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on Dynamic General Equilibrium |
| By: | George Kudrna; Chung Tran |
| Abstract: | This paper studies whether shifting retirement financing from public to mandatory private pensions can deliver Pareto improvements across generations when the implicit return on public pensions is persistently below the market return on capital. We develop a dynamic general equilibrium overlapping-generations model with heterogeneous households facing idiosyncratic earnings risk, endogenous labor supply and retirement, and a mixed public–private pension system. Calibrated to Australia -- where strict means testing creates strong complementarity between public and private pensions -- the model shows that higher private contributions raise aggregate wealth and future welfare but impose transitional welfare costs on current workers. The optimal contribution rate is around 14 percent of gross wages, yielding efficiency gains of 0.23 percent of lifetime consumption through reduced public pension eligibility and lower distortionary taxation. When combined with compensating transfers, the reform delivers a Pareto improvement across generations. In contrast, in systems with weaker or no means testing -- such as pension designs comparable to those in the Netherlands and the United States -- these gains diminish or turn negative, indicating that the linkage between private wealth and public pension entitlements is central to the scope for Pareto-improving reform. |
| Keywords: | social security, private pension, income taxation, labor supply, efficiency, life-cycle, stochastic OLG model |
| JEL: | H55 J26 H24 H21 D15 C68 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2026-34 |
| By: | Stefano Carattini; Garth Heutel; Givi Melkadze; Inès Mourelon |
| Abstract: | We study how climate policy can interact with distortionary fiscal policy and potentially lead to transition risk. Using an environmental dynamic stochastic general equilibrium model that features financial frictions and preexisting labor and capital taxes, we simulate a carbon tax and an abatement subsidy under different scenarios for returning carbon tax revenue or financing the subsidy. We find novel policy implications and important differences between the carbon tax and the subsidy. Under both policies, transition dynamics can differ sharply from long-run outcomes. For the carbon tax, transition dynamics depend on both financial frictions and the choice of revenue recycling. For the abatement subsidy, distortionary financing can generate contractionary transition dynamics, because of financial frictions. Macroprudential policy can mitigate transition risk under the carbon tax but has little effect under the subsidy. |
| Keywords: | tax interaction, double dividend, transition risk, financial frictions, climate policy, macroprudential policy |
| JEL: | Q58 G21 H23 Q54 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12670 |
| By: | Andrés Blanco; Andrés Drenik; Christian Moser; Emilio Zaratiegui |
| Abstract: | We study the macroeconomic implications of wage-rigidity-induced job separations in an equilibrium labor market model with four features: worker productivity shocks, staggered wage contracts, search frictions, and two-sided lack of commitment. Endogenous quits and layoffs are unilaterally initiated whenever a worker’s wage-to-productivity ratio or markdown moves outside an inaction region. We derive sufficient statistics for the labor market response to inflationary shocks based on the distribution of markdowns, which we show how to identify using microdata on wage changes and worker flows between jobs. Using an extension of the model for quantitative analysis, we find that aggregate shocks generate significant cyclicality in endogenous job separations, including 62 percent of the empirical quit volatility and 94 percent of the empirical layoff volatility. |
| Keywords: | search frictions, limited commitment, inaction, quits, layoffs, sufficient statistics |
| JEL: | E31 E52 J64 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12671 |
| By: | Hyeongwoo Kim (Department of Economics, Auburn University); Ren Zhang (Department of Finance and Economics, Texas State University); Shuwei Zhang (Department of Economics, Towson University) |
| Abstract: | The labor market effects of government employment shocks in the United States have varied markedly across the postwar period. Using a Bayesian structural VAR with max-share identification, we document three distinct regimes; before the Volcker disinflation, public hiring crowded in private employment, raised real wages, and reduced unemployment; during the Great Moderation, the same shocks became contractionary; and after the Global Financial Crisis, their effects were largely muted. We account for these changes with a New Keynesian DSGE model featuring public employment, alternative monetary–fiscal regimes, and a maturity structure of government debt. The model shows that while monetary–fiscal coordination holds in both the pre-Volcker and post-GFC periods, debt maturity differs sharply across them. Longer debt maturity weakens fiscal transmission even under passive monetary policy, whereas aggressive anti-inflationary policy renders government employment shocks contractionary regardless of debt maturity. |
| Keywords: | Debt Maturity, Government Employment, Max-Share Identification, Policy Coordination, Time-varying Effectivenes. |
| JEL: | E32 E61 E62 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:tow:wpaper:2026-07 |
| By: | Emmanouil Sofianos (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Thierry Betti (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Theophilos Papadimitriou (DUTH - Democritus University of Thrace); Amélie Barbier-Gauchard (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Periklis Gogas (DUTH - Democritus University of Thrace) |
| Abstract: | Forecasting public debt is essential for effective policymaking and economic stability, yet traditional approaches face challenges due to data scarcity. While machine learning (ML) has demonstrated success in financial forecasting, its application to macroeconomic forecasting remains underexplored, hindered by short historical time series and low-frequency (e.g., quarterly/annual) data availability. This study proposes a novel hybrid framework integrating dynamic stochastic general equilibrium (DSGE) modeling with ML techniques to address these limitations, focusing on the evolution of France's public debt. We first generate a large artificial macroeconomic dataset using an estimated DSGE model for France, which allows for efficient training of ML algorithms. These trained models are then applied to actual historical data for directional debt forecasting. The results show that the best machine learning model is an XGBoost achieving 90% accuracy, outperforming an elastic net model, used as benchmark. Our results highlight the viability of combining structural economic models with data-driven techniques to improve macroeconomic forecasting. |
| Keywords: | public debt, machine learning, France, forecasting, DSGE, DSGE forecasting France machine learning public debt |
| Date: | 2026–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05620169 |
| By: | Hassan Afrouzi; Andres Blanco; Andres Drenik; Erik Hurst |
| Abstract: | We study how an automating technology affects career dynamics, human capital, and welfare in an economy where workers acquire skill through the tasks they perform. In a continuous-time general equilibrium model, learning-by-doing is determined jointly with the share of tasks automated, the frontier of tasks managers maintain, and the worker-to-manager career transition. Economies with high learning capacity admit pairs of stationary equilibria strictly ranked by the aggregate learning rate. Cheaper technology has opposite effects across the two: in the high-learning equilibrium, it raises welfare through the learning channel itself; in the low-learning equilibrium, it tips the economy into a human-capital trap. The planner's first-best combines a tax on automation profits with a subsidy on frontier maintenance expenditures at a common rate. |
| Keywords: | human capital; learning-by-doing; automation; AI |
| JEL: | E23 E24 J24 |
| Date: | 2026–05–14 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:103253 |
| By: | Fernando Alvarez; Francisco J. Buera; Nicholas Trachter |
| Abstract: | We study optimal policy in a dynamic general equilibrium model where heterogeneous monopolistic competitive firms pay a fixed cost to adopt an exogenously growing frontier technology. Using Mean Field Games tools, we show that the optimal policy consists of two time-invariant subsidies: one correcting static misallocation, and one correcting the dynamic under-incentive to adopt. This holds outside of balanced growth paths, for any initial distribution of technology gaps. We analyze a version of the model that aggregates to a Neoclassical Growth Model with an S-shaped production function whenever complementarities are strong, and fully characterize when the optimal policy uniquely implements the first best. When it does not, two novel results emerge: the efficient allocation prescribes escaping a poverty trap—providing an explicit optimality foundation for a Big Push—and escaping an abundance trap, where dismantling adopted technologies is optimal. In both cases, a temporary, costless supplementary policy restores unique implementation. |
| Keywords: | production and investment; development dynamics |
| Date: | 2026–05–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedrwp:103233 |
| By: | Petre Caraiani (Bucharest University of Economic Studies and Institute for Economic Forecasting, Romanian Academy, Romania); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa) |
| Abstract: | We compare four policy instruments--deficit-financed spending, tax cuts, progressive redistribution, and monetary easing--across three HANK specifications: a one-asset baseline, a two-asset model with conventional monetary policy, and an extended two-asset model with endogenous capital, Tobin's Q, and Quantitative Easing (QE) with an explicit central bank balance sheet.Introducing a second, illiquid asset produces a sharp output reversal in the fixed-capital two-asset economy: progressive redistribution moves from most expansionary to contractionary, while deficit spending becomes the dominant output tool. Endogenous capital partially rehabilitates progressive redistribution through the investment channel, but deficit spending remains the most expansionary instrument in both two-asset specifications. A decomposition of the progressive redistribution experiment into its spending and progressivity components confirms that the output reversal is driven entirely by the progressivity channel, which shifts from mildly expansionary in the one-asset economy to strongly contractionary in both two-asset economies. Under the income-based measure, progressive redistribution remains the most equalizing instrument in every specification, with progressivity alone generating pro-poor level gaps of 0.6 percent to 2.2 percent of steady-state output across all three economies. Finally, QE stimulates output relatively more than expansionary conventional monetary policy, but has limited distributional impact. |
| Keywords: | HANK models, fiscal policy, monetary policy, inequality, two-asset models, progressive taxation, quantitative easing, Tobin's Q |
| JEL: | E21 E22 E52 E62 E63 H23 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202610 |
| By: | Kenji Miyazaki |
| Abstract: | Many tractable TANK models treat redistribution as a contemporaneous wedge. I show that this view is incomplete once wage contracts are type-specific. In a tractable Two-Agent New Keynesian model, each household type adjusts its nominal wage relative to its own previous wage. This own-lag contract makes the cross-type wage gap a payoff-relevant distributional state variable. The wage gap follows a second-order expectational law of motion and feeds back into aggregate demand through consumption dispersion. Inflation stabilization or contemporaneous profit-wedge neutralization therefore generally fails to restore the corresponding representative-agent allocation. Under the maintained commitment benchmark, RANK-equivalent stabilization from period $t=1$ onward requires history-dependent transfers that respond to inherited wage dispersion, not only current profits. In the benchmark calibration, wage rigidity raises the peak output response to a transfer shock by a factor of 3.27, from $2.49\times 10^{-4}$ to $8.14\times 10^{-4}$. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.15614 |
| By: | Simone Arrigoni; Massimo Ferrari |
| Abstract: | This paper provides novel evidence on how income inequality shapes the heterogeneity of US monetary policy spillovers to GDP across foreign economies. Using state-dependent local projections and exploiting variation in disposable income inequality across a panel of 87 countries over the period 1966-2020, we show that household heterogeneity influences how foreign GDP responds to a US monetary policy tightening. GDP contracts by up to one and a half times more when inequality is above average. However, while higher inequality amplifies negative spillovers in advanced economies, it mitigates them in emerging markets. To rationalise this finding, we use a three-country open economy Two-Agent New Keynesian (TANK) model, which suggests that this divergence is driven by differences in participation in international financial markets. Households in emerging market economies face greater barriers to international investment, limiting their ability to re-balance portfolios towards higher-return foreign bonds after the shock. |
| Keywords: | US Monetary Policy, Spillovers, Income Inequality, Local Projections, State-Dependence |
| JEL: | D31 E21 E52 E58 F42 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:banfra:1043 |
| By: | Jackie Dajin Young; Marwil J. Davila-Fernandez |
| Abstract: | There has long been an apparent consensus in the literature on intra-household allocation and fertility that greater paternal involvement in childcare relaxes maternal time constraints, enabling mothers to increase their labor supply or leisure. Recent evidence, particularly from South Korea, challenges this view: increases in fathers' childcare time have coincided with a further increase in mothers' time dedicated to child-rearing. This paper develops an Overlapping Generations (OLG) growth model to address such a puzzle. The central mechanism and our main innovation hinge on the functional form of the childcare technology. When maternal and paternal time are substitutes, the conventional result holds. However, when they are complements, greater paternal involvement necessarily raises maternal childcare time, depressing fertility and redirecting household resources toward child quality. We further argue that the elasticity of substitution should not be interpreted as a pure preference parameter, as it also reflects the social and institutional norms, the skills each parent brings to child-rearing and their intergenerational transmission. The model is extended to study the effectiveness of pro-natalist subsidies, suggesting that such policies may generate an unintended anti-fertility bias. Numerical simulations calibrated loosely to South Korean data confirm that the model is consistent with the observed quantity-quality trade-off and the persistence of low fertility despite active pro-natalist policy. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.13679 |
| By: | Patrick Coate; Kyle Mangum |
| Abstract: | This paper shows the declining trend in internal migration in the United States is primarily due to increasing home attachment in “fast locations, ” areas with relatively high rates of population turnover. These locations were population growth destinations in the 20th century, with transient populations that settled as regional population growth converged. The qualitative patterns of the U.S. experience can be generated by a model of location choice in heterogeneous regions with overlapping generations when the population has a home bias that varies endogenously with the history of population change. Using a novel measure of home attachment, this paper estimates a structural model of migration that distinguishes moving frictions from home utility. Simulations quantify channels of the mobility decline. Rising home attachment accounts for much of the decline, predominantly in fast locations. Population aging explains most of the remainder but in a more spatially neutral way. |
| Keywords: | declining internal migration; labor mobility; home attachment; rootedness; local ties; conditional choice probability estimation |
| JEL: | J61 R23 R11 C50 |
| Date: | 2026–05–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103190 |
| By: | Takushi Kurozumi; Willem Van Zandweghe |
| Abstract: | Motivated by evidence documented in labor economics, we introduce firms' monopsonistic wage-setting in an otherwise standard DSGE model. Our model identifies shocks to the wage markdown as labor demand shocks—a feature absent from standard models. With both labor demand and supply shocks, our model empirically outperforms its standard counterpart model. Firms' monopsonistic wage-setting allows real unit labor cost to be decomposed into not only real marginal cost but also the wage markdown. This refined measure of real marginal cost enhances the Phillips curve's ability to describe inflation dynamics while obviating the need for price markup shocks. |
| Keywords: | DSGE model; Labor market monopsony; Wage markdown; Labor demand shock; Real marginal cost |
| JEL: | E24 E31 J23 J42 |
| Date: | 2026–05–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:103287 |
| By: | Michinao Okachi |
| Abstract: | This paper investigates expectation-driven sovereign debt crises, focusing on the Greek experience, through a self-fulfilling default framework. We first analytically characterize the model's micro-foundations, proving the existence of distinct debt thresholds that partition the state space into Safe, Crisis, and Default zones, thereby endogenously ruling out opportunistic default deviations. Quantitatively, we challenge the standard reliance on the Simulated Method of Moments, which forces unrealistic parameterizations and yields artificially low debt levels. By calibrating core parameters directly to empirical data and extending the model to feature long-term bonds, a partial default mechanism, and persistent market exclusion, we successfully replicate key empirical moments, notably the high debt-to-GDP ratios and realistic default frequencies of advanced economies. Finally, counterfactual simulations reveal that while forced austerity inflicts substantial short-term pain, it is strictly welfare-improving over the long run compared to a baseline of serial defaults. Because gradual macroeconomic improvements cannot restore debt sustainability, we conclude that external interventions are essential; their strict conditionality acts as a vital commitment device to enforce deleveraging and eliminate self-fulfilling risks. (JEL Classification: F34, H63) |
| Date: | 2026–04–24 |
| URL: | https://d.repec.org/n?u=RePEc:toh:tupdaa:83 |
| By: | Jorge Abad; Saki Bigio; Salomon Garcia-Villegas; Joël Marbet; Galo Nuño |
| Abstract: | How does heterogeneity in banks' interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. Calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks suffer net interest margin compression — funding costs increase while legacy loan income stays unchanged — eroding capital and triggering sharper deleveraging. The lending elasticity to monetary policy is one-third larger in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. The results provide a rationale for macroprudential and monetary policy coordination and for monetary policy gradualism. |
| Keywords: | heterogeneous banks, bank lending channel, loan pricing |
| JEL: | G21 E51 E43 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12676 |
| By: | John Stachurski; Junnan Zhang |
| Abstract: | We study relationships between dynamic programs by applying conjugacy methods from dynamical systems theory. When two dynamic programs are connected by an order isomorphism, we show that optimality properties transmit from one formulation to the other. We apply these results to Epstein--Zin preferences with time preference shocks, obtaining a sharp characterization of when optimality holds. We also show that multiplicative Kreps--Porteus preferences and risk-sensitive preferences are isomorphic, so that well-known results for the latter carry over to the former. Finally, we demonstrate how isomorphic transformations can improve the numerical accuracy of value function approximations, with gains of two orders of magnitude in a multisector real business cycle model. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.22076 |
| By: | Joachim Hubmer (University of Pennsylvania); Lukas Nord (University of Pennsylvania) |
| Abstract: | The allocation of demand across firms determines aggregate productivity. Firms affect allocations through prices and non-price investment in demand. We develop a framework with search frictions and dynamic customer relationships in which demand investment shapes allocations directly by matching customers to suppliers and indirectly by driving price competition. A quantitative version matches key facts on how firms compete for customers. In equilibrium, markup distortions and business-stealing externalities induce misallocation and demand over-investment. Equilibrium interactions between demand investment and pricing create policy complementarities. Rising demand investment can raise concentration without raising market power, while reducing firms’ intangible value through equilibrium effects. |
| Date: | 2026–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:26-006 |
| By: | Firmin Ayivodji (International Monetary Fund); Etienne Briand (University of Quebec in Montreal); Kevin Moran (Laval University); Dalibor Stevanovic (University of Quebec in Montreal) |
| Abstract: | News media coverage of monetary policy is not a passive transcript of central-bank communication: it filters announcements, macroeconomic news, and editorial choices into narratives that move expectations and policy decisions. We embed media sentiment into a behavioral New-Keynesian model in which the central bank reacts to sentiment and sentiment follows an explicit law of motion. We construct monetary-policy sentiment indicators from more than 50, 000 Canadian newspaper articles using dictionary methods, transformer models, and a generative-AI framework. Media sentiment shifts household inflation and wage expectations, improves out-of-sample forecasts of GDP growth and inflation, and loads positively on the Bank of Canada's estimated Taylor rule once treated as endogenous. A Bayesian SVAR identifies anticipated and unanticipated monetary-policy shocks together with a narrative shock; the narrative shock contributes a non-trivial share of medium-horizon macroeconomic variance, and a counterfactual that shuts down the dynamic feedback from media sentiment attenuates the propagation of monetary policy to output and prices. |
| Keywords: | Monetary policy, text analysis, news media, machine learning, forecasting |
| JEL: | E52 E58 E71 D84 C32 C55 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:bbh:wpaper:26-03 |