Pub Date : 2025-12-03DOI: 10.1016/j.jedc.2025.105229
Arka Prava Bandyopadhyay , Lilia Maliar
We use model-free reinforcement learning (RL) to explore how a mortgage servicer can optimize her actions toward a borrower. Unlike conventional heuristic approaches, our methodology eliminates reliance on subjective and qualitative judgments from industry and legal experts. We are the first to incorporate post-securitization soft information and the borrower’s responsiveness to the servicer to estimate an RL-based policy rule. When maximizing her reward, the servicer dynamically learns the type of borrower, allowing it to anticipate and mitigate adversarial behavior. This, in turn, fosters greater borrower cooperation and improves overall outcomes.
{"title":"Reinforcement learning for household finance: Designing policy via responsiveness","authors":"Arka Prava Bandyopadhyay , Lilia Maliar","doi":"10.1016/j.jedc.2025.105229","DOIUrl":"10.1016/j.jedc.2025.105229","url":null,"abstract":"<div><div>We use model-free reinforcement learning (RL) to explore how a mortgage servicer can optimize her actions toward a borrower. Unlike conventional heuristic approaches, our methodology eliminates reliance on subjective and qualitative judgments from industry and legal experts. We are the first to incorporate post-securitization soft information and the borrower’s responsiveness to the servicer to estimate an RL-based policy rule. When maximizing her reward, the servicer dynamically learns the type of borrower, allowing it to anticipate and mitigate adversarial behavior. This, in turn, fosters greater borrower cooperation and improves overall outcomes.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105229"},"PeriodicalIF":2.3,"publicationDate":"2025-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145748441","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}
Pub Date : 2025-12-02DOI: 10.1016/j.jedc.2025.105227
Stéphane Adjemian , Michel Juillard
The Extended Path (EP) method solves DSGE models under certainty equivalence, capturing nonlinearities and occasionally binding constraints but ignoring the role of uncertainty. We propose the Stochastic Extended Path (SEP), which restores this channel by computing conditional expectations with quadrature and unscented transforms. To avoid the exponential explosion of a full tree of future shocks, we introduce a sparse tree representation that scales linearly with the horizon. We further develop a hybrid SEP, combining SEP with perturbation corrections to capture long-run effects of volatility at low cost. Accuracy is benchmarked in an asset pricing model with a closed-form solution, where hybrid SEP outperforms perturbation methods. We then illustrate the approach in an RBC model with a lower bound on investment.
{"title":"Stochastic extended path","authors":"Stéphane Adjemian , Michel Juillard","doi":"10.1016/j.jedc.2025.105227","DOIUrl":"10.1016/j.jedc.2025.105227","url":null,"abstract":"<div><div>The Extended Path (EP) method solves DSGE models under certainty equivalence, capturing nonlinearities and occasionally binding constraints but ignoring the role of uncertainty. We propose the Stochastic Extended Path (SEP), which restores this channel by computing conditional expectations with quadrature and unscented transforms. To avoid the exponential explosion of a full tree of future shocks, we introduce a sparse tree representation that scales linearly with the horizon. We further develop a hybrid SEP, combining SEP with perturbation corrections to capture long-run effects of volatility at low cost. Accuracy is benchmarked in an asset pricing model with a closed-form solution, where hybrid SEP outperforms perturbation methods. We then illustrate the approach in an RBC model with a lower bound on investment.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105227"},"PeriodicalIF":2.3,"publicationDate":"2025-12-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145748440","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}
Pub Date : 2025-12-01DOI: 10.1016/j.jedc.2025.105206
King King Li , Tao Zhu
This paper theoretically and experimentally investigates matching friction as a cause of monetary nonneutrality. We design a price-posting game in which mismatching (i.e., a player not being matched with a trading partner) is costly and can only be eliminated if players coordinate on one equilibrium from a specific subset of multiple equilibria. In the lab, subjects coordinate by certain pricing and visiting rules, and their actions appear to be consistent with such an equilibrium. A nominal shock disturbs the established coordination patterns and, in particular, causes sellers to adjust their pricing rules. The adjustment is persistent and differs at a disaggregate level in a way that the resulting nonneutrality gets along with the quantity theory (i.e., the aggregate price level is proportional to the aggregate nominal stock).
{"title":"Matching friction, coordination, and monetary nonneutrality","authors":"King King Li , Tao Zhu","doi":"10.1016/j.jedc.2025.105206","DOIUrl":"10.1016/j.jedc.2025.105206","url":null,"abstract":"<div><div>This paper theoretically and experimentally investigates matching friction as a cause of monetary nonneutrality. We design a price-posting game in which mismatching (i.e., a player not being matched with a trading partner) is costly and can only be eliminated if players coordinate on one equilibrium from a specific subset of multiple equilibria. In the lab, subjects coordinate by certain pricing and visiting rules, and their actions appear to be consistent with such an equilibrium. A nominal shock disturbs the established coordination patterns and, in particular, causes sellers to adjust their pricing rules. The adjustment is persistent and differs at a disaggregate level in a way that the resulting nonneutrality gets along with the quantity theory (i.e., the aggregate price level is proportional to the aggregate nominal stock).</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105206"},"PeriodicalIF":2.3,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145615741","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}
Pub Date : 2025-12-01DOI: 10.1016/j.jedc.2025.105202
Miguel Casares , Paul Gomme , Hashmat Khan
What are the socially optimal restrictions on private activity during a pandemic? How do these differ from private decisions? We address these questions by modeling the interactions between epidemiology and the macroeconomy. Unlike the private planner, the social planner accounts for two externalities: the increase in the cost of severe illness associated with more infected individuals, reflecting the capacity constraints of the health care system; and the socioeconomic transmission of the virus from asymptomatic to susceptible individuals. Owing to these externalities, the social planner imposes stricter constraints on socioeconomic activities. Applied to the COVID-19 pandemic, socially optimal restrictions reduce the welfare costs by roughly one percent of GDP.
{"title":"Private versus social responses to a pandemic","authors":"Miguel Casares , Paul Gomme , Hashmat Khan","doi":"10.1016/j.jedc.2025.105202","DOIUrl":"10.1016/j.jedc.2025.105202","url":null,"abstract":"<div><div>What are the socially optimal restrictions on private activity during a pandemic? How do these differ from private decisions? We address these questions by modeling the interactions between epidemiology and the macroeconomy. Unlike the private planner, the social planner accounts for two externalities: the increase in the cost of severe illness associated with more infected individuals, reflecting the capacity constraints of the health care system; and the socioeconomic transmission of the virus from asymptomatic to susceptible individuals. Owing to these externalities, the social planner imposes stricter constraints on socioeconomic activities. Applied to the COVID-19 pandemic, socially optimal restrictions reduce the welfare costs by roughly one percent of GDP.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105202"},"PeriodicalIF":2.3,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145615742","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}
Pub Date : 2025-12-01DOI: 10.1016/j.jedc.2025.105217
Katharina Drechsler , Sebastian Müller , Heinz-Theo Wagner
To explore whether the rise of digital innovation across firms might point to the existence of a new risk compensation in asset pricing, we construct a text-based measure of the socio-technical phenomenon of digitalization, called digital orientation, by using the MD&A section of annual firm reports from 1996 to 2020. We find that firms with a high digital orientation (digital leaders) are systematically different along several key characteristics like valuation, sales growth, and profitability, forming a peer group of digitally leading firms across traditional industry boundaries. A digital orientation strategy, which is long (short) stocks with high (low) digital orientation, earns an equally weighted (value-weighted) monthly six-factor alpha of 0.41 % (0.28 %) per month, both statistically significant at 5 %. These results are robust to various sensitivity checks, including alternative constructions of the digital orientation measure, controls for industry membership, changes to the sample dataset, and the use of an alternative dictionary. Additionally, the results remain comparable if we construct an alternative investment strategy based on the portfolio holdings of funds with a digital innovation focus.
{"title":"The “digital” premium: Why does digitalization drive stock returns?","authors":"Katharina Drechsler , Sebastian Müller , Heinz-Theo Wagner","doi":"10.1016/j.jedc.2025.105217","DOIUrl":"10.1016/j.jedc.2025.105217","url":null,"abstract":"<div><div>To explore whether the rise of digital innovation across firms might point to the existence of a new risk compensation in asset pricing, we construct a text-based measure of the socio-technical phenomenon of digitalization, called digital orientation, by using the MD&A section of annual firm reports from 1996 to 2020. We find that firms with a high digital orientation (digital leaders) are systematically different along several key characteristics like valuation, sales growth, and profitability, forming a peer group of digitally leading firms across traditional industry boundaries. A digital orientation strategy, which is long (short) stocks with high (low) digital orientation, earns an equally weighted (value-weighted) monthly six-factor alpha of 0.41 % (0.28 %) per month, both statistically significant at 5 %. These results are robust to various sensitivity checks, including alternative constructions of the digital orientation measure, controls for industry membership, changes to the sample dataset, and the use of an alternative dictionary. Additionally, the results remain comparable if we construct an alternative investment strategy based on the portfolio holdings of funds with a digital innovation focus.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105217"},"PeriodicalIF":2.3,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145615740","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}
Pub Date : 2025-12-01DOI: 10.1016/j.jedc.2025.105219
Guanyi Yang
People often delay starting college or temporarily leave college to work. To examine the welfare implications of intermittent college attendance, I incorporate flexible age-by-age college enrollment choice in a life-cycle model in general equilibrium. College serves as an investment device for the young and reduces risk for the old. Removing flexible access reduces the total welfare value of college by one quarter. Moreover, higher wealth and better human capital preparedness at age 18 incentivize early-age degree completion. However, accessing college at a later age matters more for those who are initially less advantaged. Thus, policies that alleviate financial costs generate considerable long-term welfare improvements.
{"title":"Better late than never: Macroeconomic impact of intermittent college enrollment and tuition subsidies","authors":"Guanyi Yang","doi":"10.1016/j.jedc.2025.105219","DOIUrl":"10.1016/j.jedc.2025.105219","url":null,"abstract":"<div><div>People often delay starting college or temporarily leave college to work. To examine the welfare implications of intermittent college attendance, I incorporate flexible age-by-age college enrollment choice in a life-cycle model in general equilibrium. College serves as an investment device for the young and reduces risk for the old. Removing flexible access reduces the total welfare value of college by one quarter. Moreover, higher wealth and better human capital preparedness at age 18 incentivize early-age degree completion. However, accessing college at a later age matters more for those who are initially less advantaged. Thus, policies that alleviate financial costs generate considerable long-term welfare improvements.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105219"},"PeriodicalIF":2.3,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145615743","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}
Pub Date : 2025-11-30DOI: 10.1016/j.jedc.2025.105231
Antonio Granese
A recent influential study based on a Structural VAR with frequency-domain identification argues that most cyclical fluctuations in real activity are driven by a single shock. We revisit this view using a large-dimensional Dynamic Factor Model estimated on more than 100 U.S. macroeconomic series. Our data-rich approach uncovers two main shocks that jointly drive the business cycle: one transitory and demand-like, the other persistent and supply-like. This two-shock structure explains the bulk of both business-cycle and long-run fluctuations in key macroeconomic aggregates. The findings support a classical AD-AS interpretation and challenge the notion of a single dominant business-cycle shock.
{"title":"Two main business cycle shocks are better than one","authors":"Antonio Granese","doi":"10.1016/j.jedc.2025.105231","DOIUrl":"10.1016/j.jedc.2025.105231","url":null,"abstract":"<div><div>A recent influential study based on a Structural VAR with frequency-domain identification argues that most cyclical fluctuations in real activity are driven by a single shock. We revisit this view using a large-dimensional Dynamic Factor Model estimated on more than 100 U.S. macroeconomic series. Our data-rich approach uncovers two main shocks that jointly drive the business cycle: one transitory and demand-like, the other persistent and supply-like. This two-shock structure explains the bulk of both business-cycle and long-run fluctuations in key macroeconomic aggregates. The findings support a classical AD-AS interpretation and challenge the notion of a single dominant business-cycle shock.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105231"},"PeriodicalIF":2.3,"publicationDate":"2025-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145694256","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}
Pub Date : 2025-11-29DOI: 10.1016/j.jedc.2025.105220
Elnura Baiaman kyzy , Roberto Leon-Gonzalez
This paper proposes a novel Laplace-based solution to non-linear DSGE models that has a closed-form likelihood. We implicitly use a non-linear approximation to the policy function that is invertible with respect to the shocks, implying that in the approximation the shocks can be recovered uniquely from some of the control variables. Using perturbation methods and a Lagrange inversion formula, we are able to calculate the derivatives of the likelihood and construct the Laplace based solution. In contrast with previous likelihood-based approaches, the method used here requires neither the introduction of linear shocks nor simulation to evaluate the likelihood. Using US data, we estimate linear and nonlinear variants of a well-known neoclassical growth model with and without time-varying variances. We find that a nonlinear heteroscedastic model has a much better empirical performance. Furthermore, our models allow us to ascertain that the monetary policy shock causes most of the time changes in economic uncertainty.
{"title":"Estimation of nonlinear DSGE models through Laplace based solutions","authors":"Elnura Baiaman kyzy , Roberto Leon-Gonzalez","doi":"10.1016/j.jedc.2025.105220","DOIUrl":"10.1016/j.jedc.2025.105220","url":null,"abstract":"<div><div>This paper proposes a novel Laplace-based solution to non-linear DSGE models that has a closed-form likelihood. We implicitly use a non-linear approximation to the policy function that is invertible with respect to the shocks, implying that in the approximation the shocks can be recovered uniquely from some of the control variables. Using perturbation methods and a Lagrange inversion formula, we are able to calculate the derivatives of the likelihood and construct the Laplace based solution. In contrast with previous likelihood-based approaches, the method used here requires neither the introduction of linear shocks nor simulation to evaluate the likelihood. Using US data, we estimate linear and nonlinear variants of a well-known neoclassical growth model with and without time-varying variances. We find that a nonlinear heteroscedastic model has a much better empirical performance. Furthermore, our models allow us to ascertain that the monetary policy shock causes most of the time changes in economic uncertainty.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105220"},"PeriodicalIF":2.3,"publicationDate":"2025-11-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145694255","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}
Pub Date : 2025-11-28DOI: 10.1016/j.jedc.2025.105230
Shuonan Zhang
This paper studies uncertainty shocks in the context of an intangible economy. I build a two-sector dynamic stochastic general equilibrium (DSGE) model to understand a shift in investment composition and its implications for the transmission of uncertainty shocks. The model is motivated by the role of intangible capital as a cushion, mitigating the adverse effects of uncertainty on investment, as suggested by firm-level data. The quantitative analysis shows that heightened uncertainty directs resources toward the intangible sector, making the economy more intangible-intensive. The rising importance of intangibles diminishes aggregate volatility in the uncertainty-driven business cycle.
{"title":"Uncertainty shocks in an intangible economy","authors":"Shuonan Zhang","doi":"10.1016/j.jedc.2025.105230","DOIUrl":"10.1016/j.jedc.2025.105230","url":null,"abstract":"<div><div>This paper studies uncertainty shocks in the context of an intangible economy. I build a two-sector dynamic stochastic general equilibrium (DSGE) model to understand a shift in investment composition and its implications for the transmission of uncertainty shocks. The model is motivated by the role of intangible capital as a cushion, mitigating the adverse effects of uncertainty on investment, as suggested by firm-level data. The quantitative analysis shows that heightened uncertainty directs resources toward the intangible sector, making the economy more intangible-intensive. The rising importance of intangibles diminishes aggregate volatility in the uncertainty-driven business cycle.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105230"},"PeriodicalIF":2.3,"publicationDate":"2025-11-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145694257","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}
Pub Date : 2025-11-26DOI: 10.1016/j.jedc.2025.105223
Matteo Iacoviello , Ricardo Nunes , Andrea Prestipino
We study optimal credit market policy in a stochastic, quantitative, general equilibrium, infinite-horizon economy with collateral constraints tied to housing prices. Collateral constraints imply that the competitive equilibrium is Pareto inefficient. Taxing housing or borrowing in good states and subsidizing it in recessions leads to a Pareto-improving allocation for borrowers and savers. Quantitatively, the welfare gains afforded by the optimal tax are significant. The optimal tax reduces the covariance of house prices with consumption, and, by doing so, it increases house prices on average and delivers welfare gains both in steady state and around it. We also show that the welfare gains stem from mopping up after the crash rather than the ex-ante macroprudential aspect, aligning with prior research that emphasizes the importance of ex-post measures compared to preventive policies alone.
{"title":"Optimal credit market policy","authors":"Matteo Iacoviello , Ricardo Nunes , Andrea Prestipino","doi":"10.1016/j.jedc.2025.105223","DOIUrl":"10.1016/j.jedc.2025.105223","url":null,"abstract":"<div><div>We study optimal credit market policy in a stochastic, quantitative, general equilibrium, infinite-horizon economy with collateral constraints tied to housing prices. Collateral constraints imply that the competitive equilibrium is Pareto inefficient. Taxing housing or borrowing in good states and subsidizing it in recessions leads to a Pareto-improving allocation for borrowers and savers. Quantitatively, the welfare gains afforded by the optimal tax are significant. The optimal tax reduces the covariance of house prices with consumption, and, by doing so, it increases house prices on average and delivers welfare gains both in steady state and around it. We also show that the welfare gains stem from mopping up after the crash rather than the ex-ante macroprudential aspect, aligning with prior research that emphasizes the importance of ex-post measures compared to preventive policies alone.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105223"},"PeriodicalIF":2.3,"publicationDate":"2025-11-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145694260","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}
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