Dynamic General Equilibrium Model Research Articles

Assessing carbon capture and storage technology in industrial joint venture

Carbon Capture and Storage (CCS) technology can effectively reduce carbon dioxide emissions from industrial and energy production processes. Yet the commercialization of CCS technology is hampered by financial requirements. Existing research compares the costs and benefits of business models for individual CCS projects, no studies assess the industry and national levels. Here we use a dynamic computable general equilibrium model, constructure the vertical integration and joint venture business models for CCS. This study assesses the emission and economic impacts of joint ventures between China's high-emission industries and their upstream and downstream sectors. We find that adopting the joint venture model in the coal power sector, compared to the vertical integration model, initially exerts a negative economic impact but can mitigate 0.04 % of GDP by 2060. The chemical industry consistently benefits from the joint venture model both economically and in emission reductions. Downstream sectors of the steel and cement industries are unsuitable for participation in joint ventures. In addition, the joint venture model has significant industry linkage effects, affecting energy consumption, the scale and cost of CCS deployment. This work provides important information for the large-scale commercialization of CCS technology.

Fiscal policy in the face of the health crisis: A simulation using a hybrid DSGE‐SIR model

AbstractThis study employs a dynamic stochastic general equilibrium (DSGE) model, integrated with a Susceptible‐Infected‐Recovered (SIR) epidemiological framework, to assess the macroeconomic impacts of fiscal policy during the COVID‐19 pandemic in Morocco. Calibrated with Moroccan COVID‐19 data, the model links epidemiological dynamics to macroeconomic variables, offering a detailed analysis of fiscal interventions. The primary objective is to evaluate the effectiveness of various fiscal measures, including government spending shocks, consumption tax cuts, and labor tax reductions, in stimulating economic activity and supporting households and businesses impacted by the pandemic. The results indicate that government spending shocks significantly stimulated economic activity and employment, but also led to increased public debt and inflationary pressures, thereby illustrating the inherent trade‐offs. Consumption tax cuts, intended to boost demand, had mixed effects on inflation; while prices for some goods declined, higher demand caused price increases in others. Labor tax reductions, aimed at enhancing employment, generated varied effects on labor supply and contributed to rising public debt due to lower tax revenues. The study underscores the necessity of balanced fiscal strategies to achieve both immediate economic recovery and long‐term fiscal sustainability, highlighting the critical role of well‐calibrated fiscal policies in mitigating the economic consequences of pandemics.

Economic effects of shocks in the coal industry: An analysis based on DSGE model

This paper examines the impact of the coal sector on the economy from the perspective of industry shocks. Existing research primarily focuses on the relationship between coal consumption and the economy. An 8-sector dynamic stochastic general equilibrium (DSGE) model is constructed, based on China's input-output tables from 2005 to 2020, to depict the economic effects of coal sector shocks. The research findings are: (1) The DSGE model reveals a close connection between the coal industry and the macroeconomy. (2) The coal sector shocks have the largest impact on the electricity sector. (3) Coal sector shocks primarily affect the macroeconomy through non-energy manufacturing sectors. (4) As the economic development level increases, the influence of coal sector shocks on the macroeconomy gradually diminishes. The econometric analysis indicates that the role of coal is no longer significant in the high stage of economic development. The results of the panel quantile regression model also show the same result. Based on these conclusions, this paper suggests that as China gradually enters a new stage of development, it can gradually reduce coal consumption.

Unconventional Monetary Policy Response to Covid-19 and Its Impact on Inflation in Morocco

This study explores the impact of unconventional monetary policy on Morocco’s economy during the Covid-19 pandemic. We used a hybrid model combining a financial dynamic stochastic general equilibrium (DSGE) model with a standard epidemiology model, enabling us to consider both economic and epidemiological factors. Our results indicate that unconventional monetary policy cannot fully mitigate the adverse effects of a pandemic, except for an exogenous increase in Central Bank claims. We also found that Morocco’s high inflation is partly due to Bank Al-Maghrib’s unconventional monetary measures in response to the pandemic. Our research underscores the importance of monetary authorities balancing the benefits and risks of unconventional monetary policy. While it can stimulate the economy during crises, it should be used judiciously to avoid long-term negative effects. Incorporating epidemiological factors into macroeconomic models is crucial for understanding the intricate interplay between the economy and public health crises.

Climate Change's Effect on Household Food Security in Sub-Saharan Africa and Optimal Monetary Policy

The resurgence of food insecurity in Sub-Saharan Africa during the past decade highlights the need to comprehend the phenomenon within a framework that includes all economic agents in these times of intensification of climate change. Thus, this paper, using a Dynamic Stochastic General Equilibrium (DSGE) model, analyzes the effects of climate shocks occurring in agricultural and non-agricultural sectors on household food security in Sub-Saharan Africa, while determining optimal monetary policy responses to mitigate these adverse effects. Findings highlight that climate shocks affecting the non-agricultural sector are more detrimental to long-term household food security than those affecting the agricultural sector, particularly for urban households. To mitigate these effects, flexible policies targeting food price inflation and headline inflation seem appropriate for rural and urban households, respectively. Nevertheless, in the absence of political and social pressure, flexible headline inflation targeting is optimal for mitigating climate shocks effects on Sub-Saharan Africa's food security.

Market Regulation, Cycles, and Growth Dynamics in a Monetary Union

AbstractWe build a two‐country currency union dynamic stochastic general equilibrium (DSGE) model with endogenous growth to assess the role of product market regulation (PMR) and labor market regulation (LMR) for growth and the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks can lead to permanent changes of output and real exchange rates. Differences are exacerbated by different PMR and LMR. Less regulated economies have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment, and disappointing total factor productivity (TFP) growth rates experienced in more regulated euro area members.

Default Risk, Risk Premium, and Corporate Resilience: The Role of Regulatory and Stabilization Policies

This study investigates the interaction between monetary and macroprudential policy measures and evaluates whether policymakers should address financial disruptions. To achieve this goal, we developed a dynamic stochastic general equilibrium model that incorporates frictions in financial markets and financial shocks alongside traditional macroeconomic shocks. One of the main focuses of macroprudential policies is to stabilize credit cycles. We used Moroccan data to estimate the model and assess various policy actions to counter imbalances in financial markets, including adjustments to the interest rate tool. Our findings highlight the benefits of addressing financial disruptions, the extent depending on the shock characteristics. While acting on interest rates in response to financial variables may stabilize some economic factors, it has the potential to increase the volatility of others substantially. The results confirm that the use of optimal regimes can reduce default processes and ensure companies stabilize risk premiums. Implementing such regulations leads to greater opening of the companies’ capital to external financing sources. JEL Classification C11, D53, D58, E52, E58

Monetary and fiscal policies in Brazil and the behavioral approach

PurposeThis study aims to elucidate the dynamics of monetary and fiscal policy interactions in Brazil, focusing on the impacts of positive shocks in government consumption and interest rates. By comparing rational and behavioral agent responses, it clarifies how these frameworks influence gross domestic product (GDP), inflation, private and government consumption and nominal interest rates.Design/methodology/approachThe study employs a new Keynesian dynamic stochastic general equilibrium (DSGE) model with Bayesian estimation from 2000Q1 to 2022Q4, capturing rational and behavioral behaviors with adjustments for Brazilian economic idiosyncrasies. Impulse response functions (IRF) assess the dynamic effects of policy shocks, providing a comparative analysis of the two frameworks.FindingsBehavioral agents show greater initial sensitivity to policy shocks, causing more pronounced fluctuations in GDP, inflation and private consumption compared to rational agents. Over time, the behavioral approach leads to a more robust recovery, while the rational approach results in a quicker return to equilibrium but less pronounced long-term recovery. The study also finds fiscal policy can partially offset the negative impacts of monetary tightening, with a more delayed effect in the behavioral model.Originality/valueThis paper provides insights into the interplay between monetary and fiscal policies under different agent expectations, emphasizing the importance of incorporating behavioral elements into macroeconomic models to better capture policy dynamics in emerging markets.

Technological Progress, Fiscal Policy, and Economic Fluctuations in China: Evidence from the Heterogeneous Firm DSGE Model during the COVID-19 Pandemic

Against the backdrop of the global COVID-19 pandemic and the deepening structural changes in the Chinese economy, this study presents a binary Dynamic Stochastic General Equilibrium (DSGE) model that incorporates households, heterogeneous firms, capitalists, and the government, taking into account the current domestic "dual economic structure." The model is used to simulate and analyze the impacts of fiscal policies and technological progress on diverse economic entities during the pandemic. The study reveals several key findings: (1) the pandemic outbreak has a significant short-term impact on the economy, disproportionately affecting small and microenterprises but with higher natural recovery rates compared with large and medium-sized enterprises; (2) unbiased fiscal policies have positive effects on output and capital, with larger output recovery effects observed for large and medium-sized enterprises, while capital recovery effects are less favorable; (3) technological progress contributes to rapid and stable economic growth, yielding overall benefits for large and medium-sized enterprises, but leading to significant crowding-out effects on small and microenterprises; and (4) solely increasing tax support for small and microenterprises, assuming constant tax revenue sources, does not enhance the overall resilience of the economy. These research findings provide policymakers with a dynamic microeconomic foundation within a macroeconomic framework, thereby enhancing the efficacy and precision of policies.

The nexus between local government debt risk, real estate sector, and financial stability

Rising local government debt and downturn in the real estate sector pose significant challenges to China’s economic growth and financial stability. To analyze these challenges, this paper develops a dynamic stochastic general equilibrium (DSGE) model to study the nexus between government debt risk, real estate sector, and financial stability. The findings suggest that an increase in debt risk initiated by a housing demand shock could have a persistent and magnified effect on the financial sector and the macroeconomy. The amplification mechanism originates from risk spillover and debt crowding-out effect, which trigger the negative feedback between the debt and financial risk. Longer debt maturity and the implementation of credit policy could effectively moderate the contractionary effects of this risk interaction on the economy.

Transmission of Flood Damage to the Real Economy and Financial Intermediation: Simulation Analysis using a DSGE Model

We assess physical risk associated with floods in Japan, using a dynamic stochastic general equilibrium (DSGE) model. We construct a model that incorporates transmission mechanism of floods and estimate the model using the data of flood-induced damage to capital stock and public infrastructure collected by the government in the last 40 years. The result of the analysis is threefold. First, a flood that reduces the private capital stock by about 0.1% as a direct effect causes GDP to fall by about 0.1% in the first period, with a gradual recovery to pre-flood level. Second, floods dampen GDP through multiple channels. From the supply side, a decline in capital stock inputs and total factor productivity (TFP) reduce GDP. From the demand side, the balance sheets of firms and financial intermediaries are impaired, resulting in disruptions to financial intermediation and depressing GDP. Based on our estimates, all these channels are quantitatively comparable in magnitude. Third, the quantitative impacts of flood shocks on GDP up to now have been minor compared to the standard structural shocks that are considered important in existing macroeconomic studies. However, according to the estimates that use the relationship between the key variables in our model together with climate change scenarios published by the Network for Greening the Financial System (NGFS), the impacts of these shocks could become somewhat larger in the future.

Research on the Inhibitory Effect of the EU’s Carbon Border Adjustment Mechanism on Carbon Leakage

Associated with more ambitious targets for reducing emissions, the European Union (EU) plans to implement the Carbon Border Adjustment Mechanism (CBAM) fully in 2026, aiming to reduce carbon leakage and competitiveness concerns by imposing tariffs on carbon-intensive imports, which is expected to significantly impact its trade partners. Existing research has focused on CBAM’s impact on macroeconomic indicators but has insufficiently addressed its effects on global and regional carbon leakage, especially in non-EU countries like China. This research offers a detailed analysis of industry-specific leakage rates and integrates both global and regional impacts by employing the dynamic recursive GTAP-E general equilibrium model to numerically simulate CBAM’s inhibitory effect on carbon leakage under different carbon tariff scenarios, while also exploring the synergistic effects of anti-leakage policies in non-EU countries. Our simulations indicate the following: (1) CBAM effectively inhibits carbon leakage, with greater inhibition observed at higher tax rates and with the expansion of covered industries. (2) Establishing China’s domestic carbon market pricing can further reduce regional carbon leakage rates. Implementing global export carbon tax policies will significantly diminish the risk of global carbon leakage. (3) The implementation of CBAM is projected to reduce China’s total exports to the EU, though this loss will be partly offset by trade diversion effects. Carbon-intensive industries are more adversely affected in the short term, while all industries except fossil fuels face inevitable long-term negative impacts.

Impact of energy consumption patterns on peak emissions in China's carbon neutralisation process

The investigation of the impact of energy consumption patterns on peak emissions in China is pertinent and crucial for achieving global climate goals. The study aims to form a forecast of carbon emissions in China and diagnose the achievement of established decarbonization goals based on structural changes in primary energy consumption until 2030. To achieve the goal, the study formed a Dynamic stochastic general equilibrium (DSGE) model with the implementation of Markov chains. The obtained research results yield important insights into the influence of various scenarios on carbon emissions in China by the year 2030. Specifically, considering structural transformations, an increase in emissions by 15 % can be anticipated, which is 7 % less than predicted by the classical scenario. Among the proposed scenarios, the Net Zero scenario is deemed the most efficient, where emissions could reach a level of 8509.5 million tons of CO₂. Conversely, the New Momentum scenario proves to be the most precarious, as it entails an escalation in coal usage, leading to a 4 % increase in emissions, amounting to 13264.84 million tons of CO₂. The contribution of this study is the approach to conducting carbon emission projections, which is based on the DSGE model with the implementation of Markov chains. This makes it possible to assess the adequacy of the set targets for carbon reduction based on alternative scenarios, which in crisis conditions can overlap and thus complement each other.

Green targeted lending operations in the Euro Area

In this paper, we construct a Dynamic Stochastic General Equilibrium (DSGE) model to examine the implications of dual rates for green lending. We demonstrate that implementing a distinct interest rate for banks engaged in green lending can effectively mitigate transition risks while channeling more capital towards green production sectors and firms for an immediate cut of emissions and net zero emission economy targets.

Assessing the effects of transition to low-carbon electricity generation: A dynamic computable general equilibrium model for the Iranian economy

Assessing the effects of transition to low-carbon electricity generation: A dynamic computable general equilibrium model for the Iranian economy

Delaying retirement, income distribution and economic growth

In order to investigate whether postponing retirement age contributes to fostering shared prosperity, we develop a dynamic general equilibrium model incorporating delayed retirement dynamics alongside survival probabilities and heterogeneous human capital distribution across generations. This framework provides a comprehensive assessment regarding how postponing retirement age policies affect both income inequality and economic growth dimensions. Theoretical analysis reveals disparities between low- and high-income group investments in their offspring's education as well as savings behavior. Specifically observed are heightened educational investments by lower income households compared to their affluent counterparts leading to relatively accelerated growth rates for lower income family offsprings' human capital; consequently narrowing intergenerational wealth gaps thus mitigating overall income inequalities. Furthermore,the influence exerted by postponed retirements upon economic expansion hinges largely upon its relative impacts on household educational investments vis-a-vis parental human capital accumulation.Finally, numerical simulations demonstrate that within plausible parameter ranges, pushing back retirements could indeed stimulate economic advancement.

Diversification in sight? A macroeconomic assessment of Saudi Arabia’s vision 2030

Saudi Arabia, currently the world’s largest oil exporter, embarked since 2021 on a large-scale National Investment Strategy (NIS) designed to lift potential GDP growth by diversifying the economy. This article describes the strategy and is the first paper to quantifies its impact on growth using a dynamic general equilibrium model. It also decomposes this impact into two main channels: the direct impact of the investment push and the impact of complementary reforms. We find that the overall strategy—when supported by appropriate fiscal measures, labor supply reform, and higher public sector efficiency— could boost potential non-oil growth by 4.8 percentage points to about 8.8 percent in the medium term. We also assess the growth dividends of a wider range of alternative scenarios around the NIS baseline.

The economywide recovery measures in Rwanda during the COVID-19 pandemic: How useful a lesson?

In response to the COVID-19 pandemic, governments in many low- and middle-income countries (LMICs) immediately introduced strict public health measures to contain the spread of infection. The economic consequences of these measures were negative and often large in magnitude, necessitating the rapid introduction of economic relief and recovery measures to reinvigorate economic growth and safeguard affected households. Rwanda stands out among other LMICs both for its effective public health policy response and its adaptive economic policy response to COVID-19. Using a dynamic computable general equilibrium (CGE) model of Rwanda, this paper assesses the economywide and welfare impacts of these policy measures and contextualizes results within the overall policy response to COVID-19. Modeling results generated at an early stage of Rwanda’s pandemic experience indicated that relief and recovery measures introduced in 2020 could mitigate COVID-19′s recessionary effects by about 0.8 % points of total GDP, help to recover about 115,000 jobs and, through cash transfers, significantly reduce income losses among poorer households, with total benefits from the measures exceeded their cost by a ratio of 2.2. These results demonstrate the widely replicable value of economywide modeling when used in a timely manner and when positioned within a policymaking process.

International portfolio rebalancing and fiscal policy spillovers

We theoretically and empirically evaluate the spillover effects of debt-financed fiscal policy interventions of the United States on other economies. We first consider a two-country dynamic stochastic general equilibrium model with international portfolio rebalancing effects arising from an imperfect substitutability between short- and long-term domestic and foreign bonds. We show that the model predicts fiscal multipliers for the US similar to those found in the literature. For international spillovers, the model shows that US fiscal expansions financed by long-term debt issuance would, on net, hinder economic activity in the rest of the world (ROW). This is despite the standard trade channel's net positive effect on the ROW economy given the depreciation in the ROW currency. The fall in ROW output occurs mainly due to the increase in the ROW term premiums and long-term rates through the portfolio rebalancing channel, as the relative demand for ROW long-term bonds decreases following the increase in the supply of US long-term bonds accompanying the fiscal expansion. Testing the predictions of our theoretical model by using panel regressions and vector autoregressions, we find empirical support for the trade and portfolio balance channels of fiscal spillovers and for the negative relationship between ROW output and US fiscal policy shocks.

Confidence spillovers, financial contagion, and stagnation

Financial crises tend to spread across countries, causing equity price crashes that cannot be fully explained by fundamentals. This paper introduces a two-country dynamic general equilibrium model of global financial crises that distinguishes between interdependence and financial contagion. Interdependence arises through trade and capital flows, while contagion occurs through a new channel: confidence spillovers. In the model, contagion is possible due to multiple dynamic and steady-state equilibria, even with fully rational consumers. Self-fulfilling beliefs about equity prices can shift the economy between equilibria, amplifying negative effects and causing contagion. The model has three policy implications. Firstly, monetary policy can offset recessions without causing inflation. Coordinated international policy can potentially improve welfare further. Secondly, capital controls can prevent contagion. Lastly, increased trust in government can mitigate negative confidence shocks. These recommendations emphasize the role of beliefs, where pessimism can spread internationally via the confidence channel, leading to contagion.