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on Dynamic General Equilibrium |
| By: | Junming Chen |
| Abstract: | This paper studies the issue of “should monetary policy lean against rational asset price bubbles†by establishing an analytically tractable New Keynesian model with endogenous capital accumulation. Rational bubbles may exist in equilibrium because of the extra liquidity they generate for financially constrained firms when a lumpy investment opportunity arrives. Under certain conditions, bounded bubble-driven fluctuations (in output) may emerge via both supply-side and demand-side mechanisms. The monetary policy analyses of the model do not strongly favor a leaning-against-the-bubble strategy and emphasize a special overreaction risk that it may suffer from relative to its conventional counterpart. |
| Keywords: | rational asset price bubbles, monetary policy, financing constraints, New Keynesian model |
| JEL: | E12 E22 E32 E44 E52 E63 G12 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:yor:yorken:25/04 |
| By: | Hanks, F. |
| Abstract: | Workers displaced by the reallocation of labor demand across industries suffer persistent earnings losses, in large part due to higher unemployment risk. This paper quantifies the aggregate unemployment implications of a reallocation of labor demand. I develop a search and matching model with multiple industries and industry specific skill that is calibrated to the US economy. In the model a reallocation shock leads to up to a 0.5 percentage points rise in unemployment. The combination of industry specific skill and imperfect substitutability between workers of different skill levels are key to this result. |
| Date: | 2025–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2571 |
| By: | Takeki Sunakawa (Professor, Faculty of Economics, Hitotsubashi University (E-mail: takeki.sunakawa@gmail.com)) |
| Abstract: | We investigate the extent to which fiscal factors have contributed to inflation in Japan over the past four decades. Despite sustained fiscal expansion and rising debt since the 1990s, inflation remained low until recent years. Using the medium-scale DSGE model developed by Bianchi et al. (2023), we estimate the model with Japanese data and find that, in contrast to the U.S. case, unfunded fiscal shocks are not the main drivers of inflation in Japan. Instead, real demand and supply shocks, along with accommodative monetary policy, have played more significant roles in shaping inflation dynamics. |
| Keywords: | Inflation, Fiscal Theory of Price Level, Japan |
| JEL: | E31 E52 E62 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-14 |
| By: | Bobasu, Alina; Ciccarelli, Matteo; Notarpietro, Alessandro; Ambrocio, Gene; Auer, Simone; Bonfim, Diana; Bottero, Margherita; Brázdik, František; Buss, Ginters; Byrne, David; Casalis, André; Conti, Antonio M.; Di Casola, Paola; Dobrew, Michael; Dupraz, Stéphane; Giammaria, Alessandro; Gomes, Sandra; Goodhead, Robert; Grimaud, Alex; Haavio, Markus; Martínez Hernández, Catalina; Imbierowicz, Björn; Jacquinot, Pascal; Kalantzis, Yannick; Kornprobst, Antoine; Kortelainen, Mika; Lozej, Matija; Mandler, Martin; McClung, Nigel; Mogliani, Matteo; Müller, Georg; Odendahl, Florens; Priftis, Romanos; Rannenberg, Ansgar; Reichenbachas, Tomas; Repele, Amalia; Theofilakou, Anastasia; Valderrama, María T.; Vestin, David; Vetlov, Igor; Wacks, Johannes; Zhutova, Anastasia; Zimic, Srečko; Zlobins, Andrejs; Berg, Tim Oliver; Delis, Panagiotis; Gonçalves, Nuno Vilarinho; Izquierdo, Matías Covarrubias; Le Gall, Claire; Nilavongse, Rachatar; Yakut, Dilan Aydın |
| Abstract: | This paper serves as a reference guide on the effects of “standard” monetary policy shocks on output and prices, based on harmonised simulation exercises conducted across models of the European System of Central Banks (ESCB), meta-analysis of existing empirical literature for the euro area, and selected works on heterogeneity and non-linearities in the monetary transmission mechanism as captured by empirical models. Our analysis starts by comparing the effects of monetary policy shocks as estimated by structural, semi-structural and dynamic stochastic general equilibrium (DSGE) models, and identifying the main sources of heterogeneity – most notably via the specification of monetary policy rules, the slope of the Phillips curve, the role of real rigidities and financial frictions, and the expectations formation mechanism. While DSGE models tend to produce sharper responses, semi-structural models often reveal more gradual and persistent effects, in line with backward-looking empirical models. The second chapter presents a meta-analysis of estimated effects based on the empirical literature, which are broadly consistent with the results obtained from the ESCB models, although differences might appear when correcting for publication bias, or accounting for different identification frameworks. The study is then complemented by selected works on heterogeneity and non-linearities in the monetary transmission mechanism as captured by empirical models. Our analysis in the final chapter shows that monetary policy transmission is heterogeneous across countries, sectors, demand components, and time. It also reveals important non-linear and state-dependent dynamics: in high-inflation periods, greater price and wage flexibility amplifies the response of inflation while dampening output effects, thereby lowering the sacrifice ratio. [...] JEL Classification: C22, C52, D58, E31, E52, E58, F45 |
| Keywords: | empirical models, heterogeneity, inflation, meta-analysis, monetary policy, output, semi-structural, structural models |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbops:2025377 |
| By: | Bilbiie, F. O.; Hanks, F.; Lavender, S. |
| Abstract: | Complementarity between consumption and work is essential for heterogeneous-agent models' ability to generate realistic multiplier effects from aggregate demand shocks, while avoiding puzzling predictions. We show how parameterizing complementarity - in the spirit of Frisch's utility acceleration"- separately from income effects is necessary to achieve both. HANK models equipped with such complementarity deliver plausible fiscal multipliers and simultaneously resolve two key challenges in the literature: a "trilemma" of matching marginal propensities to earn (MPEs) and to consume (MPCs), and a Catch-22 "dilemmac of resolving the forward guidance puzzle. We establish these results analytically in a tractable HANK framework and confirm them in a calibrated quantitative HANK model. Standard utility functions, however, constrain either complementarity or income effects - or both - thereby forcing multipliers to depend exclusively on one or the other. We introduce two flexible parametric forms that allow arbitrary, independent calibration of complementarity and income effects: a quasi-separable "GHH-CRRA" utility and a "CCRRA" (constant complementarity and relative risk aversion) specification. |
| Keywords: | Consumption-Hours Complementarity, HANK, Income and Wealth Effects, Fiscal Multipliers, Utility |
| JEL: | D11 E32 E52 E62 |
| Date: | 2025–10–31 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2573 |
| By: | Andreas Dibiasi; Heiner Mikosch; Samad Sarferaz; Armin Steinbach |
| Abstract: | In a novel survey, we study how German senior government officials systematically adjust fiscal policy in response to economic shocks, focusing on their fiscal responses to a contractionary monetary policy shock. Using randomized vignette treatments, we examine how officials update GDP and inflation expectations under fiscal and monetary policy shock scenarios and assess their preferred fiscal adjustments. Our findings show that officials predominantly respond by increasing debt and reducing spending, with tax increases playing a minor role, often combining multiple fiscal instruments. Counterfactual analysis reveals that officials’ reasoning aligns with key insights from the Heterogeneous Agent New Keynesian literature. |
| Keywords: | fiscal policy, monetary policy, fiscal-monetary interaction, expectation formation, survey experiment |
| JEL: | D83 E62 E63 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12247 |
| By: | Campos, Maria Manuel; Gomes, Sandra; Jacquinot, Pascal; Cardoso-Costa, José Miguel |
| Abstract: | This paper studies the effect of alternative monetary policy responses and the implementation of different fiscal policy measures to an inflationary shock in a monetary union, through the lens of a global DSGE model calibrated to the euro area. We find that a more aggressive monetary policy response mitigates the inflation surge, but has a detrimental impact on economic activity that imposes a stronger increase of public debt, reducing the fiscal policy space. We also find that some fiscal policy measures may alleviate the negative impact of the shock on households and firms, but do not significantly alter the inflation dynamics: a reduction of consumption taxes reduces inflation only temporarily, while an increase of transfers or of public investment slightly increase inflation initially, even if the latter may have a protracted negative impact. Overall, an appropriate mix of monetary and fiscal policies may be needed to ensure a swift return of inflation to target, while mitigating the impact on consumption. Targeting transfers to support constrained households has a mild impact on inflation, but may be a way to mitigate the impact on the most vulnerable with a less detrimental effect on public debt. JEL Classification: E52, E62, E63, F45 |
| Keywords: | cost-push shock, fiscal policy, inflation, monetary policy, public debt |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253145 |
| By: | Maximilian Boeck; Zeno Enders; Michael Kleemann; Gernot Müller |
| Abstract: | The business cycle is driven by expectations - some justified, some not - as documented by a host of studies. What is less clear are the conditions that make the economy susceptible to "sentiment shocks." In this paper, we document that uncertainty, as measured by forecaster disagreement, is essential. At times when disagreement is low, sentiment shocks hardly matter for economic activity but are fully absorbed by prices. If, instead, disagreement is high, they move activity with little impact on prices. We obtain these results based on time-series data and a theoretical account based on a New Keynesian model with dispersed information. |
| Keywords: | sentiment shocks, noise shocks, animal spirits, business cycles, nowcast error, disagreement, dispersed beliefs |
| JEL: | C32 C34 D84 E21 E23 E32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12252 |
| By: | Marius Brülhart; Aurélien Eyquem; Isabel Z. Martínez; Enrico Rubolino; Enrico Rubolino |
| Abstract: | We study how inheritance affects labor supply over the life cycle, and we quantify its aggregate impact. Tracking earnings histories around some 135, 000 inheritances and 5, 000 lottery wins, we exploit the quasi-random timing and size of these events to identify labor supply responses with high precision. Earnings responses are negative at all ages but peak between ages 55 and 64, largely due to early retirement. Inheritances generate smaller impact responses than comparable lottery wins, consistent with anticipation effects. Our estimates match the predictions of a life-cycle model with endogenous labor supply and early retirement. Aggregating model-based responses across the population, our point estimate of the GDP cost of inheritance is 1.1%. The timing, size, and anticipation of inheritance all contribute to shaping its macroeconomic consequences. |
| Keywords: | inheritance, labor supply, lottery wins, life-cycle effects |
| JEL: | J22 D31 D64 G51 H31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12255 |
| By: | Masao Fukui (Boston University (E-mail: mfukui@bu.edu)); Niels Joachim Gormsen (University of Chicago, Booth School of Business (E-mail: niels.gormsen@chicagobooth.edu)); Kilian Huber (University of Chicago, Booth School of Business (E-mail: kilianhuber@uchicago.edu)) |
| Abstract: | We show that firms' nominal required returns (i.e., discount rates) are sticky with respect to expected inflation. Sticky discount rates generate distinct theoretical predictions that are broadly consistent with stylized empirical patterns: increases in expected inflation directly raise real investment; demand shocks generate investment-consumption comovement; and the sensitivity of investment to interest rates is low. Sticky discount rates imply monetary non- neutrality, even when all other prices are flexible, because of a direct link from expected inflation to investment. In the New Keynesian optimal monetary policy problem, the central bank steers long-run inflation expectations, even in response to temporary shocks. |
| Keywords: | investment, discount rate, required return, nominal rigidity, monetary non-neutrality, New Keynesian |
| JEL: | E0 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-16 |
| By: | Antti J. Tanskanen |
| Abstract: | A life cycle model of consumption and labor supply describes employment decisions of a collection of individuals during their lifetime. We develop a life cycle model describing a heterogeneous population operating in Finland under a wide variety of employment states and life situations. A rich life cycle model requires a large state space representing the possible states of simulated agents. The results demonstrate that the model reproduces a number of statistics of the Finnish employment market such as the age structures of employment rate and unemployment rate, distributions of observed effective marginal tax rates and participating tax rates, and proportion of part time work. As an application of analysis of a reform, we analyze how the program of Orpo government influences employment and public finances in Finland. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2511.00660 |
| By: | Stephen Murchison |
| Abstract: | The post-pandemic rise in global inflation has renewed interest in the relative roles played by demand and supply factors in determining prices. Many central banks have stressed the joint role that persistent increases in input costs and excess demand played in boosting inflation in 2021 and 2022. Yet the latter influence plays no independent role in the workhorse New Keynesian models used by many central banks. Under the typical assumption of constant elasticity of substitution (CES) preferences, variations in consumption shift the firm’s profit function up and down, but do not influence its curvature. As a result, the optimal markup is not a function of demand. This assumption is contradicted by both evidence about household shopping behaviour and survey evidence about how firms set prices. This paper proposes an alternative structure based on non-homothetic household preferences over varieties of consumption goods. Specifically, the elasticity of substitution between goods is state dependent, declining during periods of strong per-capita consumption and vice versa. This captures the stylized fact that individual consumers are less price sensitive during economic booms and more price sensitive during downturns. These substitution effects in turn give the firm an incentive to adjust its markup in response to consumption demand. In aggregate, this generates desired markups that increase nonlinearly in consumption demand. When strategic complementarities in pricing are present, these preferences also give rise to state-dependent pass-through of cost shocks. A New Keynesian sticky price model featuring non-homothetic preferences is estimated on Canadian data, and strong evidence favouring a direct role for per-capita consumption demand is presented. This model is better able to capture the increase in core inflation that occurred in 2021–22, particularly when simulated in its nonlinear form. |
| Keywords: | Economic models; Market structure and pricing; Inflation and prices |
| JEL: | E27 E52 Q43 Q58 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:25-30 |
| By: | Andre Brunelli; Bruno Martins; Carlos Carvalho |
| Abstract: | This paper examines how individual consumers adjust consumption and debt in response to a large, exogenous financial windfall, using Brazil’s 2017 FGTS reform, which allowed early access to previously illiquid severance fund balances. Leveraging rich administrative data linking credit registry and labor records, we use a difference-in-differences design exploiting quasi-exogenous eligibility timing based on birth month. We decompose the shock into liquidity and wealth components: the liquidity channel reflects early access to illiquid savings, while the wealth component arises from the present-value gain due to FGTS yields being persistently below market interest rates. Credit-constrained individuals primarily used the funds to reduce debt and lower default risk, while unconstrained consumers increased credit-financed spending, raising financial fragility. Liquidity components drove deleveraging and stability, whereas wealth components led to durable consumption and greater credit exposure. These results provide rare empirical validation of key Heterogeneous Agent New Keynesian (HANK) mechanisms and offer policy-relevant insights into how the composition of financial transfers influences consumer behavior and financial stability. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:634 |
| By: | Diego Comin (Dartmouth College, NBER, and CEPR (E-mail: diego.comin@dartmouth.edu)); Robert C. Johnson (University of Notre Dame, and NBER (E-mail: rjohns24@nd.edu)); Callum Jones (Federal Reserve Board (E-mail: callum.j.jones@frb.gov)) |
| Abstract: | We develop a New Keynesian framework to evaluate how potentially binding capacity constraints, and shocks to them, shape inflation. We show that binding constraints for domestic and foreign producers shift domestic and import price Phillips Curves up. Further, data on prices and quantities together identify whether constraints bind due to increased demand or reductions in capacity. Applying the model to interpret recent US data, we find that binding constraints in the goods sector explain half of the increase in inflation during 2021-2022. In particular, tight capacity served to amplify the impact of loose monetary policy in 2021, fueling the inflation takeoff. |
| Keywords: | inflation, supply chain, occasionally binding constraints |
| JEL: | E31 E52 E62 F63 D24 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ime:imedps:25-e-15 |