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on Dynamic General Equilibrium |
| By: | Yasuoka, Masaya |
| Abstract: | This paper demonstrates that the modified golden-rule level of capital stock derived in the Ramsey model can also be obtained within the overlapping generations model. While the standard overlapping generations model typically addresses a two-period optimization problem and involves dynamic inefficiency, the introduction of a bequest motive allows the equilibrium to coincide with that of the Ramsey model under certain conditions. This indicates that, despite differing motivations for leaving wealth, the solutions of the two models can converge. |
| Keywords: | Overlapping Generations Model, Dynamics of Capital Stock, Ramsey Model |
| JEL: | E0 |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126065 |
| By: | Masaya Yasuoka (School of Economics, Kwansei Gakuin University) |
| Abstract: | In macroeconomics, the Ramsey model and the two-period overlapping generations (OLG) model are regarded as standard frameworks. The latter is widely used due to its simplicity and its ability to explain a variety of economic phenomena. Although three-period models also exist, they are often constrained by analytical limitations, such as the inability to incorporate capital accumulation. As multi-period models, the altruism-based Ramsey model and the continuous-time OLG model have been developed; however, neither is well-suited for analyzing independent decision-making across generations, elderly labor supply, or pay-as-you-go pension schemes. Against this background, this paper constructs a four-period model consisting of youth, middle age, early old age, and late old age. By incorporating Romer-type capital externalities, it analytically derives the complex capital accumulation equations and theoretically demonstrates the existence, stability, and potential multiplicity of steady states. |
| Keywords: | Overlapping Generations Model, Dynamics of Capital Stock |
| JEL: | E0 H2 J1 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:297 |
| By: | Jurado, Elvis |
| Abstract: | This study investigates the long-term macroeconomic and welfare impacts of transitioning from a Pay-As-You-Go to a fully funded pension system, specifically within the Ecuadorian economic context. The study is motivated by financial and demographic challenges that threaten the sustainability of the current pension structure. Understanding the effects of such a transition is essential for informed implementation. The research has two primary objectives: first, to simulate this reform under various economic shocks, particularly changes in oil income and interest rates given that variability in oil revenues directly affects the economy as oil is Ecuador’s main source of income; and second, to evaluate how the timing of the changes influences welfare outcomes across generations. The analysis is based on a transition from a Pay-As-You-Go system to a Fully Funded system, allowing for a more flexible response to demographic and fiscal pressures. To achieve this, a calibrated Overlapping Generations model is employed, integrated with a Small Open Economy framework and tailored to Ecuadorian data. This model allows for simulation of the pension reform under different macroeconomic conditions and transition scenarios. Findings suggest that while a fully funded system may increase welfare in the new steady-state equilibrium relative to a PAYG system reflecting the right timing for replacing the social security system under a general equilibrium model positive economic shocks can produce large welfare gains. However, welfare outcomes during the transition period remain highly sensitive to shocks, which in some scenarios can cause net losses for certain generations. The impact varies depending on the type of shock and the timing of reform implementation. These results highlight the importance of timing and economic context when designing pension policy. A poorly timed reform could reduce expected benefits, even if long-term outcomes appear favorable. |
| Keywords: | Overlapping Generations, Welfare, Smal Open Economy, Demography, Ageing |
| JEL: | C61 C63 E21 E24 I31 |
| Date: | 2025–08–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125793 |
| By: | Adrian Ifrim; Robert Kollmann; Philipp Pfeiffer; Marco Ratto; Werner Roeger |
| Abstract: | Based on an estimated two-region dynamic general equilibrium model, we show that the persistent productivity growth differential between the Euro Area (EA) and rest of the world (RoW) has been a key driver of the EA trade surplus since the launch of the Euro. A secular decline in the EA's spending home bias and a trend decrease in relative EA import prices account for the stability of the EA real exchange rate, despite slower EA output growth. By incorporating trend shocks to growth and trade, the analysis departs from much of the open-economy macroeconomics literature which has focused on stationary disturbances. Our results highlight the relevance of non-stationary shocks for the analysis of external adjustment. |
| Keywords: | global growth divergences, trade balance, real exchange rate, estimated DSGE model, Euro Area, demand and supply shocks, persistent growth shocks |
| JEL: | F4 F3 E2 E3 C5 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-50 |
| By: | Tomohiro Hirano; Joseph E. Stiglitz |
| Abstract: | This paper examines the simplest OLG models with capital accumulation, demonstrating three results that stand in marked contrast to those of the standard model: first, the possibility of multiple steady states; second, the possibility of multiple momentary equilibria under rational expectations; third, one of implications of multiple momentary equilibria is that dynamics may be marked by complex fluctuations (lacking even periodicity), but still within well-defined bounds. We provide quite general conditions (with general utility and production functions) under which in the simplest of OLG models, there can be multiple steady states, multiple momentary equilibria, and complex dynamics. Furthermore, we present a simple illustration of wobbly growth by incorporating credit friction. |
| JEL: | C61 E32 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34193 |
| By: | Kenji Miyazaki |
| Abstract: | This paper argues and analytically demonstrates that, in a fully analytical Two-Agent New Keynesian model with Rotemberg-type nominal rigidities, monetary transmission is amplified if and only if two conditions hold: first, the heterogeneity-induced IS-slope effect dominates; second, the price-stickiness channel is active. We also show when amplification weakens or disappears, most notably under pure wage stickiness, where the price channel shuts down and the heterogeneity-driven term vanishes. The framework features household heterogeneity between savers and hand-to-mouth households and adheres strictly to microeconomic foundations while avoiding restrictive assumptions on relative wages or labor supply across types that are common in prior analytical work. The closed-form solution makes transparent how price stickiness, wage stickiness, and the share of hand-to-mouth households jointly shape amplification. We further derive a modified aggregate welfare loss function that quantifies how heterogeneity, operating through distributional effects from firm profits, re-weights the relative importance of stabilizing inflation. Overall, the tractable yet micro-founded analytical framework clarifies the interaction between household heterogeneity and nominal rigidities and pinpoints the precise conditions under which monetary policy gains or loses traction. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.12073 |
| By: | Paymon Khorrami; Jung Sakong |
| Abstract: | We argue that a long-term low real rate environment can increase labor income inequality, amplify the emergence of the working rich, and reduce intergenerational mobility. We provide a simple model with endogenous human capital accumulation and credit constraints to demonstrate this causal link. The mechanism operates through a tilting of the human capital gradient: wealthy households, more so than poor households, will increase human capital investment in response to low rates. Normatively, these tilting responses to low rates are inefficient, but higher capital taxes are not an ideal response. We find empirical support for our tilting mechanism over the last 60 years in the U.S. Quantitatively, we show that the endogenous human capital investment response to low interest rates can account for a 17% rise in cross-sectional labor income variance (higher inequality) and a 7% higher parent-child labor income intergenerational elasticity (lower mobility). |
| Keywords: | Human capital; Income inequality; intergenerational mobility; working rich; Low interest rates; Borrowing constraints |
| JEL: | D30 E21 E22 E24 E25 |
| Date: | 2025–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:101718 |
| By: | Bryce Morsky; Tyler Meadows; Felicia Magpantay; Troy Day |
| Abstract: | The gig economy has grown significantly in recent years, driven by the emergence of various facilitating platforms. Triggering substantial shifts to labour markets across the world, the COVID-19 pandemic has accelerated this growth. To understand the crucial role of such an epidemic on the dynamics of labour markets of both formal and gig economies, we develop and investigate a model that couples disease transmission and a search and match framework of unemployment. We find that epidemics increase gig economy employment at the expense of formal economy employment, and can increase the total long term unemployment. In the short run, large sharp fluctuations in labour market tightness and unemployment can occur, while in the long run, employment is reduced under an endemic disease equilibrium. We analyze a public policies that increase unemployment benefits or provide benefits to gig workers to mitigate these effects, and evaluate their trade-offs in mitigating disease burden and labour market disruptions. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.18377 |
| By: | Gantert, Konstantin (Tilburg University, School of Economics and Management) |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiutis:f216d0be-e3fb-422e-a68a-6f2313641b71 |
| By: | Vytautas Valaitis; Alessandro Villa |
| Abstract: | We examine the role of government investment in defense capital as a deterrence tool. Using an optimal fiscal policy framework with endogenous disaster risk, we allow for an endogenous determination of geopolitical risk and defense capacity, which we discipline using the Geopolitical Risk Index. We show both analytically and quantitatively that financing defense primarily through debt, rather than taxation, is optimal. Debt issuance mitigates present tax distortions but exacerbates them in the future, especially in wartime. However, since additional defense capital deters future wars, the expected tax distortions decline as well, making debt financing a welfare-improving strategy. Quantitatively, the optimal defense financing in the presence of heightened risk involves a twice higher share of debt and backloading of tax distortions compared to other types of government spending. |
| Keywords: | Optimal fiscal policy; Incomplete markets; endogenous disaster risk |
| JEL: | E62 D52 E60 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedhwp:101716 |
| By: | Grancini, Stefano |
| Abstract: | This paper investigates the relationship between public debt and the effectiveness of fiscal policy, presenting evidence of an inverse relationship between government debt and fiscal multipliers. To explain the results, I develop and calibrate a HANK model tailored to the U.S. economy. The model reveals that higher public debt diminishes fiscal multipliers by making households less constrained. Theoretically, I show intertemporal marginal propensities to consume (iMPCs) are sufficient statistics of public debt, influencing fiscal multipliers. Decomposing changes in iMPCs into components driven by wealth distribution and the policy function, I find that the primary factor driving variations in iMPCs is the change in interest rates due to the variation of government bonds. This highlights a novel mechanism: even in the absence of fiscal limits or crowding out, large stocks of debt can weaken fiscal stimulus through their effect on household behavior. JEL Classification: E21, E62, E43, D31, D52 |
| Keywords: | consumption heterogeneity, fiscal multipliers, government bonds, interest rates, wealth effects |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253106 |
| By: | Georgy Lukyanov; Emin Ablyatifov |
| Abstract: | We embed honesty-based reputation into a Ramsey taxation framework with competitive firms and households. In a static benchmark with exogenous trust, there is a sharp cutoff below which the optimal policy sets no taxes and above which the optimal tax take rises with trust. In the dynamic model, beliefs evolve through noisy public monitoring of delivered public goods; the planner's problem is well posed, the value is increasing and convex in beliefs, and optimal revenue is monotone in reputation with a trust threshold that is weakly below the static cutoff. With multiple broad instruments and symmetric monitoring, the dynamic force acts through the total revenue scale; the tax mix is indeterminate along an equivalence frontier. Blackwell-improving monitoring and greater type persistence expand the optimal scale and shift the trust threshold inward. The model delivers clear policy prescriptions for building fiscal capacity in low-trust environments and testable links between measured trust, verifiability, and revenue. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.03087 |