{"title":"Approximating around the stochastic steady state matters: rethinking uncertainty shocks in small open economies","authors":"Guillermo Hausmann-Guil","doi":"10.1016/j.jedc.2026.105273","DOIUrl":"10.1016/j.jedc.2026.105273","url":null,"abstract":"<div><div>This paper shows that, when solving DSGE models with strong volatility by perturbation, the approximation point matters. In particular, the standard solution can deliver misleading results if the deterministic steady state is far from where the model’s stochastic dynamics occur. This problem can be corrected by approximating around the stochastic steady state instead, a strategy that is now easy to implement with standard software thanks to two-parameter perturbation. Using the small open economy model by Fernández-Villaverde et al. (2011, AER) as a laboratory, I find that approximating their model around the stochastic steady state yields much more accurate dynamics, in which the real effect of uncertainty shocks loses quantitative relevance. The reason is that the debt level is much smaller at this point compared to the deterministic steady state, which greatly diminishes the precautionary incentive to reduce outstanding debt in response to riskier interest rates. The results are robust to the choice of emerging economy, the device used to close the model, slight recalibrations that significantly improve the model’s ability to match data, and alternative solution methods. Overall, the findings suggest that, from a theoretical perspective, uncertainty shocks play a significantly smaller role in driving aggregate fluctuations in small open economies than previously thought.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"184 ","pages":"Article 105273"},"PeriodicalIF":2.3,"publicationDate":"2026-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146039642","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Central bank digital currency: When price and bank stability (Don’t) collide","authors":"Daniel Bird, David Weiss","doi":"10.1016/j.jedc.2026.105263","DOIUrl":"10.1016/j.jedc.2026.105263","url":null,"abstract":"<div><div>In a recent influential paper, Schilling et al. (2024) caution that the introduction of a central bank digital currency gives rise to a central bank trilemma in a nominal version of the quintessential (Diamond and Dybvig, 1983) model of bank-runs. Specifically, the central bank can achieve at most two out of three policy objectives: attaining the socially efficient allocation, financial stability, and price stability. We show that the central bank can employ a natural policy to evade their concerns. In particular, the central bank can create debt, backed by assets, to provide to patient runners. Giving patient households the option to save, rather than spend, with a safe asset solves the inflationary pressures of a run. The key mechanism is thus liability composition: accommodating safe-asset demand without monetizing goods-market demand.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"184 ","pages":"Article 105263"},"PeriodicalIF":2.3,"publicationDate":"2026-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146039643","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Long-term debt and the efficiency of crisis-contingent policies: Taming overborrowing externalities","authors":"Long Ma, Sichuang Xu","doi":"10.1016/j.jedc.2025.105253","DOIUrl":"10.1016/j.jedc.2025.105253","url":null,"abstract":"<div><div>Credit market interventions that stabilize economies ex post are typically blamed for the moral hazard arising from firms’ anticipation of government relief. This view, based on short-term debt models, overlooks the important role of long-term debt in corporate finance. We develop a dynamic general equilibrium model to study the design of credit market interventions in the context of long-term debt and financial frictions. In the model, firms overborrow due to pecuniary externalities, where collective investments inflate factor prices, resulting in excessive debt and amplified financial fragility. With interest rate subsidies in sight, firms anticipate cheaper future borrowing and, constrained by collateral limits, reduce current long-term debt to preserve future capacity, curbing overborrowing. Optimal Pigovian taxes that take into account this incentive effect of long-term debt lead to a welfare gain of 1.02% ∼ 1.23%, and we find empirical support for this mechanism using US manufacturing data.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"184 ","pages":"Article 105253"},"PeriodicalIF":2.3,"publicationDate":"2026-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146039759","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Felix Bönisch , Tobias König , Sebastian Schweighofer-Kodritsch , Georg Weizsäcker
{"title":"Beliefs as a means of self-control? Evidence from a dynamic student survey","authors":"Felix Bönisch , Tobias König , Sebastian Schweighofer-Kodritsch , Georg Weizsäcker","doi":"10.1016/j.jedc.2026.105279","DOIUrl":"10.1016/j.jedc.2026.105279","url":null,"abstract":"<div><div>We repeatedly elicit beliefs about the returns to study effort, in a large university course. A behavioral model of quasi-hyperbolic discounting and malleable beliefs predicts that the dynamics of beliefs mirrors the importance of exerting self-control, such that believed returns increase as the exam approaches, and drop post-exam. Exploiting variation in exam timing to control for common information shocks, we find this prediction confirmed: average believed study returns increase by about 20% over the period before the exam, and drop by about the same afterwards. Additional analyses further support the hypothesized mechanism that beliefs serve as a means of self-control.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"184 ","pages":"Article 105279"},"PeriodicalIF":2.3,"publicationDate":"2026-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146189850","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Public investment, economic growth, and wealth distribution","authors":"Toshiki Tamai","doi":"10.1016/j.jedc.2026.105280","DOIUrl":"10.1016/j.jedc.2026.105280","url":null,"abstract":"<div><div>This paper analyzes the effects of public investment on economic growth and wealth distribution in an endogenous growth model with perpetual-youth overlapping generations and idiosyncratic investment risks. Accidental bequests by sudden death and investment risks lead to a widespread wealth distribution with long tails, leading to wealth inequality. Public investment enhances economic growth by increasing the net marginal productivity of private capital. In contrast, excessive investment impedes growth by disturbing private investment due to decreased net marginal productivity. Moreover, public investment reduces wealth inequality by decreasing investment risks through a reallocation from risky to risk-free assets. These growth and distributional effects generate an inverted U-shaped relationship between economic growth and wealth inequality.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"184 ","pages":"Article 105280"},"PeriodicalIF":2.3,"publicationDate":"2026-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146189293","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Yoosoon Chang , Fabio Gómez-Rodríguez , Christian Matthes
{"title":"The influence of fiscal and monetary policies on the shape of the yield curve","authors":"Yoosoon Chang , Fabio Gómez-Rodríguez , Christian Matthes","doi":"10.1016/j.jedc.2026.105276","DOIUrl":"10.1016/j.jedc.2026.105276","url":null,"abstract":"<div><div>We study how fiscal and monetary policy shape the nominal yield curve and associated term premia. Government spending affects the long end of the curve, while tax changes and monetary policy influence the short end at impact. Within spending categories, only government consumption shifts the short end, but these effects dissipate within a year. While monetary policy and government consumption operate primarily through expected short rates, other fiscal interventions affect yields mainly by altering term premia.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"184 ","pages":"Article 105276"},"PeriodicalIF":2.3,"publicationDate":"2026-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146080125","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The social value of strategic public information","authors":"Xuesong Huang, Jianhao Lin, Yifan Zhang","doi":"10.1016/j.jedc.2025.105250","DOIUrl":"10.1016/j.jedc.2025.105250","url":null,"abstract":"<div><div>We study the welfare effects of strategically using public information when the provider’s information quality is unobservable. Our model features a benevolent public authority that privately observes her information quality and strategically chooses whether to provide public information to private-sector agents in a beauty-contest game à la Morris and Shin (2002). We show that the authority’s equilibrium strategy hinges on her expected information advantage relative to private-sector agents. When the advantage is either small or large, the authority pools across qualities, and with risk-averse agents, the added uncertainty regarding quality lowers welfare relative to a benchmark without such uncertainty. When the information advantage is intermediate, a separating equilibrium emerges: the high-quality authority provides public information, while the low-quality authority withholds it. In this case, the strategic use of public information enhances welfare by channeling superior information into decisions while limiting overreaction to weak information. By delineating these regimes, we clarify when the social value of strategic public information is beneficial versus detrimental, offering guidance for public communication policies.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105250"},"PeriodicalIF":2.3,"publicationDate":"2026-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145939702","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Equilibrium determinacy with behavioral expectations","authors":"Jonathan J․ Adams","doi":"10.1016/j.jedc.2026.105255","DOIUrl":"10.1016/j.jedc.2026.105255","url":null,"abstract":"<div><div>Behavioral expectations affect determinacy in macroeconomic models. Relaxing rational expectations can make models more or less well behaved, depending on the behavioral assumptions. In some cases, multiplicity is created; in other cases, multiplicity is eliminated. Is it possible to tell exactly when there are multiple solutions? Yes: I derive a Behavioral Blanchard-Kahn sufficient condition that ensures a unique equilibrium exists. An equilibrium must be unique if the BBK condition holds, or if a Sunspot Admissibility (SSA) condition fails. When SSA holds and the BBK condition fails, multiplicity occurs. These conditions depend on the spectrum of the behavioral expectation operator. I describe how to check these conditions for an arbitrary behavioral expectation, and illustrate with a large variety of popular types of expectations, heuristics, and information frictions. As an example, I demonstrate that a large class of behavioral expectations imply a unique solution to the New Keynesian model with an interest rate peg, including all strictly backwards-looking heuristics. Another class of expectations imply that asset prices exhibit non-fundamental volatility in a standard model.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105255"},"PeriodicalIF":2.3,"publicationDate":"2026-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145978268","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Bertrand Achou , Philippe De Donder , Franca Glenzer , Minjoon Lee , Marie-Louise Leroux
{"title":"At home versus in a nursing home: Long-term care settings and marginal utility","authors":"Bertrand Achou , Philippe De Donder , Franca Glenzer , Minjoon Lee , Marie-Louise Leroux","doi":"10.1016/j.jedc.2025.105254","DOIUrl":"10.1016/j.jedc.2025.105254","url":null,"abstract":"<div><div>Marginal utility of spending when needing long-term care, and the related incentives for precautionary savings and insurance, may vary significantly by whether one receives care at home or in a nursing home. In this paper, we develop strategic survey questions to estimate those differences. All else equal, we find that the marginal utility of spending (net of the minimum cost of care) is significantly higher when receiving care at home rather than in a nursing home. Using an illustrative calibrated life-cycle model with these LTC-setting-specific preferences, we obtain that the higher marginal utility of spending under home care generates stronger precautionary savings incentives and a higher valuation of home care subsidies relative to nursing homes. Overall, our results suggest that shifts (e.g., due to Covid) leading to a stronger preference for home care could significantly increase savings as well as the benefits of allocating resources to long-term care.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105254"},"PeriodicalIF":2.3,"publicationDate":"2026-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145978267","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Dancing to the wrong tune: How rational myopia, belief heterogeneity, and adjustment costs shape financial bubbles","authors":"Elyès Jouini","doi":"10.1016/j.jedc.2025.105251","DOIUrl":"10.1016/j.jedc.2025.105251","url":null,"abstract":"<div><div>We introduce the Anticipations-Based Production Equilibrium (ABPE) as a minimal extension of the Arrow–Radner Production Equilibrium (ARPE). Whereas ARPE requires optimality and rational expectations, ABPE relies only on local optimization and locally coherent expectations. This mild departure preserves internal consistency, coincides with ARPE in discrete time, while in continuous time allows for speculative bubbles, defined intrinsically as price trajectories that rise explosively before collapsing in finite time. To illustrate the concept, we develop a continuous-time production economy with heterogeneous beliefs and convex adjustment costs, where bubbles emerge endogenously from the interplay of nonlinear price dynamics, and belief-driven momentum. We characterize the precise conditions under which bubbles emerge, and distinguish between financial bubbles, which affect only asset prices, and real bubbles, which also impact production and growth. The ABPE framework is general and accommodates a variety of belief formation mechanisms, which we illustrate with anticipations constructed through backward inference and regret minimization.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105251"},"PeriodicalIF":2.3,"publicationDate":"2026-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145939703","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}