I show how to construct a stochastic long-lived overlapping generation’s model that is based on a non-stochastic model developed by Olivier Blanchard and Philippe Weil and that nests the RBC model as a special case. My innovation over previous work is to add an aggregate stochastic shock. I provide three different calibrations of my model economy. One mimics the RBC model and the other two are heterogenous agent economies (HA and HATAX) with and without corporate income taxes. I show that the HA and HATAX models can explain the low safe rate of interest that has been observed for long periods in US data. The HATAX model can also explain the fact that the investment to GDP ratio in US data is lower than the profit share. All three models are almost identical in their predictions for the comovements and volatility’s of consumption, investment, employment and GDP at business cycle frequencies.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
3154.
Find related papers by JEL classification: D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General D90 - Microeconomics - - Intertemporal Choice and Growth - - - General E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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