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on Dynamic General Equilibrium |
| By: | Mingli Chen (University of Oxford); Rama Cont (University of Warwick); Andreas Joseph (Bank of England); Michael Kumhof (Bank of England); Xinlei Pan (University of California (Berkeley)); Wei Xiong (University of Oxford); Xuan Zhou (Reserve Bank of Australia) |
| Abstract: | We propose deep reinforcement learning (DRL) as a general approach to bounded rationality in dynamic stochastic general equilibrium (DSGE) models. Agents are represented by deep artificial neural networks and learn to maximise their intertemporal objective function by interacting with an a priori unknown environment. Applying this approach to a model from the adaptive learning literature, DRL agents can learn all equilibria irrespective of local stability properties. However, learning is slow and may be unstable without the imposition of early stopping criteria. These findings can have implications for the use and interpretation of DRL agents and of DSGE models more generally. |
| Keywords: | Artificial intelligence;deep reinforcement learning;adaptive learning;monetary policy;fiscal policy;multiple equilibri |
| JEL: | C14 C52 D83 E52 E62 |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023264 |
| By: | Sara Casella; Jesús Fernández-Villaverde; Stephen Hansen; Ryohei Oishi; Minchul Shin |
| Abstract: | Standard macroeconomic data do not cleanly separate the systematic and nonsystematic components of monetary policy. We show that incorporating unstructured text data into the structural estimation of a DSGE model can sharpen this distinction. We augment a standard state-space model with a non-core measurement block that links structural shocks to time series derived from FOMC transcripts, using a spike-and-slab prior to let the data select which series are informative. In a medium-scale New Keynesian model for the U.S., incorporating text improves predictive performance and materially alters structural inference: the new model estimates a lower response of the policy rate to inflation, higher price stickiness and lower price indexation, implying a flatter and less backward-looking price Phillips curve. |
| JEL: | C11 C32 C55 E37 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35487 |
| By: | Bence Bardóczy; Joao Guerreiro |
| Abstract: | Automatic stabilizers can respond to a recession without a new policy decision, but their effects on aggregate demand may still only arrive with delay. We study the transmission lag for unemployment insurance extensions in a heterogeneous-agent New Keynesian model that closely matches the incidence of unemployment risk and the response of household spending to job loss and UI extensions. More generous UI stimulates demand largely by relaxing precautionary saving, so households must anticipate future unemployment risk and benefit duration. To quantify this channel, we work directly with survey expectations, using a measured history of forecast errors and revisions, rather than committing to a specific model of belief formation. Our estimated model implies a significant Expectations-Driven Efficacy Lag. The direct effect of UI extensions on consumption peaks only after UI duration has begun to recede. In general equilibrium, the consumption multiplier is about 0.6 on impact, about half its value under full-information rational expectations, but the policy becomes more effective by the end of the first year of the recession. |
| JEL: | E03 E2 E3 E6 E7 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35705 |
| By: | Ms. Alina Carare; Metodij Hadzi-Vaskov; Jessie Kilembe; Felipe Leal |
| Abstract: | We augment the two-country DSGE model from Mandelman and Zlate (2012) with endogenous migration of both skilled and unskilled labor, and analyze the economic impact of restricting migration for each type of labor on the migrants’ source and host countries. We calibrate the model with data for Guatemala and the U.S. as the source and host countries respectively. Restricting unskilled immigration has a more severe contractionary impact on the host economy than restricting skilled migration—reducing aggregate output by approximately 1 percent and consumption by 0.6 percent compared to the steady state—, given that in the steady state a lot more unskilled migrants are needed in the production function. Restricting unskilled immigration impacts negatively skilled immigration flows, but not vice versa, and it has a significant overall impact on the source economy, with aggregate consumption and income declining (mostly due to a fall in remittances). Our findings also highlight a key policy trade-off for the host economy: while a restrictive immigration policy (especially for unskilled labor) could reduce wage inequality by compressing the skill premium—raising host-country unskilled wages by 8 percent while lowering skilled wages by 1 percent compared to the steady state—, and could increase output per capita, it comes at the cost of lower overall economic activity and aggregate consumption. Moreover, by increasing the wage gap for unskilled labor between host and source economies, it also raises incentives for immigration, despite the increased cost of migration. |
| Keywords: | International Migration; Immigration Policy; Remittances; Skill Heterogeneity; Endogenous Migration; DSGE Model |
| Date: | 2026–08–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/182 |
| By: | Isabel Cairó; Hess T. Chung; Francesco Ferrante; Cristina Fuentes-Albero; Camilo Morales-Jimenez; Damjan Pfajfar |
| Abstract: | Labor market variables frequently send conflicting signals about the degree of slack or tightness, often complicating policy assessments at critical junctures. This paper develops a Structural Labor Market Indicator (SLMI) for the U.S. economy that addresses the limitations of existing univariate measures or atheoretical statistical approaches that synthesize multiple labor market indicators but cannot distinguish between supply and demand driving forces. We construct the SLMI using a medium scale New Keynesian DSGE model featuring search and matching frictions, endogenous labor force participation, and variable hours. The model is disciplined by a comprehensive dataset that includes not only labor market variables but also other macroeconomic aggregates. The SLMI synthesizes model-implied gaps across multiple labor market dimensions using principal component analysis. We show that GDP growth and inflation provide substantial information about labor market slack beyond what labor market variables contain, validating our multi-variable structural approach. Relative to alternative measures, the SLMI often provides earlier warnings of deteriorating conditions at recession onset but recovers more gradually during expansions. |
| Keywords: | search and matching; labor market; labor market slack |
| JEL: | E32 J64 J20 E37 |
| Date: | 2026–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:103679 |
| By: | Francesco Bianchi; Nicolò Ceneri; Leonardo Melosi; Alessandro T. Villa |
| Abstract: | Since the 1980s, the United States has experienced a pronounced saving glut of the rich, a large accumulation of assets among the top 1% of earners. We argue that this development partly reflects a shift in the financing of redistributive policies, from inflationary finance in the 1960s and 1970s to debt finance backed by future taxation beginning in the early 1980s. The central insight is that, in the presence of a progressive tax system, a switch from inflationary to debt financing leads to debt accumulation by top earners. We develop a New Keynesian model with borrowers and savers in which redistributive transfers can be either funded or unfunded. Unfunded transfers generate fiscal inflation that erodes the real value of public and private debt, redistributing wealth through asset revaluation effects. Funded transfers, by contrast, are financed through future taxes borne primarily by high-income households, which respond by accumulating claims on both households and the government. Using a structurally estimated version of the model, we find that the shift from unfunded to funded redistribution in the 1980s contributed significantly to the subsequent saving glut of the rich. |
| JEL: | D31 E50 E62 E63 H63 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35715 |
| By: | Hristov, Nikolay; Menno, Dominik |
| Abstract: | We employ a medium-scale New Keynesian model with banks and endogenous financial panics (system-wide bank runs) to study whether and how (non-zero) average trend inflation affects the risk of bank runs. Consistent with descriptive empirical evidence for a panel of advanced economies, we find that trend inflation significantly affects the probability of banking panics - this probability more than doubles when annual trend inflation rises from 0% to 6% p.a. The incidence of a banking panic mainly depends on the magnitude of the associated decline in asset prices. With higher trend inflation this decline is stronger. The presence of an occasionally binding zero lower bound increases the likelihood of bank runs, but only for low levels of long-run inflation. Disinflations engineered by the central bank are associated with significantly higher bank-run probability in the short- run, especially when a sharp "cold turkey" disinflation is pursued. Finally, we discuss how trend inflation affects some of the trade-offs faced by monetary and macroprudential policy. |
| Keywords: | Long-run inflation, bank runs, financial panics, crisis probability |
| JEL: | E12 E23 E31 E32 E52 E44 G01 G21 G33 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:343042 |
| By: | André Luduvice; Roberto Pinheiro |
| Abstract: | We model artificial intelligence (AI) as a distinct capital input in a nested CES aggregate production function that extends work done by Krusell et al. (2000) and embed it in a dynamic general equilibrium economy. By bringing the model to the data, we estimate the degree to which AI either substitutes for or complements the other production inputs at the aggregate level. We find that AI is complementary to the high-skill–equipment composite and that the AI weight in production remains small. We then use the model to study how this complementarity shapes the macroeconomic and distributional effects of AI capital accumulation. The estimated model implies different effects of alternative AI shocks. A rise in the AI usage share is contractionary as it increases reliance on a scarce complementary input. A fall in AI prices is expansionary due to the lower cost of accumulating AI capital. A tax on AI capital income raises limited revenue while the AI capital stock remains small, but can finance welfare-improving transfers as the AI price falls. A large-scale universal basic income (UBI) funded jointly by a consumption tax slows AI investment with welfare gains for low-skill workers at the expense of losses for high-skill workers and entrepreneurs. On the measurement side, we construct a quality-adjusted AI price index from hedonic regressions and build a corresponding AI capital stock. |
| JEL: | E22 E25 J24 J31 |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:103765 |
| By: | Fernando E. Alvarez (The University of Chicago, Department of Economics and NBER); Francisco J. Buera (Washington University in St. Louis, Department of Economics and NBER); Nicholas Trachter (Federal Reserve Bank of Richmond) |
| Abstract: | We study optimal policy in a dynamic general equilibrium model where heterogeneous monopolistically competitive firms pay a fixed cost to adopt a frontier technology that grows exogenously. Using Mean Field Games tools, we show that the optimal policy consists of exactly two time-invariant subsidies: one correcting the static misallocation from market power, and one correcting the dynamic under-incentive to adopt. This holds outside of balanced growth paths, for any initial distribution of technology gaps. We analyze a simplified version of the model that aggregates to a Neoclassical Growth Model with an S-shaped production function whenever complementarities are strong, and fully characterize when the optimal policy uniquely implements the first best. When it does not, two novel results emerge: the efficient allocation prescribes escaping a poverty trap—providing an explicit optimality foundation for a Big Push—and, more surprisingly, escaping an abundance trap, where dismantling adopted technologies is optimal. In both cases, a temporary, costless supplementary policy restores unique implementation. |
| JEL: | D92 O14 O25 O40 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfi:wpaper:2026-59 |
| By: | Hochmuth, Brigitte (University of Copenhagen); Merkl, Christian (FAU Erlangen-Nuremberg); Stüber, Heiko (Hochschule der Bundesagentur für Arbeit (HdBA)) |
| Abstract: | This paper studies how an unemployment-benefit reform in one member state of a monetary union affects savings, net foreign asset positions, and fiscal space across member states when households face incomplete insurance. Lower benefits reduce unemployment and increase fiscal space in the reforming country. Employed workers increase their precautionary savings to compensate for reduced public insurance. A portion of these savings is invested abroad, pushing the non-reforming country into a negative net foreign asset position and lowering its long-run consumption. Despite raising fiscal space and long-run average consumption in the reforming country, the reform may decrease ex-ante welfare because it reduces insurance and depresses consumption during the transition as households self-insure through higher savings. We discipline our proposed model with firm-level evidence on Germany’s post-reform tradable-sector expansion following the Hartz IV reform of unemployment benefits. In our simulation, this reform accounts for a substantial share of the observed post-reform open-economy adjustment, whereas the earlier wage moderation cannot explain most of the observed patterns. |
| Keywords: | unemployment insurance reform, spillover effects, precautionary savings |
| JEL: | E21 E24 F16 F41 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18885 |
| By: | Titan Alon; Matthias Doepke; Jane Olmstead-Rumsey; James Symons-Hicks; Michèle Tertilt |
| Abstract: | We study the transmission of macroeconomic shocks in a model of the household sec tor featuring single and married households, joint labor-supply decisions of women and men, and childcare needs that interact with the availability of remote work. Re cessions concentrated among women are deeper and more persistent than those con centrated among men, reflecting weaker within-family insurance and a new empir ical finding that women re-enter employment more slowly after job loss. Yet recov ery from the pandemic recession, which had a disproportionate impact on working women due to school closures and the sectoral distribution of job losses, was surpris ingly rapid. We show that in our model, the expansion of remote work and shifting caregiving norms after the pandemic raise female labor supply and men’s share of childcare, thereby accounting for the observed recovery. These changes permanently increase female participation and narrow the gender earnings gap, but their effect on future recessions is limited: greater labor force attachment among women weakens the added-worker effect but also accelerates labor market re-entry, leading to offset ting effects on aggregate recession dynamics. |
| Keywords: | Recessions, Business Cycle, He-cession, She-cession, Pandemic Recession, Job loss, Added Worker Effect, Gender Equality, Female Employment, School Closures, Childcare, Gender Wage Gap |
| JEL: | D13 E32 J16 J20 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_774 |
| By: | Andreas Irmen (DEM, Université du Luxembourg); Yuanhua Xu (DEM, Université du Luxembourg); |
| Abstract: | "A sustained decline in hours worked per worker reduces pension benefits in a pay-as-you-go (PAYG) pension system while simultaneously weakening productivity growth through learning. We study these effects in an overlappinggenerations model with endogenous labor supply, where two-period-lived individuals have preferences proposed by Boppart and Krusell (2020). Production is subject to a learning externality: supplying more hours raises a worker’s productivity and generates knowledge spillovers to co-workers. The implied Marshallian labor supply is hump-shaped. Despite these nonlinearities, the model admits closed-form transitional dynamics and a unique, stable steady state. Along the balanced growth path, pension benefits grow more slowly than wages because higher wages induce workers to supply fewer hours. The resulting slowdown in learning further dampens both wage and pension growth. Ignoring the endogenous labor supply response substantially overestimates both pension growth and the rate of return of the PAYG system. Due to the learning externality and social discounting, the planner’s and the equilibrium allocations differ. A PAYG pension system financed by a proportional contribution rate applied to individual labor earnings cannot implement the planner’s allocation. By contrast, a PAYG system with lump-sum contributions and benefits combined with a wage subsidy for workers, can." |
| Keywords: | "Endogenous Labor Supply, Pay-As-You-Go Pensions, Learning, Endogenous Growth, Overlapping Generations." |
| JEL: | D15 H55 J22 O33 O41 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:luc:wpaper:26-12 |
| By: | J. Carter Braxton; Kyle F. Herkenhoff; Chengdai Huang; Michael Nattinger; Jonathan L. Rothbaum; Lawrence D.W. Schmidt |
| Abstract: | We document an increase in U.S. income risk from 1969 to 2019 using newly digitized IRS tax returns, distinguishing permanent from transitory risk. Since the 1970s, permanent income risk increased across the distribution, but most sharply among high earners, rising nearly 70% among the top 5%. We show that, even among top earners, large negative income shocks strongly predict financial distress and higher income risk is linked with higher savings. In a quantitative life-cycle model, rising income risk concentrated at the top lowers the risk-free rate by 0.7pp, increases wealth inequality, and contributes to the "savings glut of the rich." |
| JEL: | D15 E21 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35664 |
| By: | Kimberly A. Berg; Chadwick C. Curtis; Nelson C. Mark |
| Abstract: | We study how temperature fluctuations affect U.S. state-level economic conditions using high frequency, weekly data from 1987 to 2024. The impulse response to a temperature shock from a panel local projection framework reveals a modest short-run increase in economic conditions followed by a delayed and persistent medium-run decline. Nonlinearities show that the medium-run decline is larger and more persistent at higher base temperatures. A decomposition of the economic conditions index points to the labor market as the primary channel. To interpret these findings, we develop a weekly labor search and matching model featuring a labor disutility channel, a heat damage stock, and a slow-moving adaptation mechanism. |
| JEL: | E23 Q54 Q56 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35529 |
| By: | Gideon Bornstein; Laura Castillo-Martinez |
| Abstract: | Governments often intervene to prevent firm closures during crises, fearing that financially constrained but viable firms may fail. We develop a firm dynamics model with incomplete financial markets and show how financial frictions generate excessive firm exit. A key statistic governing this dynamic inefficiency is the marginal propensity to exit with debt. Using confidential U.S. Census data, we estimate the relationship between debt and exit and use it to discipline the model. The calibrated model implies that eliminating financial frictions reduces firm exit from 9.3% to 5.0% and generates welfare gains of 3.6% in consumption-equivalent terms. We show that the welfare costs of financial frictions rise sharply during financial crises but change little during standard productivity recessions. Finally, we compare government-guaranteed loans and grants, quantifying the trade-off between fiscal cost and effectiveness in preventing excessive exit. |
| JEL: | E32 E44 G33 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35479 |
| By: | Erin P. Gibson; Christopher L. House; Christian Proebsting; Linda L. Tesar |
| Abstract: | Unemployment rates are substantially higher and more volatile in the euro area relative to the United States. We ask to what extent the lack of cross-country labor mobility can account for unemployment dynamics in Europe. Our analytical model incorporates downward nominal wage rigidity and an endogenous migration decision. Firms are unable to freely adjust wages during economic contractions, generating an asymmetric distribution of unemployment over the business cycle. The model is calibrated to the dynamics of unemployment and net migration in a typical euro area country. An increase in labor mobility to that observed in the United States and holding all other parameters fixed would reduce the volatility of euro area unemployment by 28% and return over 1, 000, 000 unemployed to the workforce. The welfare cost to a typical euro area country of the currency union is 4.1 percent of permanent consumption; increasing labor mobility reduces this cost to about 3.55 percent. |
| JEL: | F22 F41 F45 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35668 |
| By: | Brent Bundick; Nicolas Petrosky-Nadeau |
| Abstract: | Since employment dynamics are persistent, a central bank’s dual mandate to promote maximum employment and price stability naturally generates history dependence in monetary policy. This history dependence under a dual mandate flattens the reduced-form Phillips curve, reduces the volatility of inflation in response to demand shocks, and improves outcomes at the zero lower bound. Moreover, we show that a dual mandate can be observationally equivalent to average inflation targeting following a demand shock. However, this equivalence breaks down in the presence of supply shocks. We first illustrate these findings analytically and then examine their quantitative importance in a model with nominal rigidities and labor search frictions calibrated to match U.S. business-cycle moments. An employment mandate can naturally provide the benefits associated with history-dependent policy frameworks. |
| Keywords: | inflation; monetary policy; dual mandate |
| JEL: | E32 E52 J64 |
| Date: | 2026–08–26 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103696 |
| By: | Marc de la Barrera; Masao Fukui |
| Abstract: | We develop a theory of firm wage dynamics that integrates the canonical wage-posting model à la Burdett and Mortensen (1998) with firm dynamics. Firms offer dynamic wage contracts under an equal-treatment constraint in the presence of search frictions. We provide an analytical characterization of equilibrium wage contracts and firm growth as functions only of the distribution of marginal surplus. Consistent with recent empirical evidence, the model implies that (i) firm wages are strongly linked to firm growth but not to firm size; (ii) firm wages decline over the firm life cycle; and (iii) the pass-through of permanent productivity shocks to wages is higher in the short run than in the long run. Firms at the top of the job ladder face excessive labor market competition, so the optimal policy subsidizes their hiring. At the macro level, the optimal policy elevates business dynamism in the steady state, and even more so along the transition. |
| JEL: | E0 J0 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35554 |
| By: | Maximiliano Dvorkin; Brian Greaney |
| Abstract: | The spatial distribution of wealth in the United States is very heterogeneous. We study the spatial distribution of wealth in a country and how it is shaped by regional earning characteristics and mobility frictions. For this, we develop a tractable model of consumption, savings and location choice with many regions, incomplete markets and heterogeneous agents facing persistent and transitory income shocks. Our theory extends a workhorse macroeconomic model of consumption and savings under uncertainty to an economy with multiple labor markets and costly mobility. Despite complex spatial and individual heterogeneity, we characterize the optimal consumption, savings and mobility decisions of workers in closed form. Mobility frictions increase precautionary savings as workers hedge against consumption fluctuations generated by moving decisions. The spatial distribution of wealth is primarily driven by the interaction between persistent income shocks, saving behavior and worker sorting over locations. Our results highlight the importance of accounting for worker mobility and regional heterogeneity in earnings dynamics when studying the spatial distribution of wealth. |
| Keywords: | mobility; precautionary savings; spatial equilibrium; wealth; inequality |
| JEL: | R12 R23 E21 J61 F16 |
| Date: | 2026–08–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:103686 |
| By: | Ambrogio Cesa-Bianchi (Bank of England); Andrea Ferrero (University of Oxford); Shangshang Li (University of Liverpool) |
| Abstract: | In response to an unanticipated monetary policy tightening in the US, the demand/financial channel of the international transmission of the shock dominates over the expenditure‑switching effect. For a typical small open economy with flexible exchange rates, credit spreads increase, while real GDP and exports fall despite a depreciation of the local currency. In an estimated two‑country open economy model, financial and pricing frictions that assign a prominent role to the global reserve currency are key to account for the empirical evidence. Model‑based counterfactual policy analysis suggests that, even in the presence of a global financial cycle, the exchange rate regime matters. The volatility of output and inflation is an increasing function of the weight associated to the stabilisation of the exchange rate in the monetary policy rule. The introduction of countercyclical policy instruments that target either domestic credit or capital flows dampens economic fluctuations. In a fixed exchange rate regime, either instrument can limit the negative spillovers of foreign monetary policy shocks on real economic activity, but not on inflation. |
| Keywords: | Exchange rates flexibility;currency invoicing;dilemma;expenditure‑switching;foreign exchange liabilities;global financial cycle;trilemma. |
| JEL: | E44 E58 F32 F42 |
| Date: | 2025–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023263 |
| By: | Kaiji Chen (Emory University); Hanming Fang (University of Pennsylvania and NBER); Yang Tang (Nanyang Technological University) |
| Abstract: | Rapid economic growth creates large differences in lifetime incomes across generations. This paper examines the intergenerational redistribution generated by subsidized access to appreciating public assets in rapidly growing economies. We show that providing incumbent generations with subsidized access to these assets before future growth is fully capitalized into market values gives them an early claim on subsequent economic growth, thereby redistributing resources from future to incumbent generations. In the context of housing privatization, subsequent capital gains on privatized housing enable homeowners to trade up, further amplifying housing demand, house prices, and intergenerational redistribution. We evaluate the early ownership and capital gains channels of asset-based redistribution in a quantitative equilibrium model calibrated to China’s housing privatization. Relative to more standard pension-based redistribution, we show that asset-based redistribution delivers higher welfare for future cohorts while substantially reducing long-run fiscal burdens once economic growth unexpectedly slows. |
| Keywords: | Asset privatization; Intergenerational redistribution; Housing; Capital gains;Economic transition; Social security |
| JEL: | G28 E02 E5 G11 H2 |
| Date: | 2026–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:26-013 |
| By: | Jess Benhabib; Pengfei Wang; Yi Wen |
| Abstract: | This paper incorporates the Lucas (1973) island model into a standard DSGE framework. It demonstrates that self-fulfilling stochastic inflation equilibria, which are driven by intrinsic uncertainty or pure sentiments, can exist under rational expectations. Furthermore, it shows that these sentiment-driven stochastic equilibria exhibit monetary non-neutrality, even when the fundamental equilibrium is unique and monetarily neutral. As the aggregate price or inflation rate can appear to fluctuate independently of the money supply, our model explains the complex relationship between inflation and the money supply in the real world, where the basic quantity theory of money often seems invalid. |
| JEL: | D8 D84 E03 E32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35563 |
| By: | Pau Belda (Bank of England) |
| Abstract: | Do capital gains tax cuts destabilize or stabilize asset prices? In an asset pricing model with heterogeneous agents and realization-based taxation, a tax cut has two opposing effects. It dampens volatility by reducing realization-based trading frictions, but also amplifies it by strengthening the pass through from expectations to prices, fuelling self-fulfilling fluctuations. Estimated on US stock-market data, the model implies that the sequence of tax cuts since the 1970s triggered a net increase in volatility of about +35%, driven primarily by stronger belief-to-price pass-through. Policy experiments suggest a tax on unrealized gains robustly reduces volatility, whereas a financial transaction tax has mixed effects. |
| Keywords: | Capital gains taxation;asset pricing;learning |
| JEL: | D83 D84 E44 G12 G14 H20 H31 |
| Date: | 2026–08–21 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:023541 |
| By: | Kartik B. Athreya; José Mustre-del-Río; Juan M. Sánchez |
| Abstract: | CORRECT ORDER OF AUTHORS: Mustre-del-Río, Sánchez, Athreya. In the US, households often delay payments on unsecured debt for extended periods. These delinquencies are costly, making them a useful indicator of financial distress. Mortgage forbearance, another form of payment delay, saw swift take-up early in the COVID-19 pandemic, but was fleeting. Most borrowers exited quickly despite generous terms. This paper reconciles these seemingly contradictory payment postponement patterns using a life-cycle model of mortgages and unsecured debt. Combining survey evidence with credit history data, our model resolves these facts through selection and expected income losses. Forbearance primarily attracted financially healthier homeowners, while anticipated income losses failed to materialize. |
| Keywords: | delinquency; bankruptcy; forbearance; heterogeneity; impatience |
| JEL: | D14 D84 E21 G51 |
| Date: | 2026–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:103742 |