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on Dynamic General Equilibrium |
| By: | Francesco Morelli (Link Campus University) |
| Abstract: | The modern macroeconomic debate grapples with explaining complex phenomena, often giving rise to theoretical and empirical puzzles. In response, New Keynesian models have evolved, incorporating frictions and agent heterogeneity, leading to the development of TANK and HANK frameworks. However, increasing model complexity does not always clarify underlying causes. This work introduces a New Keynesian model with Omitted Effects, incorporating previously unaccounted-for variables into agents’ objective functions. Similar to Omitted Variable Bias in econometrics, neglecting key variables in a general equilibrium setting leads to model misspecification and puzzling anomalies. The study follows both theoretical and empirical approaches: first, demonstrating how Omitted Effects address the Forward Guidance Puzzle and the consumption response to government spending; second, using an algorithm to identify omitted variables that improve model fit to US data. Empirical findings highlight the crucial role of real wages, inflation, and income Omitted Effects in resolving key macroeconomic inconsistencies. This framework enhances DSGE models’ flexibility, providing a systematic tool to refine economic modeling and deepen the understanding of macroeconomic dynamics. |
| Keywords: | DSGE, Omitted Effects, Forward Guidance Puzzle, Government Spending, Identification, General Equilibrium. Augmented Objective Function |
| JEL: | E10 E20 E21 E24 E27 E30 E31 E37 E52 E62 |
| Date: | 2025–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:rtv:ceisrp:604 |
| By: | Christian Bayer; Fabio Stohler |
| Abstract: | If households self‐select into a risky high‐income state through investment, increased government debt can stimulate investment and improve welfare. In a heterogeneous agent endogenous growth model, government debt helps households smooth consumption and encourages investment in risky, high‐return assets, crowding in aggregate growth. However, when debt becomes excessive, capital crowding out and distortionary taxation negate these benefits. Using a model calibrated to U.S. data, we show that this crowding‐in effect suggests a higher optimal debt‐to‐GDP ratio than currently observed. |
| Keywords: | Incomplete Markets, Public Debt, Endogenous Growth, Portfolio Choice |
| JEL: | D31 E21 G11 H63 O43 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_691 |
| By: | Gorkem Bostanci; Omer Koru; Sergio Villalvazo |
| Abstract: | We argue that inflationary shocks affect allocative efficiency by changing the rate and the characteristics of workers’ job-to-job transitions. First, using monetary policy shocks and survey data on search effort, we empirically show that a one percentage point rise in inflation increases job-to-job transitions by up to 4.5%, and workers with higher inflation expectations are more likely to search and do so more effectively. Second, we build a general equilibrium model of directed on-the-job search to quantify the aggregate implications of labor market reactions. Higher-than-expected inflation reduces real wages, prompting workers to search more actively and aim lower. This increases job-to-job transitions but lowers the efficiency gains per transition. Therefore, the effect on output is ambiguous. Last, we calibrate the model to the U.S. economy. Inflationary shocks increase reallocation rates, yet allocative efficiency and output decline. Small deflationary shocks (e.g., 2%) increase output in the short run, while others decrease it. |
| Keywords: | Inflation; Job-to-job flows; Worker reallocation |
| JEL: | E24 E31 J31 |
| Date: | 2025–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2025-42 |
| By: | Arce, Fernando; Morgan, Jan; Werquin, Nicolas |
| Abstract: | Political crises often coincide with fiscal crises, with complex causal dynamics at play. We examine the interaction between tax revolts and sovereign risk using a quantitative structural model calibrated to Argentina. In the model, the government can be controlled by political parties with different preferences for redistribution. Households may opt to revolt in response to the fiscal decisions of the ruler. While revolts entail economic costs, they also increase the likelihood of political turnover. Our model mirrors the data by generating political crises concurrent with fiscal turmoil. Specifically, we find that our model aligns closely with the conditions observed during the Macri administration (2015-2019). We find that left-leaning parties are more prone to default upon entering office, while right-leaning parties issue more debt. Our framework explains the high deficits observed during the Macri administration as well as the sovereign default that occurred immediately after the left regained power. |
| Keywords: | Civil unrest;Financial Crises;sovereign default;redistribution |
| JEL: | E32 E44 F41 G01 G28 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14144 |
| By: | Boehnert, Lukas (University of Oxford); de Ferra, Sergio (University of Oxford); Mitman, Kurt (Stockholm University); Romei, Federica (University of Oxford) |
| Abstract: | We investigate how the composition of expenditure shapes the transmission of monetary policy in a currency union. European Monetary Union data reveal three facts: (1) higher inequality countries have larger service expenditure shares; (2) monetary policy has a weaker output impact in these high-service-share, high-inequality countries; and (3) monetary policy induces systematic trade flows between high- and low-service-share countries. We develop a New Keynesian model with non-homothetic preferences and heterogeneous sectoral income that rationalizes these facts. Pro-cyclical inequality, driven by wealthier households' greater income exposure to services, buffers poorer households' consumption to contractionary shocks, dampening overall policy transmission. Our findings suggest that accounting for cross-country differences in consumption and income distributions is essential for understanding common monetary policy. |
| Keywords: | currency union, monetary policy, inequality |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17950 |
| By: | Muñoz, Manuel A. (Bank of England); Smets, Frank (Bank for International Settlements, Ghent University and CEPR) |
| Abstract: | We reconcile theory and recent evidence on the benefits of building releasable bank capital buffers when there is headroom for doing so by building a quantitative macro-banking model that provides a rationale for static bank capital requirements and dynamic capital buffers due to externalities arising from bank risk failure and collateral constraints. Optimal dynamic capital buffers gradually build in response to expected upward shifts in bank net interest margins. In the absence of pecuniary externalities due to collateral constraints, such capital buffers are ineffective. The model also captures previous empirical findings such as the negative effect of a capital requirement tightening on short-term lending and the optimality of setting static bank capital requirements at relatively conservative levels. We present an application of our quantitative analysis in the form of a simple framework for calibrating the so-called ‘positive neutral counter-cyclical capital buffer’ (PN-CCyB). |
| Keywords: | Macroprudential policy; pecuniary externalities; borrowing limits; bank default risk; bank lending spread |
| JEL: | E44 G21 |
| Date: | 2025–05–30 |
| URL: | https://d.repec.org/n?u=RePEc:boe:boeewp:1128 |
| By: | Galo Nuño |
| Abstract: | The natural interest rate is the real rate that would prevail in the long-run. The standard view in macroeconomics is that the natural rate depends exclusively on structural factors such as productivity growth and demographics. This paper challenges this view by discussing three alternative, and complementary, views: (i) that the natural rate depends on fiscal policy via the stock of risk-free assets; (ii) that it depends on monetary policy via the central bank in ation target; and (iii) that it depends on persistent supply shocks such as tariffs or wars. These three theories share the relevance of precautionary savings motives. We conclude by drawing some lessons for monetary policy design. |
| Keywords: | HANK model, monetary-fiscal interactions, deep learning, cost-push shocks |
| JEL: | E32 E58 E63 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11878 |
| By: | Diogo Baerlocher (Department of Economics, University of South Florida) |
| Abstract: | This paper investigates the relationship between labor regulation and the skill composition of the workforce. Using a quantitative model calibrated to U.S. data, I show that labor market frictions induced by regulation have contrasting effects on different types of workers and across time horizons. Increases in vacancy posting costs reduce welfare for both skilled and unskilled workers, but they raise wages for the unskilled while lowering wages for the skilled. Similarly, policies that strengthen workers' bargaining power tend to benefit unskilled workers but impose costs on skilled workers through reduced earnings and firm profitability. On the empirical side, I exploit health improvements as an instrument for the share of skilled workers to estimate a causal relationship between workforce composition and labor regulation. The findings indicate that countries with larger shares of skilled workers tend to adopt less stringent labor regulations, highlighting how shifts in human capital can shape institutional outcomes. |
| Keywords: | Labor regulation, labor market frictions, skill composition, welfare |
| JEL: | E24 J64 D83 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:usf:wpaper:2025-03 |
| By: | Adachi, Daisuke; Skipper, Lars |
| Abstract: | The offshoring of manufacturing jobs has replaced low-skilled workers who often lack the relevant skills to transition to new occupations. Using Danish adult education and employer-employee data, we study how adult vocational training influences occupational choice and mitigates labor demand shocks. Despite low participation rates in training programs, we show that manufacturing workers trained in business services (BS) programs have a 0.9-3.1 percentage point higher probability of transitioning to BS occupations using dynamic difference-in-difference analysis. We then propose and estimate a life-cycle model of occupation and program choice that yields a nested logit conditional choice probability. The program take-up elasticity is lower than the occupation choice elasticity, suggesting that individuals are insensitive to the monetary value of the programs. A counterfactual wage subsidy policy tied to participation in BS-related programs supports transitions from manufacturing to BS occupations and reduces the share of low-skilled individuals leaving the labor force, especially at older ages, demonstrating the potential for a resilient labor market. |
| Date: | 2025–06–06 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:7dktj_v1 |
| By: | Anastasiia Antonova; Ralph Luetticke; Gernot J. Muller; Gernot Müller |
| Abstract: | What determines the effectiveness of military buildups? We introduce the concept of the military multiplier: the percentage increase in military equipment an additional dollar buys. It varies with the costs of allocating resources to military production, depending, among other things, on the industrial structure and capital reallocation frictions. We show that the response of military-goods prices to military buildups is a sufficient statistic for the military multiplier and that it has declined over time in the US. Using a calibrated multi-sector business cycle model, we show this decline stems from the economy’s structural shift toward the service sector. |
| Keywords: | military buildup, government spending, effectiveness, sectors, reallocation |
| JEL: | H56 E62 E23 O41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11882 |
| By: | Shijun Gu; Chengcheng Jia |
| Abstract: | Can the expansion of higher education lead to firm productivity growth? In this paper, we examine how China's college expansion program contributes to the rapid growth of firms' R&D expenditure and productivity. In our model, heterogeneous firms make endogenous R&D decisions, requiring them to allocate skilled workers between production and R&D. We structurally estimate the model using firm-level data on the level and distribution of R&D, as well as macro-level data on skill prices and sectoral allocation. Quantitative analysis reveals that between 2004 and 2018, the combination of the R&D-sector-biased technology shock, the skill-biased technology shock, and the skilled-labor supply shock leads to a 12 percent increase in total factor productivity (TFP), of which one-fifth is explained by the rising supply of skilled labor. Counterfactual analysis shows that a further increase in the share of skilled labor has the potential to increase TFP by an additional 2 percent, but the marginal effect diminishes due to the rising wages of unskilled labor. |
| Keywords: | R&D; TFP; skilled labor; college expansion; Chinese economy |
| JEL: | J24 O31 O32 |
| Date: | 2025–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:101133 |