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on Dynamic General Equilibrium |
| By: | Erik Dasenbrock; Britta Gehrke |
| Abstract: | This paper studies how unemployment benefits affect aggregate outcomes through general equilibrium effects. First, we document that lower unemployment benefits tend to reduce the real interest rate in a structural vector autoregression with narrative sign restrictions. Young workers experience greater employment gains than older workers. An overlapping generations model with labor market frictions rationalizes these findings. Reduced benefits boost employment among younger working-age populations, raising their incomes and enabling them to reduce borrowing, which in turn lowers real interest rates. This endogenous interest rate response amplifies the expansionary effects of the benefit reduction. The interest rate channel proves quantitatively relevant, suggesting important general equilibrium considerations for unemployment benefit design. |
| Keywords: | Unemployment benefits, narrative SVAR, life-cycle model, real interest rate, search and matching |
| JEL: | E24 E21 E43 |
| Date: | 2025–09–29 |
| URL: | https://d.repec.org/n?u=RePEc:bdp:dpaper:0074 |
| By: | Pablo Garcia Sanchez; Olivier Pierrard |
| Abstract: | Both health and wealth are distributed heterogeneously across the population. These two dimensions are empirically linked by a robust positive correlation between income and life expectancy. Yet the mechanisms underlying this link and the implications for economic policy remain incompletely understood. This paper develops a life-cycle model with heterogeneous agents to explore the bidirectional relationship between income and health: higher income enables greater health investment, while better health enhances productivity and therefore earnings. We calibrate the model to U.S. data, capturing key empirical aspects of the distribution of income, health and age-at-death. We show that the income-tohealth channel is more important early in life, while the health-to-income channel dominates at older ages. We then use this framework to evaluate policies aimed at redistribution or health. We find that income redistribution, while reducing inequality, weakens individuals’ incentives to invest in health, lowering both average life expectancy and aggregate income. In contrast, health subsidies enhance health, raising both longevity and economic output, without reducing income inequality. |
| Keywords: | Health, Income, heterogeneity, life-cycle model, policies. |
| JEL: | C60 D15 H24 H51 I12 I14 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp200 |
| By: | Pablo Garcia (BANQUE CENTRALE DU LUXEMBOURG); Pascal Jacquinot (EUROPEAN CENTRAL BANK); Crt Lenarcic (BANKA SLOVENIJE); Kostas Mavromatis (DE NEDERLANDSCHE BANK); Niki Papadopoulou (EUROPEAN CENTRAL BANK); Edgar Silgado-Gómez (BANCO DE ESPAÑA) |
| Abstract: | We explore the macroeconomic effects of climate policies promoting the green energy transition in the euro area using an extended version of the Euro Area and Global Economy (EAGLE) model. The model differentiates between brown and green energy sectors and incorporates carbon taxes and brown capital income taxes. We analyze scenarios with unilateral and globally coordinated carbon taxes, with and without revenue redistribution to green firms and financially constrained households. Carbon taxes act as negative supply shocks, raising inflation and lowering output, while subsidies to green energy firms reduce green energy prices, supporting the transition and easing recessions. Redistribution to constrained households boosts consumption but does not accelerate the green transition. Taxes on brown capital income lower both inflation and output by acting as demand shocks. Recycling revenue from this tax to subsidize green capital investment strengthens the shift to green energy and moderates economic contractions. Global coordination of carbon taxes delivers only modest additional macroeconomic effects compared with unilateral action, as substitution in energy use outweighs international spillovers. Sensitivity analyses confirm the robustness of these findings under alternative assumptions about price rigidity, substitution elasticities and monetary policy. |
| Keywords: | climate policy, carbon taxation, fiscal policy, monetary policy, euro area, DSGE modeling |
| JEL: | C53 E32 E52 F45 H30 Q48 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2537 |
| By: | Mrs. Sandra Lizarazo; Brandon Joel Tan |
| Abstract: | The informal sector accounts for a large fraction of the economy and labor force in many emerging market and developing economies. This paper develops a dynamic stochastic general equilibrium model of a small open economy with an informal sector. Nominal price and wage rigidities are present in the formal sector, while prices and wages are flexible in the informal sector. Production of traded goods rely more on formal inputs (which can be produced at home or imported) while non-traded goods rely more on informal inputs. We show that, despite its costs, the informal sector can provide a flexible margin of adjustment in labor and product markets which helps buffer the impact of domestic and external shocks. |
| Keywords: | Informality; Shock Propagation |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/190 |
| By: | Raquel Fonseca; Etienne Lalé; François Langot; Thepthida Sopraseuth (CY Cergy Paris Université, THEMA) |
| Abstract: | We develop a general-equilibrium OLG model of human capital to study the dynamics of the U.S. college premium and lifetime wage profiles between 1940 and 2020. The model features endogenous education and on-the-job training, along with exogenous aggregate (skill-neutral and skill-biased) shocks and cohort-specific trends in initial human capital endowments and learning capabilities. The estimated model replicates the W-shaped evolution of the college premium and the flattening then steepening of lifetime wage profiles. We show that changes in labor efficiency, rather than changes in relative skill prices, are the main driver of these dynamics. We quantify the contribution of estimated exogenous drivers and find a key role for the deterioration of human capital endowments and learning abilities among more recent cohorts. Crucially, endogenous adjustments in educational attainment and skill prices serve as powerful equalizing forces. Without these market mechanisms, the gap between the lifetime wage profiles of skilled and unskilled workers would widen and the college premium double. |
| Keywords: | College premium, Life-cycle wage profile, On-the-job training, Human capital, Technological progress |
| JEL: | E24 E25 J24 J31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2025-12 |
| By: | Daisuke MIYAKAWA; Koki OIKAWA; Kozo UEDA |
| Abstract: | This paper studies how population aging shapes firm dynamics and macroeconomic outcomes through business succession. Using large-scale Japanese firm-level panel data, we document systematic age transition patterns in successions, an inverted U-shape in performance with respect to managerial age, and the causal effects of succession on firm outcomes. Building on these facts, we develop a general equilibrium model with heterogeneous firms and life-cycle managerial ability. The model shows that declining population growth reduces succession but raises average managerial ability and strengthens firm selection. Quantitative analysis suggests that despite lower aggregate output, per capita output increases under demographic decline. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25096 |
| By: | Jasmina Hasanhodzic; Laurence J. Kotlikoff |
| Abstract: | “Junior Can’t Borrow, ” Constantinides, Donaldson, and Mehra’s (CDM) three-period exchange model, eliminates borrowing by the young, and, consequently, all generations to resolve the equity premium puzzle. This paper examines CDM’s resolution in an 80-period, OLG model with capital, fiscal policy, macro shocks and steeply rising borrowing costs. Imposing such costs on all generations and, thereby, eliminating the bond market produces, as in CDM, a large premium. But permitting even one generation to sell bonds without transactions costs dramatically raises the safe rate, restoring the puzzle. Hence, “No One Can Borrow” not “Junior Can’t Borrow” is CDM’s real message. Since zero or low marginal-cost borrowing is commonplace – be it via secured borrowing or friends and family loans, CDM’s “solution” isn’t plausible. As in representative-agent RBCs, macro risk is low in OLG-RBCs – not because aggregate shocks are small, but because they can be hedged via self-insurance (saving) and largely average out over agents’ lifetimes. Indeed, absent high marginal borrowing costs, agents, even older ones, are close to indifferent between holding shares and holding bonds, rendering their net bond demand (supply) curves highly elastic. This explains why even a single generation is willing to supply significant amounts of bonds at a low price (high yield). |
| JEL: | E0 E44 G0 G12 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34328 |
| By: | Luca Fornaro; Martin Wolf |
| 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: | Fiscal Policy, Public Debt, Endogenous Productivity Growth, Stagnation, Investment. |
| JEL: | E22 E62 H63 O40 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1905 |
| By: | Rym Aloui (Université Lumière Lyon 2, CNRS, Université Jean Monnet Saint Etienne, EMLyon Business School, GATE, 69007, Lyon, France); Hafedh Bouakez (HEC Montréal, 3000 Côte-Sainte-Catherine, Montréal, Québec, Canada) |
| Abstract: | We derive the (second-best) optimal long-run carbon tax in a polluted economy with preexisting tax distortions, where labor and capital income taxes adjust endogenously to changes in the ratio of public debt to GDP via pre-established fiscal rules, and sovereign debt carries default risk. Relative to the no-climate-policy scenario, the welfare-maximizing carbon tax lowers the debt-to-GDP ratio as well as labor and capital income taxes, while raising consumption and GDP. The strength of these effects depends on the aggressiveness of the tax rules and on the initial level of public debt. When initial debt is low, the optimal carbon tax and the resulting increase in consumption, GDP, and welfare rise with the aggressiveness of the tax rules. When initial debt is high, however, this monotonic relationship breaks down, and the highest welfare gain from the optimal carbon levy is attained when the tax rules are moderately aggressive. This result hinges crucially on the convexity of the default probability with respect to the ratio of public debt to GDP. |
| Keywords: | Distortionary Taxes, Optimal Carbon Tax, Public Debt, Revenue Recycling, Second Best, Sovereign Default |
| JEL: | E62 H21 Q56 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:gat:wpaper:2519 |
| By: | Frederico Alencar (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil); Marcus Araripe (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil); Marcelo Arbex (Department of Economics, University of Windsor); Marcio V. Correa (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil) |
| Abstract: | This paper quantifies the impact of tax evasion on the labor-income Laffer curve in Brazil. We develop a heterogeneous-agent model with incomplete markets, progressive taxation, and imperfect tax enforcement. Beyond the well-known arithmetic and economic effects, the model highlights a novel evasion effect – higher statutory rates induce greater concealment of income and reduce effective tax collections. Calibrated to Brazilian data, the model shows that the aggregate Laffer curve peaks at a marginal rate of 25.3%, below the current 27.5%. Tax evasion reduces potential revenue by up to 54% (3.1% of GDP), with losses concentrated among high-income households. A disaggregated analysis further reveals heterogeneous responses across income groups, underscoring distributional and policy implications. |
| Keywords: | Laffer Curve, Tax Evasion, Labor Income Taxation, General Equilibrium. |
| JEL: | E20 E60 D85 H26 I10 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:wis:wpaper:2505 |
| By: | Kosuke Aoki (BANCO DE ESPAÑA); Enric Martorell (BANCO DE ESPAÑA); Kalin Nikolov (BANCO DE ESPAÑA) |
| Abstract: | We examine the interplay between monetary policy, bank risk-taking, and financial stability in a quantitative macroeconomic model with endogenous risk-taking by banks and systemic crises. Banks’ access to leverage depends on their charter value, which is itself affected by movements in the real interest rate. We find that permanent shifts in the long-term real interest rate have a significant impact on banks’ leverage and on their investments in systemically risky assets, while transitory movements have a more limited impact. We show that in the presence of systemic risk-taking, the systemic component of monetary policy faces a trade-off between price stability and financial stability. A moderate reaction to inflation deviations from the target is optimal, as it sustains banks’ equity value after financial crises. Seeking price stability reduces inflation volatility but leads to increased systemic risk-taking and more severe financial recessions. The optimal central bank policy combination involves an increase in regulatory bank capital requirements coupled with a moderate reaction of monetary policy to inflation. |
| Keywords: | financial intermediation, monetary policy, systemic risk, macroprudential policy |
| JEL: | E44 E52 E58 G21 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2517 |
| By: | Davide Debortoli; Jordi Galí |
| Abstract: | We provide an empirical assessment of a central implication of models with idiosyncratic income risk and incomplete markets: the existence of a role for the distribution of wealth in shaping the dynamics of aggregate consumption. Estimates of consumption Euler equation models extended to include wealth distribution statistics show the latter to have a negligible quantitative impact on aggregate consumption. This contrasts with the important role played by current disposable income, even when we use data for households with (relatively) high liquid wealth. The latter finding suggests the presence of a significant behavioral component behind the high sensitivity of consumption to current income. |
| Keywords: | idiosyncratic income risk, incomplete markets, representative household, HANK models, TANK models |
| JEL: | E21 E32 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1903 |
| By: | Jeremy Fox; Alfred Galichon; Pauline Corblet |
| Abstract: | We introduce a model of dynamic matching with transferable utility, extending the static model of Shapley and Shubik (1971). Forward-looking agents have individual states that evolve with current matches. Each period, a matching market with market-clearing prices takes place. We prove the existence of an equilibrium with time-varying distributions of agent types and show it is the solution to a social planner’s problem. We also prove that a stationary equilibrium exists. We introduce econometric shocks to account for unobserved heterogeneity in match formation. We propose two algorithms to compute a stationary equilibrium. We adapt both algorithms for estimation. We estimate a model of accumulation of job-specific human capital using data on Swedish engineers. |
| Date: | 2025–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:azt:cemmap:18/25 |
| By: | Anmol Bhandari; Paolo Martellini; Ellen McGrattan |
| Abstract: | We develop a theory of firm dynamics and capital reallocation in private firms and use it to study the taxation of business income, capital, and capital gains. Intangible assets—such as customer bases and trade names—are created using owners' time and are infrequently traded in bilateral meetings. We discipline the model with U.S. administrative data, which report purchase prices and counterparties in asset transfers, allowing us to calibrate the investment technology and output elasticity for otherwise unobservable intangible capital. The equilibrium features dispersion in marginal product of capital, transferable share of firm value, and return on business wealth. Introducing taxation, we find that capital gains taxes are most distortionary, primarily by discouraging entry and reallocation of capital, whereas income taxes are least distortionary. |
| JEL: | E22 E6 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34319 |
| By: | Edouard Schaal; Mathieu Taschereau-Dumouchel |
| Abstract: | We study how time-to-build and delivery lags affect the propagation of sectoral and aggregate shocks in an economy with input-output linkages. Time-to-build significantly contributes to the persistence of shocks, with highly heterogeneous effects across sectors. We analyze delay shocks and demonstrate that bottlenecks can be identified by the product of a sector’s supplier and buyer centralities. Shocks propagate asynchronously through the network, generating endogenous fluctuations via an echo effect. These fluctuations arise due to the presence of loops in the network. We show that the Fourier spectrum of sectoral and aggregate output can be predicted from the durations and weights of the network’s dominant cycles. Sectoral comovements are complex and can be decomposed into the network’s dominant walks. |
| JEL: | C67 D57 D85 E23 E32 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:upf:upfgen:1901 |