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on Dynamic General Equilibrium |
| By: | Hannah Magdalena Seidl |
| Abstract: | I study the transmission mechanism of Quantitative Easing (QE) in the form of large-scale asset purchases in the mortgage market to aggregate consumption. To this end, I develop a New Keynesian model that features heterogeneous households, a microfounded housing market, and frictional intermediation. This model helps explain the empirical evidence suggesting that QE increases aggregate consumption by raising house prices. I find that higher house prices account for around half of QE’s stimulative effects, with higher labor income contributing the remaining half. |
| Keywords: | Quantitative easing, heterogeneous agents, incomplete markets, sticky wages, housing, asset prices |
| JEL: | E12 E21 E44 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2141 |
| By: | Pablo A. Guerron-Quintana; James M. Nason |
| Abstract: | This chapter surveys Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models. We focus on New Keynesian (NK)DSGE models because of the ongoing interest shown in this class of models by economists in academic and policy-making institutions. Their interest stems from the ability of this class of DSGE model to transmit monetary policy shocks into endogenous fluctuations at business cycle frequencies. Intuition about this propagation mechanism is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on detrending its optimality and equilibrium conditions to construct a linear approximation of the model from which we solve for its linear decision rules. This solution is mapped into a linear state space model. It allows us to run the Kalman filter generating predictions and updates of the detrended state and control variables and the predictive likelihood of the linear approximate NKDSGE model. The predictions, updates, and likelihood are inputs needed to operate the Metropolis-Hastings Markov chain Monte Carlo sampler from which we draw the posterior distribution of the NKDSGE model. The sampler also requires the analyst to pick priors for the NKDSGE model parameters and initial conditions to start the sampler. We review pseudo-code that implements this sampler before reporting estimates of a canonical NKDSGE model across samples that begin in 1982Q1 and end in 2019Q4, 2020Q4, 2021Q4, and 2022Q4. The estimates are compared across the four samples. This survey also gives a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research agenda. |
| Keywords: | dynamic stochastic general equilibrium, Bayesian, Metropolis-Hastings, Markov Chain Monte Carlo, Kalman filter, likelihood |
| JEL: | C32 E10 E32 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-52 |
| By: | Vanessa Schmidt; Hannah Magdalena Seidl |
| Abstract: | We study the effects of movements in aggregate lending standards on macroeconomic aggregates and inequality. We show in a New Keynesian model with heterogeneous households and housing that a looser loan-to-value (LTV) ratio stimulates housing demand, nondurable consumption, and output. Our model implies that the LTV shock transmits to macroeconomic aggregates through higher household liquidity and a general-equilibrium increase in house prices and labor income. We also show that a looser LTV ratio redistributes housing wealth from the top 10% of the housing wealth distribution to the bottom 50%, indicating an overall decrease in inequality. |
| Keywords: | Heterogeneous agents, incomplete markets, housing, macroprudential policies |
| JEL: | E12 E21 E44 E52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2140 |
| By: | Juvonen, Petteri; Sariola, Mikko |
| Abstract: | DSGE models are often specified so that the long-run variation of variables is driven by one or two common trends, which rarely holds in the data. We find that when this discrepancy exists, high-frequency components (measurement errors) capture variable-specific time variation in trends. When high-frequency components are restricted to be small or ignored, the discrepancy is captured by the model component, which distorts shock decompositions. We show that incorporating variable-specific trend components directly into the measurement equations yields a decomposition in which the high-frequency, model, and trend components each capture what they are intended to. We also find trend modelling useful in forecasting. |
| Keywords: | DSGE, trends, business cycles |
| JEL: | E17 E32 E37 C52 C53 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:325481 |
| By: | Alberto Montagnoli; Miroslava Quiroga-Trevino; Christoph Thoenissen |
| Abstract: | This paper provides empirical evidence on the balance sheet channel of fiscal policy in peripheral European economies. Our findings using a Panel VAR, reveal that shifts in financial institutions' balance sheets following a debt-financed fiscal expansion, reduce credit provision and investment in these countries. Moreover, the analysis indicates that economies with higher sovereign exposure experienced higher credit crunches and investment declines. To explore the underlying mechanisms, we estimate a DSGE model that incorporates banks as primary holders of sovereign debt. The model shows that sovereign exposure amplifies the negative effects on credit supply, lowering investment and capital formation. A counterfactual scenario without bank-held sovereign bonds isolates the contribution of the balance sheet channel: removing this channel weakens the crowding-out effect, with investment falling 0.2 percentage points less and output increasing by 0.02 percentage points more. These effects appear stronger during the financial and sovereign debt crises. |
| Keywords: | SVAR;DSGE;Bayesian estimation;Fiscal policy;Sovereign debt;Credit;Euro Area. |
| JEL: | C11 E32 E44 E62 H63 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2025-12 |
| By: | Ryan Chahrour; Kyle Jurado |
| Abstract: | Macroeconomic disturbances affect both current fundamentals and expectations of future fundamentals, but most analyses report only the total of these effects. The expectation response function (ERF) isolates the role of expected future fundamentals in a theory. Defined as the response today to a change in expected fundamentals at each future horizon, the ERF does not depend on the fundamentals' laws of motion, the information held by agents, or the assumption of rational expectations. In applications, we show that (i) the new-Keynesian model implies modest expectational effects of technology and monetary shocks, while (ii) markup shocks in a medium-scale DSGE model have far larger expectational impacts than the “puzzling” effects of forward guidance. |
| JEL: | D83 E32 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34210 |
| By: | Olympia Bover (CEMFI); Nezih Guner (CEMFI); Yuliya Kulikova (Bank of Spain); Alessandro Ruggieri (CUNER Universidad); Carlos Sanz (Banco de Espana) |
| Abstract: | Family-friendly policies aim to help women balance work and family life, encouraging them to participate in the labor market. How effective are such policies in increasing fertility? We answer this question using a search model of the labor market where firms make hiring, promotion, and firing decisions, taking into account how these decisions affect workers’ fertility incentives and labor force participation decisions. We estimate the model using administrative data from Spain, a country with very low fertility and a highly regulated labor market. We use the model to study family-friendly policies and demonstrate that firms' reactions result in a trade-off: policies that increase fertility reduce women's participation in the labor market and lower their lifetime earnings. |
| Keywords: | flexibility, search and matching, human capital accumulation, gender gap, welfare |
| JEL: | E24 J08 J13 J18 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hka:wpaper:2025-006 |
| By: | Stefan Wöhrmüller |
| Abstract: | How does uninsurable idiosyncratic risk shape the optimal design of carbon taxation? To answer this question, I augment a heterogeneous-agent incomplete-markets model with a climate externality on total factor productivity and dirty energy demand of households and firms. A government sets a carbon tax on energy and redistributes its revenue via lump-sum transfers. When labor tax instruments are held fixed, I find that the optimal carbon tax rises with the level of uninsurable idiosyncratic risk. In contrast, when labor taxes can adjust, the carbon tax remains relatively stable across different economic environments. Overall, welfare gains are primarily driven by improved insurance provision. |
| Keywords: | heterogeneous agents; precautionary savings; carbon taxation |
| JEL: | D31 D52 E21 H21 Q50 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:841 |
| By: | Jinting Guo |
| Abstract: | This paper provides the first econometric evidence for diagnostic expectations (DE) in DSGE models. Using the identification framework of Qu and Tkachenko (2017), I show that DE generate dynamics unattainable under rational expectations (RE), with no RE parameterization capable of matching the volatility and persistence patterns implied by DE. Consequently, DE are not observationally equivalent to RE and constitute an endogenous source of macroeconomic fluctuations, distinct from both structural frictions and exogenous shocks. From an econometric perspective, DE preserve overall model identification but weaken the identification of shock variances. To ensure robust conclusions across estimation methods and equilibrium conditions, I extend Bayesian estimation with Sequential Monte Carlo sampling to the indeterminacy domain. These findings advance the econometric study of expectations and highlight the macroeconomic relevance of diagnostic beliefs. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.08472 |
| By: | Bonneton, Nicolas; Sandmann, Christopher |
| Abstract: | This paper studies assortative matching in a non‐stationary search‐and‐matching model with non‐transferable payoffs. Non‐stationarity entails that the number and characteristics of agents searching evolve endogenously over time. Assortative matching can fail in non‐stationary environments under conditions for which Morgan (1995) and Smith (2006) show that it occurs in the steady state. This is due to the risk of worsening match prospects inherent to non‐stationary environments. The main contribution of this paper is to derive the weakest sufficient conditions on payoffs for which matching is assortative. In addition to known steady state conditions, more desirable individuals must be less risk‐averse in the sense of Arrow–Pratt. |
| Keywords: | non-stationary random search; assortiative matching; risk preferences; NTU |
| JEL: | J1 |
| Date: | 2025–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128639 |
| By: | Otto, Christian; Schult, Christoph; Vogt, Thomas |
| Abstract: | Vietnam, a lower-middle-income economy, faces severe climate risks from heat waves, sea-level rise, and tropical cyclones, which are expected to intensify under ongoing global warming. Using a dynamic general equilibrium model, we analyze economic transition dynamics from 2015 to 2100, incorporating heat-induced labor productivity losses, agricultural land loss, and cyclone-related property damage. We compare a Paris-compatible scenario limiting warming to below 2 êC with a high-emission scenario reaching 4-5 êC. While output and investment impacts remain highly uncertain and statistically indistinguishable across scenarios until 2100, consumption losses are significantly larger under high emissions, mainly driven by heat-related productivity declines, with cyclones contributing most to uncertainty. These findings underscore the importance of considering multiple impact channels beyond output damages in climate-development research. |
| Keywords: | climate change impacts, dynamic general equilibrium model, impact channels, mitigation |
| JEL: | O44 Q13 Q54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:325836 |
| By: | Ryo ISHIDA; Kazumasa OGURO; Masaya YASUOKA |
| Abstract: | This article constructs a simple overlapping generations (OLG) model to analyze the progressive child allowance and related policies with the objective of addressing the declining number of births in Japan. The analysis assumes the existence of a pay-as-you-go pension system and a certain constraint on fiscal resources. The focus is on maximizing household utility in the steady state. Results of the analysis reveal the following findings: 1) The number of births that maximizes household utility in the steady state can be achieved by appropriately introducing a progressive child allowance. Moreover, the smaller the budget necessary to implement and support measures to address the declining number of births, the more desirable it is to increase the progressivity of the child allowance. 2) A linear child allowance can also achieve the number of births that maximizes household utility in the steady state. However, unlike the progressive child allowance, by taking the example of Japan, the specific numerical examples presented in this article demonstrate that the linear child allowance may exceed the available budget for such measures. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25087 |
| By: | Hyunduk Suh; Nathaniel A. Throckmorton |
| Abstract: | This paper examines how very low fertility rates in East Asia might affect inflation in the face of fiscal limits. In a calibrated overlapping-generations model, low fertility rates cause the debt-to-GDP ratio to rise, which can push the tax rate to a political ceiling and force either monetary accommodation or reduced transfers to retirees. The fiscal limit creates inflationary pressure relative to a scenario with no fiscal limit, adding to our understanding of possible inflation outcomes in aging economies. Korea faces the strongest demographic headwind and is projected to experience the earliest fiscal limit and highest inflation rates, with inflation projected to peak roughly 10 years later and 2.5pp higher with a fiscal limit than without one. Taiwan’s more favorable initial fiscal conditions help reduce inflationary pressure, and China benefits from a delayed demographic transition that leads to lower inflation, despite worse initial fiscal conditions than Taiwan. In all countries, a higher tax rate ceiling or older retirement age effectively reduce peak inflation. |
| Keywords: | low fertility; demographic transition; population aging; East Asia; overlapping generations model; fiscal sustainability; inflation projections |
| JEL: | J11 H63 E52 E63 J13 |
| Date: | 2025–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:cwm:wpaper:171 |
| 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: | childcare subsidies, fertility, optimal policy, parental leave |
| JEL: | H21 J13 J24 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1507 |
| By: | Raouf Boucekkine; Giorgio Fabbri; Salvatore Federico; Fausto Gozzi; Ted Loch-Temzelides; Cristiano Ricci |
| Abstract: | In order to investigate strategic interactions between a "global north" and a "global south" we introduce a two-country extension of the model in Golosov et al. (2014). We consider different transfers between the two regions, including transfers that can improve the abatement technology. Our model can accommodate several kinds of heterogeneity, including in preferences, time discount rates, and damages resulting from the stock of accumulated GHG. We solve for both planner’s solutions and non-cooperative equilibria. We then calibrate our model in order to study quantitative differences between these solutions and to quantitatively explore the role of heterogeneity and Knightian uncertainty. We characterize emissions, damages, consumption, transfers, and welfare by computing the Nash equilibria of the associated dynamic game. We then compare these to efficiency benchmarks. Further, we investigate how (deep) uncertainty affects climate outcomes. We develop a general model for the study of optimal control and differential games that are linear-in-state, which we term the Integral Transformation Method (ITM), which encompasses several existing models as special cases. |
| Keywords: | Integral Transformation Method, Analytical Integrated Assessment Model, Differential Game, Climate Policy, Robust Control |
| JEL: | C7 Q5 Q54 D62 H23 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:gbl:wpaper:2025-04 |
| By: | Jong-Wha Lee; Eunbi Song |
| Abstract: | This study examines the factors underlying the sharp decline in marriage and fertility rates by integrating microdata analysis with a structural macroeconomic model. Drawing on 25 years of individual-level panel data from the Korean Labor and Income Panel Study, it employs discrete-time survival models to examine how individual and regional factors influence the incidence of first marriage and childbirth. The findings show that rising educational and marriage-related expenses significantly reduce the likelihood of marriage, whereas increased female labor force participation and escalating child education costs are associated with lower probabilities of childbirth. These empirical patterns motivate a dynamic overlapping-generations model with endogenous family formation, human capital investment, and intra-household bargaining. The model incorporates gender-based differences in partner matching and household labor, which influence time allocation and marriage utility, particularly for college-educated women. Simulation results indicate that rising marriage and child-rearing costs have been the primary drivers of declining family formation since 1990, while increases in women’s education have played a modest role. The findings further suggest that a package of targeted policies--such as childcare and education support, marriage-cost subsidies, and gender-equalizing reforms in households and the labor market--could raise the fertility rate from 0.75 to around 1.2, a level comparable to that of other low-fertility advanced countries. |
| Keywords: | growth, fertility, gender equality, human capital accumulation, marriage, Korea |
| JEL: | E24 J11 J12 J13 J71 O53 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-51 |
| By: | Svetlana Pashchenko (University of Georgia); Ponpoje Porapakkarm (National Graduate Institute for Policy Studies) |
| 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: | precautionary savings, bequest, institutions, social security, Preferences |
| JEL: | D81 D91 J32 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:hka:wpaper:2025-008 |
| By: | Colin C. Caines; Amartya Lahiri |
| Abstract: | Saving rates are significantly different across countries and remain different for long periods of time. This paper provides an explanation for this phenomenon. We formalize a model of a world economy comprised of open economies inhabited by heterogeneous agents endowed with recursive preferences. Our assumed preferences imply increasing marginal impatience of agents as their consumption rises relative to average consumption of a reference group. Using measured productivity as the sole exogenous driver, we show that the model can not only reproduce the sustained long run differences in average saving rates across countries, but also provides a good fit to the time series behavior of saving observed in the data. |
| Keywords: | World savings; Recursive preferences |
| JEL: | E20 F30 F40 |
| Date: | 2025–08–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1416 |