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on Dynamic General Equilibrium |
| By: | Daniel Baksa; Yotam Peterfreund; Nadav Podoler; Ivy Sabuga; Tanya Slobodnitsky; Luis-Felipe Zanna |
| Abstract: | This paper introduces the Israeli Structural Model (ISM), a New-Keynesian Dynamic Stochastic General Equilibrium (DSGE) model tailored to reflect key characteristics of the Israeli economy. The ISM incorporates diverse consumer saving behaviors and labor skills, a dynamic high-tech (HT) sector, international trade and capital integration, and comprehensive fiscal components. As an integral part of the Ministry of Finance’s (MOF) Forecasting and Policy Analysis System (FPAS), the ISM serves as a macroeconomic policy scenario analysis tool, aiding in policy discussions and decision-making. This paper illustrates the ISM's policy use by evaluating strategies for utilizing additional government revenue generated from the HT sector boom in 2022 and their macroeconomic impacts. It compares three policy options: accelerated public debt reduction, redistribution through transfers, and increased public investment. The findings indicate that increased public investment is the most beneficial strategy, in the aftermath of the COVID-19 pandemic, accelerating GDP's convergence to its trend, reducing public debt to GDP ratios, and mitigating real appreciation and the impact on the most vulnerable population. |
| Keywords: | Israel; Forecasting and Policy Analysis System; DSGE Model; Fiscal Policy; Monetary Policy |
| Date: | 2025–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/213 |
| By: | Daniel Jaar; Joao Ritto |
| Abstract: | We develop a dynamic general equilibrium model with heterogeneous households and a cash-intensive informal sector that replicates two empirical patterns: the negative relationship between informality and firm productivity, and the declining share of informal consumption with household wealth. The non-homotheticity of informal consumption implies that tax incidence is heterogenous: poor households pay less consumption taxes but are more exposed to inflation. We use the model to study the distributional effects of financing government revenue through seigniorage versus consumption taxes. Calibrated to Peru – where informality accounts for around half of economic activity – the model shows that informal purchases provide significant savings through lower prices, particularly for poor households, who save up to 11% compared to purchasing the same bundle formally. The model also uncovers substantial variation in preferences over revenue-neutral combinations of inflation and consumption taxes: households in the top expenditure decile would like inflation to be as high as 12%, while those in the bottom favor inflation below 5%. This disagreement grows with the size of the informal sector. |
| Keywords: | Informality; Inflation; Public Finance; Inequality |
| JEL: | E62 H22 O17 |
| Date: | 2025–10–27 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-805 |
| By: | Stéphane Bouché; Mikhail Pakhnin |
| Abstract: | We study a neoclassical growth model with population growth and agents who are heterogeneous in their discount factors. Population growth is interpreted as the entry of new infinitely-lived agents with zero initial endowments who are not included in the economic calculus of existing agents. We prove that when capital and labor are substitutes in production and utility is isoelastic, there exists a unique stationary equilibrium in per capita terms. A stationary equilibrium can take one of two forms: a Ramsey conjecture equilibrium, in which only the most patient agents own the entire capital stock, or a non-degenerate equilibrium, in which agents other than the most patient ones also hold positive amounts of capital. We show that introducing public debt, a labor income tax or a capital subsidy shifts the economy from a Ramsey conjecture stationary equilibrium to a non-degenerate one, and analyze the resulting relationship between income and inequality. |
| Keywords: | economic growth, heterogeneous discounting, inequality, ramsey conjecture, overlapping generations |
| JEL: | D15 D31 D50 E21 O40 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12213 |
| By: | Kaldorf, Matthias |
| Abstract: | We propose a quantitative DSGE model with environmental and financial frictions to asses how high emission taxes affect optimal central bank collateral policy. Central banks specify which assets banks can pledge as collateral to obtain short-term central bank funding. This is referred to as central bank collateral policy and involves a trade-off between supplying sufficient liquidity to banks and exposing itself to losses from accepting risky assets as collat- eral. Emission taxes affect this trade-off by reducing productivity in the non-financial sector, such that the corporate default rate increases and the quality of collateral deteriorates. High emission taxes also reduce investment, debt issuance and, hence, the amount of collateral available to banks. This decline in the quantity of collateral is more pronounced if emission tax shocks are very persistent or permanent. It is therefore optimal to relax collateral policy in the longer run, where the collateral quantity channel dominates, and to tighten collateral policy after a transitory emission tax shock, in order to offset the short run reduction in collateral quality. |
| Keywords: | Central Bank Collateral Policy, Climate Policy, Collateral Premia, Corporate Default Risk |
| JEL: | E44 E58 E63 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:330307 |
| By: | Grey Gordon; Pablo Guerrón-Quintana |
| Abstract: | Hard sovereign defaults—defaults with large haircuts—are associated with deeper recessions, longer durations, and, as we show, larger devaluations than soft defaults. We rationalize these regularities by developing a single-proposer noise bargaining game and embedding it in a two-sector sovereign default model. Creditors weigh the sovereign's haircut offers against likely future offers and idiosyncratic valuation shocks. In short-lived recessions, creditors tend to reject large proposed haircuts, anticipating better terms as the economy recovers—endogenously correlating default intensity with adverse outcomes. Two years after default, our decomposition attributes nearly 80% of the observed output differentials to selection on different shock realizations. |
| Keywords: | Default; Sovereign; Debt; Growth; Haircuts |
| JEL: | F34 C78 E32 |
| Date: | 2025–10–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:101987 |
| By: | Gizem Koşar; Davide Melcangi; Laura Pilossoph; David G. Wiczer |
| Abstract: | Using detailed microdata, we document that households often use “stimulus” checks to pay down debt, especially those with low net wealth-to-income ratios. To rationalize these patterns, we introduce an empirically plausible borrowing price schedule into an otherwise standard incomplete markets model. Because interest rates rise with debt, borrowers have increasingly larger incentives to use an additional dollar to reduce debt service payments rather than consume. Using our calibrated model, we then study whether and how this marginal propensity to repay debt (MPRD) alters the aggregate implications of fiscal transfers. We uncover a trade-off between stimulus and insurance, as high–debt individuals gain considerably from transfers, but consume relatively little immediately. This mechanism lowers the immediate stimulus effect of fiscal transfers, but sustains aggregate consumption for longer. |
| JEL: | E21 E62 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34399 |
| By: | SUNAKAWA, Takeki |
| 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., First draft: July 2005. This draft: September 2025 |
| Keywords: | Inflation, Fiscal Theory of Price Level, Japan |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-151 |
| By: | Pashchenko, Svetlana; Porapakkarm, Ponpoje |
| Abstract: | Three key drivers of savings are life-cycle, precautionary, and bequest motives. What is their relative quantitative importance? We revisit this question focusing on the role of preferences and institutions. We address the challenge of disentangling the effects of different saving motives on one’s decisions by considering many aspects of people’s behavior both before and after retirement. We illustrate why this approach is informative about the underlying preference parameters, and hence allows us to uncover the relative strength of different motives. Our decomposition exercises reveal that bequest motive is the key driver of savings starting from the middle-age and long before retirement. We also find that life-cycle motive and precautionary motive due to medical expense shocks play a minor role. The former result is due the crowding out effect of Social Security. The latter is due to the combined effect of health insurance and the means-tested transfers. |
| Keywords: | savings, self-insurance, bequest motives, life-cycle models, medical spending, social security claiming |
| JEL: | D52 D91 E21 H53 I13 I18 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125799 |
| By: | Grindaker, Morten (University of Chicago); Simmons, Michael (Department of Economics, Umeå University) |
| Abstract: | Does Unemployment Insurance affect how employed workers search for new jobs? We provide novel evidence by combining administrative data on the universe of Norwegian workers and firms with a regression kink design. A marginal increase in benefits lowers job-to-job transitions, increases unemployment incidence, and lowers future earnings. These effects are stronger for workers with higher predicted unemployment risk and align with job search models where workers systematically move towards safer jobs. In an equilibrium job search model calibrated to match these empirical effects, employed workers’ responses account for 45 percent of the net fiscal costs of a marginal benefit expansion. |
| Keywords: | On the job search; Unemployment Insurance; Regression kink design; Unemployment Risk |
| JEL: | G33 G52 H31 H55 J31 J65 |
| Date: | 2025–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:umnees:1039 |
| By: | Juan M. Sanchez; Stefan Song |
| Abstract: | Households learn whether income changes are temporary or persistent from the history of their own paychecks. This paper develops a quantitative model of household financial distress that incorporates this inference and uses survey data on income expectations to estimate the extent to which households overweight recent outcomes—diagnostic expectations. The model improves on the standard full-information, rational-expectations benchmark in two key dimensions: it explains financial distress without assuming extreme impatience, and it more accurately captures the empirical correlation between income and interest rates. Learning and diagnostic expectations play a central role, accounting for roughly half of delinquencies and more than one-third of bankruptcies, and generating welfare losses equivalent to a 1.5 percent permanent decline in consumption. Policies designed to reduce financial distress are markedly more effective in the model with diagnostic expectations. |
| Keywords: | income; learning; diagnostic expectation; financial distress; bankruptcy; delinquency |
| JEL: | D14 D84 E21 G51 |
| Date: | 2025–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedlwp:101999 |
| By: | Matteo Bizzarri (University of Naples Federico II and CSEF); Marco Pangallo (CENTAI Institute); Francisco Queirós (ISEG - Lisbon School of Economics and Management) |
| Abstract: | We study how sector-specific shocks propagate in a production economy with input-output linkages and heterogeneous time to build. We show that, depending on the sector and network characteristics, one-time idiosyncratic shocks can induce a non-monotonic response of aggregate output as it converges back to steady state– a phenomenon we term ’endogenous oscillations’ – and get amplified over time. We study the conditions on the network structure that generate this behavior. We introduce a measure to quantify the magnitude of such endogenous oscillations generated by a single small productivity shock. We quantify the model on US input-output data, showing that for some sectors a single shock can generate aggregate fluctuations. In particular, the magnitude of oscillations is twice as large as it would be if convergence to the steady state were always monotonic. |
| Keywords: | Endogenous Oscillations, Business Cycles, Production Networks |
| JEL: | C67 D57 D85 E23 E32 |
| Date: | 2025–10–16 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:764 |
| By: | Tudor Schlanger (Yale School of Management); Lena Suchanek (Bank of Canada); Jonathan Swarbrick (University of St Andrews); Joel Wagner (Bank of Canada); Yang Zhang (Bank of Canada) |
| Abstract: | We study the role of unconventional monetary policies during a pandemic, focusing on the implementation sequencing of policies when there is a social containment period. Using the Bank of Canada's main projection model (ToTEM), we compare the efficacy of a suite of extended monetary policies (EMPs), finding that the immediate implementation of forward guidance and quantitative easing, followed by credit easing when containment measures are lifted delivers the best outcome. We also quantify the fiscal response needed to offset the gap in gross domestic product created by the effective lower bound, given operational limitations in scaling up EMPs. |
| Keywords: | COVID-19; pandemic; monetary policy; monetary policy sequencing; quantitative easing; credit easing |
| JEL: | E3 E4 E5 E52 E58 |
| Date: | 2025–06–19 |
| URL: | https://d.repec.org/n?u=RePEc:san:econdp:2501 |
| By: | Brandon Kaplowitz |
| Abstract: | This paper demonstrates how reinforcement learning can explain two puzzling empirical patterns in household consumption behavior during economic downturns. I develop a model where agents use Q-learning with neural network approximation to make consumption-savings decisions under income uncertainty, departing from standard rational expectations assumptions. The model replicates two key findings from recent literature: (1) unemployed households with previously low liquid assets exhibit substantially higher marginal propensities to consume (MPCs) out of stimulus transfers compared to high-asset households (0.50 vs 0.34), even when neither group faces borrowing constraints, consistent with Ganong et al. (2024); and (2) households with more past unemployment experiences maintain persistently lower consumption levels after controlling for current economic conditions, a "scarring" effect documented by Malmendier and Shen (2024). Unlike existing explanations based on belief updating about income risk or ex-ante heterogeneity, the reinforcement learning mechanism generates both higher MPCs and lower consumption levels simultaneously through value function approximation errors that evolve with experience. Simulation results closely match the empirical estimates, suggesting that adaptive learning through reinforcement learning provides a unifying framework for understanding how past experiences shape current consumption behavior beyond what current economic conditions would predict. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.20748 |
| By: | Gianluca Benigno (University of Lausanne and CEPR); Alessandro Rebucci (Johns Hopkins University, CEPR and NBER); Aliaksandr Zaretski (University of Surrey) |
| Abstract: | In this paper, we revisit the question of how to manage financial crises using the framework proposed by Bianchi and Mendoza (2018). We show that this model economy exhibits a multiplicity of constrained-efficient equilibria, which arises because the private shadow value of collateral influences the forward-looking asset price. Among these equilibria, the specific one studied by Bianchi and Mendoza (2018) can be implemented using a tax/subsidy on debt alone. In that case, both the ex ante tax and ex post subsidy are quantitatively important for welfare under the optimal time-consistent policy. Limiting either component can lead to a welfare loss relative to the unregulated competitive equilibrium, highlighting the complementarity between crisis prevention and crisis resolution tools. We also show that, under certain conditions, all Pareto-dominant constrained-efficient equilibria entail the unconstrained allocation chosen by a social planner subject to the country budget constraint, and this allocation can be implemented with purely ex post policies. |
| JEL: | E61 F38 F44 H23 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0625 |