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on Dynamic General Equilibrium |
| By: | Margherita Borella; Mariacristina De Nardi; Johanna P. Torres Chain; Fang Yang |
| Abstract: | This paper develops and estimates a dynamic life-cycle model to quantify why households save and work. The model incorporates multiple sources of risk—health, marital status, wages, medical expenses and mortality—as well as endogenous labor supply and human capital accumulation, retirement, and bequest motives at the death of the first and last household member. We estimate it using PSID and HRS data for the 1941–1945 cohort via the Method of Simulated Moments. Eliminating bequest motives reduces aggregate wealth by 23.8% and labor earnings by 1.2%; removing medical expenses lowers them by 13.1% and 0.7%. Wage risk is crucial for early-life saving: its removal reduces wealth by 10.4% but raises earnings by 2.3%. Eliminating marriage and divorce dynamics leads couples—numerous and wealthier—to save and work slightly less, and singles—fewer and poorer—to save and work considerably more. These effects largely offset in the aggregate. Removing all saving motives beyond retirement needs and lifespan uncertainty lowers wealth by 56.9% and earnings by 2.7%. These findings show that capturing multiple risks and behavioral margins jointly is essential to understanding household saving and labor supply. |
| Keywords: | savings; labor supply; couples; singles; precautionary savings; bequest motives; medical expenses |
| JEL: | E20 I1 J0 |
| Date: | 2025–07–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:101316 |
| By: | Rosso, Biagio; Gatto, Matteo |
| Abstract: | What are key macroeconomic consequences of an occasionally binding debt-control policies in economies operating under Fiscal Dominance? From a kindred theoretical perspective, what happens when relaxing the "Sargent" assumption of a perfectly flexible monetary authority to occasionally inflexibility in the form of limits to the quantity of debt or money-growth at which the authority is willing to operate? Finally, how does this matter for optimal fiscal-monetary rules and interactions in such contexts, in particular for the desirability of inflation-targeting? The organising framework we propose, unifying MD and FD with and without occasional inflexibility is (i) a DSGE sticky-price model admitting both MD and FD as alternative solutions to indeterminacy of the equilibrium inflation path, and (ii) extended to account for occasionally binding upper boundaries to quantity of debt through which passive monetary authorities is willing to assist the dominant fiscal side (occasional policy inflexibility). Drawing on the OccBin approach in the sequence space for the analysis of DSGE models featuring non-linearities arising from endogenous regime switching, including occasionally binding constraints, we study transitional dynamics in response to shocks, and optimal monetary-fiscal policy, across unconstrained MD, FD, and FD with occasional policy inflexibility. We provide two ways of integrating this occasionally binding policy-side or supply-side constraint: an overdetermined system with temporary disequilibria or policy-induced shortages, solved for through Least Squares, and one in which the Monetary Authority endogenously deviates from its standard behaviour to enforce the inflexible policy. Subsequently, an "optimal policy" exercise -- via optimal simple rules -- is conducted seeking to identify the monetary-fiscal policy pairs that minimise a standard quadratic loss function. Based on the analysis of impulse responses and the optimal policy rules exercise, we highlight a number of new results, relevant to both theory and policy applications, on FD economies emerging from accounting for occasionally inflexibility in the form of debt ceilings. In order: dynamics display emergent properties, in the form of endogenous higher macroeconomic volatility and a recessionary-deflationary cycle; macroeconomic stabilisation is more difficult to achieve under strong inflation targeting than under perfectly flexible passive policy; more dovish monetary rules outperform hawkish ones (targeting inflation as strong as feasible under the passive monetary policy requirements); gradualism in policy reform could lead to the emergence of policy traps; more systematic fiscal policy intervention could reinstate (relative) optimality of stronger inflation targeting. |
| Keywords: | fiscal dominance; optimal monetary-fiscal policy; occasionally binding constraints; debt ceiling; endogenous regime switching; NK models; shortages; shortages as endogenous regime switches; inflation path indeterminacy; |
| JEL: | C63 E31 E32 E52 E58 E63 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125094 |
| By: | Effrosyni Adamopoulou; Anne Hannusch; Karen A. Kopecky; Tim Obermeier |
| Abstract: | Why do US college-educated couples with children marry at higher rates than those without a college degree? We argue that investing in children is more valuable for college-educated couples, who are more likely to send their children to college. Marriage, which entails lower separation risk and more equal asset division if separation does occur, provides insurance to the lower-earning spouse, which facilitates child investment. Using an OLG model of marriage, cohabitation, wealth accumulation, and educational investments where college completion is risky, we find that insurance through marriage is particularly important when investing in children is costly and college costs are high. |
| Keywords: | cohabitation; marriage; child development; time and money investments; human capital accumulation; college costs |
| JEL: | D15 E24 J12 J22 J24 |
| Date: | 2025–07–17 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:101333 |
| By: | Esquivel, Carlos; Samano Penaloza, Agustin |
| Abstract: | This paper develops a sovereign default model with capital accumulation, long-term debt, and fiscal rules with two distortions: debt dilution and private underinvestment. Fiscal rules generate a long-run economic expansion because they mitigate default risk caused by dilution, which increases capital accumulation. In the short run, however, the economy goes through a costly transition where consumption and investment drop to finance debt reduction. These dynamic trade-offs are quantified, and the welfare gains of fiscal rules are computed using a calibration for Argentina. A debt limit of 44 percent of gross domestic product attains the maximal welfare gain of 0.5 percent. Implementation of the debt limit generates short-lived drops in consumption and investment of 5 and 7 percent, respectively, and a long-run gross domestic product expansion of 1.4 percent. The paper relaxes the assumption of commitment to the rule and discusses how the threat of exclusion from implementing future rules provides enough incentives to avoid deviations. Welfare gains more than double in this case. |
| Date: | 2025–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11156 |
| By: | Ansgar Rannenberg (National Bank of Belgium, Research Department) |
| Abstract: | I show that in a canonical HANK model, under a balanced budget fiscal rule, the effect of a nominal interest rate peg is much larger than in a representative agent (RA) model. By contrast, under a standard fiscal rule where tax revenue responds gradually to deviations of the debt-to-GDP ratio from steady-state and depends on economic activity, the effect of forward guidance is much weaker than in the RA model, and becomes linear in the length of the peg. This result is robust to allowing for countercyclical inequality and income risk, and carries over to a quantitative model with capital. |
| Keywords: | Forward guidance, fiscal rules, HANK |
| JEL: | E52 E37 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202507-478 |
| By: | Ray, Walker; Droste, Michael; Gorodnichenko, Yuriy |
| Abstract: | We study the role of preferred habitat in understanding the economic effects of the Federal Reserve’s quantitative easing (QE). Using high-frequency identification and exploiting the structure of the primary market for US Treasuries, we isolate demand shocks that are transmitted solely through preferred habitat channels but otherwise mimic QE shocks. We document large localized yield curve effects when financial markets are disrupted. Our calibrated model, which embeds preferred habitat in a New Keynesian framework, can largely account for the observed financial effects of QE. QE is modestly stimulative for output and inflation, but alternative policy designs can generate stronger effects. |
| Keywords: | quantitative easing; monetary policy; market segmentation; treasury auctions |
| JEL: | E52 E43 E44 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:120833 |
| By: | Yoshiki Ando |
| Abstract: | Motivated by the substantial growth and upfront investments of venture capital (VC) backed firms observed in administrative US Census data, this paper develops a firm dynamics model over the life cycle. In the model, startups choose the source of financing from VC, Angel investors, or banks, depending on their growth potential, and invest in innovation. The calibrated model explains the life-cycle dynamics of firms with different sources of financing and implies that venture capitalists’ advice accounts for around 22% of the growth of VC-backed firms. A counterfactual economy without VC financing would lose aggregate consumption by around 0.4%. |
| Keywords: | Venture capital, firm dynamics, innovation, upfront investment, defaultable debt, endogenous sorting |
| JEL: | D22 D25 E22 G24 G30 O32 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:25-38 |
| By: | Martin Wolf; Luca Fornaro |
| Abstract: | We study public debt sustainability in an economy with endogenous productivity growth. Our model has two key features: i) financing large primary surpluses entails fiscal distortions that depress investment and growth, ii) low growth increases the primary surpluses needed to stabilize the public debt-to-GDP ratio. Negative shocks to fundamentals or pessimistic animal spirits may drive the economy into a state of fiscal stagnation, characterized by high public debt, large fiscal distortions and low productivity growth. We discuss policy options to avoid/escape fiscal stagnation. |
| Keywords: | investment, fiscal policy, public policy, Endogenous Productivity Growth, Stagnation |
| JEL: | E22 E62 H63 O40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1488 |
| By: | Stéphane Auray (ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - GENES - Groupe des Écoles Nationales d'Économie et Statistique, ESC [Rennes] - ESC Rennes School of Business); Aurélien Eyquem (UNIL - Université de Lausanne = University of Lausanne) |
| Abstract: | We develop an open-economy model of endogenous automation with heterogeneous firms and labor-market reallocation to quantify the contribution of various trends to the adoption of robots in the U.S. economy. The decline in the relative price of robots is the major trend leading to automation, but interacts with other trends that either hinder (rising entry costs, rising markups) or slightly foster (rising labor productivity, declining trade costs) the adoption of robots. Taken alone, the decline in the relative price of robots produces moderate welfare gains in the long run, but less than labor productivity growth. We then exploit our model to show that a decline in the relative price of robots (i) generates small positive cross-country automation spillovers and (ii) produces inefficient labor-market reallocation since a small subsidy on robots combined with a training subsidy can generate small welfare gains. Our main conclusion is that automation can not be simply modeled as an exogenous decline in the price of robots, and must be analyzed in a broader framework taking into account trends affecting firms, such as the decline in business dynamism and the rise in markups.✩ We would like to thank the editor B. Ravikumar and two referees for their invaluable comments. We also thank Basile Grassi, Sergio Rebelo, Ariel Resheff and Farid Toubal as well as participants in various seminars and conferences for interesting feedbacks. We acknowledge financial support from the French National Research Agency (ANR-20-CE26-0018-02). |
| Keywords: | Robots, Automation, Heterogeneous firms, Labor market, Open-economy |
| Date: | 2025–06–13 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05137753 |
| By: | Salim Ergene |
| Abstract: | This paper studies optimal government interventions to recapitalize corporations under tight financial conditions. The policymaker can finance the recapitalization program through income taxes and an inflation tax on money holdings. However, households operating the labor-intensive production technology can evade their tax obligations. Growing tax evasion raises the tendency to monetize interventions. Partially monetizing recapitalization yields welfare gains, as an inflation tax reallocates resources from less to more productive sectors. However, financing unproductive government spending through seigniorage revenue becomes an inferior policy, as contemporaneous inflation costs outweigh the expansionary effects of fiscal policy. Pecuniary externalities generate scope for macroprudential policies, mitigating the effects of financial shocks. |
| Keywords: | Tax evasion, Recapitalization, Currency mismatch, Depreciation |
| JEL: | E12 E41 E26 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tcb:wpaper:2507 |