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on Dynamic General Equilibrium |
| By: | Jesús Fernández-Villaverde (UNIVERSITY OF PENNSYLVANIA); Joël Marbet (BANCO DE ESPAÑA); Galo Nuño (BANCO DE ESPAÑA); Omar Rachedi (ESADE BUSINESS SCHOOL) |
| Abstract: | This paper studies how household inequality shapes the effects of the zero lower bound (ZLB) on nominal interest rates on aggregate dynamics. To do so, we consider a heterogeneous agent New Keynesian (HANK) model with an occasionally binding ZLB and solve for its fully non-linear stochastic equilibrium using a novel neural network algorithm. In this setting, changes in the monetary policy stance influence households’precautionary savings by altering the frequency of ZLB events. As a result, the model features monetary policy non-neutrality in the long run. The degree of long-run non-neutrality, i.e., by how much monetary policy shifts real rates in the ergodic distribution of the model, can be substantial when we combine low inflation targets and high levels of wealth inequality. |
| Keywords: | heterogeneous agents, HANK models, neural networks, non-linear dynamics |
| JEL: | D31 E12 E21 E31 E43 E52 E58 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2407 |
| By: | Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich |
| Abstract: | Attitudes toward fiscal policy differ: fiscal conservatism and fiscal liberalism varyin their willingness to tolerate budget deficits. We challenge the view that such attitudes reflect national preferences. Instead, we offer an economic explanation based on a two-country Heterogeneous Agent New Keynesian model, bringing its implicit political economy dimension to the forefront. We compute the welfare implications of alternative fiscal policies at the household level to assess the conditions under which a policy commands majority support. Whether the majority supports fiscal conservatism or liberalism depends on a country’s debt level, its wealth distribution, and the nature of the economic shock. |
| Keywords: | HANK, Two-country model, Political Economy, Government debt, Fiscal policy, household heterogeneity |
| JEL: | E32 H63 F45 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_694 |
| By: | Kase, Hanno; Rigato, Rodolfo Dinis |
| Abstract: | We introduce an estimated medium scale Heterogeneous-Agent New Keynesian model for forecasting and policy analysis in the Euro Area and discuss the applications of this type of models in central banks, focusing on two main exercises. First, we examine an alternative scenario for monetary policy during the early 2020s inflationary episode, showing that earlier hikes in interest rates would have affected more strongly households at the lower end of the wealth distribution, whose consumption our model suggests was already depressed relative to the rest of the population. To provide intuition for this result, we introduce a new decomposition of the effects of monetary policy on consumption across the wealth distribution. Second, we show that introducing heterogeneous households does not come at the cost of forecasting accuracy by comparing the performance of our model to its exact representative-agent counterpart and demonstrating nearly identical results in predicting key aggregate variables. JEL Classification: D31, E12, E21, E52 |
| Keywords: | forecasting, heterogeneous-agent New Keynesian models, inequality, monetary policy |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253086 |
| By: | Dimakopoulou, Vasiliki; Economides, George; Philippopoulos, Apostolis |
| Abstract: | This paper quantifies the future implications of repayment of bailout loans received by Greece from the EU in the previous decade. These debt obligations amount today to around 240 billion euros or 70% of the country’s total public debt and have to be repaid by 2070. This is investigated in a dynamic general equilibrium model calibrated to the Greek economy, in which fiscal policy is conducted under the rules of the new fiscal governance framework and quantitative monetary policy is subject to the rules of the Eurosystem. Our simulations show that, other things equal, repayment will have recessionary implications in the years to come, although the magnitude of these unpleasant implications will depend on how much privately-held public debt rises as the EU-held public debt falls. We then search for ways to mitigate these recessionary effects. While NGEU/RRF funds as they take place at the moment, as well as a new hypothetical support from the ES in the form of more quantitative easing are found to have small and/or temporary beneficial effects only, our simulations show that what can really help is an improvement in total factor productivity. |
| Keywords: | fiscal policy; international loans; monetary regimes |
| JEL: | F34 E62 E42 |
| Date: | 2025–07–19 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128999 |
| By: | Adamopoulou, Effrosyni; Hannusch, Anne; Kopecky, Karen A.; Obermeier, Tim |
| Abstract: | Why do US college-educated couples with children marry at higher rates than those without a college degree? We argue that investing in children is more valuable for college-educated couples, who are more likely to send their children to college. Marriage, which entails lower separation risk and more equal asset division if separation does occur, provides insurance to the lower-earning spouse, which facilitates child investment. Using an OLG model of marriage, cohabitation, wealth accumulation, and educational investments where college completion is risky, we find that insurance through marriage is particularly important when investing in children is costly and college costs are high. |
| Keywords: | cohabitation, marriage, child development, time and money investments, human capital accumulation, college costs |
| JEL: | D15 E24 J12 J22 J24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:321867 |
| By: | Clodomiro Ferreira (Banco de España); Julio Gálvez (Banco de España); Myroslav Pidkuyko (Banco de España) |
| Abstract: | The housing bust in Spain was characterised by a significant and rapid drop in home ownership among the younger cohorts, a relatively homogeneous but significant decrease in consumption and significant movements in the rent-to-house price ratio. To uncover the causes of these movements, we solve and estimate an equilibrium life-cycle model with non-linear income, mortgage and housing and rental market dynamics, and simulate a series of counterfactual policy changes and macroeconomic conditions observed in Spain during the period. The lion’s share of the observed drop in home ownership and consumption and the housing market dynamics can be explained by the tightening of credit conditions and the major shift in income dynamics observed in Spain between the boom and bust phases. |
| Keywords: | life-cycle models, mortgage debt, housing |
| JEL: | E21 E44 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2424 |
| By: | Juan Dolado (Universidad Carlos III de Madrid); Alvaro Janez (Stockholm School of Economics); Felix Wellschmied (Universidad Carlos III de Madrid) |
| Abstract: | Online food delivery platforms typically operate through a controversial business model that relies on subcontracting self-employed workers, known as riders. Using a search and matching model, we quantify the labor-market effects of the Spanish Riders’ Law in 2021 that establishes the presumption of dependent employment for riders. Riders with heterogeneous preferences for leisure trade off work flexibility and easier employability as self-employed against enjoying higher wages as employees. Our main finding is that the reform succeeded in increasing the share of employees but failed to fully absorb the large outflows from self-employment and decreased riders’ wages, resulting in welfare losses. However, complementing the reform with a payroll tax cut for platforms hiring employees preserves employment levels and increases substantially riders’ welfare. |
| Keywords: | Riders, Food delivery platforms, Self-employed, Employees |
| JEL: | J21 J60 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:2527 |
| By: | Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey) |
| Abstract: | Sovereigns implement fiscal austerity, i.e., expenditure consolidation around debt crises. We compile data on fiscal expenditure consolidation around debt restructurings with private external creditors in 1975–2020. We find that expenditure consolidation precedes preemptive restructurings or prevents restructurings—“ex ante†—, while occurs upon defaults/postdefault restructurings—“ex post†. We build sovereign long-term debt model with endogenous choice of preemptive and post-default renegotiations and public capital accumulation. The model quantitatively shows when both public capital and debt are high, the sovereign implements ex ante fiscal expenditure consolidation which, in turn, results in preemptive restructurings or avoiding restructurings. Data support theoretical predictions. |
| JEL: | F34 F41 H63 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0525 |
| By: | Marc Dordal i Carreras; Seung Joo Lee |
| Abstract: | This paper introduces a business cycle model that integrates financial markets and endogenous financial volatility at the Zero Lower Bound (ZLB). We derive three key insights: first, central banks can mitigate excess financial volatility at the ZLB by credibly committing to future economic stabilization; second, a commitment to refraining from future stabilization can steer the economy toward more favorable equilibrium paths, thereby revealing a trade-off between future stabilization and reduced financial volatility at the ZLB; third, maintaining uncertainty regarding the timing of future stabilization is strictly superior to alternative forward guidance commitments. |
| Keywords: | monetary policy, forward guidance, financial volatility, risk premium |
| JEL: | E32 E43 E44 E52 E62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12034 |
| By: | Diego R. Känzig; Maximilian Konradt; Lixing Wang; Donghai Zhang |
| Abstract: | This paper examines the relationship between green innovation and the business cycle, revealing that while non-green innovation is procyclical, green innovation is countercyclical. This pattern holds unconditionally over the business cycle and conditional on economic shocks. Motivated by these findings, we develop a business cycle model with endogenous green and non-green innovation to explain their distinct cyclical behavior. The key mechanism operates through a ‘green is in the future’ channel: green patents are expected to generate higher profits in the future, making green patenting less sensitive to short-term economic fluctuations. In general equilibrium, this channel is reinforced, making green and non-green innovation effective substitutes. We provide direct evidence supporting the model mechanism using data on market-implied values of green and non-green patents. |
| JEL: | E32 O31 Q55 Q58 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34041 |
| By: | Fischer, Marcel; Jankowski, Natascha |
| Abstract: | We set up a life cycle model with real interest rate risk to demonstrate that real interest rates have implications for optimal household consumption and investments. Lower interest rates lead to higher optimal stock investments and lower consumption. Ignoring the time-varying nature of real interest rates leads to overconsumption and underinvestment into stocks when interest rates are high and, ultimately, substantial welfare costs. Being exposed to an extended period of low interest rates even leads to substantial welfare losses when behaving optimally - particularly when being exposed to it at around retirement age when savings peak. |
| Keywords: | consumption-savings decisions, real interest rate risk, life cycle model, household finance |
| JEL: | E21 G11 G51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:arqudp:323203 |
| By: | Andrey Sarantsev; Angel Piotrowski; Ian Anderson |
| Abstract: | We create a dynamic stochastic general equilibrium model for annual returns of three asset classes: the USA Standard & Poor (S&P) stock index, the international stock index, and the USA Bank of America investment-grade corporate bond index. Using this, we made an online financial app simulating wealth process. This includes options for regular withdrawals and contributions. Four factors are: S&P volatility and earnings, corporate BAA rate, and long-short Treasury bond spread. Our valuation measure is an improvement of Shiller's cyclically adjusted price-earnings ratio. We use classic linear regression models, and make residuals white noise by dividing by annual volatility. We use multivariate kernel density estimation for residuals. We state and prove long-term stability results. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.06010 |
| By: | Gantert, Konstantin (Tilburg University, Center For Economic Research) |
| Keywords: | goods market search Frictions; endogenous price elasticity; capacity utilization; flat euler equation; search-augmented Phillips curve; search-driven cost-push shocks |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiucen:f216d0be-e3fb-422e-a68a-6f2313641b71 |
| By: | Stefano Bosi (UEVE - Université d'Évry-Val-d'Essonne, Université Paris-Saclay); Cuong Le Van (IPAG Business School, 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 - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Ngoc-Sang Pham (EM Normandie - École de Management de Normandie = EM Normandie Business School) |
| Abstract: | We study an overlapping generations (OLG) exchange economy with an asset that yields dividends. First, we derive general conditions, based on exogenous parameters, that give rise to three distinct scenarios: (1) only bubbleless equilibria exist, (2) a bubbleless equilibrium coexists with a continuum of bubbly equilibria, and (3) all equilibria are bubbly. Under stationary endowments and standard assumptions, we provide a complete characterization of the equilibrium set and the associated asset price dynamics. In this setting, a bubbly equilibrium exists if and only if the interest rate in the economy without the asset is strictly lower than the population growth rate and the sum of per capita dividends is finite. Second, we establish necessary and sufficient conditions for Pareto optimality. Finally, we investigate the relationship between asset price behaviors and the optimality of equilibria. |
| Keywords: | Pareto optimal, low interest rate, fundamental value, asset price bubble, overlapping generations, exchange economy |
| Date: | 2025–08–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:hal-05199274 |
| By: | Fischer, Marcel; Khorunzhina, Natalia |
| Abstract: | Using a life-cycle model of household consumption and investment under family transitions, we investigate the long-run financial outcomes of divorces. We find divorce leads to a reduction in wealth, and the loss is larger for higher-educated women. Earlier fertility and a smaller parenthood penalty for women with only a high school diploma result in negative effects of divorces fading away by age 45, whereas for college-educated women, the same is achieved a decade later because of later fertility and a stronger parenthood penalty. Reduced economies of scale, switching to a single-person income, and losing wealth protection within marriage have the strongest impact on the divorced household economy. |
| Keywords: | Household Finance, Divorce, Education |
| JEL: | D14 D15 E21 G51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:arqudp:323204 |