The IMPA Model

As essential tools for policymakers and other stakeholders, macroeconomic policy models estimate the long-run economic effects of legislative and regulatory proposals on the economy. Model results have important implications for the types of policies that are understood to be beneficial, or detrimental, to the size of the economy (as measured in GDP) and the distribution of employment, income, and wealth.

The IMPA model is a macroeconomic policy model built on recent advances in economic theory and contemporary empirical evidence. Importantly, the model emphasizes income and wealth inequality, the prevalence of market power in labor and goods markets, productive public capital, labor market segmentation, and the nuances of the U.S. tax system.

The economy in the model is made up of three types of actors, three types of markets, and the relationships between each of them. Lean more about the types of actors below.

Computationally, the IMPA model is a Julia-based implementation of a large scale heterogeneous-agent, multi-sectoral, general equilibrium model of the US economy. The solution method is complex and involves very careful calibration in order to make economic and distributional assessments of the impact of proposed policies. Lean more about the solution method below.

Key Innovation: Market Power

The IMPA model accounts for the fact that market power is pervasive in the economy.

Accounting for market power is imperative because it affects how the economy functions and therefore changes the implications of macroeconomic policy interventions.

Market power is the idea that corporations can exert control over the prices they charge consumers and the wages they pay workers, beyond what would be possible in a truly competitive market. Market power exists in both the labor market, where powerful firms are able to suppress workers’ wages, and in the goods market, where dominant firms charge markups on the goods and services they sell.

For example, contemporary academic research has shown that labor markets are monopsonistic – individual firms are concentrated buyers of labor in their markets – and that employers thus exert significant power over wage setting and other aspects of the employment relationship. In contrast to a model that assumes labor markets are competitive, minimum wage policies in the IMPA model need not reduce employment, in line with recent empirical evidence.

Market power also has implications for both income and wealth inequality. In the labor market, otherwise equal workers that are employed in firms with different degrees of market power will earn systematically different wages, increasing income inequality. Market power rents earned in the goods and labor markets are distributed to shareholders in the form of dividends and capital gains. This directly generates wealth inequality since stocks are primarily owned by wealthy households, while suppressing wages for workers at the bottom of the distribution.

Market power also distorts the allocation of capital across activities in the economy. For example, when market power rents generate excess profits for dominant corporations and these corporations pay out these inflated profits to shareholders, it drives up expected returns to equity and thus the cost of true productive investment economy-wide. This distorts investment decisions at all firms and directs funds toward high-rent sectors at the expense of productive activity. Under realistic assumptions about market power, corporate income taxes can correct the misallocation of capital created when firms with market power extract excess profits for shareholders. This can increase investment and economic performance and put the brakes on wealth inequality.

The Three Types of Actors

The three types of actors in the IMPA model include households, firms, and the government. 

Households

The household sector comprises the workers and consumers in the economy. Households make labor supply decisions, earn income, consume goods and services, pay taxes, receive transfers, and save through bonds and equities. The model incorporates the following key features:

• Uninsurable income risk: Households face idiosyncratic income shocks – such as unemployment – against which they cannot fully insure.
• Multi-dimensional heterogeneity: Household decisions vary along four dimensions – age, productivity, employment sector, and wealth – capturing rich distributional dynamics.
• Diverse income sources: Households receive income from wages, capital (e.g., stock market returns), and entrepreneurial “pass-through” income.
• Overlapping generations: The model includes 72 overlapping cohorts (ages 18 to 90), with retirement at age 65. Post-retirement income is limited to social security and returns on accumulated savings.
• Intergenerational linkages: Upon death, households bequeath assets to younger generations, allowing the model to capture the dynamics of wealth transmission and generational inequality.

Government

The government plays an active role in redistribution, taxation, debt issuance, and public investment. Its functions in the model include:

• Taxation: The government levies a range of taxes, including payroll and social security taxes on labor income, estate taxes on bequests, dividend and capital gains taxes on capital income, and corporate taxes on firms.
• Progressivity and deductions: The tax system is progressive, with rate schedules and brackets calibrated to match the tax code. Households receive standard deductions and deductions on pass-through income; firms benefit from deductions for depreciation, interest expenses, R&D, and sector-specific investment credits.
• Debt issuance: The government issues bonds to finance expenditures, including Treasury bills and longer-term debt instruments.
• Public investment: Government spending includes investments in infrastructure (e.g., roads, ports) and human capital (e.g., education), which enhance the productivity of private capital.

Firms

Firms operate across multiple sectors of the economy and are heterogeneous in size, productivity, and market share. They hire labor, pay wages, issue equity, produce and sell goods and services, invest in capital, and pay taxes based on their organizational form. Key features of the firm sector include:

• Legal structure: Firms are classified as either corporate entities or pass-through businesses, with tax treatment varying accordingly.
• Sectoral granularity: The model accommodates up to 19 distinct industries or sectors.
• Market structure: Firms compete in oligopolistic product markets, possessing market power that allows them to influence prices.
• Labor market power: Firms act as monopsonists in labor markets, exerting wage-setting power and shaping employment conditions in their local labor markets.

Solution Method

The model follows a general equilibrium, heterogeneous-agent framework, and is solved using state-of-the-art numerical techniques drawn from the recent literature. The underlying codebase is designed with speed, flexibility, and transparency in mind. Key features include:

1. Implementation in Julia: The model is written entirely in Julia, an open-source language optimized for high-performance scientific computing through just-in-time (JIT) compilation.
2. Advanced numerical algorithms: The solution approach closely follows best practices in the literature. For example, household policy functions are computed using the endogenous grid-point method (Carroll, 2006), while transition matrices are constructed using Young’s lottery method (Young, 2010).
3. Sequence-space solution: The model is cast and solved in sequence space (Auclert et al., 2021), significantly accelerating the computation of equilibria. To handle large, discrete policy changes – such as the Tax Cuts and Jobs Act (TCJA) – we implement a Newton-Raphson solution method following Boehm (2024).
4. Modular code design: The architecture separates solution routines from model-specific features, allowing for flexibility across applications – e.g., toggling between single- and multi-sector economies, or switching between corporate and pass-through firm structures.
5. Radical transparency: The entire codebase is developed on GitHub. While the repository is currently private (pending completion of the testing suite), it will be made public to encourage reuse, modification, and extension by researchers and practitioners.