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Intergenerational Redistribution in the Great Recession

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  • Glover, Andrew
  • Heathcote, Jonathan
  • Krueger, Dirk
  • Ríos-Rull, José-Víctor

Abstract

In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that a ffect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across di ffrrent household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages, as observed in the data. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline more than twice as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is approximately welfare-neutral for households in the 20-29 age group, but translates into a large welfare loss of around 10% of lifetime consumption for households aged 70 and over.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8329.

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Date of creation: Apr 2011
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Handle: RePEc:cpr:ceprdp:8329

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Keywords: Aggregate Risk; Asset Prices; Overlapping Generations; Recessions;

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References

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  1. Emi Nakamura & Jón Steinsson & Robert Barro & José Ursúa, 2010. "Crises and Recoveries in an Empirical Model of Consumption Disasters," NBER Working Papers 15920, National Bureau of Economic Research, Inc.
  2. Felix Kubler & Johannes Brumm, 2013. "Applying Negishi's method to stochastic models with overlapping generations," 2013 Meeting Papers 1352, Society for Economic Dynamics.
  3. Matthias Doepke, . "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," UCLA Economics Online Papers 412, UCLA Department of Economics.
  4. Kamila Sommer & William Peterman, 2013. "How Well Did Social Security Mitigate the Effects of the Great Recession?," 2013 Meeting Papers 1150, Society for Economic Dynamics.
  5. Yaz Terajima & Jose-Victor Rios-Rull & Cesaire Meh, 2008. "Aggregate and Welfare Effects of Redistribution of Wealth Under Inflation and Price-Level Targeting," 2008 Meeting Papers 381, Society for Economic Dynamics.
  6. Labadie, Pamela, 1986. "Comparative Dynamics and Risk Premia in an Overlapping Generations Model," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 139-52, January.
  7. John Y. Campbell & Yves Nosbusch, 2006. "Intergenerational Risksharing and Equilibrium Asset Prices," NBER Working Papers 12204, National Bureau of Economic Research, Inc.
  8. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
  9. Krueger, Dirk & Kubler, Felix, 2004. "Computing equilibrium in OLG models with stochastic production," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1411-1436, April.
  10. Miyazaki, Kenji & Saito, Makoto & Yamada, Tomoaki, 2010. "On The Intergenerational Sharing Of Cohort-Specific Shocks On Permanent Income," Macroeconomic Dynamics, Cambridge University Press, vol. 14(01), pages 93-118, February.
  11. Kjetil Storesletten & Chris Telmer & Amir Yaron, 2007. "Asset Pricing with Idiosyncratic Risk and Overlapping Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 519-548, October.
  12. Felix KUBLER & Karl SCHMEDDERS, 2010. "Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices," Swiss Finance Institute Research Paper Series 10-21, Swiss Finance Institute.
  13. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  14. Huffman, Gregory W, 1987. "A Dynamic Equilibrium Model of Asset Prices and Transaction Volume," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 138-59, February.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Intergenerational Redistribution in the Great Recession
    by Christian Zimmermann in NEP-DGE blog on 2011-04-17 21:10:59
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. James Bullard, 2012. "Comments on “Housing, monetary policy, and the recovery” by Michael Feroli, Ethan Harris, Amir Sufi, and Kenneth West," Speech 192, Federal Reserve Bank of St. Louis.
  2. Orrego, Fabrizio, 2010. "Demography, stock prices and interest rates: The Easterlin hypothesis revisited," Working Papers 2010-012, Banco Central de Reserva del Perú.
  3. Dominik Menno & Tommaso Oliviero, 2013. "Financial Intermediation, House Prices, and the Distributive Effects of the U.S. Great Recession," Economics Working Papers ECO2013/05, European University Institute.
  4. Alan, S. & Crossley, T. & Low, H., 2012. "Saving on a Rainy Day, Borrowing for a Rainy Day," Cambridge Working Papers in Economics 1222, Faculty of Economics, University of Cambridge.
  5. Makoto Nakajima, 2013. "Monetary Policy with Heterogeneous Agents," 2013 Meeting Papers 356, Society for Economic Dynamics.
  6. Bridget Terry Long, 2014. "The Financial Crisis and College Enrollment: How Have Students and Their Families Responded?," NBER Chapters, in: How the Financial Crisis and Great Recession Affected Higher Education National Bureau of Economic Research, Inc.
  7. Carlo A. Favero & Arie E. Gozluklu & Haoxi Yang, 2011. "Demographics and The Behaviour of Interest Rates," Working Papers 388, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  8. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2011. "The effects of employment uncertainty and wealth shocks on the labor supply and claiming behavior of older American workers," Economics Working Papers 1275, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Rodolfo E. Manuelli & Adrian Peralta-Alva, 2011. ""Frictions in financial and labor markets": a summary of the 35th Annual Economic Policy Conference," Review, Federal Reserve Bank of St. Louis, issue July, pages 273-292.
  10. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sánchez, 2013. "Life cycle patterns and boom-bust dynamics in U.S. housing prices," Economic Synopses, Federal Reserve Bank of St. Louis.
  11. Yanbin Chen & Fangxing Li & Zhesheng Qiu, 2013. "Housing and Saving with Finance Imperfection," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 207-248, May.
  12. Makoto Nakajima, 2013. "The diverse impacts of the great recession," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 17-29.
  13. Dominik Menno & Tommaso Oliviero, 2014. "Financial Intermediation, House Prices and the Welfare Effects of the U.S. Great Recession," CSEF Working Papers 373, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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