|
on Dynamic General Equilibrium |
| By: | Jesus Bejarano (Banco de la Republica, Bogota, Carrera 7 No. 14-78 Bogota, Colombia, Colombia); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | We analyze the impacts of climate change and carbon taxation on South Africa using a calibrated small open economy New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model featuring sticky-and-flexible-price specifications. A permanent productivity shock reducing GDP by 5 percent by 2050 lowers the natural interest rate by 7.5 basis points, appreciates the real exchange rate by 4 percent, and generates 4 basis points of inflation, requiring 0.5 basis point policy rate increases above the natural rate. A tenfold carbon tax increase (R236 to R2, 360/ton CO2) produces modest long-run output losses (0.22 percent) with 0.2 percent immediate inflation, necessitating 6 basis point policy tightening. Compressed adjustment horizons (2033 versus 2050) amplify short-run effects fivefold, with the natural interest rate declining by 40 basis points under accelerated climate impacts. Results suggest the South African Reserve Bank (SARB) must incorporate climate-adjusted potential output and natural rate estimates into its monetary policy framework, with particular attention to the timing of climate-induced productivity decline materialization which fundamentally determines the magnitude of required policy responses. |
| Keywords: | Climate change, Small open economy, New Keynesian DSGE, Monetary policy, South Africa |
| JEL: | E31 E32 E52 Q54 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202601 |
| By: | Tatiana Kirsanova; Øyvind Masst; Charles Nolan |
| Abstract: | This paper quantifies the macroeconomic effects of the major housing- and labour-market reforms of the 1980s in the United Kingdom under the Thatcher government. We estimate a small New Keynesian DSGE model with search frictions in both labour and housing markets to evaluate the collapse in public construction, the Right to Buy programme, the decline in trade union bargaining power, and the shift in monetary policy. We find strong cross-market spillovers: housing-market shocks account for roughly half of the volatility in unemployment and job search, and tight housing markets significantly dampen job creation. Counterfactual experiments imply that the observed fall in union bargaining power lowered the mid-1980s unemployment peak by about two percentage points relative to a no-reform path. The housing reforms tilt tenure sharply towards ownership and keep house-price-to-earnings ratios under sustained pressure, but, taken together, the reforms generate only modest changes in average affordability. In welfare terms, the negative effects of lower public construction are more than offset by the combination of lower unemployment and higher housing-service consumption, yielding a net welfare gain of around one per cent in consumption-equivalent terms. |
| Keywords: | Estimated New Keynesian DSGE Models; Monetary Policy; Search-and-Matching Frictions; Labour and Housing Markets; Bayesian Estimation |
| JEL: | E32 E24 E52 E65 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2025_13 |
| By: | Alexander Eliseev (Bank of Russia, Russian Federation) |
| Abstract: | This study focuses on improving the accuracy of nowcasting in DSGE models. We extend one of the general equilibrium models of the Russian economy by incorporating mixed-frequency data. Specifically, we introduce an equation that links a panel of non-modelled high-frequency indicators to observable variables, whose dynamics are determined directly by the model. The out-of-sample pseudo-real-time forecasting procedure demonstrates that incorporating these additional variables enhances the accuracy of Russian GDP nowcasting using the DSGE model. This improvement makes the model’s forecasts comparable in accuracy to state-of-the-art econometric models and superior to univariate models. We also investigate the extent to which fluctuations in high-frequency indicators are associated with macroeconomic factors, as well as the economic shocks driving the explained portion of these fluctuations. While the structural interpretation of non-modelled variables is a potential strength of the model, caution is warranted due to the econometric methodology employed. |
| Keywords: | nowcasting, GDP, DSGE model, mixed frequency data, pseudo real-time forecasting |
| JEL: | C53 C82 E32 E37 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps145 |
| By: | Son T. Pham (VNUIS - VNU, Hanoi); Paul Levine (University of Surrey) |
| Abstract: | A large literature over several decades studies government investment through structural DSGE frameworks, empirical fiscal-multiplier estimates, and studies of the long-run productivity effects of public capital. Recent contributions show that investment-specific time-to-build gestation lags and the distortionary fiscal adjustments required for intertemporal government budget balance can compress short-run multipliers despite positive long-run returns. We reassess this mechanism in an estimated medium-scale New Keynesian model that replaces the Cobb–Douglas technology with an empirically supported CES production function. Public-investment expansions are implemented under jointly welfare-maximizing simple monetary and tax rules. The analysis quantifies how the elasticity of substitution between private and public capital, increasing returns to scale and optimal policy interactions shape the dynamic propagation of government-investment shocks and increase both the short-run and long-run productive gains to the government investment fiscal multiplier. |
| JEL: | D52 E17 E52 E62 H54 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0226 |
| By: | Адилханова Зарина // Adilkhanova Zarina (National Bank of Kazakhstan); Андрусь Юлия // Andrus Yuliya (National Bank of Kazakhstan) |
| Abstract: | Данная работа посвящена оценке параметров на микроуровне для их последующего использования при калибровке динамической стохастической модели общего равновесия (DSGE) для экономики Казахстана. В рамках исследования произведена оценка ключевых структурных параметров, включая эластичность труда и капитала в выпуске, норму амортизации основного капитала, а также эластичность предложения труда по Фришу. Расчеты выполнены на основе микроданных предприятий за период с 2009 по 2024 годы с применением эконометрических методов. Полученные результаты способствуют повышению реалистичности макроэкономических моделей, обеспечивают их согласованность с национальными данными и могут быть использованы для анализа реакции экономики на различные шоки и меры экономической политики. // This study focuses on estimating micro-level parameters to support the calibration of a dynamic stochastic general equilibrium (DSGE) model for the Kazakhstani economy. We estimate several key structural parameters, including the output elasticities of labor and capital, the depreciation rate of fixed capital, and the Frisch elasticity of labor supply. The analysis is based on enterprise-level microdata from 2009 to 2024 and employs econometric techniques. The resulting estimates improve the realism of macroeconomic models, align them more closely with national data, and provide a solid basis for assessing how the economy responds to various shocks and policy measures. |
| Keywords: | эластичность капитала, эластичность труда, коэффициент амортизации, эластичность Фриша, capital elasticity, labor elasticity, depreciation rate, Frisch elasticity |
| JEL: | E22 E23 E24 C51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:aob:wpaper:67 |
| By: | Li, Shurui (Department of Economics, Umeå University) |
| Abstract: | This paper examines how fertility events contribute to the gender pay gap in a framework that integrates a life-cycle model with a search and matching model featuring endogenous job matching and wage bargaining. The model represents four fertility-related life-cycle stages, each of which is associated with distinct labor market behaviors and constraints. This paper highlights the role of first-birth timing, parental leave, and job amenity preferences in shaping gender gaps in human capital accumulation and career trajectories. Counterfactual simulations show that delaying the first birth and shortening parental leave substantially improve women’s trajectories of wages and promotions. Equalizing amenity preferences between genders, though not efficiency-enhancing, significantly raises women’s representation in high-paying jobs and promotes greater structural equality in the labor market. The framework provides a structural lens to assess how demographic shocks interact with search frictions and amenity preferences to produce enduring gender gaps in the labor market. |
| Keywords: | parental leave; gender gap; job amenity; human capital; search and matching |
| JEL: | D91 J13 J16 J24 J64 |
| Date: | 2026–01–19 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:umnees:1042 |
| By: | Sergey Ivashchenko (Bank of Russia, Russian Federation) |
| Abstract: | The small-scale open economy dynamic stochastic general equilibrium (DSGE) models are estimated with a second-order approximation. The models differ in monetary policy rules. Optimal policy under commitment is best according to marginal likelihood. The conventional Taylor-type rule performs better in short-term forecasting but loses to other policies in long-term forecasting. Monetary policy rules heavily influence the dynamic and estimated parameters of models. They may produce a "price puzzle" and easily lead to the absence of inflation anchoring. The most interesting results relate to the performance of different rules in economies estimated with other rules. Very hawkish policies in a usual economy lead to a non-unique solution. An explosive trajectory is produced by the usual policy in an economy with a fiscal authority that does not care about debts/assets. Only the optimal policy under commitment can work in each of them. However, it may lead to a worse loss function than that produced by simple rules. |
| Keywords: | DSGE; monetary policy; estimated optimal policy under commitment |
| JEL: | C31 C32 E37 E52 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps144 |
| By: | Ko Munakata |
| Abstract: | This paper extends the menu cost model of Gertler and Leahy (2008) by introducing a drift in the aggregate markup. Assuming that the drift is always negative and not large, consistent with moderate and positive trend inflation, the paper analytically characterizes firms' value function and markup distribution. It derives explicit equations sufficient to close the model in general equilibrium, making the calculation of impulse responses to aggregate shocks as easy as in conventional representative-agent New Keynesian models. In addition, the paper shows two implications of the model. First, the model replicates the empirically observed positive correlation between the inflation rate and the frequency of price changes. Second, the model yields an explicit equation representing the Phillips curve, with additional terms that make the inflation rate more responsive to aggregate shocks. |
| Keywords: | menu cost, Phillips curve, trend inflation, frequency of price changes |
| JEL: | E23 E31 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1327 |
| By: | Mitsuhiro Okano |
| Abstract: | This paper characterizes DSGE models as fixed-point selection devices for self-referential economic specifications. We formalize this structure as $(S, T, \Pi)$: specification, self-referential operator, and equilibrium selector. The framework applies to any DSGE model through compositional pipelines where specifications are transformed, fixed points computed, and equilibria selected. We provide formal results and computational implementation for linear rational-expectations systems, reinterpreting Blanchard-Kahn conditions as a specific selection operator and verifying that standard solution methods (such as QZ decomposition and OccBin) realize this operation. We show that alternative selectors (minimal-variance, fiscal anchoring) become available under indeterminacy, revealing selection as a policy choice rather than a mathematical necessity. Our framework reveals the formal structure underlying DSGE solution methods, enabling programmatic verification and systematic comparison of selection rules. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2601.19329 |
| By: | George Economides; James 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: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2025_11 |
| By: | Jaime Gimeno-Ribes |
| Abstract: | This paper studies how mental accounting of income and wealth affects consumption decisions in a heterogeneous agent environment with incomplete markets, idiosyncratic risk, and asset illiquidity. Mental accounting is formalized using elements from reference-dependence with loss aversion, and it offers a unified explanation of empirical facts about marginal propensities to consume (MPC) and the household distribution that elude standard models: the existence of poor, wealthy, and liquid hand-to-mouth; a spender-saver MPC distribution; realistic levels of aggregate MPC, wealth, return spread, and consumption; differential MPCs from dividends and capital gains; non- Ricardian intertemporal MPCs; and asymmetric MPCs with respect to different attributes. |
| JEL: | D11 D14 D15 D31 D90 E21 E70 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1550 |
| By: | Tiago Neves Sequeira (University of Coimbra, CeBER and Faculty of Economics); Pedro Lima (University of Coimbra, CeBER and Faculty of Economics); Joshua Duarte (University of Coimbra, CeBER and Faculty of Economics) |
| Abstract: | We develop an overlapping generations endogenous growth model with cash-in-advance constraints for (i) consumers and (ii) R&D firms which is consistent with an effect of inflation on the skill-premium labor share. Inflation decreases the skill premium in both cases and decreases the labor share through (i) which it increases through (ii). The newly described effect of inflation on the labor share is consistent with empirical evidence for a short-run effect. |
| Keywords: | inflation, labor share, human capital |
| JEL: | E24 J64 L11 O33 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:gmf:papers:2025-04 |
| By: | Sergey Ivashchenko (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation) |
| Abstract: | It is well-documented in economic literature that inflation expectations exhibit significant heterogeneity across various economic agents, notably households, firms, and financial institutions. This paper investigates the relative importance of these agents' expectations in shaping inflation dynamics within a general equilibrium framework. We introduce non-rational, non-systematic expectation shocks into an otherwise standard small open economy New-Keynesian model, calibrated and estimated using Russian data. This novel approach allows us to isolate exogenous variations in inflation expectations specific to each agent type and assess their distinct impacts on realized inflation. Our results demonstrate that central banks must respond explicitly to non-rational, non-systematic expectation shocks originating from private agents. Importantly, we find that expectation shocks from financial institutions (banks) exert a larger influence on realized inflation than shocks originating from households or firms. This outcome remains robust across multiple variations in model structure and parameterization. In contrast, the inflationary effects of households’ and firms’ expectation shocks manifest in ways unpredictable to these agents themselves, highlighting an expectations-feedback gap. The findings have important implications for monetary policy, particularly regarding communication strategies. |
| Keywords: | inflation expectations, heterogeneous agents, expectation shocks, monetary policy, financial institutions, New-Keynesian model, general equilibrium, diversity in inflation expectations |
| JEL: | E31 E37 E52 D84 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps152 |
| By: | Tomohiro Hirano; Alexis Akira Toda |
| Abstract: | Since McCallum (1987), it has been well known that in an overlapping generations (OLG) economy with land, the equilibrium is Pareto efficient because with balanced growth, the interest rate exceeds the growth rate (R > G), precluding infinite debt rollover (a Ponzi scheme). We show that, once we remove knife-edge restrictions on the production function and allow unbalanced growth, under some conditions an efficient equilibrium with land bubbles necessarily emerges and infinite debt rollover becomes possible, a markedly different insight from the conventional view derived from the Diamond (1965) landless economy. We also examine the possibility of Pareto inefficient equilibria. |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-002e |
| By: | Mikhail Andreyev (Bank of Russia, Russian Federation) |
| Abstract: | This paper uses a stochastic general equilibrium model for a small open export-oriented economy to address two key issues. First, it analyses the impact of deep habits in such an economy. Habits refer to consumers’ tendency to maintain a consumption level similar to previous periods, while deep habits indicate a tendency related to each consumed good rather than just the overall consumption level. We present a model in which the formulation of deep habits differs from the conventional one, taking into account imports in consumption. Second, we compare different financing options for growth in government spending. The role of deep habits in response to economic shocks is reflected in the dampening of shifts in the household demand curve. The paper is the first to show that deep habits lead to lower volatility in output and consumption and to higher volatility in inflation. It also demonstrates that a long-lasting government spending shock results in a crowding-out effect on consumption and output, while a temporary shock leads to an accumulation effect. The medium-term increase in government spending (and government consumption) examined in this study, due to the subsequent need to balance public debt levels, results in decreasing government consumption in the long term. Based on two criteria (maximising welfare and government consumption in the long term), the most preferred financing options for growth in expenditure are the use of a national fund invested in foreign assets or the external debt market. A key innovation of the study is the application of the concept of deep habits to an exporting economy where imports play a significant role in consumer demand; the differentiation between temporary and long-lasting government spending shocks; and the analysis of various financing options for public spending growth, which, as shown, influences the manifestation of either the accumulation or crowding-out effect. |
| Keywords: | dynamic models, rational expectations, fiscal policy, habits, fiscal expansion, crowding-out effect |
| JEL: | D58 E47 E62 E63 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps134 |
| By: | Matteo Ghilardi; Roy Zilberman |
| Abstract: | We study dividend-tax-induced fiscal uncertainty tied to deficit-financing concerns in a production-based general equilibrium model with habit-forming consumption and partially irreversible investment. Habits generate countercyclical investment and asset price dynamics following tax adjustments. Irreversibility and tax risk, in turn, bring asset price volatility closer to the data, trigger lumpy investment behavior, and raise medium-run fiscal spending multipliers. Tax-smoothing and irreversibility significantly enhance welfare despite increased valuation risk, while also revealing a trade-off between debt stabilization and stock price volatility. The irreversibility-habit-augmented model reconciles the limited decline and rapid recovery (i.e., lumpiness) in nonfinancial corporate investment following the 2012 American Taxpayer Relief Act. |
| Keywords: | partial irreversibility, habit formation, asset prices, deficit-financing dividend taxes, public debt |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:lan:wpaper:431361324 |
| By: | Martin S. Eichenbaum; Joao Guerreiro; Jana Obradovic |
| Abstract: | This paper presents new survey evidence on how household spending changes in response to fiscal transfers. Our key finding is that the planned propensity to spend out of transfers equals the marginal propensity to consume (MPC). This result implies that households do not incorporate future tax liabilities into their spending plans. The canonical HANK model cannot account for our survey results because people in that model are overly sensitive to future tax liabilities. We develop an extended HANK model in which households are partially inattentive to future tax liabilities and to the general-equilibrium consequences of fiscal policy. This inattention dampens forward-looking intertemporal MPCs, bringing the model into line with our survey evidence. We use the model to analyze the aggregate effects of fiscal policy changes and find that both transfer and government spending multipliers are larger in the inattentive HANK model than in the canonical HANK framework. |
| JEL: | E30 E39 E60 E70 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34691 |
| By: | Lee, H. |
| Abstract: | This paper extends deterministic saddle-path analysis to stochastic environments by introducing conditional saddle paths: the equilibrium path under frozen exogenous states. This concept yields a global geometric representation of stochastic equilibrium dynamics, in which equilibrium fluctuations decompose into movements along (endogenous propagation) and across (exogenous state transitions) conditional saddle paths. The framework delivers two theoretical results. First, state-dependent impulse responses arise from differences in the slopes of conditional saddle paths. Second, if an aggregate equilibrium variable varies strictly monotonically along conditional saddle paths, it uniquely indexes equilibrium states and thus provides an exact one-dimensional sufficient statistic. Applying this result, I prove that aggregate capital is a sufficient statistic in a canonical heterogeneous-household model (Krusell and Smith, 1998). |
| Keywords: | Conditional Saddle Path, Business Cycles, State-Dependent Dynamics, Sufficient Statistics, Heterogeneous Agents |
| JEL: | C62 D31 E32 |
| Date: | 2026–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2604 |
| By: | Sergey Ivashchenko (Bank of Russia, Russian Federation) |
| Abstract: | The conventional practice in estimating DSGE models is to rely on seasonally adjusted data. While convenient, this approach distorts the microeconomic foundations of the model. An alternative is to model seasonality explicitly, but this often introduces severe misspecification. This paper proposes a middle ground: using year-over-year growth rates instead of quarter-over-quarter growth rates, which allows the model to endogenously determine the seasonal adjustment. This approach greatly improves forecast accuracy by more than 20% while keeping the internal consistency of the model. Moreover, we show that model misspecification and seasonal adjustment can offset each other, implying that seasonality should be treated as model-specific rather than imposed exogenously. Empirical results for U.S. and Russian data confirm that structural seasonality improves forecasting performance, and model fit relative to conventional seasonal adjustment methods. |
| Keywords: | DSGE; seasonality; structural modeling |
| JEL: | C13 C32 E32 E52 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:bkr:wpaper:wps160 |
| By: | Calebe Figueiredo; Neville Francis |
| Abstract: | We study the labor market effects of tenure-dependent severance pay systems that tie firing costs to workers’ accumulated earnings histories. We develop an overlapping-generations search-and-matching model in which firms face increasing separation costs over the employment relationship. Using administrative employer–employee data from Brazil, we estimate the model and show that tenure-dependent severance costs induce labor hoarding among low-productivity, long-tenured workers who would not be hired if unemployed. These distortions are strongest late in the life cycle, when firms optimally delay separation to avoid severance obligations, while simultaneously imposing higher hiring thresholds on older unemployed workers with shorter continuation values. These forces imply that tenure-based severance policies protect employment histories rather than productivity, shaping labor market dynamics over the life cycle and generating allocative inefficiencies. |
| JEL: | C61 C78 J64 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34704 |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | We study how the increased cross-country ownership of financial assets between advanced and emerging economies impacted their financial and macroeconomic volatility. While cross-country ownership improved risk-sharing and reduced volatility associated with financial crises, it also increased the exposure of countries to foreign crises, leading to higher international co-movement. Through quantitative applications of a two-region model representative of advanced and emerging economies, we find that financial globalization reduced volatility worldwide, but significantly more in emerging economies. |
| JEL: | F40 F41 G01 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34689 |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | We propose a framework for studying financial and macroeconomic dynamics in an environment where liquid assets have a productive use but their supply is limited (i.e., the economy is starved for liquidity). The private demand for financial assets arises from the need to hold them for production. The private supply of financial assets is limited and unstable because of borrowing constraints and default risk. We discuss open-economy applications that analyze the accumulation of foreign reserves by emerging economies, the increase in public debt issued by advanced economies, the rapid growth of emerging economies, structural changes in financial markets, and financial globalization. A key result is that most of these developments led to a decline in interest rates and an increase in global macroeconomic volatility, driven by riskier borrower portfolios. |
| JEL: | F40 F41 G15 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34688 |