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on Dynamic General Equilibrium |
| By: | Patrick Gruning (Latvijas Banka) |
| Abstract: | During the recent monetary policy tightening cycle, the pass-through of monetary policy to interest rates offered by commercial banks and the size of bank profits have attracted substantial attention. In this study, I explore the economic effects of reducing the adjustment speed of monetary policy changes to deposit interest rates, using a suitable New-Keynesian dynamic stochastic general equilibrium model. A lower deposit interest rate adjustment speed increases macroeconomic volatility but decreases the volatility of the credit spread (except in the case of a very low adjustment speed). Bank net interest income and aggregate consumption typically increase relative to a model where the deposit interest rate perfectly tracks the monetary policy rate, while aggregate output and investment dynamics deteriorate. Introducing a tax on the interest income earned by setting deposit interest rates below the monetary policy rate leads to amplified short- and medium-run macroeconomic costs. However, the tax improves long-run economic dynamics. |
| Keywords: | Monetary policy, Financial intermediaries, Deposit interest rates, New Keynesian DSGE model, Excess bank interest income tax |
| JEL: | E31 E32 E44 E52 H25 |
| Date: | 2025–08–18 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202505 |
| By: | Fabio Milani |
| Abstract: | This paper estimates a New Keynesian model with heterogeneous agents to study the interactions among monetary policy, macroeconomic shocks, and the distribution of income between capital and labor. The model assumes two types of households: workers, who supply labor to firms and receive wage income, and capitalists, who own the firms and enjoy the corresponding profits. There are nominal rigidities in both the goods and labor markets. The structural model is estimated using Bayesian methods to match U.S. data on consumption, corporate profits, wages, inflation, and nominal interest rates, on a sample spanning more than six decades. The empirical results show that contractionary monetary policy and inflationary price-markup shocks lead to increases in inequality. Negative wage markup shocks, which proxy for declining workers' bargaining power, are major drivers of peaks in inequality over the sample; together with price markup shocks, they also account for a significant share of the changes in inequality after COVID. |
| Keywords: | Heterogeneous-Agent New Keynesian model, income distribution between capital and labor, monetary policy and inequality, inflation and inequality. |
| JEL: | E25 E31 E32 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12065 |
| By: | Bellifemine, Marco; Couturier, Adrien; Jamilov, Rustam |
| Abstract: | This paper develops a multi-country Heterogeneous-Agent New Keynesian (HANK) model of a monetary union with ex-ante heterogeneity in legacy public debt across member states. We calibrate the model to the euro area and show that, following symmetric aggregate shocks, the systematic monetary policy reaction induces heterogeneous national outcomes, driven by differences in fiscal space. This generates a trade-off between union-wide macroeconomic stabilization and cross-country synchronization of economic activity for the central bank. We characterize a possibility frontier between union-wide inflation stability and cross-country synchronization, which is traced out by varying the degree of the central bank's hawkishness towards inflation. We study the role of deficit caps, fiscal and political unions, and augmented Taylor rules as instruments to navigate the stabilization–synchronization trade-off. |
| Keywords: | fiscal space; fiscal union; heterogeneous agents; monetary union |
| JEL: | E52 F41 F42 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128186 |
| By: | Maximiliano San Millán |
| Abstract: | We examine the cross-border effects of bank capital requirements using a two-country DSGE model with financial frictions, calibrated to match Euro Area banking flows. Regulation follows a host country principle, applying uniformly to all bank exposures within a country, regardless of the banks' nationality. We find that increasing capital requirements in one country leads to a short run credit contraction in interconnected countries. However, long run credit spillovers are negligible. Instead, we find positive long run welfare spillovers, primarily due to higher bank dividend payouts to foreign bank owners, rather than increased financial stability in the foreign country. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1046 |
| By: | Lydia Cox; Jiacheng Feng; Gernot J. Müller; Ernesto Pastén; Raphael Schoenle; Michael Weber |
| Abstract: | The jointly optimal monetary and fiscal policy mix in a multi-sector New Keynesian model with sectoral government spending and productivity shocks entails a separation of roles: Sectoral government spending optimally adjusts to sectoral output gaps and inflation rates—a policy supported by evidence from sectoral federal procurement data. Monetary policy optimally focuses on aggregate stabilization, but deviates from a zero-inflation target; in a model calibration to the U.S., however, it effectively approximates a zero-inflation target. Because monetary policy is a blunt instrument and government spending trades off stabilization against the optimal-level public good provision, the first best is not achieved. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1024 |
| By: | Ngoc-Sang Pham; Alexis Akira Toda |
| Abstract: | Tirole (1985) studied an overlapping generations model with capital accumulation and showed that the emergence of asset bubbles solves the capital over-accumulation problem. His Proposition 1(c) claims that if the dividend growth rate is above the bubbleless interest rate (the steady-state interest rate in the Diamond economy without bubbles) but below the population growth rate, then bubbles are necessary in the sense that there exists no bubbleless equilibrium but there exists a unique bubbly equilibrium. We provide a counterexample to this claim based on an analytical example but prove the claim under the additional assumptions that initial capital is sufficiently large and dividends are sufficiently small. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.12477 |
| By: | Cristiano Cantore; Haroon Mumtaz; Filippo Ferroni; Angeliki Theophilopoulou |
| Abstract: | We study the interaction between monetary policy and labor supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong counter-cyclicality of hours worked in the left tail of the income distribution following a monetary policy shock in the U.S. Specifically, while aggregate hours and labor earnings decline after a monetary tightening, individuals at the bottom of the income distribution increase their hours worked. Moreover, this positive labor supply response is quantitatively significant, substantially dampening the decline in aggregate hours worked. We show that the empirical patterns are consistent with a standard one-asset HANK model featuring endogenous labor supply. The model reveals that strong income effects at the bottom of the distribution can account for the observed countercyclical labor responses, highlighting how labor supply adjustments act as an additional margin through which households smooth consumption. Comparing this specification to a model with a homogeneous labor supply, we find that labor supply heterogeneity reduces the aggregate MPC and attenuates the transmission of monetary policy through aggregate demand. As a result, the output cost of disinflation is lower in economies where poorer households can flexibly adjust their labor effort, easing the trade-off faced by the central bank. |
| JEL: | E52 E32 C10 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bol:bodewp:wp1210 |
| By: | Peter Karadi; Anton Nakov; Galo Nuño; Ernesto Pastén; Dominik Thaler |
| Abstract: | We study the Ramsey optimal monetary policy within the Golosov and Lucas (2007) state-dependent pricing framework. The model provides micro-foundations for a nonlinear Phillips curve: the sensitivity of inflation to activity increases after large shocks due to an endogenous rise in the frequency of price changes, as observed during the recent inflation surge. In response to large costpush shocks, optimal policy leverages the lower sacrifice ratio to reduce inflation and stabilize the frequency of price adjustments. When facing total factor productivity shocks, an efficient disturbance, the optimal policy commits to strict price stability, similar to the prescription in the standard Calvo (1983) model. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1025 |
| By: | Achim Hagen; Gilbert Kollenbach |
| Abstract: | We study the interaction of climate policies and investments into fossil and renewable energy generation capacity under political uncertainty caused by democratic elections. We develop an overlapping generations model, where elected governments determine carbon taxation and green investment subsidies, and individuals make investments into fossil and renewable capacity. We find that some fossil investments become stranded assets if the party offering the higher carbon tax is unexpectedly elected. Green investment subsidies can be used by governments to bind the hands of their successor. By using the subsidy, the party in power can influence the capital stocks and, therefore, the climate policy of the following period to reduce or even avoid potentially stranded assets. With endogenous reelection probability, the impact on the capital stocks can also be used strategically to manipulate the reelection probabilities in favor of the party in power. |
| Keywords: | stranded assets, elections, fossil fuel, renewable energy, carbon tax, investment subsidy |
| JEL: | D72 H23 Q54 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12063 |
| By: | George Economides; Jim Malley; Apostolis Philippopoulos; Anastasios Rizos |
| Abstract: | This paper examines the long-term macroeconomic impacts of Brexit on the UK economy employing a dynamic general equilibrium model that incorporates endogenous firm entry, price markups and market competition. By integrating the trade frictions introduced by Brexit, the model explains how increased trade costs have altered firm behaviour, market structure, and broader economic performance. We assess a range of policy responses, from theoretically optimal but practically difficult tax-subsidy schemes, to more realistic measures aimed at reducing firm entry barriers, encouraging private and public investment, and subsidising labour costs. Our findings underscore the critical role of policies that can most directly influence firm creation, investment, and competition in addressing the structural challenges Brexit has introduced. |
| Keywords: | Brexit, investment, fiscal and industrial policy |
| JEL: | E65 E22 E61 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12076 |
| By: | Hanfeng Chen; Maria Elena Filippin |
| Abstract: | We study the implications of a central bank digital currency (CBDC) for the transmission of household preference shocks and for welfare in a New Keynesian framework where the CBDC competes with bank deposits for household resources and banks have market power. We show that an increase in the benefit of CBDC has a mildly expansionary effect, weakening bank market power and significantly reducing the deposit spread. As households economize on liquid asset holdings, they reduce both CBDC and deposit balances. However, the degree of bank disintermediation is low, as deposit outflows remain modest. We then examine the welfare implications of CBDC rate setting and find that, compared to a non-interest-bearing CBDC, the gains with standard coefficients for a CBDC interest rate Taylor rule are modest, but they become considerable when the coefficients are optimized. Welfare gains are higher when the CBDC provides a higher benefit. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.15048 |
| By: | Caunedo, Julieta; Felix, Mayara; Manysheva, Kristina |
| Abstract: | The study examines how labor market shocks originating in non-agriculture affect the organization of agricultural production. Using data from Brazil between 1986 and 2017, it shows that the entry of large non-agricultural firms leads to persistent increases in local wages, declines in agricultural employment, and a shift toward more capital-intensive farming. Farms consolidate, the number of small operations declines, and mechanization increases. To study the magnitude of this reorganization, we develop a general equilibrium model which predicts that a reduction in entry costs in non-agriculture leads to labor reallocation out of agriculture, farm exit, and capital deepening. When we hold mechanization fixed, these adjustments are substantially attenuated, highlighting the role of endogenous technology adoption as an important amplification mechanism. |
| Keywords: | Agricultura, Economía, |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:dbl:dblwop:2516 |
| By: | Benjamin Moll |
| Abstract: | The thesis of this essay is that, in heterogeneous agent macroeconomics, the assumption of rational expectations about equilibrium prices is unrealistic and should be replaced. Rational expectations imply that decision makers forecast equilibrium prices like interest rates by forecasting cross-sectional distributions. This leads to an extreme version of the curse of dimensionality: dynamic programming problems in which the entire distribution is a state variable ("Master equation" a.k.a. "Monster equation"). Frontier computational methods struggle with these infinite-dimensional Bellman equations, making it implausible that real-world agents solve the associated decision problems. These difficulties also limit the applicability of the heterogeneous-agent approach to central questions in macroeconomics -- those involving aggregate risk and non-linearities such as financial crises. This troublesome feature of the rational expectations assumption poses a challenge: what should replace it? I outline three criteria for alternative approaches: (1) computational tractability, (2) consistency with empirical evidence, and (3) (some) immunity to the Lucas critique. I then discuss several promising directions, including temporary equilibrium approaches, incorporating survey expectations, least-squares learning, and reinforcement learning. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.20571 |
| By: | Labrousse, Charles; Perdereau, Yann |
| Abstract: | The distributive effects of carbon taxation are critical for its political acceptability and depend on both income and geographic factors. Using French administrative data, household surveys, and matched employer-employee records, we document that rural households spend 2.8 times more on fossil fuels than urban households and are employed in firms that emit 2.7 times more greenhouse gases. We incorporate these insights into a spatial heterogeneous-agent model with endogenous migration and wealth accumulation, linking spatial and macroeconomic approaches. After an increase in carbon taxes, we quantify that rural households face 20% higher welfare losses than urban households. In an optimal revenue-recycling exercise, we compare transfers targeting income and geography, and show that neglecting for geography reduces welfare gains by 7%. We conclude that carbon policies should account for spatial differences to improve political feasibility. JEL Classification: C61, E62, H23, Q43, Q58, R13 |
| Keywords: | carbon tax, inequalities, migration, revenue recycling, spatial and macroeconomic models |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253104 |
| By: | Ko Adachi (Bank of Japan); Naoya Kato (Bank of Japan) |
| Abstract: | This paper empirically examines the second-round effect of raw material price increases using a DSGE model. Specifically, it explores how price increases driven by rising raw material costs spill over into wages, which then feed back into prices. The analysis focuses on Japan and Europe, which share similar structures in terms of raw material inputs. The results show that the first-round effect, which captures the pass-through of rising raw material costs to prices, is slower in Japan than in Europe. On the other hand, the second-round effect through wages is gradual but persistent in both Japan and Europe. Furthermore, during the period of high inflation since 2020, the first-round effect of higher raw material costs was the main driver of inflation in both Japan and Europe, while the second-round effect contributed to the persistence of inflation. The paper also suggests that the recent changes in wage rigidity in Japan may have strengthened the second-round effect. |
| Keywords: | Wages; Prices; Second-Round Effects; DSGE Model |
| JEL: | E17 E31 J30 |
| Date: | 2025–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp25e10 |
| By: | Ying Chao; Benjamin Griffy; David Wiczer |
| Abstract: | In the United States, workers whose past earnings were below a threshold are generally ineligible for unemployment insurance (UI), creating a discontinuous jump in the value of being unemployed. Using a regression discontinuity design with administrative panel data, we estimate a sizable local effect from UI eligibility on earnings in the next employer, around 10 percent per quarter. This evidence, however, understates UI’s causal effect because of endogenous non-compliance. It also does not distinguish between underlying reasons for higher re-employment earnings, a higher share of production, or more productive matches. These are addressed through a quantitative model. The underlying causal effect is 50 percent higher than the empirical estimates, and nearly all of the effect comes from workers getting a larger share. |
| Keywords: | unemployment insurance; directed search; earnings |
| JEL: | E24 E30 J62 J63 J64 |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:101516 |
| By: | Capelle, Damien; Pellegrino, Bruno |
| Abstract: | We use a dynamic spatial general equilibrium model of international investment and production to in vestigate the real implications of the last five decades of financial globalization. We introduce a wedge accounting framework to estimate country- and time-varying measures of outward and inward Revealed Capital Account Openness (RKO). We show how to identify these wedges for a large panel of countries using limited publicly available data on national accounts and external asset and liability po- sitions since the 1970s. Our analysis reveals striking cross-country differences in the pace and direction of financial account opening: wealthier countries have become relatively more open to foreign capital inflows, while poorer countries have become relatively more open to capital outflows, a phenomenon we call "Unbalanced Financial Globalization." Counterfactual simulations show that this unbalanced financial globalization has worsened capital allocation, resulting in a 5.9% decrease in world GDP, a 3.4% rise in cross-country income inequality, lower wages in poorer countries, and a decline in rates of return on capital in richer countries. In contrast, if financial account opening had been uniform, the improved allocation of capital would have reduced income inequality, and increased global GDP. These findings underscore the crucial role of spatial heterogeneity in shaping the real impact of international capital markets integration. |
| Keywords: | capital flows, capital allocation, globalization, international finance, open economy |
| JEL: | F2 F3 F4 F6 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cbscwp:324648 |