Pub Date : 2026-01-01DOI: 10.1016/j.jedc.2025.105226
Pablo Winant
We present two complementary algorithms to solve nonlinear rational expectations models characterized by first order conditions: an accelerated time-iteration method and a Newton–Krylov solver. Both approaches exploit an explicit construction of the derivative operator (and the model Jacobian) and achieve quadratic convergence near the solution, yielding large computational gains over standard time iteration. We show how to apply these linear operators without forming dense matrices and invert the resulting systems efficiently using truncated Neumann series or GMRES. On three benchmark models (consumption–savings, RBC, and a two-country model), the two methods produce the same solution with substantially reduced runtimes.
{"title":"Back in time. fast. Accelerated time iterations","authors":"Pablo Winant","doi":"10.1016/j.jedc.2025.105226","DOIUrl":"10.1016/j.jedc.2025.105226","url":null,"abstract":"<div><div>We present two complementary algorithms to solve nonlinear rational expectations models characterized by first order conditions: an accelerated time-iteration method and a Newton–Krylov solver. Both approaches exploit an explicit construction of the derivative operator (and the model Jacobian) and achieve quadratic convergence near the solution, yielding large computational gains over standard time iteration. We show how to apply these linear operators without forming dense matrices and invert the resulting systems efficiently using truncated Neumann series or GMRES. On three benchmark models (consumption–savings, RBC, and a two-country model), the two methods produce the same solution with substantially reduced runtimes.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105226"},"PeriodicalIF":2.3,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145938758","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 : 2026-01-01DOI: 10.1016/j.jedc.2025.105238
Dario Bonciani , Joonseok Oh
We study optimal monetary policy in a model with incomplete markets, in the form of uninsurable unemployment risk, and an occasionally binding zero lower bound (ZLB) constraint. The optimal policy consists of keeping the nominal rate at zero longer than implied by current macroeconomic conditions. Such policy improves expected labour market conditions, substantially mitigating the rise in unemployment risk and precautionary savings. As a result, we find that market incompleteness does not significantly amplify contractions in output and inflation at the ZLB. However, when the central bank follows more realistic policy rules instead of the optimal policy, incomplete markets exacerbate the fall in demand, emphasising the importance of unemployment insurance for output stabilisation.
{"title":"Unemployment risk, liquidity traps, and monetary policy","authors":"Dario Bonciani , Joonseok Oh","doi":"10.1016/j.jedc.2025.105238","DOIUrl":"10.1016/j.jedc.2025.105238","url":null,"abstract":"<div><div>We study optimal monetary policy in a model with incomplete markets, in the form of uninsurable unemployment risk, and an occasionally binding zero lower bound (ZLB) constraint. The optimal policy consists of keeping the nominal rate at zero longer than implied by current macroeconomic conditions. Such policy improves expected labour market conditions, substantially mitigating the rise in unemployment risk and precautionary savings. As a result, we find that market incompleteness does not significantly amplify contractions in output and inflation at the ZLB. However, when the central bank follows more realistic policy rules instead of the optimal policy, incomplete markets exacerbate the fall in demand, emphasising the importance of unemployment insurance for output stabilisation.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105238"},"PeriodicalIF":2.3,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145938797","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 : 2025-12-31DOI: 10.1016/j.jedc.2025.105249
Reiner Martin , Edward O’Brien , M. Udara Peiris , Dimitrios P. Tsomocos
When default losses elevate borrowing costs, expanding credit cannot stabilize the economy because default rates feed back to lending rates through bank balance sheets. Asset management companies (AMCs) break this loop by purchasing nonperforming loans at their long-run recovery values, thereby fixing the effective default rate that banks face. Government purchases of performing loans expand credit but leave this feedback intact. In a model calibrated to the eurozone, the AMC reduces quarterly default rates by 0.8 percentage points, lowers lending rates by 1.6 percentage points, and raises welfare by 0.2%. Government purchases crowd out bank deposits, contracting credit; default rates rise by 1.8 percentage points, lending rates increase by 1.2 percentage points, and welfare falls by 0.3%.
{"title":"Stabilizing credit when nonperforming loans surge: The role of asset management companies","authors":"Reiner Martin , Edward O’Brien , M. Udara Peiris , Dimitrios P. Tsomocos","doi":"10.1016/j.jedc.2025.105249","DOIUrl":"10.1016/j.jedc.2025.105249","url":null,"abstract":"<div><div>When default losses elevate borrowing costs, expanding credit cannot stabilize the economy because default rates feed back to lending rates through bank balance sheets. Asset management companies (AMCs) break this loop by purchasing nonperforming loans at their long-run recovery values, thereby fixing the effective default rate that banks face. Government purchases of performing loans expand credit but leave this feedback intact. In a model calibrated to the eurozone, the AMC reduces quarterly default rates by 0.8 percentage points, lowers lending rates by 1.6 percentage points, and raises welfare by 0.2%. Government purchases crowd out bank deposits, contracting credit; default rates rise by 1.8 percentage points, lending rates increase by 1.2 percentage points, and welfare falls by 0.3%.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105249"},"PeriodicalIF":2.3,"publicationDate":"2025-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145939756","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 : 2025-12-31DOI: 10.1016/j.jedc.2025.105248
Anton Bondarev , Thorsten Upmann
This paper investigates how ecological thresholds affect strategic exploitation in renewable resource games. We extend the standard single-agent optimal control harvesting model to a non-cooperative differential game with two agents, where the resource follows piecewise-smooth (PWS) dynamics and growth rates change abruptly at a stock threshold. The resulting three-dimensional (3D) state–costate system generates new strategic behaviour absent in smooth models. We identify sliding regions and hybrid crossing limit cycles (HCLCs) as potential open-loop Nash equilibria (OLNE), depending on parameter values. These outcomes correspond to distinct economic regimes: sliding equilibria capture threshold exploitation at fragile steady states, while HCLCs reflect endogenous boom–bust harvesting cycles. In contrast to two-dimensional (2D) optimal-control models where HCLCs cannot be optimal, our results show that strategic interaction in multi-agent settings can endogenously sustain such cycles. The analysis reveals how ecological discontinuities and strategic competition jointly shape resource dynamics, offering new insights into the stability and management of renewable resources.
{"title":"A hybrid differential game in renewable resources with sliding modes and crossing limit cycles","authors":"Anton Bondarev , Thorsten Upmann","doi":"10.1016/j.jedc.2025.105248","DOIUrl":"10.1016/j.jedc.2025.105248","url":null,"abstract":"<div><div>This paper investigates how ecological thresholds affect strategic exploitation in renewable resource games. We extend the standard single-agent optimal control harvesting model to a non-cooperative differential game with two agents, where the resource follows piecewise-smooth (PWS) dynamics and growth rates change abruptly at a stock threshold. The resulting three-dimensional (3D) state–costate system generates new strategic behaviour absent in smooth models. We identify sliding regions and hybrid crossing limit cycles (HCLCs) as potential open-loop Nash equilibria (OLNE), depending on parameter values. These outcomes correspond to distinct economic regimes: sliding equilibria capture threshold exploitation at fragile steady states, while HCLCs reflect endogenous boom–bust harvesting cycles. In contrast to two-dimensional (2D) optimal-control models where HCLCs cannot be optimal, our results show that strategic interaction in multi-agent settings can endogenously sustain such cycles. The analysis reveals how ecological discontinuities and strategic competition jointly shape resource dynamics, offering new insights into the stability and management of renewable resources.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105248"},"PeriodicalIF":2.3,"publicationDate":"2025-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145939704","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 : 2025-12-30DOI: 10.1016/j.jedc.2025.105250
Xuesong Huang, Jianhao Lin, Yifan Zhang
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.
我们研究了当提供者的信息质量不可观察时，策略性地使用公共信息的福利效应。我们的模型以一个仁慈的公共权威为特征，它私下观察自己的信息质量，并在选美比赛中战略性地选择是否向私营部门代理人提供公共信息（la Morris and Shin, 2002）。我们表明，权威的均衡策略取决于她相对于私营部门代理人的预期信息优势。当优势或大或小时，权力集中在不同的品质上，而对于风险厌恶的代理人，与没有这种不确定性的基准相比，质量方面增加的不确定性降低了福利。当信息优势处于中间状态时，出现了一种分离均衡：高质量权威提供公开信息，低质量权威隐瞒公开信息。在这种情况下，战略性地使用公共信息，通过将优质信息引导到决策中，同时限制对弱信息的过度反应，从而提高福利。通过描述这些机制，我们明确了战略性公共信息的社会价值何时是有益的，何时是有害的，从而为公共传播政策提供指导。
{"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":"2025-12-30","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}
Pub Date : 2025-12-30DOI: 10.1016/j.jedc.2025.105251
Elyès Jouini
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.
{"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":"2025-12-30","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}
Pub Date : 2025-12-30DOI: 10.1016/j.jedc.2025.105247
Elijah Broadbent , Huberto M. Ennis , Tyler J. Pike , Horacio Sapriza
The provision of bank credit to firms and households affects macroeconomic performance. We use survey measures of changes in bank lending standards, disaggregated by loan category, to quantify the effect of changes in banks’ attitudes toward lending on aggregate output, inflation, and interest rates. Bank lending to businesses is particularly important for macroeconomic outcomes, with peak effects on output growth of around 30 to 40 basis points after four quarters of the initial shock. These effects depend on the stage of the business cycle and the proximity of the short-term interest rate to its effective lower bound. The effects are larger when output is growing below trend, when uncertainty is increasing or high, and when interest rates are away from the lower bound. We also find that the response of the economy to lending-standards shocks is asymmetric, with tightening shocks having larger effects on output.
{"title":"Bank lending standards and the U.S. economy","authors":"Elijah Broadbent , Huberto M. Ennis , Tyler J. Pike , Horacio Sapriza","doi":"10.1016/j.jedc.2025.105247","DOIUrl":"10.1016/j.jedc.2025.105247","url":null,"abstract":"<div><div>The provision of bank credit to firms and households affects macroeconomic performance. We use survey measures of changes in bank lending standards, disaggregated by loan category, to quantify the effect of changes in banks’ attitudes toward lending on aggregate output, inflation, and interest rates. Bank lending to businesses is particularly important for macroeconomic outcomes, with peak effects on output growth of around 30 to 40 basis points after four quarters of the initial shock. These effects depend on the stage of the business cycle and the proximity of the short-term interest rate to its effective lower bound. The effects are larger when output is growing below trend, when uncertainty is increasing or high, and when interest rates are away from the lower bound. We also find that the response of the economy to lending-standards shocks is asymmetric, with tightening shocks having larger effects on output.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105247"},"PeriodicalIF":2.3,"publicationDate":"2025-12-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145978269","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 : 2025-12-27DOI: 10.1016/j.jedc.2025.105246
Jacob A. Robbins
Periods of low interest rates and subdued inflation in advanced economies have raised the prospect of expectation traps, in which self-fulfilling pessimistic beliefs sustain recessions. This paper examines the stability and policy implications of expectation-driven recessions when agents deviate from rational expectations. We build an overlapping generations model in which belief shocks generate endogenous fluctuations in output and inflation, and show that persistent stagnation equilibria exist under bounded rationality. Optimal policy depends on the strength of feedback between current and expected income. With weak feedback, Keynesian policies— lower interest rates and higher government spending— are effective. With strong feedback, escaping the trap requires Neo-Fisherian policies— pegging interest rates and reduced fiscal spending.
{"title":"Expectation traps and Neo-Fisherian policy","authors":"Jacob A. Robbins","doi":"10.1016/j.jedc.2025.105246","DOIUrl":"10.1016/j.jedc.2025.105246","url":null,"abstract":"<div><div>Periods of low interest rates and subdued inflation in advanced economies have raised the prospect of <em>expectation traps</em>, in which self-fulfilling pessimistic beliefs sustain recessions. This paper examines the stability and policy implications of expectation-driven recessions when agents deviate from rational expectations. We build an overlapping generations model in which belief shocks generate endogenous fluctuations in output and inflation, and show that persistent stagnation equilibria exist under bounded rationality. Optimal policy depends on the strength of feedback between current and expected income. With weak feedback, Keynesian policies— lower interest rates and higher government spending— are effective. With strong feedback, escaping the trap requires Neo-Fisherian policies— pegging interest rates and reduced fiscal spending.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105246"},"PeriodicalIF":2.3,"publicationDate":"2025-12-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145939701","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 : 2025-12-22DOI: 10.1016/j.jedc.2025.105244
Boris Chafwehé , Charles de Beauffort , Rigas Oikonomou
When taxes do not sufficiently adjust to government debt levels, the Fiscal Theory of the Price Level predicts that inflation must adjust to ensure the solvency of public finances. We study the role of optimal debt maturity portfolios in this context, using a New Keynesian model with both demand and supply-side shocks. Our paper offers new analytical insights into the mechanisms through which the debt maturity composition affects the trade-off between inflation and the output gap: The Persistence, Discounting and Hedging channels of optimal policy. Our findings, based on a rich prior predictive analysis, indicate that the key driving force behind optimal portfolio decisions is Hedging. Moreover, the optimal maturity composition of debt is driven primarily by supply side shocks, rather than by demand shocks. Finally, our results indicate that debt management is a significant margin to complement monetary policy in stabilizing inflation when debt solvency is an important concern.
{"title":"Managing the inflation-output trade-off with public debt portfolios","authors":"Boris Chafwehé , Charles de Beauffort , Rigas Oikonomou","doi":"10.1016/j.jedc.2025.105244","DOIUrl":"10.1016/j.jedc.2025.105244","url":null,"abstract":"<div><div>When taxes do not sufficiently adjust to government debt levels, the Fiscal Theory of the Price Level predicts that inflation must adjust to ensure the solvency of public finances. We study the role of optimal debt maturity portfolios in this context, using a New Keynesian model with both demand and supply-side shocks. Our paper offers new analytical insights into the mechanisms through which the debt maturity composition affects the trade-off between inflation and the output gap: The Persistence, Discounting and Hedging channels of optimal policy. Our findings, based on a rich prior predictive analysis, indicate that the key driving force behind optimal portfolio decisions is Hedging. Moreover, the optimal maturity composition of debt is driven primarily by supply side shocks, rather than by demand shocks. Finally, our results indicate that debt management is a significant margin to complement monetary policy in stabilizing inflation when debt solvency is an important concern.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105244"},"PeriodicalIF":2.3,"publicationDate":"2025-12-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145885129","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}
We investigate the conditions under which a leaning against the wind (LAW)-type monetary policy is advisable to address risks to financial stability stemming from housing credit imbalances. We do so within an endogenous regime-switching dynamic stochastic general equilibrium (DSGE) model with occasional crises, effective lower bound (ELB) on interest rates, and intrinsically persistent financial cycles driven by partly backward-looking house price expectations. Under empirically plausible financial cycles, LAW amplifies the transmission of supply shocks to inflation by strengthening the countercyclical response of collateral values and domestic demand. This results in heightened inflation volatility and a lower average inflation rate, thereby increasing the frequency of ELB episodes. In our baseline estimated model, we find that these costs far outweigh the benefits of a less likely and less severe crisis. However, we also show that LAW may become advisable, depending on specific conditions, including (i) if the central bank focuses less on near-term output stabilization but more on medium-term growth stability by counteracting financial imbalances, or (ii) if the expectations-driven financial cycles are intrinsically less persistent or more policy-responsive than currently observed. Higher long-run capital regulation is better suited to addressing risks to financial stability as it significantly reduces the fluctuations in inflation and output by reducing both the frequency of ELB and the severity of crises.
{"title":"Leaning against persistent financial cycles with occasional crises","authors":"Thore Kockerols , Erling Motzfeldt Kravik , Yasin Mimir","doi":"10.1016/j.jedc.2025.105245","DOIUrl":"10.1016/j.jedc.2025.105245","url":null,"abstract":"<div><div>We investigate the conditions under which a leaning against the wind (LAW)-type monetary policy is advisable to address risks to financial stability stemming from housing credit imbalances. We do so within an endogenous regime-switching dynamic stochastic general equilibrium (DSGE) model with occasional crises, effective lower bound (ELB) on interest rates, and intrinsically persistent financial cycles driven by partly backward-looking house price expectations. Under empirically plausible financial cycles, LAW amplifies the transmission of supply shocks to inflation by strengthening the countercyclical response of collateral values and domestic demand. This results in heightened inflation volatility and a lower average inflation rate, thereby increasing the frequency of ELB episodes. In our baseline estimated model, we find that these costs far outweigh the benefits of a less likely and less severe crisis. However, we also show that LAW may become advisable, depending on specific conditions, including (i) if the central bank focuses less on near-term output stabilization but more on medium-term growth stability by counteracting financial imbalances, or (ii) if the expectations-driven financial cycles are intrinsically less persistent or more policy-responsive than currently observed. Higher long-run capital regulation is better suited to addressing risks to financial stability as it significantly reduces the fluctuations in inflation and output by reducing both the frequency of ELB and the severity of crises.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105245"},"PeriodicalIF":2.3,"publicationDate":"2025-12-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145885128","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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