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on Dynamic General Equilibrium |
| By: | Moritz Kuhn; Leanne Nam; Gašper Ploj |
| Abstract: | Labor markets feature large heterogeneity in employment stability: some careers provide lifetime employment, while others involve frequent transitions in and out of work. While this heterogeneity shapes earnings dynamics and labor market risk, its implications for household saving behavior remain poorly understood. We document two new empirical facts. More stable careers (i) exhibit steeper life-cycle earnings growth and (ii) accumulate significantly more wealth per dollar of income, even within narrowly defined worker groups. To interpret these facts, we develop a life-cycle search-and-saving model with heterogeneous employment stability, job-to-job mobility, endogenous human capital accumulation, and incomplete markets. The model matches both life-cycle earnings and wealth dynamics across careers. Our central finding is that heterogeneity in employment stability reshapes the nature of saving. Stable careers generate sustained earnings growth with a focus on life-cycle saving, while unstable careers are characterized by precautionary, buffer-stock behavior that limits long-run wealth accumulation. Quantitatively, differential earnings growth accounts for about 60% of the wealth gap across careers. These microeconomic differences have important macroeconomic implications. We demonstrate that heterogeneity in employment stability amplifies wealth inequality and substantially increases the macroeconomic consumption response to unemployment shocks. |
| Keywords: | Employment risk, employment stability, consumption-saving behavior |
| JEL: | J64 E21 E24 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:26178 |
| By: | Michael Cai |
| Abstract: | Benchmark macroeconomic models require additional frictions to explain the sluggish response of aggregate variables to sudden shocks or changes in policy. I show that standard heterogeneous agent (HA) models, the Blanchard (1985) perpetual youth and Bewley (1986) incomplete markets models, are consistent with aggregate consumption inertia without the use of habit preferences or any specific model of expectation underreaction to dampen the responsiveness of consumption savings decisions. I instead replicate observed consumption inertia in standard HA models by directly substituting survey expectations of income and interest rates for agents' expectations. I propose a new theory of macroeconomic inertia that rationalizes the observed extrapolation bias in survey expectations by embedding an unobserved components model of expectations into a tractable HA general equilibrium environment. Inertia results when expectations imperfectly account for the equilibrium amplification of shocks, which is large in HA economies. This imperfect inference causes expectations to gradually unanchor as agents repeatedly misattribute large responses of equilibrium outcomes simply to larger shocks. This theory also illustrates a novel drawback to inertial monetary policy rules and the delayed financing of fiscal deficits: Policy regimes that act more gradually experience longer transmission lags due to their decreased effectiveness at anchoring expectations. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.27548 |
| By: | Kuhn, Moritz (University of Mannheim and Macro Inequality Lab); Nam, Leanne (University of Mannheim and Macro Inequality Lab); Ploj, Gasper (Banka Slovenije) |
| Abstract: | Labor markets feature heterogeneity in employment stability: some careers offer lifetime employment, while others involve frequent transitions in and out of work. While this heterogeneity shapes earnings dynamics and labor market risk, its implications for household saving remain poorly understood. We show two empirical facts. More stable careers (i) exhibit steeper life-cycle earnings growth and (ii) accumulate significantly more wealth per dollar of income, even within narrowly defined worker groups. We develop a life-cycle search-and-saving model with heterogeneous employment stability, job-to-job mobility, endogenous human capital accumulation, and incomplete markets. It matches life-cycle earnings and wealth dynamics across careers. We find that heterogeneity in employment stability reshapes the nature of saving. Stable careers generate sustained earnings growth focused on life-cycle saving, while unstable careers are characterized by precautionary, buffer-stock behavior. Quantitatively, differential earnings growth accounts for about 60% of the wealth gap across careers. Heterogeneity in employment stability amplifies wealth inequality and substantially increases the macroeconomic consumption response to unemployment shocks. |
| Keywords: | employment risk, employment stability, consumption-saving behavior |
| JEL: | J64 E21 E24 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18754 |
| By: | Spyros Lazarakis; Max Schroeder |
| Abstract: | How should governments deleverage public debt, and who gains or loses under alternative fiscal packages? We study this question in a heterogeneous-agent general-equilibrium model with endogenous assets, labour supply, and human-capital accumulation, calibrated to the pre-pandemic United Kingdom. The government reduces the public-debt stock by an amount equal to 10 percent of initial output over 25 years. We compare front-loaded, linear, and back-loaded schedules; labour-tax, returns-tax, and transfer closures; and four uses of the fiscal capacity created by lower debt service: Government Spending, Fiscal Discipline, Additional Transfers, and Public Investment. Four results stand out. First, we find a clear ranking among the fiscal instruments: labour taxation usually creates the largest welfare losses, followed by transfer reductions, while returns taxation generates the smallest losses. Second, among workers alive when the policy is announced, back-loaded paths generally deliver higher mean welfare, but heterogeneity can create conflicts of interest that may change this ranking. Third, endogenous human capital amplifies the cost of labour-tax consolidation. Fourth, fiscal headroom is itself distributional; Fiscal Discipline protects households exposed to the chosen closure instrument; Additional Transfers build support among low-asset households, especially under returns-tax financing; and Public Investment creates broader productivity gains and can make faster deleveraging politically attractive. Debt reduction should therefore be evaluated as a package combining the debt path, the fiscal instrument, and the allocation of fiscal headroom. |
| Keywords: | public debt, fiscal consolidation, heterogeneous agents, inequality, human capital |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:lan:wpaper:442390386 |
| By: | Martijn de Werd; Bertrand Achou; Ki Wai Chau |
| Abstract: | Recent empirical evidence shows that a significant amount of wealth is bequeathed at the death of the first spouse. We study both theoretically and quantitatively how couples’ retirement portfolio of annuities and life insurance is affected by such side bequests. We show that life-contingent products allow couples to smooth their side bequests as they enable to make the latter independent of which spouse dies first. We also show that side bequests reduce the wealth left to the surviving spouse while raising the demand for life insurance (or reducing the demand for annuities). Quantitatively, we find that side bequests have a sizable impact on the demand for annuities: annuity participation is 28 percentage points lower for married women and 41 percentage points lower for married men. Finally, we find that side bequests modify the distribution of welfare gains from having access to life-contingent products and that incorrectly omitting side bequest motives in the design of optimal portfolio strategies comes at large welfare costs. |
| Keywords: | Life-Cycle Investment, Life Insurance, Annuities, Savings, Retirement Portfolio, Couple Dynamics, Bequest Motives. |
| JEL: | C61 D14 D15 G11 G22 G51 G52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:rsi:irersi:25 |
| By: | Seth G. Benzell; Laurence J. Kotlikoff; Victor Yifan Ye |
| Abstract: | This study deploys a multi-region, dynamic life-cycle, general equilibrium model to assess demography’s impact, through the course of this century, on global development. Our model’s 17 regions encompass more than 150 countries comprising 99% of the world’s population. Output is produced with three labor skill groups and internationally-mobile capital, with each country deciding annually whether to adopt its frontier automation technology. Our model features region-specific fiscal policy, TFP growth, and idiosyncratic mortality. Agents live for 100 years, first as children, then as workers, and then as retirees. Work and saving decisions are governed by CES preferences. Lifespan is uncertain, but there are no annuities apart from state pensions. Hence, bequests, while significant, are unintended. Our fertility, mortality, and net immigration rates are region- and age-specific and align fully with the UN’s projections. To illustrate demographics’ power to impact the global transition, we simulate our model under the UN’s markedly different demographic projections for 2017 and 2024. The 2024 forecast is particularly pessimistic about China’s fertility prospects. Both projections produce very substantial global aging, a major global capital glut producing very low long-run real capital returns. The latest forecast entails 10% lower global GDP in 2100 and far higher payroll tax rates to fund old-age benefits. Most important, it entails a major change in the course of economic hegemony with China’s 2100 global GDP share falling from 25.6% to 14.9% and the US share rising from 11.2% to 14.4%. Our results are sensitive. Should the US eliminate all future immigration, its 14.4% global 2100 GDP share would drop to 9.2%. And were global fertility to follow the UN’s low variant, 2100 world output would be one third, not one tenth lower. The level and division of global output is also highly sensitive to the speed at which AI expands frontier technologies. Accelerated AU/AI – 4x faster-than-recent growth in capital’s share through 2050 – or Transformative AU/AI – 10x faster capital-share growth – reinforce demographic forces, ensuring long-run US economic hegemony. Indeed, Transformative AI combined with 2024 demographics implies US and Chinese 2100 global GDP shares of 25.3% and 16.9%, respectively. And not withstanding its considerable technological catch up, the US retains, based on our calibration, a technological edge over China throughout the century. |
| JEL: | E10 E13 E60 F19 F47 H2 J1 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35618 |
| By: | Emanuele Brancati; Qingqing Cao; Raoul Minetti; Nicholas Jaehyun Yi |
| Abstract: | This paper studies how integration between the financial sector and production networks shapes business cycle transmission. We develop a dynamic model in which banks provide asset-based financing to firms embedded in supply chains. The model highlights two margins of bank–supply chain integration with opposite macroeconomic implications. Extensive-margin integration—captured by firms’ access to banks specializing in different supply chain segments—amplifies negative banking shocks. By contrast, intensive-margin integration—captured by the diffusion of factoring and invoice discounting—attenuates banking disruptions. The model reveals that the stabilizing effects of integration dominate when firm production linkages are tight. The predictions are consistent with matched bank–firm data from Italy. |
| Keywords: | banks; financial integration; production networks; factoring |
| JEL: | E23 E32 E44 |
| Date: | 2026–08–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:103624 |
| By: | Aleman-Pericon, Christian (NYUAD); Mimani, Pranav (NYUAD); Santaeulalia-Llopis, Raul (NYUAD); Wasmer, Etienne (NYUAD and LISER) |
| Abstract: | This paper revisits the belief that the mix of employer and employee social security contributions is neutral for employment and equilibrium wages. We establish the conditions required for neutrality across competitive settings, institutional minimum wages, progressive taxation, and search-and-matching frictions. We show that statutory invariance breaks down due to an asymmetry in the tax wedge operating almost identically across all models. Tax neutrality is restricted to a knife-edge case that does not hold in modern labor markets. Statutory non-neutrality in the labor market is therefore relevant quantitatively because it arises as soon as marginal tax rates are above 20\%. This has implications for designing contemporary welfare and workfare policies. |
| Keywords: | labor taxes, tax incidence, employment, search models |
| JEL: | H22 J32 J38 J64 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18850 |
| By: | Brown, Zachary S.; Chen, Le; Cho, Chanheung; Rejesus, Roderick |
| Abstract: | Soil health investments such as cover crop adoption are widely promoted to improve long-run productivity and reduce fertilizer dependence, yet adoption remains limited due to delayed and uncertain returns.This paper develops a structural dynamic model of soil capital accumulation, nitrogen fertilizer use, and cover crop technology choice under biophysical and market uncertainty. Using data from a 35-year cotton field experiment, we estimate a yield function in which output depends on fertilizer, accumulated soil capital, and their interaction. We structurally recover soil capital and embed the estimates in a stochastic dynamic programming model with regime-switching price dynamics. The results reveal strong dynamic substitution: as soil capital increases, the marginal productivity of fertilizer declines sharply. Optimal policies exhibit threshold-type adoption patterns, with cover crops becoming profitable only beyond critic also il capital levels. Policy simulations show that targeted incentives can accelerate transitions toward soil-health-based production while improving both profitability and environmental outcomes. |
| Keywords: | Agricultural and Food Policy |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea26:404397 |