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on Dynamic General Equilibrium |
| By: | François Le Grand (ESSEC Business School); Xavier Ragot (Sciences Po - Sciences Po, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po) |
| Abstract: | We analyze optimal fiscal policy in a heterogeneous-agent model with capital accumulation and aggregate shocks, where the government uses public debt, a capital tax, and a progressive labor tax to finance public spending. We first study a tractable model and show that the steady-state optimal capital tax can be positive if credit constraints are occasionally binding. However, the existence of such an equilibrium depends on the shape of the utility function. We also characterize the optimal dynamic of public debt after a public spending shock. We confirm these findings by solving for optimal policy in a general heterogeneous-agent model. |
| Keywords: | D31, E44, H21, public debt JEL codes: E21, optimal fiscal policy, Heterogeneous agents, Heterogeneous agents optimal fiscal policy public debt JEL codes: E21 H21 E44 D31 |
| Date: | 2025–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05547657 |
| By: | Justin Bloesch; Jacob P. Weber |
| Abstract: | We argue that secular change in both the production and composition of investment goods has weakened investment’s role in the transmission of monetary policy to labor earnings and consumption. We show analytically that fluctuations in the production of investment goods amplify the response of consumption to monetary policy shocks by varying labor income for hand-to-mouth agents. We document three secular changes weakening this channel: (i) labor’s share of value added in investment goods production has declined, (ii) the import share of investment goods has risen, and (iii) the composition of investment has shifted towards components that are less responsive to monetary policy. A small open economy, two agent New Keynesian model calibrated to match these facts implies a 23 percent weaker response of labor income and a 17 percent weaker response of consumption to real interest rate shocks in a 2020s economy relative to a 1960s economy. |
| Keywords: | monetary policy; investment; labor income; marginal propensity to consume |
| JEL: | E21 E22 E32 E52 F41 |
| Date: | 2026–03–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednsr:102964 |
| By: | Jonathan Adams |
| Abstract: | When inflation is low, the Calvo model is a good approximation of sticky prices. But when inflation is high, menu costs matter for macroeconomics. Drawing from recent work on mean field games, I derive an analytical solution to the menu cost model with trend inflation in response to small shocks. The solution includes dynamics of the value function, distribution of price gaps, and aggregate variables. Then, I consider a discrete time approximation that is tractable enough for use in standard DSGE models. Menu costs modify the usual Calvo Phillips curve with a single variable: the frequency of price adjustment. Accounting for the frequency matters in an inflationary economy; when trend inflation is zero, the term disappears. But surprisingly, the effect of trend inflation on the Phillips curve is first-order. The modified system is a function of the microfoundations and can be calibrated to match pricing statistics, a useful result even without trend inflation. Finally, I embed the price-setting block in an otherwise standard New Keynesian model and show how menu costs and trend inflation affect monetary policy. |
| Keywords: | State-dependent pricing; menu costs; inflation; Phillips curve; optimal monetary policy |
| JEL: | C60 E31 E52 |
| Date: | 2026–03–13 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:102919 |
| By: | Xakousti Chrysanthopoulou; Moïse Sidiropoulos |
| Abstract: | This paper revisits the debate on whether limited asset market participation (LAMP) is relevant for the design of monetary policy. While LAMP can substantially alter the monetary transmission mechanism - potentially reinforcing or reversing the contractionary demand effects of interest rate increases and challenging standard policy prescriptions - its importance depends critically on labor market institutions. We develop a New Keynesian DSGE model with LAMP that incorporates sector-specific labor unions whose wage-setting behavior accounts for broader macroeconomic conditions. The analysis shows that when wage bargaining is sufficiently centralized, particularly under monopoly union structures, LAMP becomes largely irrelevant for monetary policy design, and the Taylor Principle once again ensures equilibrium determinacy. These findings highlight the structure of wage bargaining as a key determinant of how asset market participation shapes the effectiveness and conduct of monetary policy. |
| Keywords: | Limited asset market participation; unions; monetary policy; Taylor principle; determinacy; centralized wage setting |
| JEL: | E52 E44 E24 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2026-11 |
| By: | Fahmi, Taher E. (University of Warwick) |
| Abstract: | This work quantifies the welfare cost of unorthodox monetary policy conduct in Turkiye during 2021-2023 through a counterfactual experiment based on an estimated Markov-switching DSGE (MS-DSGE) model. This episode marks a sharp departure fromHow NOT to Conduct Monetary Policy : The Case of Turkiye conventional, inflation-stabilizing policy despite rising inflation, providing an ideal setting for evaluating welfare losses caused by politically driven departures from or thodoxy. The analysis uses quarterly data from 2006Q1 to 2025Q1 and specifies four candidate models, three of which allow for regime-switching in Taylor rule parameters and shock volatilities. Estimation results indicate that the model with the best fit is one with switching in the inflation-response and interest-rate smoothing parameters, alongside volatility switching in cost-push shocks. Using the best fitting model, the counterfactual experiment estimates welfare gains of 155–177% had the central bank refrained from unorthodoxy during said episode |
| Keywords: | Unorthodox MonetaryPolicy ; Markov-Switching DSGE model ; Bayesian Estimation ; Turkiye JEL classifications: C11 ; C63 ; E31 ; E32 ; E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:wrkesp:95 |
| By: | Ruopu Hu (Kobe University); Andreas Schabert (University of Cologne) |
| Abstract: | Since U.S. bank capital holdings began rising almost concurrently with the monetary policy change after 2008, we examine the role of capital requirements for monetary policy regimes. While standard models predict that equilibrium determination and responses to aggregate shocks are fundamentally affected at the zero lower bound (ZLB), we show that these effects are absent when bank capital requirements are binding. Estimating a model version with occasionally binding capital requirements, we find that they have been almost permanently binding after 2008. We further show that capital requirements neither restore relevance of money supply nor amplify responses to macroeconomic shocks above the ZLB. |
| Keywords: | Capital Regulation, Monetary Policy, Local Equilibrium Determinacy, Regimeswitching Estimation, Zero Lower Bound |
| JEL: | E52 G28 C11 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:397 |
| By: | Carmen Camacho (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris); Hannes Tepper (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris) |
| Abstract: | This paper aims to fill the methodological gap in development economics that until now there exists no quantitative tool that allows to prioritize reforms in a systematic nor optimal way. Following the recent debate on the issues Randomized Control Trials (RCTs) have with establishing external validity and general equilibrium effects, this paper proposes a micro-founded Growth Diagnostics framework to consider general equilibrium effects and prioritize policy prescriptions. Building conceptually on Hausmann et al. (2005), we set up two continuous-time Overlapping Generations (OLG) models to obtain the private and social net-marginal valuations of economic activities as measured by their shadow values. With these in hand, we define the wedges in the net-marginal private and social valuations to set up a new planner problem (the super policy maker problem), where the planner minimizes an aggregate function of disagreement as measured by the wedges. We illustrate our frame-work with an application to the literature on structural change. Worth noting, the final wrapping optimization problem allows to prioritize optimally economic reforms in a second-best framework, thus, to put it in the words of Rodrik (2010), to first diagnose before one prescribes the remedy. |
| Keywords: | Reform, Economic policy, Structural change, General equilibrium |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:halshs-04005785 |
| By: | Francesco Zanetti; Federico Mandelman; Yang Yu |
| Abstract: | Immigration has become a central driver of U.S. labor force growth. We document new empirical findings that shed light on the relationships between immigration, labor shortages, wage growth, and job openings during the high-immigration period of 2021-2024. The textbook search-and-matching model implies highly counterfactual labor market dynamics: it predicts that a surge in immigration lowers hiring costs and stimulates vacancy posting, leaving labor market tightness and wages largely unchanged. This prediction contradicts the data, which shows a negative correlation between immigration and vacancy growth. To reconcile the evidence, we extend the framework to incorporate complementarities between native and immigrant workers together with a Leontief-type production technology that generates labor shortages similar to those observed in the post-pandemic period. In this environment, immigration alleviates these shortages by helping fill vacancies and dampening wage growth, consistent with the data. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cnn:wpaper:26-004e |
| By: | Rui Sun |
| Abstract: | The standard wage Phillips curve aggregates away from which workers reset wages when. I show this aggregation omits a first-order term: the covariance between workers' cost-push exposure and their reset frequency. I introduce two sufficient statistics and embed them in a multi-country HANK model calibrated to six euro-area economies. The omitted term generates 7 percent more cumulative core inflation in the baseline and 10--26 percent more when monetary policy is delayed. Two economies with identical openness can differ by 6.6 percentage-point-quarters solely from within-country composition. Targeted essentials subsidies reduce welfare loss by 32 percent relative to aggressive tightening. Out of sample, the model correctly predicts the persistence ranking across the UK, the US, and Japan. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.29154 |
| By: | Tomasz Sulka (HU Berlin) |
| Abstract: | This paper develops a dynamic search model in which certain ``hidden attributes" are revealed only after acceptance of an offer and may trigger continued search in the following period. The model is applied to study how workers' imperfect information about pecuniary workplace benefits (such as employer-sponsored pension and health insurance plans) during job search, and the subsequent realization of these benefits on the job, affect the multidimensional compensation packages offered in equilibrium by profit-maximizing firms. I find that unobservability of benefits prior to acceptance distorts firms' incentives toward providing inefficiently low benefits, despite the fact that lower benefits induce higher worker turnover. Furthermore, when workers differ in strategic sophistication, and therefore hold different beliefs about unobservable benefits, there exist equilibria with spurious differentiation in compensation packages. In these equilibria, the wage differential is bounded from above by the benefit differential. The model demonstrates how imperfect information about workplace benefits can explain several empirical puzzles, including inefficiently low benefit provision and large between-firm dispersion in benefits. |
| Keywords: | exploitative contracting; hidden attributes; job search; workplace benefits; compensating differentials; |
| JEL: | D83 D91 J31 J32 J33 |
| Date: | 2026–03–23 |
| URL: | https://d.repec.org/n?u=RePEc:rco:dpaper:566 |