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Intergenerational Redistribution in the Great Recession

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

Abstract

In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect 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 different 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16924.

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Date of creation: Apr 2011
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Handle: RePEc:nbr:nberwo:16924

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  1. Karl Schmedders & Felix Kubler, 2012. "Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices," 2012 Meeting Papers 536, Society for Economic Dynamics.
  2. John Y. Campbell & Yves Nosbusch, 2007. "Intergenerational Risksharing and Equilibrium Asset Prices," FMG Discussion Papers dp589, Financial Markets Group.
  3. Meh, Césaire A. & Ríos-Rull, José-Víctor & Terajima, Yaz, 2010. "Aggregate and welfare effects of redistribution of wealth under inflation and price-level targeting," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 637-652, September.
  4. Jose Ursua & Jon Steinsson & Emi Nakamura & Robert Barro, 2008. "Crises and Recoveries in an Empirical Model of Consumption Disasters," 2008 Meeting Papers 1089, Society for Economic Dynamics.
  5. 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.
  6. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  7. 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.
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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
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Cited by:
  1. 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.
  2. 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.
  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. Makoto Nakajima, 2013. "Monetary Policy with Heterogeneous Agents," 2013 Meeting Papers 356, Society for Economic Dynamics.
  5. Sule Alan & Thomas Crossley & Hamish Low, 2012. "Saving on a Rainy Day, Borrowing for a Rainy Day," Koç University-TUSIAD Economic Research Forum Working Papers 1212, Koc University-TUSIAD Economic Research Forum.
  6. : Carlo A. Favero & : Arie E. Gozluklu & : Haoxi Yang, 2013. "Demographics and The Behavior of Interest Rates," Working Papers wpn13-10, Warwick Business School, Finance Group.
  7. Orrego, Fabrizio, 2011. "Demografía y precios de activos," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 22, pages 83-101.
  8. 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.
  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.

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