approaches, however, are characterized by a flat likelihood and/or a posterior distribution driven mainly by prior information. To alleviate identification issues, we apply approximate Bayesian computation combined with the choice of specific moment conditions. This estimation approach not only allows for circumventing high dimensional likelihood functions but also avoids parameter identification problems given the use of a bootstrap method. Our estimation method is successfully applied to a hybrid version of the New Keynesian model. |
| Abstract: | Entgegen den Behauptungen in Studien zur Finanzökonomie erschwert eine spärliche Datenbasis oft die Identifizierung von Parametern in makroökonomischen Modellen. Diese Identifizierungsprobleme entstehen durch die schlecht definierte Abbildung zwischen einem strukturellen Modell und dessen Parametern in reduzierter Form. Daher greifen Forscher auf bekannte Methoden wie die Bayesianische Schätzung zurück, die eine fundierte Kenntnis der a-priori-Verteilungen der Parameter erfordert. Solche Ansätze zeichnen sich jedoch durch eine flache Likelihood-Verteilung und/oder eine, hauptsächlich durch a-priori-Informationen getriebene, posteriore Verteilung aus. Um Identifizierungsprobleme zu mildern, verwenden wir in diese Studie die Approximative Bayesianische Berechnungsmethode in Kombination mit der Wahl spezifischer Momente-Bedingungen. Dieser Schätzansatz ermöglicht nicht nur die Umgehung hochdimensionaler Likelihood-Funktionen, sondern vermeidet durch die Verwendung einer Bootstrap-Methode auch Probleme bei der Parameteridentifizierung. Unsere Schätzmethode wird erfolgreich auf eine hybride Version des Neukeynesianischen Modells angewendet. |
| Keywords: | Approximate Bayesian Computation, Identification, Moment Conditions, New-Keynesian model |
| JEL: | C11 C14 E12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hwwiwp:315485 |
| By: | Ernest Liu (Princeton University); Yukun Liu (Rochester University); Vladimir Smirnyagin (University of Virginia); Aleh Tsyvinski (Yale University) |
| Abstract: | We study the impact of supply chain disruptions on U.S. firms based on the universe of seaborne shipment-level import transactions from 2013 to 2023. The granularity of the data allows us to build an index of firm-level disruptions of international suppliers and introduce a comprehensive set of stylized facts for supply chain relationships in the cross-section of firms. We build a general equilibrium heterogeneous firms model with two types of capital stocksÑphysical and international supplier capitals. Accumulation of supplier capital is an important endogenous margin of adjustment, and limiting this ability substantially delays recovery, especially in financially constrained firms. |
| Date: | 2024–02–13 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2402r1 |