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Intergenerational Redistribution in the Great Recession

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  • Jose-Victor Rios Rull

    (Minnesota)

  • Jonathan Heathcote

    (Minneapolis FED)

  • Dirk Krueger

    (Univ. of Pennsylvania)

  • Andy Glover

    (Minnesota)

Abstract

We construct stochastic overlapping-generations general equilibrium models 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 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. 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, consistently 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 percent of lifetime consumption for households aged 70 and over.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 141.

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Date of creation: 2011
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Handle: RePEc:red:sed011:141

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References

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  1. John Y. Campbell & Yves Nosbusch, 2007. "Intergenerational risksharing and equilibrium asset prices," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 24484, London School of Economics and Political Science, LSE Library.
  2. 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.
  3. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1996. "Asset pricing with idiosyncratic risk and overlapping generations," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 405, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 1999.
  4. Kamila Sommer & William Peterman, 2013. "How Well Did Social Security Mitigate the Effects of the Great Recession?," 2013 Meeting Papers, Society for Economic Dynamics 1150, Society for Economic Dynamics.
  5. Césaire A. Meh & José-Victor Rios-Rull & Yaz Terajima, 2008. "Aggregate and Welfare Effects of Redistribution of Wealth Under Inflation and Price-Level Targeting," Working Papers, Bank of Canada 08-31, Bank of Canada.
  6. Matthias Doepke, . "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," UCLA Economics Online Papers, UCLA Department of Economics 412, UCLA Department of Economics.
  7. Huffman, Gregory W, 1987. "A Dynamic Equilibrium Model of Asset Prices and Transaction Volume," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(1), pages 138-59, February.
  8. Felix KUBLER & Karl SCHMEDDERS, 2010. "Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 10-21, Swiss Finance Institute.
  9. Labadie, Pamela, 1986. "Comparative Dynamics and Risk Premia in an Overlapping Generations Model," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(1), pages 139-52, January.
  10. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
  11. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  12. Felix Kubler & Johannes Brumm, 2013. "Applying Negishi's method to stochastic models with overlapping generations," 2013 Meeting Papers, Society for Economic Dynamics 1352, Society for Economic Dynamics.
  13. Krueger, Dirk & Kubler, Felix, 2004. "Computing equilibrium in OLG models with stochastic production," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(7), pages 1411-1436, April.
  14. Miyazaki, Kenji & Saito, Makoto & Yamada, Tomoaki, 2010. "On The Intergenerational Sharing Of Cohort-Specific Shocks On Permanent Income," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 14(01), pages 93-118, February.
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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. James Bullard, 2012. "Comments on “Housing, monetary policy, and the recovery” by Michael Feroli, Ethan Harris, Amir Sufi, and Kenneth West," Speech, Federal Reserve Bank of St. Louis 192, Federal Reserve Bank of St. Louis.
  2. Benítez-Silva, Hugo. & García Pérez, Jose Ignacio & Jiménez Martín, Sergi, 2011. "The Effects of Employment Uncertainty and Wealth Shocks on the Labor Supply and Claiming Behavior of Older American Workers," Working Papers 2011-09, FEDEA.
  3. Dominik Menno & Tommaso Oliviero, 2014. "Financial Intermediation, House Prices and the Welfare Effects of the U.S. Great Recession," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 373, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  4. Bridget Terry Long, 2014. "The Financial Crisis and College Enrollment: How Have Students and Their Families Responded?," NBER Chapters, National Bureau of Economic Research, Inc, in: How the Financial Crisis and Great Recession Affected Higher Education National Bureau of Economic Research, Inc.
  5. 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, Federal Reserve Bank of St. Louis.
  6. : Carlo A. Favero & : Arie E. Gozluklu & : Haoxi Yang, 2013. "Demographics and The Behavior of Interest Rates," Working Papers, Warwick Business School, Finance Group wpn13-10, Warwick Business School, Finance Group.
  7. 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.
  8. Orrego, Fabrizio, 2010. "Demography, stock prices and interest rates: The Easterlin hypothesis revisited," Working Papers, Banco Central de Reserva del Perú 2010-012, Banco Central de Reserva del Perú.
  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, Federal Reserve Bank of St. Louis, issue July, pages 273-292.
  10. Makoto Nakajima, 2013. "Monetary Policy with Heterogeneous Agents," 2013 Meeting Papers, Society for Economic Dynamics 356, Society for Economic Dynamics.
  11. 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, Koc University-TUSIAD Economic Research Forum 1212, Koc University-TUSIAD Economic Research Forum.
  12. Makoto Nakajima, 2013. "The diverse impacts of the great recession," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue Q2, pages 17-29.
  13. Dominik Menno & Tommaso Oliviero, 2013. "Financial Intermediation, House Prices, and the Distributive Effects of the U.S. Great Recession," Economics Working Papers, European University Institute ECO2013/05, European University Institute.

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