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on Dynamic General Equilibrium |
| By: | ZENAGUI, Sid Ahmed |
| Abstract: | Advanced Monetary Theory and Policy: New Keynesian Economics, DSGE Models, and Central Banking provides a graduate-level treatment of modern monetary economics, integrating theoretical rigor, quantitative methods, and contemporary policy applications. The textbook develops the foundations of monetary theory, including money demand, intertemporal optimization, money-in-utility models, cash-in-advance frameworks, search-theoretic monetary models, and overlapping generations models. It systematically advances toward New Keynesian economics and Dynamic Stochastic General Equilibrium (DSGE) modelling, covering price and wage rigidities, inflation dynamics, Bayesian estimation, and open-economy extensions. The volume further examines monetary policy design, inflation targeting, optimal policy under commitment and discretion, central bank credibility, forward guidance, and macroprudential considerations. Emerging research frontiers—including heterogeneous-agent models, climate-related monetary risks, central bank digital currencies, artificial intelligence in central banking, geopolitical shocks, and nonlinear DSGE methods—are incorporated to reflect developments through 2026. Emphasis is placed on mathematical derivation, empirical evidence, computational implementation using Dynare, MATLAB, Python, Julia, and R, and research-oriented exercises suitable for graduate students, researchers, and policy practitioners. The textbook aims to bridge advanced monetary theory with practical policy analysis in both advanced and emerging economies. |
| Keywords: | Monetary Economics; Monetary Policy; New Keynesian Economics; DSGE Models; Central Banking; Inflation Targeting; Bayesian Estimation; Dynamic General Equilibrium; Macroeconomic Modelling; Forward Guidance; Financial Stability; Heterogeneous-Agent Models (HANK); Central Bank Digital Currencies (CBDCs); Artificial Intelligence in Economics; Open-Economy Macroeconomics; Macroeconomic Policy. |
| JEL: | C11 C51 C68 E31 E32 E37 E41 E42 E43 E47 E52 E58 E61 F41 G28 |
| Date: | 2026–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129218 |
| By: | Jean-Guillaume Sahuc; Barbara Annicchiarico; Gauthier Vermandel |
| Abstract: | We study the intergenerational distributional effects of carbon pricing during the green transition in an overlapping-generations New Keynesian model calibrated to euro-area household micro data. Climate policy generates systematic redistribution across cohorts through two channels: a labor-income channel, driven by wage compression and lower labor demand, and a financial-wealth channel, driven by asset revaluation and higher real returns. The labor- income channel dominates quantitatively , generating persistent welfare losses of up to 6 percent in permanent-consumption equivalents for working-age households, while retirees experience comparable gains. Revenue recycling can mitigate these asymmetries, requiring 40 to 68 per- cent of carbon-tax revenues to be directed toward financial-income tax relief. Monetary policy has limited influence on the overall redistributive pattern. |
| Keywords: | Climate policy , carbon pricing, intergenerational redistribution, overlapping generations, fiscal policy , New Keynesian model |
| JEL: | E21 E32 E52 H23 Q54 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2026-11 |
| By: | Wolfgang Kuhle |
| Abstract: | This paper investigates the conditions under which the Easterlin hypothesis holds within a neoclassical overlapping generations model with endogenous capital accumulation, wages, interest rates, and fertility. We develop a tractable analytical framework that maps economic transitions into utility space via a continuously differentiable first-order difference equation for cohort lifetime utilities. This reformulation allows for a transparent normative evaluation of non-steady-state paths without requiring explicit solutions to the underlying nonlinear system. Within this framework, we show that when fertility cycles emerge and children are normal goods, the utility of small cohorts strictly exceeds that of large cohorts. Crucially, this cohort-welfare asymmetry is driven by fertility preferences and is independent of the economy's position relative to the golden rule. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.02362 |
| By: | Ji, Zihao; Zhang, Mengchen; Wang, Guan; Zhang, Hongru |
| Abstract: | Does replacing hard debt-to-income (DTI) limits with risk-adjusted pricing improve household welfare? We develop a heterogeneous agent life-cycle model incorporating behavioral flow disutility, endogenous credit menus, and regime-switching income risk. Simulating a "Double Trigger" crisis, we uncover a Solvency Paradox: price-based regulation eliminates immediate credit rationing but imposes risk premia that erode liquidity buffers, generating a 53.7% cumulative default rate among marginal borrowers exceeding the counterfactual exclusion rate under quantity limits. Welfare consequences are starkly regressive: the "marginal middle class" suffers 6.7% consumption-equivalent losses while wealthy households gain 2.1%. Our policy comparison reveals a state-contingent hierarchy: forbearance efficiently resolves transitory liquidity shocks, while principal reduction is necessary for persistent solvency crises. State-contingent contracts (Shared Responsibility Mortgages) achieve intermediate efficacy with superior dynamic stability. Marginal credit expansions are dominated across all simulated shock scenarios. Optimal macro-prudential design requires severing the link between income shocks and debt service burdens. |
| Keywords: | Macroprudential Policy, Mortgage Default, Risk-Based Pricing, Liquidity Constraints, Household Heterogeneity |
| JEL: | E44 G21 G28 R21 |
| Date: | 2026–02–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128531 |
| By: | ZENAGUI, Sid Ahmed |
| Abstract: | This paper develops a spatial Overlapping Generations (OLG) model to analyze the interactions between human capital, environmental quality, and regional dynamics in shaping intergenerational quality of life (QoL) across European regions from 2000 to 2025. Using a rich dataset of regional economic, social, and environmental indicators harmonized at the NUTS-2 level, the model incorporates human capital and pollution spillovers, household utility, and regional policy interventions. Empirical results reveal that intergenerational persistence of human capital and environmental externalities significantly influence long-term welfare, while spatial interactions reinforce core–periphery disparities. Counterfactual simulations of education investments, carbon pricing, green R&D, and EU cohesion policies demonstrate that integrated multi-sector interventions maximize aggregate welfare, reduce inequality, and enhance spatial convergence. The findings highlight important policy trade-offs across generations and underscore the relevance of coordinated environmental, educational, and redistribution policies for sustainable and equitable regional development. |
| Keywords: | Intergenerational Quality of Life, Human Capital, Environmental Externalities, Spatial Spillovers, Overlapping Generations Model, EU Regional Policy |
| JEL: | A10 O1 O47 |
| Date: | 2026–03–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128732 |
| By: | Alberto Montagnoli; Miroslava Quiroga-Trevino; Christoph Thoenissen |
| Abstract: | This paper provides empirical evidence on the balance sheet channel of ï¬ scal policy in peripheral European economies. Our ï¬ ndings using a Panel VAR, reveal that shifts in ï¬ nancial institutions' balance sheets following a debt-ï¬ nanced ï¬ scal expansion reduce credit provision and investment in these countries. Moreover, the analysis indicates that economies with higher sovereign exposure experience more severe credit crunches and investment declines. To explore the underlying mechanisms, we employ a DSGE model that incorporates banks as primary holders of sovereign debt. The model shows that sovereign exposure ampliï¬ es the negative effects on credit supply, lowering investment and capital formation. |
| Keywords: | SVAR, DSGE, Bayesian estimation, ï¬ scal policy, sovereign debt, bank capital regulation, crowding out, Euro Area |
| JEL: | C11 E32 E44 E62 H63 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-42 |
| By: | Tobias Adrian; Christopher Erceg; Marcin Kolasa; Jesper Lindé; Pawel Zabczyk |
| Abstract: | Quantitative easing (QE) has been criticized for helping fuel the post-COVID inflation boom and causing large central bank losses. In this paper, we argue that QE should be evaluated mainly on its ability to achieve core macro-objectives as well for its effects on the consolidated fiscal position of the government and central bank, although central bank losses can matter to the extent that they may weaken central bank credibility. Using a DSGE model with segmented asset markets, we show how QE can provide a sizeable boost to output and inflation in a deep liquidity trap and can reduce public debt substantially. This contrasts to the rise in public debt that occurs under fiscal expansion and makes QE an attractive tool in a high debt environment. There is more reason for caution in using QE in a "shallow" liquidity trap in which the notional interest rate is only slightly negative: QE runs more risk of causing the economy to overheat, especially if forward guidance has a strong element of commitment, and is more likely to generate sizeable central bank losses. Some refinements in strategy, including the use of escape clauses, can help mitigate overheating risks. |
| JEL: | C54 E1 E3 E5 G12 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35297 |
| By: | Arpad Abraham; Pavel Brendler; Eva Carceles |
| Abstract: | Private retirement plans have become an increasingly important component of house hold wealth in the United States, with nearly two-thirds of Americans having access to employer-sponsored defined contribution plans. These plans have significant tax advantages, as both employee and employer contributions are tax-exempt, while the returns remain untaxed until their withdrawal during retirement. We develop a quantitative life-cycle model that incorporates both private and public pension systems, the life-cycle profile of homeownership, as well as a detailed tax-transfer system. Our model is able to replicate key empirical regularities, such as the observed distribution of private retirement wealth by age and income and the age and income dependence of pickup rates. We show that these subsidies lead to “new†savings in the long run, as they do not crowd out savings in other assets, while there is some crowding out in the short run. At the same time, eliminating these tax advantages leads to a wider tax base in the short run, which allows the government to reduce taxation, generating substantial redistribution towards current generations. |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:26/830 |
| By: | MIYAMOTO, Hiroaki; SHINOHARA, Hiroaki |
| Abstract: | We study how rising longevity affects the long-run real interest rate in an overlapping-generations model with mortality risk and accidental bequests to the young. Longer lives increase retirement saving, which tends to lower the interest rate, but they also reduce such bequests and shift asset payoffs from young savers to surviving retirees, weakening aggregate saving. Public debt amplifies this second force. When debt is sufficiently high, further increases in longevity eventually raise the steady-state interest rate. Thus, longevity need not continue to depress interest rates: with large public debt, the relationship between longevity and the interest rate becomes non-monotonic. |
| Keywords: | demographic trend, fiscal policy, interest rate |
| JEL: | E21 E43 J11 |
| Date: | 2026–04–28 |
| URL: | https://d.repec.org/n?u=RePEc:hit:cisdps:711 |
| By: | Ji, Zihao; Zhang, Hongru |
| Abstract: | When do labor-market shocks become lasting health inequality? We develop and estimate a continuous-time lifecycle model of wealth, health, and skill in which medical care combines smooth maintenance with threshold-crossing repair. Adverse wage shocks push financially fragile households toward subsistence, increase toxic labor effort, delay repair, and convert temporary earnings losses into persistent biological damage. Estimated with PSID, MEPS, and RAND HRS data, the model shows that skill-biased technical change generates concentrated lower-tail losses in health, survival, and welfare. A meaningful share of this damage reflects endogenous repair failure, and the mechanism remains visible in a parsimonious general-equilibrium environment. |
| Keywords: | Life-Cycle Model, Continuous Time, Health Capital, Lifetime Inequality, Deaths of Despair, Overwork, Skill-Biased Technical Change |
| JEL: | E21 I14 I24 J22 J24 |
| Date: | 2026–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128530 |
| By: | Mohades, Siavash |
| Abstract: | This paper develops a quantitative theory of how political distortions in fiscal policy generate public debt accumulation inside a currency union. The model has two member states that share a common monetary authority. The North government maximises resident welfare. The South government maximises a weighted average of welfare and incumbent vote share, which biases fiscal policy toward targeted transfers and away from broad public goods. The numerical solution closes the fiscal block with a reduced-form stationary debt rule around calibrated debt targets. In the baseline calibration, the political distortion lowers South public goods by about 45% relative to a benevolent South government and implies a consumption-equivalent welfare cost of 3.23% per period. A one-time adverse South political shock raises South debt by 0.56% relative to its steady-state level at peak, equivalent to about 0.68 percentage points of steady-state South output. Eight consecutive adverse political shocks raise South debt by about 4.43% relative to steady-state debt, equivalent to about 5.37 percentage points of steady-state South output. The mechanism is a deterioration in the primary balance caused by politically motivated transfer expansion. This pattern is robust to alternative home bias, vote sensitivity, political transfer elasticity, and debt targets. Additional exercises show that tighter fiscal rules reduce debt volatility but do not remove the underlying distortion, while an endogenous sovereign spread breaks local determinacy under first-order perturbation. |
| Keywords: | Political distortions; fiscal policy; public debt; currency union; targeted transfers; fiscal rules. |
| JEL: | D72 E61 F45 H63 |
| Date: | 2026–05–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:129004 |
| By: | Müller, Tobias; McMiken, Shane |
| Abstract: | We study how sector-specific fiscal policy propagates in an economy with heterogeneous households and production networks. We develop a multisector New Keynesian model in which input-output linkages interact with differences in households’ marginal propensities to consume (MPCs). We show that fiscal multipliers depend on sectors’ positions in the production network, as network linkages reallocate income across households with heterogeneous consumption responses. We derive an intersectoral Keynesian cross and introduce an MPC-augmented network multiplier that jointly characterize the transmission of fiscal shocks. The interaction between heterogeneous consumption responses and production networks is non-additive: network linkages can either amplify or attenuate fiscal transmission depending on how income is redistributed across households. Fiscal policy is most effective when spending is directed toward labor-intensive, downstream sectors that employ a large share of high-MPC households. Using data from the Survey of Consumer Finances, we document substantial sectoral heterogeneity in household balance sheets and in the prevalence of hand-to-mouth households. Calibrating the model to the U.S. economy, we find sizable variation in sectoral fiscal multipliers and significant distributional effects of government spending. JEL Classification: D57, E21, E62, E32 |
| Keywords: | hand-to-mouth households, income distribution, input-output networks, marginal propensities to consume, sectoral fiscal multipliers |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263244 |
| By: | Victor Duarte; Julia Fonseca |
| Abstract: | We develop a global method to solve and estimate dynamic equilibrium models that treats prices as pseudo parameters and market clearing as moment conditions, and reduces estimation time from days to minutes. Our approach leverages AI algorithms, software, and hardware, and has three building blocks. First, we extend the state space to include equilibrium prices and model parameters, which allows us to clear markets and estimate parameters by solving the model once. Second, we approximate the mapping between parameters and moments by training neural networks on model-simulated data, which act as closed-form expressions for moment conditions. Third, we use this mapping to estimate parameters by minimizing the distance between the model and data moments, and to find equilibrium prices by targeting a market-clearing imbalance of zero. We also use this mapping to assess identification globally, verifying if the estimation objective function has a unique minimum for each parameter. We illustrate our method by estimating a dynamic general equilibrium model of leverage and investment with three state variables, three controls, endogenous default, costly equity issuance, and non-convex adjustment costs. After four days, the traditional approach does not reach the loss we achieve in under 20 minutes. We build an AI agent that applies our method to new models from natural language prompts. |
| JEL: | C15 C45 C52 C63 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35283 |
| By: | Harald Badinger; Christian Glocker; Stefan Schiman-Vukan |
| Abstract: | Using a structural VAR with a relatively agnostic identification based on narrative sign restrictions, this paper, in line with recent empirical evidence, documents an increase in the labor share following restrictive monetary policy in the euro area. We then complement the empirical analysis with a theoretical investigation that provides mechanisms linking monetary policy and the labor share — a connection that has so far been regarded as lacking an explanation. Specifically, we show that the observed responses of the labor share, real wages, and productivity to a monetary policy shock can be reconciled within an otherwise standard New Keynesian framework once capital accumulation is introduced and both nominal and real frictions — in particular, labor adjustment costs — are incorporated. |
| Keywords: | monetary policy, labor share, euro area, structural VAR, New-Keynesian model, labor market frictions |
| JEL: | C32 E25 E52 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12709 |