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on Dynamic General Equilibrium |
| By: | William L. Gamber |
| Abstract: | I study how fluctuations in business formation and destruction affect inflation and the transmission of monetary policy. To do this analysis, I extend a New Keynesian model to include endogenous business formation and destruction and heterogeneous producers. A decline in the number of producers puts upward pressure on inflation, and I find that this mechanism can explain about half of the missing deflation following the Great Recession. I then study the transmission of monetary policy in this framework. I show that endogenous fluctuations in entry generate an intertemporal trade-off in monetary policy; a contractionary shock leads employment and inflation to decline on impact, but inflation later overshoots, as the shock also causes a decline in entry and an increase in exit. |
| Keywords: | Dynamic stochastic general equilibrium (DSGE) models; Monetary policy transmission; Business formation |
| JEL: | E52 L11 |
| Date: | 2026–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:102373 |
| By: | Gordon Anderson (Institute for Fiscal Studies) |
| Date: | 2026–01–20 |
| URL: | https://d.repec.org/n?u=RePEc:ifs:ifsewp:26/08 |
| By: | Mohamed Safouane Ben Aıssa (University of Tunis ElManar); Firas Nfikha (University of Tunis ElManar) |
| Abstract: | We evaluate the transmission of monetary policy in an economy characterized by heterogeneous households and a sizable informal sector. We construct a consumption-based measure of informality at the household level which we use to estimate the Informality Engel Curve. The results are then reproduced endogenously in a dual-sector Heterogeneous Agent New Keynesian (HANK) Model. We test the effects of informality across different model specifications and at different informal sector sizes and then estimate the model’s dynamics for the Tunisian economy using the Bayesian method in a novel framework. Our results reveal that: (i) Monetary shocks from our HANK model are stronger and more effective, in terms of sacrifice ratio, than in other specifications, but within our model, the prevalence of informality dampens transmission and increases its cost. (ii) Accounting for informality doesn’t appear to undermine the transmission of monetary shocks in Tunisia but restrictive policy favors the expansion of the informal sector and affects informal workers the least. (iii) Wealth remains the primary factor influencing household responses to monetary shocks, but employment status is particularly significant among lower-wealth households. |
| Date: | 2025–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:erg:wpaper:1820 |
| By: | Ṣebnem Kalemli-Özcan; Can Soylu; Muhammed A. Yildirim |
| Abstract: | We analyze how tariff uncertainty affects exchange rates, motivated by the U.S. dollar’s depreciation after the 2025 tariff announcements. Standard macro-trade models predict that unilateral tariffs appreciate the implementing country’s currency, but we show this result can be overturned by policy uncertainty. We build a two-country general equilibrium model with risk-averse agents and segmented financial markets, where tariff volatility enters uncovered interest parity through a risk-premium wedge. Higher tariff uncertainty increases precautionary savings and risk premia, leading to immediate currency depreciation even as tariffs rise. Quantitatively, the model replicates the size and timing of the observed dollar depreciation episode dynamics. |
| JEL: | E0 F3 F40 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34728 |
| By: | Joseph Abadi (Federal Reserve Bank of Philadelphia); Jesús Fernández-Villaverde (University of Pennsylvania, NBER, and CEPR); Daniel Sanches (Federal Reserve Bank of Philadelphia) |
| Abstract: | We present a micro-founded monetary model of the world economy to study international currency competition. Our model features “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the international monetary system’s dynamics under several counterfactual scenarios. |
| Keywords: | Dominant currency, international monetary system, strategic complementarities, history dependence |
| JEL: | E42 E58 G21 |
| Date: | 2026–01–28 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:26-003 |
| By: | Christopher Phelan |
| Abstract: | This paper explores the effects of one nation's taxation of consumption on the welfare of future generations of other countries. To do this, it presents an otherwise standard one-good, two-country optimal growth model with free capital markets, but where each date represents the lifetime of a generation which cares not only about its own consumption and leisure, but also that of its descendants. Relative to a no tax benchmark, a policy of one country taxing consumption of its initial generations has ambiguous welfare effects for future generations of the other country, as long as those future generations are not too far in the future. Higher initial savings in the first country raises capital levels, and thus wages, in both countries, raising welfare of future generations in the second country, but also induces lower bequests in the second country, lowering the welfare of its future generations. In the long run, or for generations born near the steady state, the welfare effects of the first country inducing lower consumption of its initial generations are unambiguous: future generations of the second country are made worse off. Households born in the second country will regret that their ancestors allowed such policy-induced intertemporal trade. |
| JEL: | D31 E62 F60 H2 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34740 |
| By: | Serdar Birinci; Miguel Faria-e-Castro; Kurt See |
| Abstract: | We use an overlapping-generations model with incomplete markets and a frictional labor market to study how assumptions about agents’ expectations of changes in returns to wealth affect labor supply and retirement decisions. Focusing on 2020–23, when returns fluctuated sharply and retirements rose above trend, we find that when individuals internalize the dependence of returns on wealth and view changes in returns as persistent, the model generates counterfactual labor-market outcomes. Retirements fall because expectations of persistently high returns boost labor supply, outweighing wealth effects, and the model predicts retirements concentrated among the very wealthy, contrary to the microdata. |
| Keywords: | labor supply; retirement; heterogeneous returns; incomplete markets |
| JEL: | E24 G11 J21 J22 J26 |
| Date: | 2025–11–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:102353 |
| By: | Satyajit Chatterjee; Burcu Eyigungor |
| Abstract: | Administrative data are used to establish patterns in contract terms, usage, and default rates of anonymized individual credit card accounts. The canonical heterogeneous-agent macro model is extended with a competitive credit card industry and ex-ante heterogeneity to explain these facts, including that the spread on card interest rates is several multiples of default rates. Some model implications of general interest are: (i) a 10 percent cap on credit card interest rates, as proposed in recent legislation, reduces credit limits for risky borrowers and is welfare reducing for them, and (ii) although most people are not liquidity constrained, the average model MPC is in the empirically relevant range because consistency with credit card facts implies people are impatient. |
| Keywords: | Credit limits; interest rate spreads; defaults; heterogeneity; MPC |
| JEL: | D15 E44 G51 |
| Date: | 2026–02–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:102381 |
| By: | Margarida Duarte; Diego Restuccia |
| Abstract: | We study the sectoral reallocation of employment over time and across countries, with a focus on the rise of services. We document substantial changes in the ratio of aggregate employment to working-age population across countries that are not systematically related to productivity growth or income levels, yet tightly linked to the rise in services employment. We assess the quantitative contribution of changes in aggregate employment to the rise of services using an otherwise standard model of sectoral reallocation calibrated to time-series for the United States. The calibrated model implies a high elasticity of changes in aggregate employment to services: a one percentage point change in aggregate employment generates on average a 0.7 percentage point change in services employment. The implication is that actual changes in aggregate employment account for one-third of the rise in services, on average across countries, and up to one-half in countries with sustained employment increases. |
| Keywords: | employment, goods, services, productivity, structural transformation, working-age population. |
| JEL: | E1 E24 J11 J16 J21 J22 O11 O41 O51 |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-817 |
| By: | Satyajit Chatterjee; Dean Corbae; Kyle Dempsey; José-Víctor Ríos-Rull |
| Abstract: | Credit scores are a primary screening device for the allocation of credit, housing, and sometimes even employment. In the data, credit scores grow and fan out with age; at the same time, income and consumption inequality also increase with a cohort’s age. We postulate a simple model with hidden information to explore the joint determination of credit scores, income, and consumption over an individual’s lifetime which can replicate these empirical facts. We use the model to understand the role of technologies like big data or legal restrictions limiting information on certain adverse events like medical expenses intended to increase credit market access. |
| Keywords: | Adverse Selection; Moral Hazard; Bayesian Learning; Reputation |
| JEL: | D82 E21 G51 |
| Date: | 2026–02–05 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:102408 |