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on Dynamic General Equilibrium |
| By: | Michał Brzoza-Brzezina (Narodowy Bank Polski); Rodolfo Rigato (European Central Bank) |
| Abstract: | We study the distributional consequences of the recent inflationary surge and the subsequent monetary policy response in the euro area. Using an estimated two-asset Heterogeneous Agent New Keynesian model with an overlapping generations structure, we analyze the macroeconomic shocks driving inflation between 2021 and 2022. We find that these shocks generated substantial redistribution from young and poor households toward older and wealthier ones. By keeping interest rates unchanged until mid-2022, monetary policy largely offset these distributional effects. A policy response based solely on a standard Taylor rule would have failed to mitigate the redistribution. |
| Keywords: | Monetary policy, Redistribution, HANK, OLG, Euro area, Great Inflation |
| JEL: | E31 E52 E58 D31 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:nbp:nbpmis:382 |
| By: | Aniello Piscopo |
| Abstract: | Informality represents a pervasive feature of many emerging and developing economies, yet standard macroeconomic models often ignore its effects, potentially biasing the analysis of shocks and the design of monetary policy. This paper studies the macroeconomic and policy implications of informality using a structural VAR for Colombia and a two-agent New Keynesian model with formal and informal sectors, featuring heterogeneous households including hand-to-mouth consumers. I show that informal labor supply shocks generate sectoral reallocation: informal activity absorbs part of the shock, sustaining aggregate output while altering wages, hours, and capital allocation. In contrast, monetary policy shocks propagate more strongly when informality is present, amplifying distributional and capital-reallocation effects. Critically, the presence of informality alters equilibrium determinacy: standard Taylor rules may fail to ensure uniqueness, with stability depending on the share of Ricardian households, the size of the informal sector, and the monetary policy stance. My findings highlight that accounting for informal production is essential for understanding transmission mechanisms and designing effective policy in economies with significant informality. |
| Keywords: | Informal economy; Tax evasion; Monetary policy transmission; Fiscal policy; Public debt; DSGE model; Capital reallocation; Colombia |
| JEL: | E52 E62 E26 H26 O17 O54 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:569 |
| By: | Mingyan CHEN; Shinichi NISHIYAMA |
| Abstract: | This study extends the Barro–Becker–Bewley model of endogenous fertility and intergen-erational transfers by incorporating human capital investment in children and life-cycle savings. Calibrating the model to the U.S. economy, this study quantitatively analyzes the potential effects of child-related policies such as child allowances and education subsidies. Child allowances raise fertility in the short run but reduce investment in human and phys-ical capital, thereby suppressing economic growth. Education subsidies reduce fertility in the short run but enhance welfare across all generations. The effects of child-related poli-cies on income and wealth inequality and intergenerational income mobility are generally limited. |
| Keywords: | dynamic general equilibrium; heterogeneous agents; overlapping generations. |
| JEL: | C61 D15 H31 I24 J13 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:kue:epaper:e-25-014 |
| By: | Yuki Uchida (Faculty of Economics, Seikei University); Tetsuo Ono (Graduate School of Economics, The University of Osaka) |
| Abstract: | This study examines the limitations of political equilibrium in fiscal policy when shortsighted governments represent only the middle-aged and older adult generations, in contrast to a Ramsey planner who values them as well as the young and future generations. Using a three-period overlapping generations model calibrated to Germany, Japan, and the United Kingdom, we analyze the Golden Rule of Public Finance (GR), which permits deficit financing solely for public investment. We find that: (i) reduced GR compliance shifts fiscal burdens from the middle-aged to the older adult, young, and future generations; (ii) compliance depends on the elasticity of public capital, preferences for public goods, and GDP growth; and (iii) non-compliance drives political equilibrium away from the Ramsey allocation. Extending voting rights to the young is a more effective mechanism for mitigating inefficiency and enhancing fiscal rule compliance than Demeny voting, which allocates additional votes to the middle-aged based on the number of their children. |
| Keywords: | Fiscal Rule; Golden Rule of Public Finance; Probabilistic Voting; Overlapping Generations; Political Distortions |
| JEL: | D70 E62 H63 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:osk:wpaper:2501r |
| By: | Buhai, Ioan-Sebastian (Stockholm University - SOFI, UC Chile - Instituto de Economia, and University of Minho - NIPE) |
| Abstract: | Wage dispersion and job-to-job mobility are central features of modern labour markets, yet canonical equilibrium search models with exogenous job ladders struggle to account for both facts and the magnitude of frictional wage inequality. We develop a continuous-time equilibrium search model in which match surplus follows a diffusion, workers choose on-the-job search and separation, firms post state-contingent wages, and the cross-sectional distribution of match states endogenously pins down outside options and the job ladder. The problem is formulated as a stationary mean field game with a one-dimensional surplus state. We establish existence and uniqueness of stationary equilibrium under standard regularity and monotonicity conditions, and show that separation is governed by a free-boundary rule. Quantitatively, we solve the coupled Hamilton-Jacobi-Bellman & Kolmogorov system with monotone finite-difference methods, calibrate the model to micro evidence on match productivity and mobility, and use it to decompose wage dispersion and to study how firing costs, search subsidies, and volatility shape mobility, the job ladder, and the wage distribution. |
| Keywords: | wage dispersion, on-the-job search, job ladders, stochastic match productivity, mean field games |
| JEL: | C73 D83 J31 J63 J64 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18358 |
| By: | Nemanja Antic; Harry Pei |
| Abstract: | We develop an overlapping generations model where each agent observes a verifiable private signal about the state and, with positive probability, also receives signals disclosed by his predecessor. The agent then takes an action and decides which signals to pass on. Each agent's action has a positive externality on his predecessor and his optimal action increases in his belief about the state. We show that as the communication friction vanishes, agents become increasingly selective in disclosing information. As the probability that messages reach the next generation approaches one, all signals except those with the highest likelihood ratio will be concealed in equilibrium. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.09406 |
| By: | Burgert, Matthias; Darracq Pariès, Matthieu; Priftis, Romanos; Röhe, Oke; Rottner, Matthias; Silgado-Gómez, Edgar; Stähler, Nikolai; Durand, Luigi; González, Mario; Varga, Janos |
| Abstract: | This paper presents a novel model comparison to examine the challenges posed by changes in carbon-intensive energy prices for monetary policy. The employed environmental monetary models have a detailed multi-sector structure. The comparison assesses the effects of both a temporary and a permanent energy price increase with a particular focus on the euro area and the United States. Temporary and permanent price shocks are both inflationary. However, the inflationary impact of the permanent shock depends on the underlying model assumptions and monetary policy response. The analysis also establishes that these models share large commonalities in their quantitative and qualitative results, while also pointing out cross-country differences. JEL Classification: C54, E52, H23, Q43 |
| Keywords: | climate change, DSGE models, model comparison, monetary policy, multi-sector models |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263192 |
| By: | Juan Pablo Di Iorio (Universidad de San Andrés); Javier García-Cicco (Universidad de San Andrés) |
| Abstract: | A salient feature of many emerging and developing economies is that a substantial fraction of government debt is denominated in foreign currency. We study the implications of the Fiscal Theory of the Price Level (FTPL) in a standard New Keynesian small and open economy model, with an explicit role for the currency denomination of public debt. We show that, while the classical FTPL characterization of equilibrium existence and uniqueness extends largely independently of debt composition, the propagation of shocks does not. The currency denomination of public liabilities alters the effects of monetary and fiscal policy, including the possibility that a monetary tightening leads to a depreciation under active fiscal regimes. More broadly, the interaction between the fiscal-monetary policy mix and the share of foreign-currency debt also plays a central role in shaping the response to external shocks. |
| Keywords: | E31; E52; E63; F41 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:sad:wpaper:179 |
| By: | Rigato, Rodolfo Dinis |
| Abstract: | Sequence-space models are becoming increasingly popular in macroeconomics, especially in the heterogeneous-agent literature. However, the econometric toolkit for users of these models remains less developed than that available for traditional state-space methods. This note introduces an algorithm for efficiently filtering unobserved shocks in linear sequence-space models. The proposed filter solves a least-squares optimization problem in closed form and returns the expectation of unobserved shocks conditional on observed data. It handles heteroskedasticity, missing observations, measurement error, and non- Gaussian shock distributions. To illustrate its properties, I apply it to data simulated from a medium-scale heterogeneous-agent New Keynesian model and show that it accurately recovers the underlying structural shocks. JEL Classification: C32, E27, E32, E37 |
| Keywords: | filtering, least squares, sequence space |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263191 |
| By: | Moll, Ben |
| Abstract: | The thesis of this essay is that, in heterogeneous agent macroeconomics, the assumption of rational expectations about equilibrium prices is unrealistic and should be replaced. Rational expectations imply that decision-makers forecast equilibrium prices like interest rates by forecasting cross-sectional distributions. This leads to an extreme version of the curse of dimensionality: dynamic programming problems in which the entire distribution is a state variable (the ‘Master equation’, also known as the ‘Monster equation’). Frontier computational methods struggle with these infinite-dimensional Bellman equations, making it implausible that real-world agents solve the associated decision problems. These difficulties also limit the applicability of the heterogeneous agent approach to central questions in macroeconomics—those involving aggregate risk and non-linearities such as financial crises. This troublesome feature of the rational expectations assumption poses a challenge: what should replace it? I outline three criteria for alternative approaches: (1) computational tractability, (2) consistency with empirical evidence and (3) (some) immunity to the Lucas critique. I then discuss several promising directions, including temporary equilibrium approaches, incorporating survey expectations, least-squares learning and reinforcement learning. |
| JEL: | E30 |
| Date: | 2026–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:130139 |
| By: | Hanna Wang |
| Abstract: | I develop and estimate a life-cycle discrete-choice model of fertility and female labor supply to study the optimal design of a range of child-related policies. First, I examine two German reforms that introduced wage-contingent parental leave payments and expanded access to low-cost public childcare. I find that both reforms raised completed fertility, with the parental leave reform having a particularly strong impact on highly educated women. Second, I solve for a budget-neutral optimal policy portfolio that maximizes either aggregate welfare or fertility, while ensuring that welfare and fertility do not decline for any education group. I consider four prominent child subsidies as well as the degree of tax jointness. My results show that optimal policy has the potential to increase welfare by 0.5% or fertility by 5.7%. While the solutions are qualitatively similar, they prioritize different policy instruments depending on the specific objective being targeted. |
| Keywords: | fertility, parental leave, childcare subsidies, optimal policy |
| JEL: | H21 J13 J24 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12416 |
| By: | Alessandra Fogli (Federal Reserve Bank of Minneapolis Department of Economics); Veronica Guerrieri (University of Chicago Booth School of Business and NBER); Mark Ponder (NERA Economic Consulting); Marta Prato (Bocconi University) |
| Abstract: | We study the macroeconomic effects of neighborhood-specific policies in a general equilibrium model of a city with endogenous residential sorting and educational investment. A key feature of the model is the presence of endogenous local spillovers that depend on the distribution of families across neighborhoods. We analyze three policies: a housing-voucher policy inspired by the MTO program, which enables poor families to relocate to low-poverty neighborhoods; a place-based transfer (PBT) policy that provides monetary transfers to families in poor neighborhoods; and a place-based investment (PBI) policy that invests resources in local institutions, such as public schools, to directly enhance local spillovers. We find that the MTO policy generates substantial income gains for children of recipient families, but scaling up the program dampens these gains and induces large welfare losses for non-recipients. By contrast, the PBT policy delivers larger average welfare gains but is less effective in reducing inequality and segregation. Finally, the PBI policy produces smaller short-run effects but, over time, resolves the trade-off by raising average welfare while simultaneously reducing inequality, lowering segregation, and improving intergenerational mobility. |
| JEL: | E24 I2 O15 R2 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfi:wpaper:2026-23 |
| By: | Boele Bonthuis; Yongquan Cao; Christoph Freudenberg |
| Abstract: | China is experiencing rapid population aging and a declining workforce, posing significant economic and fiscal challenges, especially to the pension system. This paper examines the evolution of China’s pension system, assesses its gaps relative to international peers, and evaluates the macro-fiscal implications of population aging and various pension reforms. Using a calibrated overlapping generations model that explicitly incorporates the rural–urban disparities, we project that population aging alone can slow annual GDP growth by about 2 percentage points between 2024 and 2050, while pension spending can rise by nearly 10 percentage points of GDP. The 2024 retirement age reform eases some of the long-term growth and fiscal sustainability pressures, raising GDP growth by 0.2 percentage points annually and reducing pension spending from 15.3 percent to 11.9 percent of GDP by 2050. We also use the model to examine a set of policy-relevant reforms—doubling Residents Pension Scheme benefits which are currently inadequate, linking benefits to life expectancy, further increasing the retirement age, and promoting urbanization—and find significant effects on fiscal and macroeconomic outcomes. |
| Keywords: | Population Aging; Pension System; Urbanization; China; Fiscal Policy |
| Date: | 2026–02–20 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/027 |
| By: | Joseph Abadi |
| Abstract: | I develop a general equilibrium macro-finance model that integrates demand-based asset pricing. Assets are held by financial intermediaries (“funds”) with investment mandates that induce downward-sloping demand curves. A representative household seeks out profitable investment opportunities by shifting its savings across funds, but it does so only gradually due to frictions in adjusting its portfolio. The aggregate demand for assets in this economy is inelastic and depends on the distribution of net worth across funds. Consequently, shocks to asset supply and unanticipated financial flows have meaningful effects on asset prices. The framework is general enough to accommodate an arbitrary set of intermediaries and assets, so it can be applied to several questions in macro-finance. Analytically, I characterize sufficient statistics to construct counterfactual asset price responses to shocks and show how these statistics relate to estimates of asset demand elasticity in the literature. Quantitatively, I demonstrate that the model can account for the “excess volatility” in asset prices. |
| Keywords: | Asset Pricing; Macro-Finance; Financial Intermediation; Slow-Moving Capital |
| JEL: | E44 E50 E58 |
| Date: | 2026–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:102820 |
| By: | Adam, Klaus; Weber, Henning |
| Abstract: | The introduction of a firm or product life cycle into New Keynesian frameworks fundamentally alters the design of optimal monetary policy. Economic welfare and the Phillips curve then depend on the gap between inflation and a time-varying inflation target that arises endogenously from turnover. The inflation target is positive on average and shifts in response to productivity disturbances. As a result, steady-state price stability is no longer desirable and the dynamics make it optimal for monetary policy to "look through" certain productivity disturbances. The latter requires keeping nominal rates unchanged even though both output and inflation move. This complicates the empirical distinction between supply, demand, and policy shocks. Our results highlight that accounting for supply side turnover delivers a rich set of policy-relevant results for inflation targeting and shock identification. |
| Keywords: | firm turnover, product turnover, optimal monetary policy, time-varying inflation target |
| JEL: | E31 E32 E52 E61 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:337464 |
| By: | Lentz, Rasmus (University of Wisconsin-Madison); Maibom, Jonas (Aarhus University); Moen, Espen (BI Norwegian Business School) |
| Abstract: | We present a tractable, hybrid framework that nests random and perfectly directed search, in which workers are more likely to direct their search toward submarkets with higher returns, while still searching in inferior submarkets with positive probability. The choice of submarket is governed by a logit choice model with noise parameter μ ∈ [0, ∞). In the respective limits, search becomes either completely random or perfectly directed. We characterize the model equilibrium and show that even the perfectly directed search limit is inefficient, in contrast to its otherwise close cousin, competitive search. We proceed to quantify the extent of directedness on Danish matched employer–employee data. Identification relies on the insight that the two benchmark models differ qualitatively in their implications for job-to-job worker reallocation. We find evidence of substantial directedness in search. Finally, we study the implications for underinvestment due to holdup problems and show that the observed degree of directedness substantially reduces underinvestment relative to a setting with random search. |
| Keywords: | partly directed search, structural estimation, efficiency |
| JEL: | J62 J63 D83 D4 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18375 |
| By: | R. Jason Faberman; Andreas I. Mueller; Ayşegül Şahin |
| Abstract: | This paper studies gender gaps in labor-market outcomes, with a focus on job ladder dynamics. We show that women experience substantially lower wage growth conditional on prior wages despite nearly identical job-to-job transition rates for men and women. To reconcile these observations, we document gender differences in the valuation of nonwage job amenities and in job search behavior, and develop a multi-dimensional job-ladder model with endogenous search effort where workers value both wages and amenities. The model allows for gender heterogeneity in separation rates, search effort, the value of nonemployment, amenity valuations, and bargaining power, enabling a joint analysis of gender wage and employment gaps. A quantitative decomposition shows that differences in preferences for nonwage amenities account for nearly 40 percent of the gender pay gap. Differences in the value of nonemployment and bargaining power explain most of the remainder, with only a limited role for differences in separation rates and search behavior. Finally, we show that increases in job amenities—such as the expansion of remote work—raise the gender wage gap while reducing gender differences in employment. |
| JEL: | J16 J60 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34877 |
| By: | Elisa Belfiori; Daniel Carroll; Sewon Hur |
| Abstract: | We characterize optimal climate policy in an economy with heterogeneous households and non-homothetic preferences. We focus on constrained efficiency, where the planner is restricted from transferring resources across households. We derive three results. First, the constrained-optimal carbon tax is heterogeneous and progressive. Second, if restricted to a uniform tax, the optimal rate is lower than the standard Pigouvian level due to inequality. Third, this allocation is decentralizable using only uniform instruments - a carbon tax, clean subsidy, and a lumpsum transfer. In a quantitative application, we show this policy generates a Pareto improvement, reconciling climate efficiency with inequality concerns. |
| Keywords: | carbon tax, inequality, consumption, welfare, climate change |
| JEL: | E21 H21 H23 Q54 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12443 |
| By: | Abrahams, Scott (Louisiana State University); Flabbi, Luca (University of North Carolina, Chapel Hill); Mabli, James (Mathematica) |
| Abstract: | We develop and estimate a dynamic model of household labor supply and SNAP participation that explains two empirical puzzles: incomplete program take-up despite substantial benefits, and minimal employment effects of SNAP work requirements despite the constraints they impose. Our model incorporates detailed program rules, labor market frictions, and heterogeneous participation costs, revealing that eligible households may rationally forgo benefits when facing administrative barriers to participation and uncertain future employment. Exploiting our model estimates, we perform policy experiments finding that more stringent work requirements lead to dramatic reductions in participation (from 10% to 2.3%) without increasing employment levels or participants' self-sufficiency. While more stringent work requirements do not seem to be effective in our population, other policies do. An increase in benefits would lead to better labor market outcomes, while a lower benefit reduction rate would be one of the most effective policies to increase take-up. |
| Keywords: | search and matching, SNAP, work requirements, structural estimation, household labor supply, administrative costs, means-tested programs |
| JEL: | C63 D10 H53 I38 J22 J64 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18392 |
| By: | Kazuharu Yanagimoto |
| Abstract: | This paper reformulates the Greenwood and Guner (2009) marriage and divorce model in continuous time using the HACT methods of Achdou et al. (2022). Replacing the AR(1) match quality process with an Ornstein-Uhlenbeck process yields a tridiagonal generator, reducing the computational complexity of both the value function and stationary distribution calculations from quadratic to linear in the number of grid points. The continuous-time model closely replicates the discrete-time equilibrium across all key outcomes, including the share of married households, the marriage rate, and the divorce rate, while achieving substantial gains in computation time and memory usage. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.19798 |
| By: | Saurav Kumar (Indira Gandhi Institute of Development Research); Taniya Ghosh (Indira Gandhi Institute of Development Research); Shesadri Banerjee (Reserve Bank of India) |
| Abstract: | This study examines the macroeconomic dynamics under the recently announced intensity based Carbon Credit Trading Scheme (CCTS) in India using an Environmental Dynamic Stochas tic General Equilibrium framework. The policy freely allocates carbon certificates in the primary carbon market and aims to incentivize their trading by monetizing emission intensity reductions in the secondary carbon market. Distinguishing between thermal power and green electricity we find that the incentive mechanism of this policy promotes the adoption of green electricity and reduces emissions in the long term. Although phasing out the use of fossil fuels remains a challenge in the short term, an ambitious intensity target, coupled with cheaper green electricity, can accelerate the energy transition. In addition, it stabilizes the economy against volatility in fossil fuel prices. Our results highlight that the rate-based CCTS outperforms the price-based carbon tax policy in promoting the energy transition while sustaining the growth objectives. |
| Keywords: | E-DSGE, Secondary carbon market, Intensity target, Free allocation |
| JEL: | E32 Q48 Q58 D47 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-027 |