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on Dynamic General Equilibrium |
| By: | Foroni, Claudia; Gelain, Paolo; Marcellino, Massimiliano; Lorusso, Marco |
| Abstract: | We quantify the effect of severe weather shocks on the US economy in an environment in which the economy can switch between periods of financial stability and financial instability, like the Great Recession. We estimate a New Keynesian dynamic stochastic general equilibrium model with banks and severe weather events. We show that severe weather shocks: 1) have a negative impact on real and financial US variables, sizable only in periods of financial instability, but muted effects on nominal variables; 2) are never a relevant source of business cycles fluctuations; 3) transmit mainly via a deterioration in the quality of capital. JEL Classification: Q54, E32, E44 |
| Keywords: | actuaries climate index, financial frictions, Markov switching, NK DSGE models, severe weather shocks |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263211 |
| By: | Joshua K. Hausman; John V. Leahy; John Mondragon; Johannes Wieland |
| Abstract: | Nominal interest rates have real effects. Residential mortgages and other real world debt contracts require a sequence of constant nominal payments. Combined with payment-to-income constraints, these nominal payments force borrowers to take on less debt when nominal interest rates rise, regardless of the behavior of the real interest rate. Survey data shows that conditional on the real rate, higher nominal mortgage interest rates reduce home buying sentiment. And increases in nominal mortgage rates reduce mortgage origination more in cities where payment-to-income constraints are more likely to bind. We explore the macroeconomic implications of payment-to-income constraints in a new Keynesian model modified to include a credit good. The payment-to-income constraint amplifies the effect of current short-term nominal interest rates on output and inflation, making the model less forward-looking than the standard new Keynesian model. |
| JEL: | E4 E50 G21 R21 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35033 |
| By: | Nils M. Gornemann; Eugenio Rojas; Felipe Saffie |
| Abstract: | Does global financial risk affect long-run growth? Using a panel state-space model for emerging and advanced small open economies, we measure the effects of U.S. monetary policy uncertainty shocks. A one-standard-deviation shock lowers the level of the stochastic trend in emerging markets by at least 25 basis points after three years, with little effect in advanced economies. A small open economy model with growth through innovation and occasionally binding borrowing constraints explains this heterogeneity: higher interest-rate volatility depresses valuations, tightens collateral constraints, and slows innovation in equilibrium. A novel interaction between the occasionally binding constraint and stochastic volatility is key for our results. |
| Keywords: | Emerging market economies (EME); Dynamic stochastic general equilibrium (DSGE) models; Monetary policy; Productivity; Volatility |
| JEL: | F32 F41 G15 O16 |
| Date: | 2026–03–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:102989 |
| By: | Darracq Pariès, Matthieu; Jouvanceau, Valentin; Eyquem, Aurélien |
| Abstract: | We study how trade wars propagate to countries that are not directly targeted. We develop a three-country New Keynesian model with trade in final and intermediate goods, incomplete asset markets, and asymmetric monetary regimes, and quantify the spillovers of the 2025 U.S.-China tariff escalation to the euro area. A bilateral U.S.-China trade war generates large and asymmetric welfare losses for the U.S. and China, while the euro area benefits temporarily from trade diversion. Once tariffs extend to euro-area goods, third-country welfare flips into losses and the Chinese downturn deepens. Welfare-maximizing retaliatory tariffs by the euro area deliver only modest domestic improvements, at the cost of large additional losses for the U.S. and China. Overall, the global incidence of trade policy is intrinsically multilateral: third-country gains under bilateral protectionism are short-lived, reverse once protection broadens, and cannot be inferred from two-country analysis. JEL Classification: F30, F40, F41 |
| Keywords: | protectionism, third-country effects, trade wars |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263213 |
| By: | Lutz Hendricks; Tatyana Koreshkova; Oksana Leukhina |
| Abstract: | This paper studies the effects of expanding high-quality public university capacities on student earnings and welfare. Using a quantitative model of college choice, we find that expanding the most selective colleges by 20 percent increases aggregate earnings by 0.8 percent and welfare by 2 percent. The gains arise because a large number of high-ability students are rationed out of selective colleges. When admitted, these students graduate at high rates and enjoy substantial earnings gains. The earnings gains generated by expanding college capacity are eight times larger than the fiscal cost of financing it. These findings remain robust when we account for peer effects in learning and general equilibrium changes in the college wage premium. |
| Keywords: | college quality; human capital; public finance of higher education |
| JEL: | J24 |
| Date: | 2026–03–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:102965 |
| By: | Yoshitaka Ogisu (Faculty of Economics, Konan University and Research Institute for Economics & Business Administration, Kobe University, JAPAN) |
| Abstract: | Referral hiring has a similar nature to unemployment insurance. An additional channel provided by referrals can shorten workers' unemployment duration due to the increase in the matching probability. Accordingly, referral hiring has the potential to contribute to the business cycle stability. This study examines to what extent referrals affect cyclical properties of the business cycle. Using two representative models with referral processes, I propose a comparison of the dynamics between models with and without referrals. From the impulse response to a productivity shock, it is found that referral hiring does not necessarily reduce the business cycle fluctuations. The key structure leading to the result is whether the referral process passes through the labor market, in particular, there are significant shifts in the dynamics of the unemployment rate. |
| Keywords: | Referral hiring; Business cycle; Unemployment |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2026-12 |
| By: | Dong Cheng; Mario J. Crucini; Hanjo T. Kim |
| Abstract: | Aggregate real U.S. GDP fell by roughly 26 percent between 1929 and 1932, yet the severity of the Great Depression varied dramatically across states: CPI-deflated income per capita declined by 15 percent in Maryland but by 48 percent in South Dakota. To analyze this heterogeneity, we digitize Slaughter’s (1937) panel of state-by-sector production income for all 48 U.S. states and construct a novel set of sector- and state-specific deflators, allowing us to separate movements in physical quantities produced from the large relative price changes that occurred during the Great Depression. We then discipline a three-sector, 48-region dynamic spatial stochastic general equilibrium model and recover sequences of sector-state productivity shocks that exactly reproduce the observed sector-state quantity paths. The choice of deflators proves central, as correct deflation shifts the aggregate contraction away from agriculture and toward manufacturing while preserving idiosyncratic income variation across agricultural-dependent states. We further show that narratives based on common or even sector-specific shocks are inconsistent with the observed evolutions of state-level quantities and relative prices. Explaining the geography of the Great Depression therefore requires a high-dimensional sector-state shock structure. |
| JEL: | E32 F44 N12 R13 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35028 |
| By: | Lutz Kilian; Michael D. Plante; Alexander W. Richter; Xiaoqing Zhou |
| Abstract: | This paper shows how to assess the inflationary impact of the rise in the price of oil caused by the 2026 Iran War. We first generate projections of the quarterly price of oil from a calibrated DSGE model of the global economy under a range of scenarios and then incorporate these projections into a monthly VAR model of the impact of U.S. gasoline price shocks on inflation and inflation expectations. Our analysis speaks to the magnitude and persistence of the impact of higher oil prices on headline and core PCE inflation and on household inflation expectations. |
| Keywords: | geopolitical risk; rare disasters; oil prices; gas prices; inflation; structural VAR |
| JEL: | C54 E31 E37 Q43 |
| Date: | 2026–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103008 |
| By: | Aguilar, Pablo; Darracq Pariès, Matthieu; Jouvanceau, Valentin; Meunier, Baptiste; Spital, Tajda |
| Abstract: | In April and in October 2025 China imposed export controls on rare earths amid escalating trade tensions with the United States. Although these measures were too short-lived to generate macroeconomic effects, they signalled China’s ability to draw on its dominant position in the rare earth supply chain. This paper provides a structured assessment of the potential macroeconomic consequences associated with rare earth supply disruptions. First, it documents that exposure to rare earth supply disruptions is concentrated in high-tech and security-sensitive sectors including automotive, electronics and defence-related industries. Second, drawing on earlier episodes of Chinese export restrictions on critical minerals (notably in 2010 and 2023), it highlights two key mitigating forces from the targeted countries’ perspective: practical and strategic constraints on China’s ability to implement strict export bans, and innovation-led substitution by targeted countries. Third, the paper quantifies the global macroeconomic implications of a hypothetical scenario of stringent but partial Chinese export restrictions on rare earths lasting for 18 months. To do so, the analysis combines, for the various segments of the transmission chain, a partial equilibrium setup, a closed-economy DSGE model, and the multi-country multi-sector dynamic model of Aguilar et al. (2026). The main results, across specifications, suggest estimated output losses for the United States ranging between 0.3% and 0.6%, with the largest impacts concentrated in automotive and electronics manufacturing. The results at the same time highlight the sensitivity of model-based estimates to assumptions on the substitutability of rare earths and the severity of restrictions. JEL Classification: F13, F17, C63, C68, Q37 |
| Keywords: | critical minerals, export ban, export restrictions, supply chain, trade modelling |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2026384 |