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The effects of a baby boom on stock prices and capital accumulation in the presence of Social Security

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  • Andrew B. Abel

Abstract

Is the stock market boom a result of the baby boom? This paper develops an overlapping generations model in which a baby boom is modeled as a high realization of a random birth rate, and the price of capital is determined endogenously by a convex cost of adjustment. A baby boom increases national saving and investment and thus causes an increase in the price of capital. The price of capital is meanreverting so the initial increase in the price of capital is followed by a decrease. Social Security can potentially affect national saving and investment, though in the long run, it does not affect the price of capital.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-2.

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Date of creation: 2002
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Handle: RePEc:fip:fedpwp:03-2

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Keywords: Stock - Prices ; Capital;

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  1. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246 National Bureau of Economic Research, Inc.
  2. Andrew B. Abel, 2001. "On the Invariance of the Rate of Return to Convex Adjustment Costs," NBER Working Papers 8635, National Bureau of Economic Research, Inc.
  3. Zilcha, Itzhak, 1991. "Characterizing efficiency in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 55(1), pages 1-16, October.
  4. Robert E. Hall, 2000. "The stock market and capital accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  5. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 1-19, January.
  6. Basu, Parantap, 1987. "An Adjustment Cost Model of Asset Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 609-21, October.
  7. Andrew B. Abel, 2001. "Will Bequests Attenuate The Predicted Meltdown In Stock Prices When Baby Boomers Retire?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 589-595, November.
  8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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Blog mentions

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  1. Can demographics explain why the income shares of high earners have increased?
    by Stephen Gordon in Worthwhile Canadian Initiative on 2011-09-18 21:22:12
  2. L'impact de la démographie sur le prix des actifs
    by bertrandachou@orange.fr (Bertrand Achou) in BS Initiative on 2013-12-19 04:43:28
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